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Devaluation: Nigeria’s current account deficit rises again

Nigeria has a cumulative current account deficit of $9.1 billion and BOP of $4 billion as of the third quarter of 2019

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Data from the Central Bank of Nigeria reveals that Nigeria has a cumulative current account deficit of $9.1 billion as of the third quarter of 2019stoking fears of an impending exchange rate crisis in 2020. 

A current account deficit occurs when a country’s foreign liabilities exceed its foreign assets. It is exacerbated when the country imports more than it exports.  Nigeria has reported a negative current account balance in 8 quarters out of the 16 quarters reported under this government. The figures are stated net because the inflows are set off against outflowsthus a negative balance deficit. 

Based on the data, Nigeria’s balance of payment stood at a whopping $4 billion as at the third quarter of 2019 up from $48.7 million dollars in the preceding quarter and $4.5 billion in the third quarter of 2018.

[READ ALSO: Bureaux de Change operators kick against CBN’s new forex policy(Opens in a new browser tab)]

Nairametrics first reported the ballooning current account deficit in an article in September, as the country posted a current account deficit of $3.7 billion in the second quarter of 2019. It had posted a deficit of $2.6 billion in the first quarter of 2019. The latest data shows that the current account deficit was $2.79 billion (provisional figure as it may change) in the third quarter of 2019, indicating that Nigeria may close the year with a deficit. The last time Nigeria closed the year with a current account deficit was in 2015, with about $15.4 billion. 

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Forex outflows as captured in the CBN’s Balance of payment report.

Services drive deficit – As reported in our article in September, Nigeria’s thirst for foreign-related services has remained high, despite efforts by the government to diversify away from reliance on imports. Services ate up $9.56 billion (inflows $1.1 billion) in total dollar liabilities during the quarter compared to $9.4 billion and $9.5 billion respectively in the first and second quarters of 2019 respectively.  

Business services-related payments again topped demand for forex during the quarter, with about $3.9 billion in the third quarter. Business and personal travel followed with $3.4 billion, as ticket sales and travel allowances drive up demand.  

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[READ ALSO: Bureaux de Change operators kick against CBN’s new forex policy(Opens in a new browser tab)]

Most of these outflows are spent on paying technical services fees, professional fees and others required to power nearly all sectors of the economy. Businesses across the economy rely on foreign services such as software, consulting and auditing, patents, etc. to power and scale businesses. 

Personal travel dominated demand with about $2.9 billionwith education-related travel accounting for a whopping $1.5 billion in the third quarter of 2019 ($1.4 billion in Q2). 

Forex Income: In terms of income, Nigeria continues to rely on crude oil for its dollar earnings, with oil exports making up $13.7 billion in inflows out of the $15 billion earned in the quarter. Nigeria has so far earned about $46.6 billion from total exports in 2019 compared to $46.4 billion in the corresponding quarters in 2018. We, however, observed growth in non-oil dollar inflows recording a total of $4.8 billion in the first three quarters of 2019 compared to $3.6 billion in the comparative period in 2018.  

What this means: We do not expect the CBN to continue to carry on with a negative current account deficitconsidering its ramification on the external reserves. Nigeria’s currency reserves have been on constant decline, dropping below $40 billion in November. For Nigeria to mitigate against the rising current account deficit, it will have to either increase its export proceeds or cut down on demand for dollars.  

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Looking at the data, it appears that cutting dollar demand might be the next logical strategy that the CBN might adopt. We envisage another curb on how much Nigerians are allowed to spend on foreign travel, just as it did in 2015/2016 when we last hit an exchange rate crisis.

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If the government targets personal travel allowances, then it might face potential backlash from Nigerians who need to pay the school fees of their wards or fund their medical tourism needs. Should the CBN decide to leave personal travel allowances, then it could target business services expenses. The CBN has often targeted this sector by delaying foreign-related payment of fees for services rendered to Nigerian companies.  

Another option available to the CBN could be to devalue the currency, making it more expensive for Nigerian businesses to demand forex, and forcing them to rely more on local services.  

 

 

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Business

HealthPlus crisis: Alta Semper directors reported to Police for trespassing

HealthPlus has made a formal complaint to the Police following its ensuing battle with Alta Semper.

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HealthPlus crisis: Alta Semper directors reported to Police for trespassing

Nigerian Pharmacy Chain, HealthPlus Ltd which is in a battle for control with private equity firm Alta Semper Capital took a new twist as Health plus reported Alta Semper directors to the police last week, as observed in a document seen by Nairametrics.

In a letter sent to the Assistant Inspector General of Police on the 25th of September, HealthPlus stated, “We had the presence of unknown persons around our head office locations.”

READ: FG apologizes, says Self-Certification directive is not for everyone

The locations stated were 4 HealthPlus branches in Lekki, Lagos.

HealthPlus stated further, “We are aware that there are unauthorized and illegal plans by certain persons to take over our company premises to steal sensitive company property and assets, and ultimately take over operations of the company”

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The 4 persons mentioned by HealthPlus are; Zachary Fond and Ivan Genadiev (both Alta Semper Directors), Ernest Eguasa, CFO of company and an unidentified middle-aged white man.

Explore the Nairametrics Research Website for Economic and Financial Data 

Niarametrics reported last week that HealthPlus Limited appointed Chidi Okoro as Chief Transformation Officer.

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However, the announcement set off a chain of allegations and counter-accusations, including online media mudslinging with both sides trying to court public sympathy for who is in control of the company.

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Economy & Politics

P&ID dispute: UK Court orders $200 million guarantee to FG

Nigeria’s Foreign Exchange Reserves was boosted after a London Court ordered the release of $200Million placed as security in the case against P&ID.

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A London Commercial Court has ordered the release of a $200 million guarantee as security to be paid to the Nigerian government in the P&ID $10 billion Arbitral Claim.

This was disclosed in a social media statement by the Central Bank of Nigeria on Tuesday.

Nairametrics reported earlier this month that The Federal Government secured a landmark victory in its bid to overturn a $10 billion arbitration judgment award against it in a case against Process and Industrial Developments (P&ID).

READ: Nigeria seeks bank documents of former President, others over $9.6 billion P&ID case

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The Court said that Nigeria has established a strong prima case that the contract was procured by bribes paid to insiders as part of a larger scheme to defraud Nigeria. He said that there is also a strong prima face case that the P&ID’s main witness in the arbitration, Mr Quinn, gave perjured evidence to the tribunal, and that contrary to that evidence, P&ID was not in the position to perform the contract.

In today’s statement, the CBN said, “Nigeria’s Foreign Exchange Reserves was this morning boosted by over $200Million when the London Commercial Court ordered the release of the $200Million guarantee put in place as security in respect of the execution of the much discredited P&ID $10 Billion Arbitral Claim.”

READ; Why the NNPC is being dragged to US courts by Exxon Mobil, Shell

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“The court also awarded a £70,000 cost in favour of Nigeria in addition to an earlier award of £1.5m.”

On January 31, 2017, an arbitration tribunal had ruled that Nigeria should pay P&ID, the sum of $6.6 billion as damages and breach of contract after a 2010 deal for a gas project in the Niger Delta part of Nigeria collapsed. The pre and post judgement accrued interest of 7% has seen the amount standing against Nigeria, rise to almost $10 billion, an amount that will be a serious dent on the country’s external reserve.

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Business

FG to revitalize rice farms in rice producing regions

The Minister stated that rice production is expected to increase as the government continues to revitalize rice farmers.

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The Federal Government has stated that Rice Farms in Anambra State and other regions will be revitalized to boost rice production, create jobs and also improve the living standard of the people in the State and the region.

This was disclosed by the Minister of State, Agriculture and Rural Development, Hon. Mustapha Baba Shehuri, during the assessment of Federal Government Rice Farms/Mills in Omor and Umerum in Anambra State.

Given the importance of rice as a staple in Nigeria, the Minister stated that the Federal Government is taking steps to achieve self-sufficiency in rice production, and this is evident in the policies of the government in achieving food and nutrition security, import substitution and promotion of inclusive economic growth across all sectors of the economy.

READ: CBN says 22 banks to restructure over 35,000 loans due to COVID-19

Government Policy Interventions in Agriculture and Rural Development has helped to develop the rice sector, and these interventions include the provision of farm inputs such as agrochemicals, organic fertilizers, knapsack sprayers, planting & harvesting equipment such as reapers, mini combine harvesters, threshers at a subsidized rate in order to increase productivity.

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The Minister added that these policies have not only increased the quantity of rice produced annually but interventions through the provision of modern rice milling machines to small/medium scale processors, has also helped to improve the quality of Nigeria milled rice to international standard.

READ: New PIB amends royalties by oil firms as Sylva clarifies position on scrapping of NNPC

However, Nigeria’s rice consumption still holds higher than production, but government interventions through myriads of policies have increased rice production from 4.8 million metric tons of milled rice in 2015 to over 6 million metric tons by 2019 with a huge reduction in the nation’s deficit.  Hon. Mustapha Baba Shehuri explained that production is expected to increase as the government continues to revitalize rice farmers.

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Shehuri said that ”the Ministry has established 23 Paddy Aggregation Centers nationwide to aggregate and store paddy. The centres were given to members of the Paddy Dealers Association of Nigeria (PRIDAN) under the public-private partnership arrangement”.

READ: How to register for FG’s N75 billion MSME survival funds

In like manners, there will be the dissemination of modern rice production and processing technologies, through capacity building of farmers and processors directly and also in conjunction with the international donor agencies such as Japan International Cooperation Agency (JICA), Food and Agriculture Organization (FAO), German International Cooperation (GIZ), International Fund for Agricultural Development (IFAD), Competitive Africa Rice Initiative (CARI), AfricaRice.

He reiterated that the Ministry is currently responding to the challenges of food availability posed by the COVID-19 pandemic by supporting smallholder farmers nationwide with various inputs including certified seeds of improved varieties of food crops such as rice, maize, sorghum, wheat, orange-flesh sweet potato, groundnut cowpea, soybean, yam, as well as cash crops like cashew, cocoa, sesame, oil palm, gum Arabic. Others include herbicides, pesticides and agricultural machinery such as rice reapers, transplanters, power tillers motorized sprayers and processing equipment.

These interventions are expected to alleviate the effect of the pandemic on farmers and ensure that they keep producing food for the country.

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