Currencies
Digitization of the U.S Dollar faces U.S Senate hearing
Member of the Financial Services Committee asked to know what digital dollars had to do with financial inclusion.
The world’s most powerful economy was in the spotlight yesterday, as America’s Senate Banking Committee deliberated on the digital dollar project before a selected audience, and offered solutions on how to upgrade the country’s financial infrastructure.
The U.S banking committee sought counsel from Paxos CEO, Charles Cascarilla, a financial researcher and professor at Duke Nakita Cuttino, and former CFTC Chair, Chris Giancarlo, as witnesses.
Charles Cascarilla explained in detail how stablecoins operate and their advantages in modern finance. In his words, “Stablecoins address the antiquated plumbing of our financial system.”
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“We need to address the frictions that exist with the payments system now,” Cuttino said. “Of course with innovation there comes the reduced cost.” Given the focus of her research, Cuttino provided the greatest insight on the specific concerns of the unbanked:
“Any solution should have low transaction costs. In the early days for Bitcoins, the transaction cost was extremely high — and remains extremely high.”
READ MORE: Libra working on multiple versions of digital coins
Top member of the Financial Services Committee, Patrick McHenry, asked Giancarlo to explain what digital dollars had to do with financial inclusion, to which Giancarlo responded: “It’s about on-ramps into the financial system and making them as simple and accessible as possible.”
Giancarlo’s current champion of the Digital Dollar Project spoke more about the project. He said:
“We began this journey nine months ago, long before COVID was even a concern, long before the insufficiencies of a lot of our payment systems were as broadly noted and acknowledged as they are now. We have said from the beginning and will continue to say, something as important as upgrading the U.S. dollar needs to be done thoughtfully, deliberately.
Explore the Advanced Financial Calculators on Nairametrics
“But we need to start now. And if COVID response is the catalyst to starting now, if China’s BSN is the reason to start now, if the Riksbank of Sweden is the reason to start now, if Bitcoin is the reason to start now — all of those pretexts are fine and all of them may appeal to a different constituency, but they say the same thing and that is we’ve got to get started. But we can’t rush it.”
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Currencies
How rise in oil prices will impact exchange rate
Oil prices are currently inching closer to $70 per barrel as the positive outlook of a return to global economic recovery swells investor sentiments.
Nigeria, Africa’s top oil producer and home to the second-largest reserves on the continent, is expected to benefit from the rise in oil prices in many ways.
Oil prices are currently inching closer to $70 per barrel as the positive outlook of a return to global economic recovery swells investor sentiments.
Historically, there has been a strong positive correlation between crude oil prices and the performance of the Nigerian economy. For example, when oil prices plummeted due to the COVID-19 outbreak and the implementation of lockdown protocols in 2020, the Nigerian government scaled down the budget to align better with the drop in crude oil price.
Now that there is a surge in oil price, we should expect that there would be an increase in government revenue translating to a stirring-up of aggregate demand.
READ: Nigeria records highest trade deficit since 1981
Why oil price is rising
The OPEC+ output restrains, despite the strong recovery of oil consumption, continues to give formidable fitting to bullish sentiments about soaring oil prices.
- Oil prices are rising as optimism about a strong rebound in fuel demand in developed countries overshadows concerns of full lockdown to curb covid-19 in India.
- Oil (BRENT) has seen a 34.3% increase Year to Date with the oil price at $69.34 showing an increase of +1.15% as of the time of writing this article.
What it means for the exchange rate
Perhaps the greatest benefit of the recent oil price rise is exchange rate stability. Since the crash in oil prices began in late 2019, Nigeria’s official currency has faced a barrage of sell pressure as local and foreign investors increase demand for the dollar.
This forced the central bank to curtain demand, implementing various forms of capital controls across the economy. With oil prices on the rise, Nigerians can begin to expect the following:
- An increase in government revenue, which also means higher dollar earnings and thus increased FX reserves. Nigeria’s FX reserve reportedly stands at $34.7 billion as of Tuesday, May 4th, 2021. Soaring oil prices strengthen the exchange rate and promote economic growth. This effect trickles down to higher reserves held by the CBN meant for stabilization of the currency.
- Higher oil prices could also mean a more stable economy thus propelling economic growth. This, in turn, attracts foreign investor dollars or at least retains what we already have and reduces the pressure on demand.
- Nigerians have intensified diversifying their currency holdings, keeping less of naira and holding more dollars as they hedge against depreciation. This has kept the pressure on the exchange rate over the last one and a half years. This trend could reverse if oil prices continue their steady rise.
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The implication? The parallel market exchange rate might appreciate closer to the NAFEX rate if this trend continues.
Hence, it is safe to presume that as the world resume business and travel activities, the demand for Black Gold will continue to increase, and with supply held steady by OPEC+ we can speculate that this is enough catalyst to relieve the pressure of FX demand and increase our foreign reserves thereby propelling growth.
However, the inclusivity of this growth may still be in question.
