The sharp fall in international oil prices since mid-2014 has significantly affected Nigeria’s liquidity position. As oil made up about 75% of total exports, the current account turned into a deficit in 2015 after displaying a surplus for more than a decade. To defend eroding foreign exchange reserves, capital controls and imports restrictions were introduced by the Central Bank of Nigeria (CBN). In the light of the recent additional fall in oil prices, down to USD 30 per barrel, the CBN slapped on supplementary measures on 11 January 2016. Dollar sales through bureaux de change (BDC) were ceased after alleged rent-seeking behaviour and financing of non-priority transactions. These new capital controls will very likely exacerbate liquidity shortages and add to disruptions for trade transactions by making foreign exchange even less available. Moreover, the international press reports that Nigeria asked the World Bank and the African Development Bank for USD 3.5 billion in emergency loans to fill the growing gap in its budget. Nigeria’s finance minister moreover communicated that the country will return to the international bond market for the first time since 2013.

Impact on country risk

With deficient buffer savings, the relentless fall in oil prices has hit Nigeria particularly hard. GDP growth is projected to have shrunk to 3% in 2015 resulting from cuts in investment, domestic consumption and government spending. With foreign exchange reserves falling by around 30% since the end of 2013, the naira came under severe pressure and was ultimately allowed to devaluate by 20% in two stages over 2015. To safeguard reserves of around 4 months of import cover and prevent further devaluation, the authorities imposed capital controls, firstly in June 2015, by curbing foreign exchange access for imports of 41 specific items and restricting Nigerians’ credit and debit use abroad, followed by the more recent January restrictions that will further amplify trade disruptions. Even though these unorthodox measures are partly meant to encourage local industries in the longer run, they decelerate domestic economic activity and create supply shortages. Fuel shortages in particular have been causing social unrest, business disruption and elevated operating costs. For all these reasons, Credendo Group decided to downgrade Nigeria’s short-term political risk classification from category 5/7 to 6/7.

Analyst: Louise Van Cauwenbergh, l.vancauwenbergh@credendogroup.com