Investors are fleeing emerging markets in record numbers and piling into the safe-haven greenback, with two emergency interest-rate cuts this month by the Federal Reserve doing nothing to diminish the dollar’s appeal.
With the American dollar more integrated into the world economy than ever before, its gains are an added stress for businesses and governments as they brace for soaring costs on their dollar debt.
The dilemma for emerging market central banks is that as they slash interest rates to support growth, they risk destabilizing their currencies as well if they cut too much.
Victor Silas, an investment analyst spoke to Nairametrics on the phone that, “It is no news that there is a school of thought arguing about a possible devaluation given the oil prices hovering around $30 per barrel in recent weeks as a round of the low demand side and a price war between Russia and Saudi and most importantly the continued depletion in our FX reserves since H2 2019 currently at 36bn dollars.“
However, he added that, “The CBN press release on 12 March stated that he size of Nigeria’s foreign exchange reserve remains robust and comfortable, given the current realities of Nigeria’s genuine and legitimate FX demand.”
Nigeria has reacted to the crisis triggered by Coronavirus and oil’s collapse in the same way that it did when crude last crashed in 2014 by trying to prevent the naira weakening and tightening capital controls.
With foreign reserves having fallen almost 20% since July, Nigeria needs a currency almost 40% weaker if Brent prices stay at $30 per barrel
What it means: This outlook will weaken investors’ confidence. It will generate speculative pressures on the currency. It will result in the depreciation of the naira exchange rate. It will trigger inflationary pressures, increase production and operation costs for businesses and will weaken purchasing power and ultimately undermine the welfare of the citizens.
Tempitope Busari, CFA treasurer at a leading Lagos based consumer finance firm in an email sent to Nairametrics added that, “As far as a stronger dollar goes, my view is that the USD/NGN rate will continue the upward trend at least at the ‘freer’ unofficial window.
“Recall that this window caters to the noisier segment of the market and as such, sustained pressure is seemingly inevitable. I don’t see the rates receding anytime soon. For the first time ever.
“Nigeria has about 50 cargoes of crude oil that have yet to find off-takers, coupled with the reality that oil price is very well below $30pb. The country’s FX earnings are being threatened, and this situation is not helped by the fact that our cost of crude oil production is still triple that of Saudi’s.
“It is only a matter of time before the official market follows – our imports and crude oil revenues dependent economy will force their hand if things continue this way.”
The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, rose by 1.77% to 99.88. as at 10.50 am Nigerian local time
FAAC disburses N696.2 billion in July 2020, as Lagos State parts with N1.46 billion
The sum of N696.18 billion to the Federal, State, and Local governments in July 2020 from the FAAC account.
The Federation Account Allocation Committee (FAAC), disbursed the sum of N696.18 billion to the Federal, State, and Local governments in July 2020, from the revenue generated in the month of June 2020. This was stated in the latest FAAC report, released by the National Bureau of Statistics (NBS).
According to the report, the monthly disbursement increased by 27.2% compared to N547.3 billion shared in June, and 14.8% increase compared to N606.2 billion disbursed in May 2020.
Checks by Nairametrics research, shows that a total of N4.58 trillion has been shared to the three tiers of government, between January and July 2020. Highest disbursement was recorded in April (N780.9 billion), followed by N716.3 billion in January 2020.
Meanwhile, Lagos State – the economic hub of Nigeria, parted with N1.46 billion as external debt deductions in the month, indicating a total of N9.74 billion deductions between January and July 2020.
Explore the Nairametrics Research Website for Economic and Financial Data
- The amount disbursed in July comprised of N474.53 billion from the Statutory Account, N128.83 billion from Valued Added Tax (VAT), N42.83 billion from Exchange Gain Differences, and Distribution of N50 billion from Non-Oil Revenue for the Month.
- Federal Government received a total of N266.13 billion from the total disbursement. States received a total of N185.77 billion, and Local Governments received N138.97 billion.
- The sum of N28.50 billion was shared among the oil producing states as 13% derivation fund.
- Revenue generating agencies such as Nigeria Customs Service (NCS), Federal Inland Revenue Service (FIRS), and Department of Petroleum Resources (DPR) received N6.32 billion, N15.05 billion, and N2.68 billion respectively as cost of revenue collections.
South-South scoops highest share
The South-South region, also known as the Niger Delta region, received the highest share of the disbursement in the month of July. The region received a sum of N49.44 billion, representing 25.4% of the total net allocation for states.
This is largely because the region contributes mostly to crude oil production in Nigeria, which is a significant source of revenue for the federation. Out of the six states in the region, only Cross River State is not an oil producing state. Hence, Rivers, Edo, Akwa Ibom, Bayelsa, and Delta States received a total of N24.28 billion as part of 13% oil derivation fund.
North-West region received N36.83 billion (18.9%); followed by North-Central region, which received a net total of N30.69 billion (15.8%). Others include South-West (N29.55 billion), North-East (N26.32 billion), and South-East (N21.97 billion).
External debt deductions
A total of N4.47 billion was deducted from the state’s allocation, as external debt deductions for the month of July. Lagos State parted with the highest amount of N1.46 billion, representing 32.6% of the total debt deductions in the month. A sum of N9.74 billion has been deducted as a result of external debt obligations between January and July 2020.
It is worth noting that, the State’s external debt has declined by 9.67%, from $1.39 billion recorded as at the end of December 2019 to $1.26 billion in June 2020.
Others on the list of top 5 deductions are, Kaduna (N414.6 million), Oyo (N305.4 million), Rivers (N280.3 million), and Cross River (N222 million). On the flip side, Ogun State parted with the lowest, as N9.1 million was deducted, followed by Borno (N21.6 million), and Taraba (N24.5 million).
- With dwindling federally collected revenue, caused by volatility in global crude oil price and economic downtrend caused by COVID-19 pandemic, it is evident that federal allocations will likely face drastic decline, which is a cue for the State governments to strategize on more creative ways of generating revenue internally.
- A quick check at the states’ IGR numbers, shows that 91.9% of the states in Nigeria with the exception of Abuja, Ogun, and Lagos States rely more on federal allocation, as against internally generated revenue.
- This implies that several states in Nigeria are technically bankrupt without debt financing, and Federal Government monthly allocation.
Buhari to finally send Petroleum Industry Bill to National Assembly next week
Sources in the Presidency have disclosed that the President may be presenting the bill to the National Assembly.
President Muhammadu Buhari is expected to present the long-awaited Petroleum Industry Bill (PIB) to the Senate as early as next week.
According to Reuters, who were quoting 4 sources familiar with the development, the presentation of the bill to the National Assembly, follows its official approval by the president late last week. This is as the National Assembly has already formed teams of members that will work most closely on the individual portions of the bill.
Both chambers of the National Assembly must have to pass the bill after deliberating on it before it can then be passed on to the president for his final signature.
The PIB which is an oil reform bill has been in the works for about 20 years, is key to the repositioning of Nigeria’s Oil and Gas Industry under its post-COVID-19 agenda as the main laws governing oil and gas exploration have not been fully updated since the 1960s due to some contentious issues like taxes, payments to local communities, terms and revenue sharing within Nigeria.
The Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), had disclosed that the delay and non-passage of the bill has made international investors to start losing confidence in the country’s oil and gas industry.
While revealing last month that the PIB will be presented to the National Assembly in the next few weeks, the Minister of State for Petroleum Resources, Timipre Sylva, also said that the executive arm will be requesting the lawmakers to specially reconvene to receive and start deliberations on the bill.
These oil reforms and regulatory certainty became more pressing this year as low oil prices and a shift towards renewable energy made competition for investment from oil majors tougher.
The draft copy of the bill which was prepared by the Petroleum Ministry is a product of series of consultation between the federal government, oil and gas companies and other industry stakeholders.
Excerpts from the bill reported by Reuters include provisions that would streamline and reduce some oil and gas royalties, increase the amount of money companies pay to local communities and for environmental clean-ups alter the dispute resolution process between companies and the government.
It also included measures to push companies to develop gas discoveries and a framework for gas tariffs and delivery. Commercializing gas, particularly for use in local power generation, is a core government priority.
FG needs to focus on business environment reforms – Sanusi
While speaking at the Kadinvest 5.0 Summit in Kaduna, the former CBN Governor gave salient suggestions to revamping the economy.
Former CBN Governor, HH Muhammadu Sanusi II has said the Nigerian government needs to focus on reforms that enable a better business environment and also called for economic diversification through maximizing technology as means to generate revenue away from crude oil.
Muhammadu Sanusi II disclosed this at the Kadinvest 5.0 Summit in Kaduna on Tuesday morning. Sanusi said the Nigerian government’s role in the economy should be small, both in absolute and relative terms. Sanusi cited Nigeria’s GDP per capita and tax revenue per capita, at $2,400 and $75 respectively, while development spending is just $36 compared to Kenya at $280 tax revenue per capita, and development spending of $280, despite having 90% of Nigeria’s GDP per capita at $2,151.
“Government needs to multiply its tax revenue, the government needs to spend on business environment reforms,” he said.
(READ MORE: Can Agriculture replace Oil in Nigeria?)
Solutions for Nigeria:
He said that the diversification made colonial Nigeria an economic success, based on the trading sector and the diversity of Nigeria’s export base, including palm oil, groundnuts, cocoa, tin, hides and cotton, and others. He added that the diversity of export meant Nigeria was less vulnerable to terms of trade shocks driven by one export in particular.
“Nigeria has suffered boom and burst periods due to oil valuations. It affects us in direct and personal ways. The government needs to understand the importance of wrong and adverse economic decisions on the human being,” he said.
Sanusi cited inflation numbers, saying Nigeria ignored inflation numbers of 2%, instead of breaking down the CPI and seeing how it affects millions of people who spend on food from minimum wages and how a 2% inflation growth wipes out earnings.
He compared Nigeria’s growth in the past 40 years with countries similar to countries like Malaysia. He added that Malaysia’s export base has been diversified from commodities to manufactured goods in the past 30 years.
By 1979, Malaysia’s top 2 exports were Crude Rubber and Cork and Wood. By the year 2000, Malaysia’s top 2 exports were Electrical Machinery and Office machines/Automated Data Processing equipment. Malaysia’s GDP per capita grew in the same period from $41 to $4,045. Compared to Nigeria’s GDP per capita, which increased from $345- $2,655 from 1985-2015, but failed to diversify export base as Crude Oil was Nigeria’s top export for the period.
“We were growing, but we did not diversify and that explains the huge level of poverty. It also explains the vulnerability of the economy to shocks,” he said.
Sanusi added that the failure to diversify explains the relativity of Nigeria’s slow pace, compared to Nigeria’s growth for the same period.“We have not moved in all these years. This is the difference between us and Asia, they moved!”
(READ MORE: Sanusi gets another major appointment)
On growth and structural change:
Sanusi made a case for a change of mindset with technology adaptation. He added that the wide usage of smartphones does not mean Nigeria has leapfrogged development, as we are not a producer of technology but primarily, a consumer.
He added that Nigeria is yet to leverage on the investments in the telecoms sector. “Infrastructure in Africa has become increasingly decoupled from tech training. Someone who uses a smartphone to produce a Nollywood movie is producing! We need to invest in human capital to boost technology innovation, the smartphone is a ticket to wealth… Every excuse Nigeria has to not grow, Indonesia and Malaysia had. We need to move away from a consuming attitude( with technology) to production,”
On Power generation for productivity:
“In a low-income environment, income elasticity is far more important than price elasticity. People would pay for electricity if they could use it to earn,” he said. “Look at electricity as an economic resource, look at how much you could make. There is a difference between not earning a thing and earning something.”
He cited how China focuses on two major metrics, which are; the number of employed and the number of those with access to electricity, citing the per capita contribution of electricity to production needed to move people away from poverty.
He encouraged skilled jobs that leverage technology, which would enable growth and also remove the pressure of Oil money on the states.
“Youths need an environment that has been created to give them skills. We need to invest in broadband as an economic resource,” he said citing the importance of skill transfers in developing broadband infrastructure.
On patterns for structural changes:
Sanusi said East Asia has moved from agriculture to manufacturing and later services, majorly from the informal to the formal sector. However, in Nigeria, the bulk of a similar change has been in the informal sector.
“Manufacturing GDP in Africa has fallen from 14% in 1990 to 10.1% today. Formal job creation has been modest. This is partly because of a mistaken view that Africa can simply leapfrog manufacturing to become a service-based economy. We have declining activity, while the rest of the world has increased activity”.
He added that an enlightened industrial policy will translate to meaningful job creation. He concluded that Nigeria needs to link infrastructure development to economic growth. “You have to make sure your projects are linked, you don’t just build a road here, a rail line there, an airport there without knowing how there are going to translate into an economy.”
He also mentioned that Nigeria’s Public Debt has risen, and due to high inflation he cannot see how the CBN can keep expanding its balance sheet. He urged the FG to spend more time creating the environment through reforms that will attract the investments while also fixing the balance sheet.