Russia’s Central Bank recently laid out a recipe for what could trigger the next financial crisis for emerging countries like Nigeria. In a report published during the week, they warned that rising inflation across the world could create another financial crisis for emerging economies if left unchecked.
“Risk premiums will increase significantly, the most indebted countries will struggle to service their debt, and a significant financial crisis will begin in the global economy in the first quarter of 2023 — one comparable to the 2008-2009 crisis, with a long period of uncertainty and a protracted recovery,” it stated.
For Nigeria, an economic crisis is an incessant and unsustainable depreciation of the exchange rate much of which the economy is currently experiencing. At an exchange rate of N530/$1 at the black market, there is palpable fear that we could be approaching N600/$1 by year end. This is mostly due to rising inflation, imported inflation and a stronger and growing western economy. The warning from Russia’s central bank is not to be taken likely.
This is also not the first-time central banks across the world are warning of an impending economic crisis that could be triggered by high inflation. The reason of course is that high inflation raises borrowing costs and also triggers an outflow of foreign investments from emerging economies like Nigeria, starving it of forex and sending its economy into a tailspin.
Apart from higher inflation, an even more ominous scenario for Nigeria and other sub-Saharan African countries that rely heavily on foreign investments to keep their exchange rates stable is if the United States economy continues to grow and economies in emerging markets like Nigeria continue to falter.
Already, the US is set to reclaim the top spot for foreign direct investment in the world, a position it lost to China last year. Its propensity to attract capital inflows due to a stronger economy and potentially higher return is a recipe for economic crisis across emerging markets.
Higher inflation in developed economies, faster economic growth rate, outflow of investments into richer countries, insecurity in poorer countries, all lead to a chain reaction that is daunting and hunting emerging economies like Nigeria.
US inflation rate topped 4% in July suggesting a rate hike might be imminent. When inflation rate is higher, investors in the US and other larger economies, expect interest rates to rise, thus making their domestic capital markets even more attractive.
In the past, a growing US economy aids higher remittances for developing countries like Nigeria but lately, this has not been the case. Diaspora remittances are no longer as robust as they were.
Nigerians are already experiencing the challenges of economic growth in western countries compared to emerging frontier economies in Africa. As the local economy struggles to survive the continuous effects of the covid-19 economic setback, more and more Nigerians are looking abroad as an alternative to its faltering economy.
