The coronavirus outbreak and tumbling oil prices are triggering a dollar shortage in Nigeria

Nigeria has recorded only two confirmed cases of Covid-19 but the global pandemic’s growing impact on its economy is far more significant.

As oil prices tank while global demand drops drastically in the wake of the outbreak, Nigeria’s economy is being caught in the cross-hairs. Essentially, with oil being Nigeria’s biggest export, the government relies heavily on the resource for dollar earnings to fund its national budget. And with this year’s $37 billion budget passed with a benchmark oil price of $57 per barrel—nearly double its current price of around $31 to $33, Africa’s largest economy cannot currently fund its budget.

One unfolding real-time effect is a US dollar shortage that’s already manifesting on parallel forex markets with the informal dollar dealers who often operate just in front or across the road from airports and top hotels in the business districts of Lagos and Abuja.

With Nigeria’s naira official exchange rates fixed by the country’s Central Bank, these black market operators often deliver a more accurate verdict on the levels of supply, demand and prices. Over the past two days, naira to dollar exchange rates—which have stayed quite stable at around 360 naira to the dollar since mid-2017—have reached 430 naira. One currency trader tells Quartz Africa dollars are literally no longer available even on the black market due to “excessive demand.”

Much of that demand is down to bureau de change operators hoarding dollars while speculators attempt to hedge against potential naira losses in the event of a devaluation. “Both are happening at the same time but there is a balance tilted towards towards hoarding [by bureau de change operators],” says Manasseh Egedegbe, an Abuja-based investment manager.

With Nigeria’s economy perennially import-dependent, a dollar crunch typically affects a wide range of businesses that require hard currency to fund imports of input materials in a country whose weak industrial base means it makes very little from scratch.

The availability of dollars is also typically a hot button issue among middle class Nigerians, a key demography, who can afford foreign travel, health care or even education—Nigerians spent $514 million to school in the United States in 2018

Déjà vu

While still in its infancy, the growing dollar shortage will feel very familiar for most Nigerians. In 2016, amid a recession triggered by a fall in oil prices, the government imposed currency controls in a bid to stem the flow of foreign exchange out of the country given dwindling foreign reserves.

But the measures came with damaging effects as restricted access to dollars left businesses unable to import raw materials and locals unable to meet dollar-denominated expenses, including medical expenses and tuition at foreign schools. Even while abroad, Nigerians still felt the brunt of the restrictions as banks placed spending limits on debit cards. The currency controls also had an adverse effect on investors as international airlines either pulled out or cut down on routes to Nigeria.

Many critics have long claimed the naira was effectively being overvalued by the central bank’s currency controls and at various points in recent years, there have been calls for the naira to be allowed to float to find its true level.

Given some of the economic parallels with 2016, it remains to be seen if the government will do things differently this time around. But economic experts forecast it will have little choice.

Charles Robertson, chief economist at Renaissance Capital expects Nigeria’s central bank to “bow to reality” and weaken the naira within a few months. While the government might be ordinarily reticent to do so, Mathias Hindar, Sub-Saharan Africa analyst at Falanx Assynt, says sustained low oil prices will “see the government’s ability to protect the naira diminish.” For its part, Aza, an African currency broker, is advising clients to “reduce exposure” to the naira as it expects “further weakening” in the coming days.