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Nigeria’s External Reserves plunge to $40.3 billion as devaluation concerns brew

Nigeria’s External Reserves plunge to $40.03 billion as devaluation concerns brew

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Nigeria’s External Reserves plunged to $40.3 billion as at October 18, 2019. This is the first time in almost two years that the nation’s external reserves would decline to $40.3 billion.

According to data obtained from the CBN, Nigeria’s external reserves dropped from $45 billion in July to $40.3 billion in October 18 2019. This suggests the country’s external reserves has depleted by $5 billion in less than four months. The CBN’s reserves is now at a 21 months low.

Nairametrics has tracked the movement of the external reserves in recent months in view of several monetary interventions in the economy.

[READ MORE: External reserves drop by $3.2 billion in Q3’19]

The Oil Price effects?

While the decline in the country’s external reserves has coincided with recent fluctuations in global oil prices, the depletion in reserves has more to do with CBN intervention in the foreign exchange market.

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For instance, Financial Expert, Walle Smith, in a recent analysis cited by Nairametrics, stated that as foreign capital flowed out of the country, the CBN had to actively intervene to keep the Nigerian Naira in line.

According to him, “Oil is no longer the biggest driver of CBN reserve inflows. In 2018, oil accounted for 26% of CBN USD inflows (Q119:23%) vs over 90% before 2015. CBN purchases at the spot and swap market are now a big driver half of non-oil FX flows.”

While providing explanations to the reason to decline in the country’s reserves, the CBN in its monthly economic report for August 2019 stated that the decrease was due, mainly, to increased foreign exchange market interventions and external debt service payments, as well as, direct payments.

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Foreign exchange market

Since the introduction of the Investors and Exporters’ window in Nigeria, the CBN has increasingly intervened in the forex market as an active buyer and seller of currencies.

For instance, the half-year report recently released by the CBN’s Financial Markets Department showed that for half-year 2019 (January – June), the apex bank made available a whopping sum of $8.28 billion to authorised dealers in the FX market.

[READ ALSO: Nigeria’s foreign reserves fall to 6-weeks low, lose $81.10 million]

Nigeria’s External Reserves Trajectory as of October 22nd, 2019.                        Source: CBN website

Debt concerns and its attendant costs

While the CBN’s intervention in the foreign exchange market has been a source of concern, two other issues depleting the country’s reserves are the country’s debt profile and outflow of foreign exchange.

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Recent report released by the Debt Management Office (DMO) showed that Nigeria’s total debt stock rose to N25.7 trillion (US$83.8 billion) as of the end of June 2019, compared to N24.9 trillion recorded in March 2019. That is, within three months, Nigeria increased its debt by N754.56 billion, representing a 3.2% increase.

A further look at the international payment section of the CBN showed that Nigeria paid $732.9 million (N224.6 billion) between January and June 2019. There is no gainsaying that the country’s reserves were used to service the debt.

Currency flows

The external sector performance of the Nigerian economy has continued to be on the low as oil prices plummeted while the country’s non-oil export slowed. This implies that the use of the country’s reserves to either defend the naira or service the debt comes at a great cost.

According to the CBN report for August 2019, the decline in international prices of crude oil affected the inflow of foreign exchange into the country. Meanwhile, this has not stopped outflow for an import-dependent economy like Nigeria.

In August, for instance, foreign exchange inflow through the CBN was put at $4.8 billion while the outflow was $6.14 billion. This puts the net outflow at $1.24 billion.

[READ ALSO: Nigeria’s External Reserves and SWF: Why IMF cannot be ignored]

Devaluation Concerns?

Recent policy moves by the CBN suggest that devaluation concerns are already brewing as the apex bank is throwing all measures to prevent this from happening. In a desperate bid to prevent naira from devaluation, the CBN has introduced several policy measures which include FOREX ban on food items and some fiscal measures to improve revenue.

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Also, the CBN Governor, Godwin Emefiele had recently mentioned that if external reserves drop to between $30 billion and $25 billion, and oil price falls between $50 – $45, the apex bank could consider moving on to float the exchange rate and devalue the naira.

This means if the current trend continues, the Nigerian economy may just be heading for another quagmire.

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Samuel is an Analyst with over 5 years experience. Connect with him via his twitter handle

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  1. Pingback: NIGERIA’S NAIRA MAY BE WEAKENED AS EXTERNAL RESERVES PLUMMET www.fund.i.ng » Super Wordpress

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Financial Services

How foreign exchange risks and others affect the Nigerian pension industry 

A report has analysed risks militating against the Pension industry in Nigeria.

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This is why you should make voluntary contributions to your pension fund

Despite being one of the fastest-growing sectors in the Nigerian financial services industry, the Nigerian pension industry has been affected by various riskssuch as the volatility in the foreign exchange and other factors.

However, these risks have harsh consequences on the retirement income of contributors. For example, in Nigeria, whilst the pension assets in the last decade have grown by 21% annually, the growth in the value of assets when converted to USDhas been about 11% over the same period. 

This is according to a recent report released on Pension Sector Forum by ARM Pension, with the theme “Pension Assets Risk Management in the Face of Uncertainties 

All other things being equal, the findings revealed that the Defined Contribution Pension scheme assets on a 10- year time frame, grew faster than Defined Benefits (CAGR 8.4% pa vs 4.8% pa). Increased member coverage and higher contributions were probable factors responsible for the growth In addition, most retirees might not have enough funds to maintain a decent standard of living, as retirement risk has been transferred to them. 

Other risks outlined in the summit includeinterest rate risk, political risk, operation risk, and key macroeconomic risks such as unemployment, GDP, inflation, currency among others. 

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With regards to who bears the retirement risk, 68% of the risk is borne from one’s sources, while 38% is from outside sources. 

The report also stated that the total pension contributions received in the industry from 2017- 2019, was almost equally split between the private and public sectors at the end of Q3 2019 

Way Forward 

In mitigating the risks inherent in the Nigerian pension industry, experts at the summit called for increased collaboration among stakeholders, engagement with all regulators, increased advocacy for corporate governance, increased awareness, and sensitization of contributors by stakeholders among others as viable options going forward. 

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Key Highlights  

  • As of June 2020, only 11.3% of the Nigerian labour force had opened retirement savings accounts (RSAs), while pension assets stand at less than 10% of GDP. 
  • The total number of funds under management currently stands at N11.1 trillion. 
  • There are currently over 9.04 million subscribers and 32 operators. 

To view the report, click to download HERE

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Financial Services

Nigerian fintech companies raised $600 million in five years – McKinsey Report 

McKinsey report has revealed that Nigeria’s fintech companies have raised over $600 million in funding in the last six years.

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fintechs, commercial banks, Events in FinTech industry in 2019, Nigeria's fintech industry 2020: The growth frontier of the new decade

In a space of five years, Nigeria’s fintech companies have raised over $600 million in funding, attracting 25($122 million) of the $491.6 million raised by African tech startups in 2019 alone – second only to Kenya, which attracted $149 million.  The period under review is 2014- 2019. 

This information is contained in a recently published report by McKinsey titled Harnessing Nigeria’s Fintech Potential.” The report highlighted the combination of youthful demographic, increasing smartphone penetration, and concerted efforts to driving financial inclusion as factors that interplay to produce conducive and thriving enabler or platform for the fintech firms in Nigeria. 

The report outlined some of the feedback against fintech companies ranging from poor user experience, underwhelming value-added from using some of the financial products, low returns on savings, and limited access to investment opportunities. 

The report also showed that Nigerian fintech companies are primarily focused on payments and consumer lendinghaving allotted an aggregate of 39% on payments to consumers, SMEs, and corporate FSP, and an additional 25% to consumer lending. The breakdown is depicted below. 

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Source: McKinsey report, 2020. 

On the driving factors behind the increasing choice of payment and consumer lending as an area of concentration by fintech companies, a part of the report read thus; 

The factors driving growth in each of these segments vary. Payment-focused solutions have surged over the past two years, spurred in part, by the central bank’s financial inclusion drive and favorable regulatory policies, including revised Know Your Customer (KYC) requirements for lower-tier accounts and incentives, to accelerate development of agent networks across the country. PagaOPayCellulant, and Interswitch’s QuickTeller compete with mobile banking applications and bank unstructured supplementary service data (USSD) channels to send and receive transactions and bill payments. 

Fintech activity in lending is picking up, thanks to the fact that fintechs are able to leverage payment data to determine lending risk more easily, and utilize smartphones as a distribution channel. For example, fintech startups such as Carbon and Renmoney have successfully leveraged alternative credit-scoring algorithms, to provide instant, unsecured, short-term loans to individuals. A few fintechs, such as Migo, have also stepped up to offer unsecured working-capital loans to SMEs with minimal documentation. Banking fintech solutions have been fast followers here, with leading banks launching digital lending platforms like Quick Credit by GTBank and Quickbucks by Access Bank. 

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In general, access, convenience, and trust have all played key roles in the increasing use of fintech products. For example, in the last six months, 54% of consumers have reported increased usage of their fintech products 

Why this matters 

In line with the National Financial Inclusion goals of 2020, and owing to the fact that despite the remarkable progress recorded by traditional banking institutions, the vast majority of consumers are underserved.  Hence, the issue of accessibility especially in remote areas, affordability, and user experience have been a front-burner issue. 

The aforementioned issues have created an opening that fintechs have been quick to take advantage of, providing enhanced propositions across the value chain, to address major points in affordable payments, quick loans, and flexible savings and investments among others. 

Conclusion 

Fintech accounted for only 1.25of retail banking revenues in 2019, signaling a room for development. Despite recording a growth of fintech investments in Nigeria to the tune of approximately $460 million in 2019, majority of these investments were from external investors. This was only a small fraction (1.27%) of the $36 billion invested in fintech globally. 

The report opined that full optimization of fintech companies in Nigeria can stimulate economic activity, by creating a multiplier effect, and can drive progress towards development goals. Economic impact will primarily come from expanding revenue pools and attracting foreign direct investment to the country. The sector can unlock a plethora of economic benefits by driving increased fintech productivity, capital, and labour hours through digitization of financial services.  

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Business

PenCom recovers N17.51billion from defaulting employers, imposes penalties

N17.51 billion was recovered by PenCom from employers who refused to remit pensions from workers’salaries

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Nigeria’s Pension Asset increased by N228 billion in October, PFAs increase investment in infrastructure to N40.52 billion   

The National Pension Commission has recovered N17.51 billion from employers that refused to remit deducted monthly pensions from their workers’ salaries to their Retirement Savings Accounts with the respective Pension Fund Administrators.

This was disclosed by the Commission in its 2020 second quarter report which was released on Friday.

Out of the N17.51 billion, the principal contribution was N8.89 billion, while the penalty imposed on the employers was N8.63 billion.

The report read, “Following the issuance of demand notices to some defaulting employers whose outstanding pension contribution liabilities had been established by the recovery agents, 16 of the affected employers remitted the sum of N261.33 million representing principal contribution of N152.79million and penalty of N108.54million during the quarter. This brought the total recoveries made from inception as at June 30, 2020 to N17.51billion.”

According to the report, one batch of NSITF lump sum payment application totalling N225,442.72 was however received on behalf of five NSITF members during the quarter.

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It said the application was processed and five members’ contributions were transferred to their bank accounts.

Consequently, it added, the cumulative sum of N2.94billion had been paid into the bank accounts of 36,551 NSITF contributors as lump sum/one off payment from inception to June 30.

For the quarter ended June 30, the commission said it processed monthly pension payments totalling N62.25million in respect of 3,629 NSITF pensioners.

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As of June 30, it said the total pension payment to NSITF pensioners amounted to N4.73billion.

The commission added that it reviewed the request for the payment of attributable income to eligible NSITF members and granted a “no objection” for payment of N2.92billion to 165,954 eligible NSITF members whose NSITF contributions were refunded to their RSAs or bank accounts as of December 2018.

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