Sterling skids to three-month low as ‘hard Brexit’ fears bite – Reuters

By Jemima Kelly | LONDON

Sterling skidded to its lowest levels – bar a “flash crash” in October – in 32 years on Monday, hit by fears that Prime Minister Theresa May will say on Tuesday that Britain is set for a “hard” Brexit out of the EU and its single market.

Sterling fell as much as 1.5 percent against the dollar and over 2 percent against the yen. That shifted the spotlight away from the greenback, which has come under pressure in recent days as investors ponder U.S. President-elect Donald Trump’s likely economic policies after he takes office on Friday.

The pound plunged to as low as $1.1983 GBP=D4 in early trade in Asia, depths not seen since a bout of thin liquidity triggered a “flash crash” on Oct. 7 that wiped as much as 10 percent off the pound in a matter of minutes.

 

By 0851 GMT (03:51 a.m. ET) sterling had managed to inch back above $1.20 but still traded down 1.1 percent on the day at $1.2040.

Dealers said the market was reacting to various media reports over the weekend, including one in The Sunday Times that said May will signal plans for a “hard” Brexit in her speech on Tuesday, saying she’s willing to quit the European Union’s single market to regain control of Britain’s borders.

Investors have been worried such a decisive break from the single market would hurt British exports and drive foreign investment out of the country.

“Consistently we’ve had environments where sterling tends to weaken quite aggressively when May comes in with heavier rhetoric than expected, and this is definitely heavier rhetoric than expected,” said Citi’s head of European G10 currency strategy in London, Richard Cochinos.

“Broadly, the market has not has sterling and Brexit and Theresa May in its mind for the last two months – it’s been driven by Trump and Treasuries, and more the U.S. drivers. And now for two weeks in a row we’ve had news on May … really bring that to the forefront again.”

Cochinos said Britain’s hefty current account and budget deficits meant it was heavily dependent on foreign capital, and that the more uncertainty investors felt over Britain’s place in Europe, the more that investment would dry up.

May has said she will trigger Article 50 – starting the formal withdrawal from the EU – by the end of March. But so far, she has revealed few details about what kind of deal she will seek, frustrating some investors, businesses and lawmakers.

“SAFE-HAVEN” YEN

The euro climbed almost 1.5 percent against the pound to a two-month high of 88.53 pence EURGBP=, while sterling fell as much as 2.3 percent on the perceived safe-haven yen to a two-month low or 136.48 yen GBPJPY=.

The Japanese currency gained broadly as a risk-off mood dominated, hitting a six-week high of 113.61 yen to the U.S. dollar JPY=.

“The risk-averse sentiment stemming from ‘hard Brexit’ (worries) is pushing down the dollar/yen,” Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

“But so far, I think the correction from the dollar/yen’s high in December, and concerns about stronger protectionism under the new U.S. presidency, have been the dominant theme.”

The dollar index climbed 0.4 percent to 101.59 .DXY.

Trump revealed few policy clues at his first press conference last week since his November election victory. The dollar rose after the election on expectations that his administration would embark on stimulus to boost growth and inflation, prompting the U.S. Federal Reserve to adopt a faster pace of interest rate hikes.

But Trump’s protectionist stance has also added to some investors’ risk aversion, as he has threatened to impose retaliatory tariffs on China, build a wall along the Mexican border and tear up the North American Free Trade Agreement (NAFTA).

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

(Additional reporting by Wayne Cole in Sydney and Tokyo markets team; Editing by Catherine Evans)

Bitcoin seen surging on adoption by MMM and Chinese Yuan weakening – Businessday

Analysts are betting on cryptocurrency, Bitcon, to trade at record levels in 2017, following its adoption by Ponzi Scheme, MMM in Nigeria and also the fear that the Chinese currency, the yuan suffers more pain under Donald Trump’s presidency and a strengthening US dollar.

MMM, the Russian based Ponzi scheme, which has become popular in Nigeria, opened shop on 14 January with its Nigerian clients accounts converted to Bitcoin equivalent. However, BusinessDay found out that participants in the scheme are allowed to change from bitcoins to naira. But the option of holding accounts in the crypto currency will likely lead to a surge in demand for the digital currency in Africa’s largest economy. Before the closure of the MMM platform in December, an estimated three million Nigerians had their money in MMM.

Also the relationship between the Yuan and Bitcoin is such that when the yuan weakens, the bitcoin jumps. And as more investors hedge against currency risks, analysts project the bitcoin could more than double in price by the end of 2017.

Saxo Bank, which first invested in bitcoin as early as 2014, tips the currency to soar as high as $2,000 this year. Saxo Bank trades over 179 forex currency pairs.

Bitcoin was trading at $776 as at 12.00GMT (12noon Nigeria time) on Friday, January13.

The Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC) have already set up a committee to study bitcoin, a move which has been applauded by many analysts.

“It is commendable that the CBN is looking into bitcoin. Because if they chose to ignore it, the traditional banks will be ‘disrupted’ which is not good for the economy. We should expect some kind of statement on the position of the Federal Government on bitcoin this year,” said Tope Aladenusi, Chief Strategy Officer at Deloitte Nigeria.

He added that “Ponzi schemes, like MMM, will become more fraudulent with the adoption of cryptocurrencies and the economic situation.”

MMM, in a statement to participants, said it will start receiving payments in bitcoin when it resumes operations on January 14. The ponzi scheme with three million registered Nigerians said the decision is due to the recent sharp price fluctuations of the crypto currency.

It is expected that if demand for bitcoin jumps due to MMM adoption, prices may edge higher. However, other analysts have cautioned that the currency is very volatile and could lead to loss of investment.

Jesse Hallet, Javascript Engineer at Jive Software said it depends on whether investors are willing to accept the risk involved.

“If you really wish to invest, consider doing so with licensed investment organisations,” Aladenusi said via his Twitter handle.

One reason analysts cite in favour of investing in bitcoin is supply. Bitcoin supply is fixed as there are only 21 million of them in existence. According to Laura Shin, Forbes bitcoin analyst, “once 21 million bitcoin are released (a number that will be reached around 2140), the system will stop creating new coins.” The fact that bitcoins are not released arbitrarily ensures its stability over time. She also noted that over the next 100 years or so, the rate at which the supply of bitcoin increases will slow – every four years, the number of bitcoin being released will be halved, further preserving its buying power.

Another reason to consider in favour of bitcoin is that as it becomes more ingrained in society; individuals, groups, businesses and government embrace and use it for day to day transactions, the less volatility the digital currency experiences. Already businesses are starting to pay more attention to the digital currency.

In the past few days, the price of bitcoin has been the major subject of discussion in the global market. It began with the rollercoaster surge of the cryptocurrency to a high of $1,153 the first time in three years. It eventually came crashing to $887.47 – more than 11% according to data from the Coindesk Bitcoin Price Index, sparking different speculations the digital currency was experiencing déjà vu.

In November 2013, the currency rose to a record $1,200 per bitcoin. The value dropped a few weeks later to less than half of its high and further down to $200 in early 2015. It began climbing back up in 2016 and got to its present high.

According to Chris Burniske, author of “Bitcoin: A Disruptive Currency”, “Given its predictable growth and ultimate fixed supply, bitcoin could become a store of value superior to fiat currencies in the long term.”

Jesse Hallet projects that if bitcoin become stable, as the world economy and the number of coins on the market does not, the value of bitcoin should gradually increase over time. It is however difficult to speculate how much it will increase but if we are to consider Peter Smith’s forecast, that the value of bitcoin may not be going back to its 2015 lows.

 

FRANK ELEANYA & LOLADE AKINMURELE

Updated: FCTA sets December 2017 date for completion of $824m Abuja light rail – Businessday

The Federal Capital Territory Administration (FCTA) has announced December 2017 as the new date for the completion of the Abuja Light Rail project.

In the bid to fast-track the completion of the project, the administration unveiled plans to concession three lots: 4, 5 and 6 which are currently under procurement under a Design, Build and Operate basis.

The final design and construction of Lot 1 and 3 of the rail project was firstly awarded on the 25th May, 2007 to China Civil Engineering Construction Corporation (CCECC) Nigeria Limited, at the cost of $841,645,898 covering 60.67km with a completion period of 48 months (2011).

According to a report obtained by BusinessDay, the scope of the project was however reviewed in August 2012 “due to deficiencies noticed in the estimations.”

Speaking on the development, Abdulhamid Suleiman, acting Secretary, FCT Transport Secretariat, disclosed that “the scope of the contract was varied to $823,540,545.87 for the final design and construction of Lot 1 and 3 with a completion date of 36 months.
“This segment now covers a distance of 45.245km double track of rail line. The project has attained about 84.33 percent completion as at December, 2016,” he said.

As outlined in the documents, details of the work done on the project include: 45.245km double track (98 percent) completed; 12 No of stations 75 percent completed; 50 culverts 100 percent completed; 9 pedestrian overpasses, 85 percent completed; 13 railway bridges 100 percent completed; 15 flyover bridges 80 percent completed; locomotive and rolling stock depot 85 percent completed; communication 67 percent completed, while signalling is at 67 percent completion level.

Suleiman who reiterated the resolve of the present administration towards accelerating the project, explaimed that the feasibility study and conceptual design for the remaining Lots 4, 5 and 6 is under procurement.

According to him, the three lots are available for concession under a Design, Build and Operate basis.

The immediate past administration of Goodluck Jonathan had negotiated $500 million from the China Exim Bank to finance the project.

Speaking recently on the Abuja Light Rail project, Muhammad Bello, FCT Minister, reiterated that his administration is determined to make the Abuja light rail project operational by December 2017.

Bello added that all the rail corridors would be developed to boost trade and commercial activities in the territory.
The rail project runs from Idu in Abuja to Rigafa in Kaduna state and is expected to enable more people reside in satellite towns between Abuja and Kaduna, at much cheaper rates than both cities offer and still commute to work in the big cities, while enjoyining the serenity, space, as well as the freshness and lower prices of food that the sub-urbs typically offer.

 

KEHINDE AKINTOLA, Abuja

Sterling falls below $1.20 again on fears over Theresa May’s Brexit speech –

By Emma Haslett

 

The pound tumbled below $1.20 this morning for the first time since October’s so-called flash crash, as investors nervously awaited a speech from Theresa May.

Late last night the pound hit a three-month low, falling to $1.1983 as trading resumed in Australia and New Zealand.

Having recovered slightly overnight, this morning it fell as low as $1.996, 1.5 per cent down. At the time of writing, it was hovering at $1.2033, 1.2 per cent down.

The Prime Minister will address an audience of diplomats including EU officials tomorrow, in what has been dubbed the most significant speech of her premiership.

May is expected to formalise her intentions to pursue a so-called hard Brexit, saying the UK is prepared to leave the Single Market, customs union and the jurisdiction of the European Court of Justice.

“The pound hasn’t wasted any time in reacting to the early reports,” said Connor Campbell, financial analyst at Spreadex.

“While there is every chance it could see some kind of recovery tomorrow if a firm strategy is finally laid out, the size of this morning’s decline suggests that may not matter as much anymore.”

Still – there was a bright side.

“This latest pound-drama is set to define Monday’s trading, something that could be good news for the FTSE,” added Campbell.

Sterling Options Signal More Turmoil as May Speech, Ruling Loom – Bloomberg

  • Pound slides toward 31-year low after ‘hard Brexit’ report
  • Supreme court ruling could trigger ‘violent’ rally, BTMU says 

StanChart’s Maratheftis: Expect Pound to Fall Further

A measure of anticipated swings for the pound climbed to the highest in three months before U.K. Prime Minister Theresa May’s speech on Brexit plans Tuesday and a court ruling this month on whether the British leader or Parliament carries the power to invoke the exit.

“Even if the pound recovers somewhat in London, it seems as though the realities of a hard Brexit are still not fully priced in,” said Sean Callow, senior strategist at Westpac Banking Corp. in Sydney. “It is difficult to make the case for the pound to avoid testing, probably breaking, the ‘flash crash’ lows in coming weeks.”

The pound fell as much as 1.6 percent on Monday to $1.1986, the weakest level since Oct. 7 when it slid to $1.1841, the least since 1985. Sterling was 1.2 percent down at $1.2037 as of 2:53 p.m. in Tokyo.

Government officials said they expected May’s speech to cause a further “market correction,” according to the Sunday Times, which didn’t say how it obtained the information. The prime minister’s office declined to comment on the report when contacted by Bloomberg News.

Sterling trimmed some losses after Bloomberg News reported the U.K. Treasury is drawing up plans to reassure investors following May’s speech on Tuesday and U.S. President-elect Donald Trump told the Times he will offer the U.K. a “fair” trade deal.

One-month implied volatility for the pound climbed to as high as 13.3250 percent, the most since Oct. 12, from 12.0250 percent Friday, as traders sought protection against more turmoil. Bank of England Governor Mark Carney will speak at 6:30 p.m. in London Monday before the release of December inflation data on Tuesday.

The pound may come under broad‑based downside pressure this week as faster inflation is expected to push U.K. real interest rates further below zero, according to Commonwealth Bank of Australia.

Leveraged funds boosted net short positions on sterling to 61,273 contracts as of Jan. 10, double the amount from the week ending Dec. 20, according to data from U.S. Commodity Futures Trading Commission.

May’s speech isn’t the only approaching Brexit milestone. “The pound risks a violent rally to cover short positions if the U.K. Supreme Court rules to support Parliament,” said Naohiro Nomoto, manager of foreign-exchange trading at Bank of Tokyo-Mitsubishi UFJ in Tokyo.

The pound is prone to outsized swings during Asian trading, with the most extreme being October’s flash crash when the currency tumbled over 6 percent within minutes. While an investigation by the Bank for International Settlements released last week found no single cause for the event, it highlighted that the time of day played a significant role in making the market more vulnerable.

Yuan Top Forecaster Sees No End to Losses as China Economy Slows – Bloomberg

  • Danske Bank’s Mehren sees currency at 7.26 by end-September
  • PBOC using offshore rate to burn bears, the strategist says

Pressure on China’s yuan to depreciate will persist as the economy slows, according to the currency’s top forecaster.

The yuan will fall to 7.26 per dollar by the end of September, according to Allan von Mehren, a strategist at Danske Bank A/S, the yuan’s most accurate forecaster as ranked by Bloomberg. That implies a 5 percent drop from current levels, and is more pessimistic than the median estimate of 7.13 in a separate survey.

“I am more bearish on the economy to slow down than the market, and I think the currency is in a structural downward trend because of the structural headwinds,” Mehren said in an interview. “Fundamental pressures on the yuan are very much still in place.”

China’s currency has turned more volatile this year as the People’s Bank of China sought to curb capital outflows and overnight costs to hold yuan in Hong Kong surged, sending the offshore exchange rate to a record weekly advance. Data last week showed the nation’s exports tumbled 6.1 percent in December, showing the weakening yuan is doing little to lift shipments.

The offshore yuan rate is being used as a weapon by the PBOC to send warnings to speculators, because it doesn’t hurt the Chinese economy as most funding is taking place onshore, Mehren said. 

The city’s overnight deposit rate touched a record earlier this month, while the spread between the offshore and onshore exchange rates reached the widest since 2010. The mainland-traded yuan fell 6.5 percent in 2016 to trade at an 8 1/2 year low against the dollar. The currency was little changed at 6.9030 per dollar as of 5:12 p.m. in Shanghai, while the offshore rate in Hong Kong fell 0.3 percent to 6.8630.“They can deal with high offshore rates for some time,” Mehren said, adding that a one-time devaluation is unlikely to happen. “The offshore rate as a weapon has proven quite effective.”

— With assistance by Tian Chen, and Lillian Chen

Foreign reserve hits $26.9bn, as value of open contracts rises – Vanguard

By Emeka Anaeto

 

NIGERIA’S foreign exchangereserves increased week-on-week by 2.51 per cent toUSD26.88billion, according to latest update from the Central Bank of Nigeria, CBN, last weekend. The latest uptick in the reserves came against the backdrop of a week-on-week decline in global crude oil price, a factor that had stoked the upswing in reserves in the past one month. Brent crude oil price and OPEC’s reference basket price moderated lower week-on-week by 1.39 per cent and1.36 per cent toUSD56.11per barrel and USD52.30 a barrel, respectively, at the weekend.

Naira But activities at the interbank foreign exchange market remained minimal even as more pressures came on the parallel market segment of the foreign exchange market, sending Naira value, at N497/ USD1, closer to the dreaded N500 mark. This was despite indications by the Association of Bureau De Change operators to adopt N400.00/USD1 as BDC rate during a meeting with CBN a day before the latest depreciation.

However, in the Foreign Exchange Futures Market, the value of open contracts rose to US$3.8 billion from US$3.7 billion recorded in the first week of the year. It was observed that the value of the “soon-to-mature” Naira/USD January 25, 2017 dated contracts rose by US$58.3 million during the week. Meanwhile exchange rates at the spot market for one month, three months, six months and 12 months forward contracts were stable at N305/USD, N305.25, N320.18/USD, N330.537/USD, N346.07/USD and N378/USD respectively But analysts noted that despite the attractive prices of the contracts on offer, most of the contracts in the Futures market remained largely undersubscribed due to overhanging liquidity crisis in the currency market.

There was USD7.5 million intervention sales by CBN to banks during the week. In the current week, CBN will resume selling USD to BDCs for the first time this year; hence, we expect moderation of the Naira/USD exchange rate Analysts expect exchange rate at the interbank to remain stable this week as the CBN continues daily intervention. Meanwhile, plans by the CBN to resume dollar sales to BDC operators may offset some of the pressure on exchange rates at the parallel market. With last week’s depreciation amidst major moves by Central Bank of Nigeria, CBN, to assuage Bureau de Change, BDC, operators with improved availability of foreign exchange resources, some market operators believe the latest depreciation may be speculative, expecting a reversal this week.

Weekly foreign exchange supply However, Financial Vanguard learnt that dealers are not confident in the arrangements under the International Money Transfer Agency system which the apex bank has been working out for some months now. They said they are yet to receive foreign exchange supply under the arrangement this year, a situation which may have worsened the liquidity crises in the foreign exchange market while heightening speculations. This situation was coming at the backdrop of the reduction in the volume of weekly foreign exchange supply to the interbank market by the CBN previous week.

Read more at:Vanguard

Uniform exchange rate for BDCs and naira’s stability – The Guardian

By Chijioke Nelson

In recent years, the pursuit of exchange rate stability has been tough. The drop in crude oil prices and depletion of foreign reserves have led to the depreciation across markets. Now, the Association of Bureau De Change Operators of Nigeria (ABCON) has launched a Uniform Weekly Exchange Rate for Licensed Bureaux De Change portal, a move they said, was to enforce same-rate for operators and achieve fair pricing and stability for the naira.

Already, stakeholders have applauded the group’s dynamism and assessed support to the policies of the Central Bank of Nigeria (CBN). Could this be the elusive elixir for public confidence on registered operators and needed support to end arbitrage?

The foreign exchange (forex) market is driven by information flow and investors’ sentiments and the type of information available swings the rates for local and international investors. Of course, positive information flow would make the naira better off.

ABCON, the umbrella body for all CBN-licensed Bureaux de Change (BDC) operators, said the lunch of the portal was meant to enable BDCs achieve same exchange rate for the naira against the dollar across all licensed operators.

President of ABCON, Alhaji Aminu Gwadabe, who launched the portal at the maiden Business Editors of Print, Electronic Media and Wire Services, in Lagos, reiterated that the move would bring about exchange rate convergence, eradicate currency speculation and ensure speedy recovery for the naira against the dollar.

He said such feats are in line with Central Bank of Nigeria (CBN) Governor, Godwin Emefiele’s plan to stabilize the naira and boost investors’ confidence in the economy. According to him, the purpose for launching the BDCs Weekly Rate was to make it a reference point for realistic rates in the market that will boost foreign investment inflows and displacing the damaging effect of foreign media platforms to the economy.

He was confident that with the gradual recovery in crude oil prices, enhanced commitment of the CBN to diversification, leading to rising production of local rice and drop in import bills, as well as political will of the government to implement key economic reforms, the task of achieving a single determined exchange rate will be realised.

He urged the media to always quote rate on the ABCON website- www.abcong.ng for consistency and uniformity of reporting, while reiterating the need for people to deal with CBN-licensed BDCs only.

“ABCON wishes to reiterate its willingness to embark on a comprehensive media campaign on the roles, activities and location of members nation-wide to provide a guide to the public in dealing with only CBN-licensed BDCs and report any errant operator for necessary sanction,” he said.

Gwadabe said that CBN now implements between N500,000 to N2 million fines against BDCs that violate regulatory policies, and a risk of license suspension.“We also seek your support and partnership to assist the CBN and government to eliminate or reduce to the barest minimum, activities of parallel market operators. We also want to through our partnership with you, to give visibility to registered BDCs in the market and create more awareness on the role of operators in selling forex to the retail end of the market,” he stated.

Stakeholders’ reaction
Former Executive Director, Keystone Bank, Richard Obire, said that ABCON’s courage to seek a unified rate among themselves will bring sanity to the forex market.“I do not know how the group wants to achieve this, but if well implemented, it will bring orderliness to the market. It is easier to achieve such feats- Personal Travel Allowance and Business Travel Allowance transactions.  It is really a good initiative that will reduce the level of uncertainty in the market,” he said.

The Associate-Research, Eczellon Capital Limited, Mustapha Suberu, said there was need to allow a transparent price discovery in the market, which he believed would stimulate dollar inflows into the economy and subsequently, lead to local currency stability.

He solicited a well thought-out plan that would impact the forex market activities and allow foreign investors to develop confidence in the economy, and bring about positive market-determined rate.

The Managing Director, Afrinvest West Africa, Ike Chioke, believes the incorporation of a long-term diversified strategy in fiscal policy is required to cushion shocks in various segments of the economy and revive the naira.

According to him, the persistent pressure on the naira could have been minimised if a counter fiscal policy had been developed, as the CBN cannot continue to defend the naira with foreign reserves endlessly.

“To reduce this pressure, an inward looking policy (tax incentives, infrastructure development and production subsidy) should be emphasised to reduce the dependence on imported goods”, he said.He explained that beside oil receipts, the development of the agricultural sector will in the short-term reduce the forex burden of food imports and in the long run, enhance foreign receipts if its comparative advantage in the sector is efficiently deployed.

Automation of operations
ABCON affirmed that the automation of BDCs’ operations was ongoing, to faciltate online real-time operations and enhancement of compliance among operators. These, the group’s chief noted, would boost transparency of operations, ease of public accessibility of BDCs’ procedures, returns rendition and regulatory supervision. 

“We want to introduce certification for registered BDCs. The ABCON is also coming up with schools that will train and retrain members and encourage record keeping. We believe that once we are able to introduce measures that make the operations of parallel market irrelevant, they will be eradicated,” he said.

He said the BDCs are now jostling to be sole handler of Personal Travel Allowances and Business Travel Allowances, while at the same time, raising their operational modalities to ensure that they become agents of International Money Transfer Operators (IMTOs).He assured that ABCON and CBN would continue to work together and find sustainable solutions to wriggle the economy out of the ongoing forex crisis.

“We have continuously assured the CBN and taken appropriate measures to ensure that purchased funds are disbursed to end users and for eligible transactions only.“We also render weekly returns on purchases from the banks to Trade and Exchange Department of the apex bank.  We also ensure strict compliance to the provisions of the anti-money laundering laws observance of appropriate Know-Your-Customer principles in the handling of forex transactions,” he said.

Re-emphasising the need for a single forex market rate system, he said licensed BDCs will post an exchange rate each Monday on its website from January 16 to “highlight positive rate development in the market” and counter some domains, which he alleged to publish ‘high’ unofficial prices daily.

For a start, BDCs will initially quote exchange rate at N399/$ today.Trading in the parallel market became more regular since 2014 after the CBN strengthened capital controls as crude oil prices dropped. Dollar trades for about N490, compared with the official rate of about N315.The ABCON chief said there was need to disregard the parallel market rates, as they are not recognised by law.

Why Nigerians will become poorer with rising oil prices – Punch

Henry Boyo

Crude oil price has steadily increased beyond $50/barrel after OPEC agreed to cut output by about 1.2 million barrels/day in November 2016. Nigeria’s export revenue prospects will consequently be boosted, if this price trend is sustained, particularly if restiveness is minimised in the Niger Delta. However, much against popular expectation, the more bountiful the export dollars, the bigger also will be our economic headache!

President Muhammadu Buhari must be disturbed that the naira exchange rate has suffered so poorly under his watch, particularly after he promised parity between the naira and dollar, if he won the election. Unfortunately, the worst has yet to come, because, if crude oil price further rises while output remains favourable, the dollar will paradoxically spike well above N500=$1 and may approach N1000=$1 before December 2017! Any attempt to bridge the widening gap between official and parallel market exchange rates will devalue the naira and trigger a steep rise in fuel price to shoot inflation well beyond 20 per cent and make Nigerians poorer still.

 

Advisedly, patriotic Nigerians should alert Mr. President that his legacy will be characterised by mass poverty if he remains in denial of this reality. Hereafter, an interview format will be adopted, to explain the chain of cause and effect that will induce the horrifying realities foretold above.

Why are you so pessimistic and why should increasing dollar revenue make Nigerians poorer? Isn’t this a contradiction?

Yes, it would indeed seem a contradiction for a weaker naira and deepening poverty to be products of increasing dollar revenue, but interestingly, this has been our economic experience lately. For example, Nigerians became listed amongst the world’s poorest, despite the stupendous income from oil for several decades. Ironically, in retrospect, when crude oil prices hovered about $10/barrel, N1 exchanged for about US$2.

Conversely, when crude oil prices bounced beyond $140/barrel and output remained at over two million barrels/day, with well over $50bn as reserves, the naira inexplicably exchanged for over N150=$1! Consequently, Nigerians have to work 300 times harder, just to earn $1, particularly when income levels rise more slowly, despite our buoyant reserves. It is therefore evident that deepening poverty nationwide, unfortunately, correlates with increasing dollar income! So, my perspective is not pessimistic but is actually a logical deduction.

So are you suggesting that the economy will do better with smaller export revenue from oil? 

Unfortunately, in view of our national experience, it’s a case of heads you lose, and tails, you also lose, as the present lower oil price and revenue is also promoting severe hardship everywhere.

So, why does oil revenue instigate this economic dilemma?

The oil revenue is not the problem; the primary cause of the oppressive dilemma is the distortional process the Central Bank of Nigeria adopts for infusing the dollar revenue into the domestic money market to drive economic growth.

So, how is the dollar revenue infused into the system presently? 

Inexplicably, revenue allocations are all denominated in naira, even though dollar revenue, from crude, generally contributes the lion’s share. The question therefore is, what happens to the dollars held back by the CBN after substitution with the naira and how is the exchange rate determined for the naira shared as allocations?

How does naira substitution and the applied exchange rate distort inclusive economic growth?

The fear of an unrestrained inflationary spiral is the first lesson in economic management everywhere. The CBN is constitutionally empowered to keep inflation at best practice levels, usually below two per cent, so that income values and consumer demand will be favourably sustained. However, the main driver of spiralling inflation is undeniably excess money, (in this case, excess naira supply). Instructively, money supply inadvertently expands every time the CBN unilaterally substitutes naira allocations for dollar denominated revenue. Thus, the higher the dollar revenue, the greater will be naira supply and the greater also will be the serious threat of unbridled inflation wrecking the economy!

The popular perception is that the CBN adopts the open market rate for the naira it substitutes for dollar allocations. This may indeed be so, but the same CBN is guilty of consciously manipulating the exchange rate mechanism to favour the dollar rather than the naira, for which it is both the custodian and guardian.

How does this happen?

Well, by directly substituting naira allocations, the CBN immediately assumes ownership of billions of dollars. Historically, the so-called dollar “reserves” have unfortunately been serially abused by the CBN itself and incumbent Presidents. Nonetheless, the perverse argument is that once constitutional beneficiaries accepted naira allocations for their share of dollar revenue, they cannot turn around to also lay claim to the billions of dollars withheld by the CBN, as this would be akin to having your cake and eating it! However, if the tiers of government subsequently require dollars for any legitimate purpose, it is regrettable that they have to buy back such dollars from commercial banks, at a rate that may be higher than the earlier rate adopted by the CBN for substituting naira allocations.

So, how is the dollar rate presently determined?

Well, the present price mechanism appears regrettably skewed against the naira, as the CBN proceeds to AUCTION rations of the same dollars, earlier withheld, in a money market that it has unwittingly already suffocated by the bloated naira allocations paid to government every month. In practice, any item auctioned would sell for higher prices. Consequently, the CBN’s subsequent auctions of dollar rations, in a naira surfeit market, obviously spells perpetual doom for the naira exchange rate and inadvertently also, distressingly, fires the inflation rate.

Thus, the more bountiful the CBN’s withheld “dollar reserves” become, the greater also will be the threat from excess naira supply and spiralling inflation and the more urgent therefore will be the need to introduce restrictive policy measures to hold back inflation.

So, what measures are taken by the CBN to restrain spiralling inflation?

As I said, the presence of excess money supply is the major driver of inflation, so the CBN is invariably compelled to reduce consumer access to the excess naira supply, by increasing the mandatory Cash Reserve Requirement for banks and raising the interest rate commercial banks pay, whenever they borrow from the CBN to cover their temporary cash short falls. Expectedly, these banks would in turn, make lending more expensive to their customers by charging higher interest rates for loans advanced. This reflex action inevitably constitutes an obstacle to inclusive economic growth, and industrial competitiveness and clearly challenges the drive for import substitution.

So what is the way out?

The CBN should adopt dollar certificates for paying allocations of dollar denominated revenues, rather than unilaterally substituting naira allocations which precipitates excess liquidity.

Is it not possible that issuance of dollar certificates to states and MDAs will facilitate capital flight?

No, it won’t, because the beneficiaries cannot collect dollar cash; they can only collect the naira equivalent of their certificates from commercial banks at the prevailing market exchange rate. The dollars will always remain in the domiciliary accounts of public sector beneficiaries with the CBN, who will then directly act on the instruction of any bank, which purchased the dollar certificates from the original beneficiaries, to make onward payments for authorized imports on behalf of customers. Similarly, for their imports, government beneficiaries of dollar allocations will submit attested invoices for officially valid transactions, through their banks, for the CBN to debit their domiciliary accounts and settle their invoices with respective overseas suppliers directly.

Consequently, with this arrangement, there is little or no room for round-tripping and forex hoarding, unless the CBN management also compromises itself.”

This article was first published on December 12, 2016 and is reproduced here verbatim because of its pungency and continued relevance to current economic realities in the country.