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China Reserves Post First Yearly Drop Since 1992

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Currency Exchange Bureaus As China Roils Markets For Second Day As Yuan Tumbles With Stocks

China’s foreign reserves shrank last year for the first time since 1992, ending a 22-year ascent that began under former top leader Deng Xiaoping and accelerated with presidents Jiang Zemin and Hu Jintao.

The currency hoard plunged by $513 billion in 2015 to $3.33 trillion as of Dec. 31, the People’s Bank of China said Thursday. It was dragged down down by factors including central bank intervention to prop up the yuan after an August devaluation roiled global markets and capital flight from the world’s second-largest economy, analysts said.

Reserves were swelled for more than two decades by foreign capital pouring in to an economy expanding at an average 10 percent clip a year and a trade surplus fueled by exporters seizing market share overseas. Now policy makers are fighting to hold up the currency amid slower growth and plunging stocks, burning through assets to reduce yuan volatility.

“The switch from reserve accumulation to decline is a major turning point in the history of Chinese development,” said Freya Beamish, a London-based economist at Lombard Street Research Ltd. “It signifies a reversal of China’s role in the U.S. Treasuries market from buyer to seller. China is still a large excess saver, but it’s now reducing those savings and the foreign-exchange reserve decline is a result of that.”

The yuan sank to a five-year low on Thursday, weakening as much as 0.6 percent to 6.5956 per dollar, as the PBOC set the reference rate at an unexpectedly weak level, a signal that it’s more tolerant of depreciation as the expansion slows.

With the slowest economic growth in a quarter century, a long-held expectation that the yuan is a one-way appreciation bet has given way to a median forecast that the currency will depreciate to 6.64 per dollar this year.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Economy

Central Bank of Nigeria Raises Interest Rate to 26.25% in Bid to Tackle Soaring Inflation

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Central Bank of Nigeria (CBN)

The Central Bank of Nigeria (CBN) has increased the Monetary Policy Rate (MPR) by 150 basis points from 24.75% to 26.25% following a two-day meeting of its Monetary Policy Committee (MPC).

The decision, which is the third consecutive interest rate hike, comes as inflation levels in Nigeria have surged to 33.69% in April 2024.

CBN Governor and MPC Chairman, Yemi Cardoso, highlighted the key focus of the MPC meeting.

He cited food inflation as a primary driver, attributing it to rising transportation costs, infrastructure challenges, insecurity, and exchange rate issues.

While announcing the interest rate hike, Cardoso noted that the Cash Reserve Ratio (CRR) of Deposit Money Banks (DMBs) would remain at 45%, and the MPC would maintain the Asymmetric Corridor around the MPR at +100 and -300 basis points.

Also, the liquidity ratio would be retained at 30%.

The decision reflects the CBN’s determination to address the economic challenges stemming from high inflation rates.

Despite protests and pressure from labor unions, President Bola Tinubu has urged patience, expressing confidence in his government’s reform initiatives.

The announcement of the interest rate hike comes amid rising prices of commodities and an escalating cost of living for Nigerians.

The removal of fuel subsidies last year and the floating of the naira have contributed significantly to historic high inflation levels.

In recent months, the CBN has taken measures to combat the falling value of the naira, including targeting the operations of cryptocurrency exchange Binance.

While these measures initially led to an appreciation of the currency, recent weeks have seen the gains stall.

The decision to raise the interest rate shows CBN’s commitment to implementing measures aimed at stabilizing the economy and restoring confidence in the nation’s financial system.

However, the effectiveness of these measures in curbing inflation and promoting economic growth remains to be seen amid ongoing economic challenges and uncertainties.

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Analysts Forecast Rate Increase as Naira Depreciates Sharply

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Interbank rate

As the Nigerian naira experiences a sharp depreciation against major currencies, financial analysts are predicting that the Monetary Policy Committee (MPC) will opt for another interest rate hike to address the country’s economic challenges.

The recent slump in the naira, coupled with a 28-year high inflation rate, has raised concerns among economists, prompting expectations of further tightening measures.

Since mid-April, the naira has witnessed a significant decline, falling by 28% against the US dollar over the past four weeks.

This rapid depreciation has been exacerbated by President Bola Tinubu’s decision to relax foreign-exchange controls last June.

In response to the economic turmoil, the MPC raised interest rates by 6 percentage points in the first quarter, bringing the benchmark rate to 24.75%.

However, with inflation soaring to 33.7% last month—well above the central bank’s target range of 9%—analysts believe that additional rate hikes may be necessary to curb rising prices and stabilize the currency.

Giulia Pellegrin, a senior portfolio manager at Allianz Global Investors, highlighted the need for proactive measures, stating, “The committee will likely be watching recent currency volatility and may decide more action is needed.”

She emphasized the importance of tightening monetary policy to restore investor confidence and ensure price stability.

Yvonne Mhango, an economist at Bloomberg Africa, echoed similar sentiments, noting that the naira’s depreciation necessitates “additional and sizeable rate hikes.”

Mhango emphasized the significance of maintaining positive real interest rates to combat inflationary pressures effectively.

Investors are eagerly awaiting the MPC’s decision, with many expecting another interest rate increase at the upcoming meeting on May 21.

Ayodeji Dawodu, director of fixed income at BancTrust & Co., stressed the importance of transparency and intervention in the currency market to restore stability.

“Investors also want Cardoso to announce more liquidity-tightening measures and introduce greater transparency in the currency market,” Dawodu remarked.

Despite recent declines in liquid reserves, analysts remain hopeful that decisive action from the central bank will help alleviate concerns about the quality of reserves and bolster confidence in the economy.

As Nigeria navigates through turbulent economic waters, all eyes are on the MPC’s decision and its potential implications for the country’s financial landscape.

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Nigeria’s N3.3tn Power Sector Rescue Package Unveiled

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power project

President Bola Tinubu has given the green light for a comprehensive N3.3 trillion rescue package.

This ambitious initiative seeks to tackle the country’s mounting power sector debts, which have long hindered the efficiency and reliability of electricity supply across the nation.

The unveiling of this rescue package represents a pivotal moment in Nigeria’s quest for a sustainable energy future. With power outages being a recurring nightmare for both businesses and households, the need for decisive action has never been more urgent.

At the heart of the rescue package are measures aimed at settling the staggering debts accumulated within the power sector. President Tinubu has approved a phased approach to debt repayment, encompassing cash injections and promissory notes.

This strategic allocation of funds aims to provide immediate relief to power-generating companies (Gencos) and gas suppliers, while also ensuring long-term financial stability within the sector.

Chief Adebayo Adelabu, the Minister of Power, revealed details of the rescue package at the 8th Africa Energy Marketplace held in Abuja.

Speaking at the event themed, “Towards Nigeria’s Sustainable Energy Future,” Adelabu emphasized the government’s commitment to eliminating bottlenecks and fostering policy coherence within the power sector.

One of the key highlights of the rescue package is the allocation of funds from the Gas Stabilisation Fund to settle outstanding debts owed to gas suppliers.

This critical step not only addresses the immediate liquidity concerns of gas companies but also paves the way for enhanced cooperation between gas suppliers and power generators.

Furthermore, the rescue package includes provisions for addressing the legacy debts owed to power-generating companies.

By utilizing future royalties and income streams from the gas sub-sector, the government aims to provide a sustainable solution that incentivizes investment in power generation capacity.

The announcement of the N3.3 trillion rescue package comes amidst ongoing efforts to revitalize Nigeria’s power sector.

Recent initiatives, including tariff adjustments and regulatory reforms, underscore the government’s determination to overcome longstanding challenges and enhance the sector’s effectiveness.

However, challenges persist, as highlighted by Barth Nnaji, a former Minister of Power, who emphasized the need for a robust transmission network to support increased power generation.

Nnaji’s advocacy for a super grid underscores the importance of infrastructure development in ensuring the reliability and stability of Nigeria’s power supply.

In light of these developments, stakeholders have welcomed the unveiling of the N3.3 trillion rescue package as a decisive step towards transforming Nigeria’s power sector.

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