The planned withdrawal of the United Kingdom from the European Union and the ongoing trade war between the United States and China constitute major threats to Nigeria’s economy, the World Bank has said.
In its latest Nigeria Economic Update, the World Bank said the two issues indicated a resurgence of ‘protectionism’.
Protectionism refers to government’s actions and policies that restrict or restrain international trade, often with the intent of protecting local businesses and jobs from foreign competition.
The World Bank noted that the resurgence of protectionism, as suggested by Brexit and the US-China trade war, could result in lower demand for Nigeria’s exports, and reduced Foreign Direct Investment.
Brexit, an abbreviation for ‘British exit’, refers to the UK’s decision, in a June 23, 2016 referendum, to leave the EU, and the recent victory of the Conservative Party, led by pro-Brexit Prime Minister, Boris Johnson, has made the action more imminent.
The US-China trade war, an economic conflict between the world’s two largest national economies, commenced when President Donald Trump, in 2018, began setting trade barriers to China with the goal of forcing it to make changes to what the US said were unfair trade practices.
In the Nigeria Economic Update, the World Bank said Brexit and the trade war posed ‘external risks’ to the Nigerian economy.
It stated, “Limited buffers and oil dependence leave Nigeria vulnerable to shocks”, adding, “Externally, geopolitical risks are contributing to an increasingly volatile environment, highlighting the need to build fiscal and external buffers to mitigate shocks.
“The prolonged trade dispute between the United States and China and the ongoing uncertainty surrounding Brexit are generating anxiety about resurgent protectionism, which may adversely affect growth prospects both in Nigeria and worldwide.
“Moreover, Nigeria’s crude oil faces heightened competition from rising US production of light crude, which could cut into demand for Nigeria’s key export.”
The under-development of the Nigerian domestic sovereign bond market amplified its exposure to hikes in global interest rates, the bank added.
The 2019 edition of the World Bank’s Global Economic Prospects revised down projections for global growth by 0.3 percentage points and growth in sub-Saharan Africa by 0.5 percentage points.
The bank, in the NEU, warned that “any further slowing would have serious negative spill-overs on Nigeria because of both lower external demand for its exports and lower remittances and the FDI.”
The World Bank, in the same vein, advised the Federal Government to pay close attention to sources of Nigeria’s external financing.
“Sources of external financing for Nigeria require close monitoring. Highly concentrated in monetary instruments, Foreign Portfolio Investment flows tend to be responsive to domestic monetary policy decisions, oil price movements, and unpredictable policy adjustments globally.
“For Nigeria, sudden outflows would eat into already slipping external reserves and could destabilise the current exchange rate solution decision to hold the IEFX rate at about N360/$.”
According to the bank, the gross figure of Nigeria’s external reserves masks considerable amounts of forex swaps and foreign holdings of short-term government and Central Bank of Nigeria securities.