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Foreign reserves depletion could lead to exchange rate depreciation, inflationary pressures – AfDB warns Nigeria

THE African Development Bank has said further depletion in foreign reserves of  Nigeria could lead to sharp exchange rate depreciation and inflationary pressures.

The Bank said this in its African Economic Outlook 2021, themed, ‘From debt resolution to growth:  The road ahead for Africa’, launched recently.

It added that  policy uncertainty and macroeconomic imbalances are impediments to Nigeria’s ability to attract external private financial flows.

According to the information on the website of the Central Bank of Nigeria  on Friday, the inflation rate stood at 17.33 per cent as of February 2021 while a dollar exchanged for N379 officially. But in the parallel market, a dollar cost N480.

The Outlook was launched virtually by the AfDB President, Dr Akinwumi Adesina, who was joined by the recipient of the 2001 Nobel Memorial Prize in Economic Sciences and American economist, Prof Joseph Stiglitz; Governor, South African Reserve Bank, Lesetja Kganyago; Governor of the Bank of Ghana, Ernest Addison; Secretary of State for Budget and Public Investments, Republic of Angola; Aia-Eza da Silva; and the President, Center for Global Development, Masood Ahmed.

The report, which contained the recent macroeconomic and financial developments, outlook and risks, and financing issues and options for each country, said of Nigeria.  
“Nigeria’s public debt is relatively sustainable at 25 per cent of GDP, but debt service payments are high and the country’s ability to attract external private financial flows is hurt by macroeconomic imbalances and policy uncertainty.

“During the first half of 2020, Nigeria received $7.1bn in foreign investment. This was half the amount it received in the corresponding period of 2019.

“Nigeria’s financing requirements require improved domestic revenue collec­tion. Currently, non-oil revenue collections are equivalent to four per cent of GDP. The revenue yield in 2020 from an increase in the value-added tax rate to 7.5 per cent from 5 per cent was less than projected because of subdued economic activity.”

The report, however, identified remittances and sharia icon pliant sukuk bonds as likely potential financing options.

According to the report, in 2019 remittances totalled $23.8b which it said was 5.3 per cent of the country’s GDP in the year.

The report, however, expressed reservation that the effect of Covid-19 pandemic in key source markets could reduce this figure.

It stated further that reopening borders would increase access to inputs, easing pressure on domestic prices and inflation in 2021.

It added, “Downside risks include reduced fiscal space, should oil prices remain depressed. In addition, flooding and rising insecurity could hamper agricultural production. High unemployment (put at 33.3 per cent by the National Bureau of Statistics a few days ago), poverty and growing inequality remain a major challenge in Nigeria.”

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