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Currency deregulation and finding the true value of the Naira

Why does a government borrowing heavily choose to subsidize the dollar?

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A colleague said to me, “it’s uncanny how your Central Bank’s policy on Foreign Exchange is similar to that of Zimbabwe of 2008”.

I had to go check what Zimbabwe did and where it led them to.  Zimbabwe. after a bout of hyperinflation, abandoned its currency. Nigeria’s current arrangement may get us there.

It is a good time to own a BDC. BDC licenses can cost as much as N15m now. The same license cost about N3m some years ago. Why has it gone up? A BDC can generate a weekly return of N1.3-1.4m just on a $50k bid.  Most people can live on that. With a spread of N65 on a dollar: official at 410 and parallel at 475, why do you have to sweat?

So what is the impact of this? A long run destruction of the economy, a higher subsidy than calculated on petrol and a significant market distortion. A distortion that profits less than 1% of the population and sending a higher number into poverty.

READ: FG rejects IMF’s advice to devalue the naira

With, until recently, accretion to reserves impaired by low crude prices and low volumes, there is a rapid depletion of the country’s reserves. Why does a government borrowing heavily choose to subsidize the dollar?

The answer is corruption. Corruption played out supported by perceptions of what could happen to the middle class if the Naira were allowed to float. Nigerians tend to politicize the exchange rates. It’s for them a sign of economic management. Governments in power have that awareness. It’s part of the play in sustaining corruption.

The future is bleak. The external reserves shed over a $1billion in the last few weeks. Nigeria is consuming the present and the future. There is really nothing to show for the years of interventions. With the ongoing challenges in security and rising poverty, the destination is going to be a crash.

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It is time for market unification. It is time for Nigeria to move to find the true value of the Naira. It must stop the corruption in the markets.

SSKOHN

 

Written by Demola Adigun

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Nairametrics frequently publishes articles from experts such as financial analysts, economists, researchers and investors. We also feature articles from guest writers and bloggers who wish to push their views and opinions through our platform.To get your articles on Nairametrics, kindly send an email to [email protected] and we will publish it within 24 hours of approval by our editorial team.

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    Columnists

    CIFI: Despite CBN funds, can the creative industry thrive in this environment?

    The Nigerian technology ecosystem is at its nascent stage, and beyond money, there is the need to ensure an enabling environment for operators.

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    Despite a frail 2020 for the Nigerian economy, there was a bit of silver lining. The Nigerian Information, Communication, and Technology (ICT) sector emerged as the leading segment of the economy aiding the country’s exit from recession by a whisker in Q4 2020.

    The development, in effect, justifies to some extent, the earlier decision of the Central Bank of Nigeria (CBN) to create the Creative Industry Financing Initiative (CIFI) to support businesses in the following areas:

    • Fashion
    • Information Technology
    • Movie Production and Distribution
    • Music

    The CBN began to contemplate the idea of the CIFI following the influx of private investment into the technology space in 2019. For instance, according to the African Tech Start-ups Funding report for 2019, Nigeria got foreign exchange inflows totalling US$137.9m in the period.

    This continued into 2020, considering that despite the pandemic, the sector still attracted an additional US$122m in seed funding. Furthermore, the sector contributed 13.12% of the total real Gross Domestic Product (GDP) of Nigeria which came to N19.53tn as of Q4 2020.

    Evaluating the progress made so far with the CIFI, as of Q3 2020, the CBN had reportedly disbursed c. N3.12bn in intervention to 320 beneficiaries. While there are concerns around the tenor of the loan for Software Engineers and accessibility of funds to other technological entrepreneurs, we laud the CIFI and encourage relevant agencies to do more.

    The Nigerian technology ecosystem is at its nascent stage, and beyond money, there is the need to ensure an enabling environment for operators. For instance, the recent BVN concerns that rocked the financial technology space and the regulatory uncertainty which is a key risk for telecommunication operators among other concerns, are issues that should be decisively dealt with.


    CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange

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    Columnists

    Book of States 2020: Vast resources, low industrial development

    State governments have been heavily reliant on FAAC distribution to meet recurrent expenditure, thus making no room for capital spending. 

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    Oil Price Crash: Governors to meet on budgetary and economic issues, Insecurity: Governors to meet on Wednesday over rising insecurity
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    The Nigerian Investment Promotion Commission (NIPC) in a recent report titled “Book of States 2020” highlighted the investment prospects of the 36 states of the federation including the Federal Capital Territory (FCT) to steer attention to the subnational investment opportunities in Nigeria. We note that the report is an outcome of a partnership between the commission and the Nigeria Governors’ Forum (NGF) to showcase the key investment opportunities for each state.

    The report focused on the key areas of physical capital (airports, railway stations and seaports), resources (natural and minerals) and demography (population and labour force) of each state including their Internally Generated Revenues (IGRs), budget spending and household consumption.

    While we acknowledge the decrepit infrastructure as a major hindrance to the growth of businesses and economic prosperity of many states, we note the little emphasis placed by the states on financing capital projects to attract private sector investments. Over the years, state governments have been heavily reliant on FAAC distribution to meet recurrent expenditure, thus making no room for capital spending.

    The truth is that as long as state governments do not make desperate efforts to develop their internal revenue-generating capacity, the states in the country would continue to operate an inefficient rent collection system where they rely solely on FAAC allocation to meet basic needs such as paying workers’ salaries.

    In our view, we believe the efforts to revive the ailing status of many states depend on the effectiveness and soundness of policies made to propel investments. Currently, Nigeria has enormous potentials to improve tourism given its ample amount of resources to attract both local and international tourists. Many countries in the continent such as South Africa, Kenya and Morocco have made great fortunes from tourism.

    Over 50% of the states have recorded no foreign direct investments over time due to little or no requisite infrastructure needed to attract capital inflows amid untapped resources in these affected regions. Also, we believe the Federal Government needs to relax its control on some of the state-owned resources to enable the states better exploit these resources.


    CSL Stockbrokers Limited, Lagos (CSLS) is a wholly-owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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