Nigeria among countries at high risk of capital controls

By Moses Obajemu

• As forex shortage bites
• Lack of fiscal reforms‭, ‬slower economic growth
• Not effectively advanced sectoral diversification
• Export revenues largely from single commodity

A new report has identified Nigeria among some African countries who are currently experiencing foreign currency shortage as countries at greater risk of re-imposing or expanding capital controls to defend their weakened currencies and to protect scarce foreign exchange reserves.

In what will be seen as a warning to investors, the report is already reverberating across global investor communities who are likely to become even more cautious in taking that investment decision to bring capital into the country.

Global economic research firm, IHS Markit, which produced the report, titled it, “Capital controls in Sub Saharan Africa,” and made it available to Business a.m. over the weekend.

In league with Nigeria, according to the report, are Angola, Ethiopia, Zambia and some member countries of the CFA franc zone, who are also at risk of expanding capital controls and are already showing early signs of foreign-currency risks.

In specific reference to Nigeria, the report said despite improved external indicators, Nigeria was still restricting foreign-currency access for imported goods that can be produced domestically, such as dairy and food products.

On Angola, HIS Markit noted that the burden of servicing oil-collateralised debt restricts scope to generate foreign exchange, causing severe dislocation for businesses and individuals lacking political connections.

It explained that a persistent, structural balance-of-payments deficit in Ethiopia is unlikely to be resolved, causing significant payment delays other than for flagship infrastructure development projects and the export-orientated coffee sector.

The report also puts South Africa at risk of expanding capital controls as “continued policy uncertainty and state-owned enterprises-sector stress” in South Africa threaten the loss of the country’s credit rating’s investment-grade status, with the associated risk of rapid outflows of foreign portfolio investors’ capital placing significant pressure on the rand.

“Those countries at greatest risk of needing to maintain or expand capital controls share one or more characteristics. Several countries, such as Angola, Equatorial Guinea, Gabon, Nigeria, and Zambia, have not effectively advanced sectoral diversification, with export revenues still being derived largely from a single commodity, such as copper or crude oil.

“These economies are, therefore, exposed to downturns in commodities markets, increasing pressure to implement or expand capital controls. Other factors contributing to this risk are large external public-debt burdens, such as in Congo, Gabon, and Zambia, and excessive servicing costs relative to available foreign-currency reserves, especially where debt obligations are collateralised by key foreign-exchange-earning exports, such as in Angola.

“In commodity net importing economies, it is the centrally controlled and highly state-owned economy that has caused a structural balance-of-payments deficit, reflecting the historically large outlays for public infrastructure projects,” the authors of the report further explained.

The report also blamed the external debt crisis faced by Nigeria and other countries in this league, on lack of fiscal reforms and slower economic growth, adding that despite strong economic growth in sub Saharan Africa and growing demands for infrastructure development, these were not accompanied by significant progress in reforming government finances as growing fiscal gaps were bridged largely by governments using easy access to external financing.

“Over the past decade, strong economic growth in sub-Saharan Africa was accompanied by resurgent commodity prices and growing demands for infrastructure development. However, these were not accompanied by significant progress in reforming government finances as growing fiscal gaps were bridged largely by governments using easy access to external financing.

“Despite slower Chinese growth easing demand for commodities, the tapering of QE programmes and accelerated local-currency depreciation, sub-Saharan African countries generally have been unwilling to undertake prudent fiscal consolidation measures. The shift towards non-concessional external debt financing has increased debt-service burdens within government budgets and current accounts,” the authors further wrote.

The report mirrors concerns recently expressed by a deputy governor of the Central Bank of Nigeria (CBN) and another member of the Monetary Policy Committee (MPC), that the persistent fall of Nigeria’s external reserves in recent times may induce exchange rate crisis and trigger capital outflows from the country.

Joseph Nnana and Robert Asogwa, deputy governor in charge of economic policy and an MPC member respectively, expressed the fears in their personal statements at the last meeting of the MPC seen by Business a.m.

Reviewing the external reserves movement, Nnana said external reserves had trended downwards in recent months, declining from US$43.971 billion as at July 31, 2019 to US$ 41.79 billion as at September 16, 2019 or by US$ 2.181 billion or 4.9 percent.

“Although this stock of reserves could finance over 9 months of 36 imports of goods and services at end July 2019, there is need to watch this level considering that the reserves stock at the end of June 2019 could finance over 12 months imports.

“More importantly, the level of reserves has implications for capital inflows and outflows. A weakened net capital inflows position, due to weakening oil prices and external reserves position is helpful to exchange rate stability or the easing of monetary policy stance.

“This thus suggests the need to avoid monetary policy responses that could worsen the capital flows position and, hence external reserves and exchange rate stability,” he said.

Asogwa in his submission, explained that  some considerable pressures still exist as the conditions of external reserves and current account balance seemed to have worsened in between the MPC meetings.

“CBN staff report show that gross external reserves as at end of August 2019 declined by 4.7 percent when compared to the levels at end July and there are expectations of additional declines by the fourth quarter of 2019.

“There are however fears that this declining trend in external reserves may affect exchange rate stability in the near future,” he said.