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SDR to the rescue of developing countries

The IMF Board has approved Special Drawing Rights (SDR) of $650bn to member countries, of which Nigeria will receive $3.35bn. This is expected to boost liquidity and the external position of economies especially at a time of rising covid infections. The IMF had earlier provided Nigeria with palliative support worth $3.2bn, bringing the Fund’s total support this year to approximately $7bn, which is approximately 20% of the external reserves level ($33.48bn). Like Ghana, Rwanda and Kenya, Nigeria is likely to go to the Eurobond market to raise funds ($3bn). The recent policy reforms embarked by the authorities will make Nigeria more attractive to lenders, depending on its rating outlook. However, the downside to rising external debt is that when interest rates start to increase, servicing the debt will become more onerous.

Nigeria on the path to convertibility or fair value

First it was scrapping the old official rate of N380/$ and adopting the I&E window rate of N411, effectively an 8.16% depreciation and a convergence move. This was to be followed by an abrupt end to the BDC sale of forex at the retail market. The CBN is gradually but surely moving towards a more market determined exchange rate mechanism, whilst protecting the naira from speculative attacks. The focus now will be maintaining the competitiveness of the currency against a basket of its major trading partners and adopting a crawling peg to ensure a fiscally neutral exchange rate. With the price of oil briefly touching a 24-month high ($76pb) and the OPEC quota up by 22%, the naira is in a fundamentally stronger position to withstand exogenous shocks and remain competitive. The big issue for the CBN is to increase dollar liquidity in the forex market.

Is the 3rd wave a real or exaggerated threat?

The major risk to achieving a GDP growth of 2.5% in 2021 is the growing spread of covid infections and the possibility of a precision lockdown. The delta variant of the coronavirus has been detected in the country and it seems to be spreading. The big risk is that Nigerians across all segments seem to have forgotten about the covid protocols. There is therefore a need to have a very clear strategy on vaccination and the possibility of a third wave in Nigeria. It is 18 months since the pandemic occurred and since then, the Nigerian government has ramped up its spending on the health sector in addition to social packages released to support the poor.

In this edition of the FDC bi-monthly publication, the FDC Think-Tank analyzes these issues and their implications on businesses and the economy at large.

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