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Naira depreciates at 5 years forwards market, now N570 to $1

Nigeria’s 5 years onshore Non-Deliverable forward contract posted its biggest drop by plunging 27% from N413.36 to close at N569.69.

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Nigeria’s 5 years onshore Non-Deliverable forward contract posted its biggest drop by plunging 27% from N413.36 to close at N569.69 a price differential of N156.  The 1-year Non-Deliverable forward contract was down 5% from N394.29 to close at N421.22 a price differential of N26.93.

One month NDF is now N395/$1 suggesting an imminent devaluation in the I&E window which could also impact the current official exchange rate of N360/$1 as well as the BDC rate which was devalued to N370/$1 some weeks back.

A forward market is an OTC market platform that fixes the price of a financial asset for future delivery. Forward markets are used for trading a range of instruments, especially in the foreign exchange market.  Forward currency contracts are used by traders, investors to lock in a currency’s exchange on a date agreed on.  

Non-Deliverable forwards allow hedging of currencies where fiscal regulators ban foreign access to local currency or the parties want to remunerate for risk without the physical exchange of cash. 

READ ALSO: Possible impacts of last week’s CRR debit on banks’ balances by the CBN

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Nigeria’s central bank has been struggling to stabilize Nigeria’s currency exchange rate because of historical low crude prices and the shutdown of economic activities in major cities of Nigeria  

Plunging crude oil prices has negatively disrupted the economy of Africa’s biggest oil producer, just as the onslaught of Covid-19 closed businesses and disrupted human activities of people to contain. Nigeria’s central bank devalued the naira against the dollar in March but is still under pressure to devalue the naira even further amid a scarcity of U.S dollars and poor export earnings. 

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READ MORE: External reserves to fall below $30 billion, more forex restrictions expected

What this means: This depreciation is a clear indication of the supply gap that currently exists in the foreign exchange market. Demand is high but not enough supply to stabilize the exchange rate. As things stand, the CBN will struggle to support the exchange rate as it did in 2017 when it newly introduced the I&E window. Back then, oil prices picked up and the government also received proceeds from its Eurobond offers.

The CBN’s expensive rate induced monetary policy also helped keep foreign dollars within Nigeria. The situation has changed from then as oil prices remain depressed and the economy is still reeling from the Covid-19 lockdowns.

There is also likely going to be more depreciation of the naira if things remain the same. Sources with connection to the megabanks inform Nairametrics that as things stand, most local businesses that rely on foreign inputs with significant dollar demand will either have to pivot sourcing locally or go bankrupt.

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READ MORE: IMF list unpopular policies CBN must reverse

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Meanwhile, the naira had hit N460 last week at the black market (its weakest level in three years), as dollar scarcity crippled the market. The naira was selling at N442 to a dollar at the black market today according to the Everdon bureau de change. The black market rateremains 16% lower than the official exchange rate which is pegged at N360.  

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Olumide Adesina is a France-born Nigerian. He is a Certified Investment Trader, with more than 15 years of working expertise in Investment trading. Follow Olumide on Twitter @tokunboadesina or email [email protected] He is a Member of the Chartered Financial Analyst Society.

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Macro-Economic News

Price Watch: Nigerians paid less for Kerosene in December 2020

NBS Report shows that consumers paid less for Kerosene in December than they did in November 2020.

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Average prices of Kerosene, Diesel and Cooking Gas in Nigeria

The latest National Bureau for Statistics (NBS) Price Watch report for the month of December 2020 indicates that the average price per litre paid by consumers for National Household Kerosene reduced by 0.17% from N353.38 in November 2020 to N352.79 in December 2020.

Also according to the report, the average price per gallon paid by consumers for National Household Kerosene reduced by 3.52% from N1,218.50 in November 2020 to N1,175.59 in December 2020.

Price variations across states

  • In the month of December 2020, States with the highest average price per litre of kerosene include; Benue (N436.81), Ebonyi (N425.83) and Taraba (N423.33).
  • However, consumers in Bayelsa (N235.95), Rivers (N302.04) and Delta (N307.69) enjoyed the lowest average price per litre of kerosene.
  • Consumers in Kebbi (N1,534.21), Nasarawa (N1,488.00) and Benue (N1,450.00) paid the highest average price per gallon of kerosene.
  • While consumers in Sokoto (N733.33), Bayelsa (N773.75) and Adamawa (N822.00) on the other hand, paid the lowest average price per gallon of kerosene.

Prices across zones

  • Consumers in South-East zone paid the highest average price for a litre of Kerosene (N377.53), followed by North East (N370.13), North West (N354.66), North Central (N354.44) while consumers in South West(N337.57) and South South (N325.96) paid the lowest average price for a litre of Kerosene.
  • In respect of the average price paid for a gallon of Kerosene, consumers in North West zone paid the highest (N1,197.54), followed by North Central (N1,305.68), South East (N1,220.66), while consumers in South West (N1,161.00), North East (N1,113.25) and South-South(N1,037.60) paid the lowest average price of a gallon of kerosene.

Why this matters

Kerosene has remained an important source of energy for cooking for most families, both in the rural areas and cities. Kerosene is mostly used in rural areas as a source of lighting.

Considering that food and lighting are very essential to life, it is therefore important that the price paid for Kerosene is quite reasonable and as well as affordable for most Nigerians.

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Nigeria’s inflation rate hits 15.75% in December 2020, highest in 3 years

This is 0.86% points higher than the rate of 14.89% recorded in November 2020.

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Despite billions on agriculture, food inflation up by 108% since 2015.

Nigeria’s inflation rate increased by 15.75% (year-on-year) in December 2020, the highest rate recorded in 3 years.

According to the latest Consumer Price Index report, released by the National Bureau of Statistics (NBS), the latest figure is 0.86% points higher than the rate of 14.89% recorded in November 2020.

On a month-on-month basis, the index increased by 1.61% in December 2020. This is 0.01% point higher than the rate recorded in November 2020 (1.60%).

READ: Inflation rate up 207% since 2009 as bad economic policies ravages naira.

Food inflation

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The closely watched index rose sharply by 19.56% in December compared to 18.3% recorded in the previous month.

  • On a month-on-month basis, the food sub-index increased by 2.05% in December 2020, up by 0.01% point from 2.04% recorded in November 2020.
  • The rise in the food index was caused by increases recorded in prices of bread and cereals, potatoes, yam and other tubers, meat, fruits, vegetable, fish and oils and fats.

READ: Hope rises for employment in December 2020 and January 2021 – CBN survey Report 

Core inflation

The “All items less farm produce’‘ or Core inflation, which excludes the prices of volatile agricultural produce stood at 11.37% in December 2020, up by 0.32% when compared with 11.05% recorded in November 2020.

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  • Also, on a month-on-month basis, the core sub-index increased by 1.10% in December 2020. This was up by 0.39% when compared with 0.71% recorded in November 2020.
  • The highest increases were recorded in prices of passenger transport by air, medical services, hospital services, shoes and other footwear, passenger transport by road, miscellaneous services relating to dwellings, hairdressing salons and personal grooming establishments, and repair of furniture.
  • Others include vehicle spare parts, pharmaceutical products, motor cars, maintenance and repair of personal transport equipment, paramedical services, motorcycle, dental services, and bicycles.

READ: Cost of data subscription reduces by over 50% in 2020

Worst hit states

  • In the month of December 2020, Bauchi State recorded the highest inflation rate at 19.85%, closely followed by Kogi State with an inflation rate of 18.4%
  • Others include Edo (18.1%), Zamfara (17.9%), and Sokoto (17.6%)
  • In terms of food inflation, Edo State also recorded the highest rise in inflation rate with 24.1%, followed by Kogi (23.16%), Sokoto (22.2%); while Kwara and Zamfara State recorded food inflation of 22.1% and 21.7% respectively.

READ: Nigeria’s inflation expected to maintain double digit in the next one year

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Meanwhile, the urban inflation rate increased by 16.33% (year-on-year) in December 2020 from 15.47% recorded in November 2020, while the rural inflation rate increased by 15.20% compared to 14.33% recorded in November 2020.

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What this means

The rise in the consumer price index indicates that consumers spent more in the month of December compared to the previous month.

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  • This implies that the purchasing power of Nigerians is continually eroding.
  • Nigerians could be faced with new worries if the second wave of the covid-19 pandemic leads to a second round of lockdown in the country.
  • The significant increase could, however, be attributed to the Christmas and New year festivities in the month of December.

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Nigeria’s total public debt rises to N32.2 trillion ($84.57 billion) as at September 2020.

The total public debt (External and Domestic) incurred by Nigeria stood at N32.22 trillion ($84.57 billion) as of September 2020.

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How to avoid debt despite economic challenges

Nigeria’s total public debt stock as of September 2020, increased by over N6 trillion in just one year. This is according to the Nigerian Domestic and Foreign Debt report, recently released by the National Bureau of Statistics (NBS).

The total public debt (External and Domestic) incurred by Nigeria stood at N32.22 trillion ($84.57 billion) as of September 2020, which represents an additional N6.01 trillion when compared to N26.21 trillion recorded as of the corresponding period of 2019.

READ: Nigeria total public debt hits N31 trillion as debt service gulp over N1.2 trillion in H1 2020 

The breakdown shows that external debts accounted for 37.82% (N12.19 trillion) of the total debt stock, while domestic debts at N20.04 trillion represented 62.18% of the total.

Breakdown

  • Further disaggregation of Nigeria’s foreign debt showed that $16.74bn of the debt was multilateral.
  • Also, $502.38m was bilateral (AFD) and another $3.26bn bilateral from the Exim Bank of China, JICA, India, and
    KFW while $11.17bn was commercial which are Eurobonds and Diaspora Bonds.
  • Total external debt grew by $5.04 billion (N3.9 trillion) within the period, indicating an increase of 18.72%.
  • Total domestic debt on the other hand declined by $5.86 billion. However, it represents an increase in Naira value of N2.09 trillion, largely due to multiple devaluations of the currency during the period.

READ: Growing concern for Nigeria’s ballooning debt profile

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A cursory look at the breakdown of the domestic debts show that 73.53% (N11.65 trillion) were in form of Federal Government bonds, 17.17% (N2.72 trillion) in Treasury bills, followed by Promissory Notes accounting for 6.13% (N971.9 billion) of the total federal government domestic debts.

Others include; FGN Sukuk (N362.6 billion), Treasury Bonds (N100.9 billion), Green bond (N25.7 billion), and Savings bond (N12.6 billion).

READ: Debt burden of the least developed nations rises to $744 billion – World Bank

More loans to be expected

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On the 31st of December 2020, President Buhari signed the 2021 appropriation bill of N13.59 trillion into law, which 25.7% higher than the revised 2020 budget of  N10.8 trillion. However, the budget comes with a deficit of N5.6 trillion, which is expected to be financed mainly through borrowings both externally and domestically.

READ: Global Economy to grow by 4% in 2021 – World Bank

According to the minister of Finance, Budget, and National Planning, Dr. Zainab Ahmed, in a budget presentation on Tuesday, N2.34 trillion will be sourced each from domestic and foreign sources respectively, N709.69 billion from Multilateral/bilateral loan drawdowns, and N205.15 billion from privatisation proceeds.

READ: Analysis: Nigeria needs an austerity diet

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Recall that Nairametrics reported in December that, the World Bank finally approved a $1.5 billion loan request made by Nigeria as budget support in order to cushion the impact of the covid-19 pandemic on the country’s revenue.

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It is also worth noting that the federal government will be tapping into funds in unclaimed funds and dormant accounts.

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