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CBN Devalues Naira To 630/$1

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The Central Bank of Nigeria (CBN) has devalued the Naira to N631 to the dollar from N461.6 it sold at the Importers and Exporters (I&E) window the previous day.

The devaluation came 48 hours after President Bola Ahmed Tinubu announced the plans of the federal government to unify the country’s exchange rate to stimulate the economy.

In his inaugural speech, minutes after he was inaugurated as the 16th president of the country, Tinubu said, “Monetary policy needs a thorough house cleaning. The Central Bank must work towards a unified exchange rate. This will direct funds away from arbitrage into meaningful investment in the plant, equipment and jobs that power the real economy.”

There has been a wide margin between the I&E window and the parallel market, a situation that experts say encouraged round-tripping with Bureau de Change operators.

The situation has seen the CBN devise several measures to check the practice as well as completely stop the sale of forex to BDCs.

On Tuesday, President Tinubu met with the top echelon of strategic institutions including the CBN Governor, Godwin Emefiele, at the presidential villa.

At the end of the meeting, neither the presidency nor Emefiele disclosed the outcome of the briefing. It was, however, gathered that the issue of the exchange rate was discussed at the meeting.

The President also met with the Group Chief Executive Officer of the Nigerian National Petroleum Company Limited, Mele Kyari. The removal of petrol subsidy was discussed, it was gathered.

Daily Trust finding, however, revealed that at the resumption of the weekly bidding for foreign exchange, the apex bank sold the spot rate to banks on behalf of their customers at N631 to a dollar and most bidders got the full amount they requested.

One of the customers told this paper that they applied and that their request was fully granted at N631 as against N461.6.

The move has also seen prices at the parallel market trend downwards. Checks by this paper revealed that prices dropped from N750 to a dollar in the early hours of yesterday to N745 by evening in Abuja and Kano respectively.

The naira weakened in the parallel market to the lowest level in a year on expectations of a possible change in exchange rate management after Tinubu takes office on Monday.

The naira dropped to N762 a dollar on Friday from 775 the previous day in the unauthorized market in Lagos, said Umar Salisu, a BDC operator who tracks the data in the nation’s commercial capital.

The unit has weakened steadily in the parallel market since last week after stabilizing for most of this year.

The market arbitrage (difference between the official and parallel markets) has widened in the past three years from N100 per dollar or about 30 per cent in 2020 to over N400 per dollar (above 100 per cent) sometime last year when the black market rate spiked to N880/$.

Development institutions, including the International Monetary Fund (IMF), are wary of exchange rate differential in excess of five per cent and warn that such could trigger unhealthy manipulation that could negatively affect other efforts on market stabilisation.

From 2020 to 2022, the CBN spent about $42 billion intervening in the foreign exchange market to stabilise the naira. The amount was sold to the end-users, including students and tourists, at the official rates, which are way off the effective exchange rate of the naira.

According to the Financial Stability Report, a publication of the CBN, the apex bank sold $9.2 billion in the market in the first half of last year.

The full data for the second half are not available, but the annualised value is assumed to have surpassed that, especially with the level of social and economic activities associated with the second half.

Whereas the black market rate averaged N730/$, the I&E window finished at suppressed N447/$ on average. That puts the arbitrage at N283/$, pushing the CBN’s FX subsidy in the year to about N3.65 trillion.

Realistic exchange rate regime to save N4tr – Ex-DG LCCI

In his analysis on the impact of FX subsidy, Dr Muda Yusuf, the Director of the Centre for Promotion of Private Enterprise (CPPE), said a realistic exchange rate regime would add N4 trillion to the federation account.

The former director general of the Lagos Chamber of Commerce and Industry (LCCI), said the exchange rate regime constitutes an enormous burden to the economy and public finance.

He said: “Nigeria is facing an all-time tight fiscal space. This year’s budget is stuffed with over 50 per cent deficit, even in the face of spurious revenue projections. The federal government is contemplating an additional loan of N8.8 trillion to support funding of the budget, which could raise its outstanding liabilities to nearly N80 trillion.

Devaluation a double-edged sword – Expert

Basil Abia, a private research consultant with a track record of supporting think tanks, start-ups, and development projects in Nigeria, said the devaluation of the naira will result in increased inflation and an erosion of the Nigerian consumer’s already dwindling purchasing power.

However, he adds that there could be some benefits from the devaluation. “If it is perceived to be temporary, it may present attractive opportunities for foreign investors to invest in our domestic financial markets. It is not certain, but it is a possibility that FPI (foreign portfolio

investments) inflow to Nigeria may temporarily increase.”

2023 budget first casualty – Prof. Uwaleke

On his part, a Professor of Capital Market, Uche Uwaleke said, “The first casualty will be the 2023 Appropriation Bill. It means the 2023 budget, which is predicated on N435 per dollar is dead on arrival.”

He said, no doubt, the devaluation will force down the volume of imports and reduce the pressure in the forex market temporarily.

“But have we thought of the impact it would have on the pump price of fuel and the multiplier effects? How about the knock-on with regard to inflation and interest rates, especially at a time when the inflation rate remains elevated? Is high inflation rate not inimical to investments whether local or foreign?” he said.

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Inflation To Fall In 2024 — CBN

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The Central Bank of Nigeria’s governor Yemi Cardoso expects headline inflation to fall to 21.4 per cent in 2024.

The apex bank’s governor disclosed this during his keynote speech at the launching of the Nigerian Economic Summit Group macroeconomic outlook report for 2024.

He said, “Inflationary pressures are expected to decline in 2024 due to the CBN’s inflation-targeting policy, which aims to rein in inflation to 21.4 per cent.”

According to him, the inflation targeting will help the government in its battle against inflation which hit 28.9 per cent in December. Lower rates will ultimately affect businesses, he alluded.

“The outlook for decreasing inflation in 2024 will have a profound impact on businesses, providing a more predictable cost environment and potentially leading to lower policy rates, stimulating investment, fueling growth, and creating job opportunities,” Cardoso said.

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Petrol Prices To Fall Over Refineries’ Take Off, Says Cardoso

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The pump prices of Premium Motor Spirit (PMS) petrol will moderate this year as government and private-owned refineries begin operation, Central Bank of Nigeria (CBN) Governor, Olayemi Cardoso has said.

He spoke on Wednesday, January 24, at the launch of the Nigerian Economic Summit Group (NESG) 2024 Macroeconomic Outlook Report in Lagos.

Cardoso said the expected stabilisation or reduction in fuel costs is poised to have far-reaching implications across various sectors, contributing significantly to overall economic efficiency and resilience.

While Dangote Refinery has already commenced production, the Port Harcourt Refinery is expected to begin production anytime from now.

Cardoso said the apex bank, the Ministry of Finance and the NNPCL have collaborated to ensure that all FX inflows are returned to the Central Bank to boost reserves accretion.

He described the naira, which exchanges around N1,370 to the dollar at the parallel market as undervalued.

“We believe that the naira is currently undervalued and, coupled with coordinated measures on the fiscal side, we will expedite genuine price discovery in the near term,” he said.

In summary of the NESG 2024 Macroeconomic Outlook Report in Lagos, the Chief Economist at NESG, Dr. Olusegun Omisakin, listed some economic outcomes of achieving a stable and appropriate pricing of the exchange rate in Nigeria.

The NESG report advised that stabilising the exchange rate through a functional and transparent foreign exchange market entails enhancing market liquidity through regular auctions, reducing administrative restrictions, and ensuring efficient allocation of FX reserves.

“Adopting a managed float system, regulating speculative activities, and encouraging foreign investments would bolster market confidence. Besides, access to FX needs to be realigned to facilitate international trade and transactions – as such, local access needs to be to the limit of the Naira equivalent. Reinforcing monetary policies for inflation control and export diversification would promote currency stability,” the report advised.

Cardoso acknowledged the challenges facing the economy and the resistance to proposed solutions by various stakeholders, assuring that the economy is now at a turning point, and the bold reforms being undertaken across different segments of the economy, while initially challenging, are ultimately directed towards addressing these challenges in a sustainable manner.

“I am confident that we are already witnessing positive outcomes, and these will undoubtedly become more apparent in the near future. The dedicated and relentless efforts being made are certain to bring about significant and positive changes for our economy.”

“Indeed, recent reports from international rating agencies such as Fitch, Moody’s, and commendations from multilateral banks like 3 Classified as Confidential the World Bank reflect this, with upgrades to Nigeria’s ratings from stable to positive. These reports acknowledge the possible reversal of the deterioration in the country’s fiscal and external position due to the authorities’ reform efforts,” Cardoso said.

“While noting the painful adjustments, they all identify a direction of travel that will unlock the much needed growth and development for our economy in the medium to long term.”

He said the rising costs of food prices and volatility in the forex market will soon be addressed.

On economic growth, he said the global economy is currently grappling with persistent challenges, including inflation and subdued growth prospects.

Despite Gross Domestic Product (GDP) growth outperforming expectations in 2023, it is projected to further moderate in 2024 due to tightened financial conditions, sluggish trade expansion, and reduced business and consumer confidence. The International Monetary Fund (IMF) anticipates a mild slowdown in global economic growth to 2.9 percent in 2024, down from the 3.0 percent growth observed in 2023, with Asia driving the majority of the projected global growth in 2024, similar to the previous year.

He said the projections for the nation’s economy paint an optimistic trajectory as the Federal Government of Nigeria anticipates real GDP growth of 3.76 percent in 2024, slightly surpassing the estimated 3.75 percent for 2023.

The optimism, he said, was underpinned by the implementation of key government reforms set to shape the economic landscape. Foremost among the factors contributing to this positive outlook is the expectation of improved crude oil prices and production, highlighting the crucial role the oil industry is expected to play in driving economic growth.

Cardoso said the positive outlook for Industry, Services, Agriculture, and Mining, Electricity, Gas & Water Supply sub-sectors reflects the potential effect of market-based reforms through private investment and SMEs-led growth that would contribute to business improvement and confidence.

“Government reforms in the mining and energy sub-sectors are expected to serve as a catalyst for growth and development. 3. While the potential for growth exists in 2024, each sector may encounter unique challenges and opportunities,” he said.

He said that inflationary pressures are expected to decline in 2024 due to the CBN’s inflation-targeting policy, which aims to rein in inflation to 21.4 percent.

This will be aided by improved agricultural productivity and the easing of global supply chain pressures, benefiting businesses by boosting consumer confidence and purchasing power.

He explained that the CBN’s adoption of the inflation-targeting framework involves clear communication, use of monetary policy instruments, and collaboration with fiscal authorities to achieve price stability, fostering market confidence and positively influencing consumer behaviour.

“The outlook for decreasing inflation in 2024 will have a profound impact on businesses, providing a more predictable cost environment and potentially leading to lowered policy rates, stimulating investment, fueling growth, and creating job opportunities,” he said.

Cardoso said the expected stability in the foreign exchange market for 2024 can be attributed to the reduction in petroleum product imports and the recent implementation of a market-determined exchange rate policy by the CBN.

“This reform is designed to streamline and unify multiple exchange rates, fostering transparency and reducing opportunities for arbitrage. The resulting consistent and stable exchange rate will not only boost investor confidence but also attract foreign investment, elevating Nigeria’s appeal to global investors,” he said.

Cardoso said the NESG’s Macroeconomic Outlook Report for 2024 emphasises the necessity of economic transformation under the central theme, “Economic Transformation Roadmap: Medium-Term Policy Priorities.”

“This theme underscores the requirement for a clearly outlined roadmap comprising distinct yet interconnected phases and essential policy recommendations. This resonates with me as we have just last week, launched a new 5-year Strategy for the Central Bank of Nigeria for the period 2024-2028 that provides a clear roadmap for achieving our mandates,” he said.

The NESG report explained that when exchange rates are stable, everyone is better off. Price stability supports economic growth and employment. It allows people to make more reliable plans for borrowing, saving, and expanding businesses.

“Decreased volatility of the exchange rate helps to support stability in inflation, which mainly affects low-income households because they have fewer resources to protect themselves. In the situation of price stability, it helps to maintain social cohesion and stability. History has shown that episodes of high inflation tend to be associated with social unrest,” the report.

According to the report, increased capital inflows will fortify the nation’s external reserves, establishing a robust defence against external shocks.

“This can only happen with the stability of the exchange rate. Capital inflows, comprising foreign investment, loans and remittances, elevate the reserve levels, bolstering Nigeria’s financial stability and economic resilience,” it said.

The NESG report advised that in addition to nominal enhancements in revenue, the country’s revenue-to-GDP ratio must reach a minimum threshold of 15 percent to substantiate the processes of economic growth and stabilisation.

“The country must significantly decrease its current public debt service-to revenue ratio, aiming for a reduction to less than 22 percent from the current high of 80.2 percent as of 2022. This reduction is crucial to create fiscal space, enabling the government to reallocate funds toward economic development and stability initiatives.

“A moderate fiscal deficit can be a useful tool for financing essential investments and stimulating economic activity. Hence, the optimal level of fiscal deficit that supports economic growth and stability in Nigeria requires a careful balance. A fiscal deficit of less than three per cent as stipulated in the FRA 2007 is considered appropriate for the economy,” it said.

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