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Decline in Foreign Reserves May Force CBN to Devalue Naira

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With the continued slide in crude oil prices at the international market, which has translated to perennial decline in the foreign reserves, FBNQuest has said there are indications that the Central Bank of Nigeria (CBN) would opt for devaluation of the naira, sometime this year.

The same position is being held by Dunn Loren Merrifield, which noted that it did not rule the possibility of another devaluation of the naira this year, should the foreign reserves decline beyond acceptable levels, But it was quick to add that “devaluation presents more ‘negatives’ than ‘positives’ for Nigeria.”

According to FBNQuest, these indications emerged as a result of the scenario created in the light of the oil crisis, which will continue in the months ahead.

Even though, the investment banking outfit stated that the CBN had been applying administrative measures to manage forex demand and could intensify the measures, the apex bank would not allow the measures to negatively affect sensitive imports like the petroleum products.

“Our take is that the decline will continue in the months ahead unless there is an unexpected recovery in the oil price. The CBN could intensify its administrative measures but would be unlikely to risk steps which jeopardise sensitive imports such as petroleum products.

“Rather than take such steps, we suspect that the CBN/MPC will opt for a devaluation this year while maintaining a managed exchange-rate regime. This would make life a little easier for the FGN in the sense that it would highlight the direct connection between the slowdown in the economy and the external trigger for the devaluation (the collapse in the oil price),” it stated.

FBNQuest, however, added that “the devaluation would not dramatically increase forex supply, particularly if the adjustment was small (as we would expect). At best, it would bring a modest rise in non-oil export values and portfolio inflows, the drawdown of more domiciliary accounts and the re-entry of some unrecorded capital.”

The company quoted data from the CBN, which showed that official reserves declined by $910million in January on a 30-day moving average basis to $28.2billion. “The decline over 12 months has amounted to $6.1billion despite the CBN’s many administrative measures to contain forex demand and some FGN successes in plugging leakages. Reserves at end of January provided 6.3 months’ cover for annual merchandise imports and 4.6 months when services are included on the basis of CBN data running through to September 2015. This would represent adequate cover in less troubled times but not when the international price of crude oil has fallen by two thirds in just 18 months.

DLM , which made its position known in its Economic Outlook for 2016,expected that “the decline in oil prices will continue to exert pressure on the exchange rate due to the outflow of foreign funds as investors express concern on macro-economic stability due to weakening economic fundamentals.” This, according to the company, was “reflected in the steady decline in external reserves recorded in the previous year which resulted largely from a slowdown in portfolio and foreign direct inflows during the period.”

While noting that “Nigeria remains a largely import-dependent economy which in our view contributes to the high demand for foreign currency”, the company stated that it “will sustain pressure on the naira.”

The investment banking outfit, however, believed “initiatives that support increased domestic productivity and a lower reliance on imports would lower the pressure on the naira in the medium to long term.”

Also, DLM predicted that inflation rate will hover around the lower double digit range in 2016.

Making this prediction, the company noted that “though inflation rate remained within the single-digit band in 2015, we expect that inflationary pressures remain apparent and will subsist in the short-to-medium term with seasonal adjustments, food supply shocks and the risk of higher imported inflation being major concerns. “

DLM explained that it anticipated that the CBN will maintain its expansionary monetary policy stance in the current year.

“This”, according to the company, “is in line with our view that priority should be given to lower interest rate which would place the economy on a path of sustainable growth through provision of appropriately-priced long term financing to the real sector and employment creation.”

“We are not oblivious of the fact that a reduction in interest rate poses some degree of risk to headline inflation, exchange rate and the exit of ‘hot money’ in search of higher yields. However, we believe that the focus should be on long term gains rather than short term.”

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Economy

Cuba’s Central Bank Suspends US Dollar Deposits Nationwide

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US Dollar - Investorsking.com

Cuba, the island country located where the Caribbean Sea, Gulf of Mexico, and the Atlantic Ocean meet, said this week U.S. dollars will be suspended in the country.

The mandate comes from the country’s central bank and foreign tourists have been told to leave U.S. dollars at home when visiting. The announcement was invoked at a roundtable discussion that was aired on state-sponsored Cuban television.

“In view of the obstacles that the U.S. embargo creates for the national bank system to deposit abroad the U.S. dollars that are collected in the country, a decision was made to temporarily suspend deposits in U.S. banknotes in Cuba’s bank and financial system,” the Central Bank of Cuba (Banco Central de Cuba, BCC) members said.

Yamilé Berra Cires, the vice president of the BCC, explained during the roundtable discussion that at the beginning of the Trump administration’s leadership, the U.S. tightened the embargo’s grip. The United States has had an embargo with Cuba since 1958 and the U.S. has had numerous issues with Cuba during the Eisenhower presidency and Kennedy presidency as well. After the 2008 crisis, the U.S. and Cuba seemed to gravitate toward friendlier terms during the Obama presidency.

However, BCC vice president Berra Cires claims issues have gotten worse since Trump and said 24 foreign banks stopped dealing with Cuba. Berra Cires also said during the roundtable discussion that 95 foreign financial institutions reported on the transgressions of Cuban national banks doing business with counterparties. “It is ever more difficult for Cuba to find international banking or financing institutions willing to receive, convert or process U.S. currency in cash,” Berra Cires further remarked.

“People who will be coming into the country during this time will have to arrive with a currency other than the dollar,” Francisco Mayobre Lence the BCC’s first vice president said.

Of course, after hearing about the USD ban in Cuba, members of the cryptocurrency community wanted Cuba to adopt digital currencies like El Salvador recently did with bitcoin. “It’s like [a] 50-year embargo. It’s really depressing,” one individual wrote about the Cuba situation with America on Reddit. “Will they take crypto now?” another Redditor asked in the r/cryptocurrency thread. Another crypto enthusiast responded to the question and said:

I doubt they want to be the last Latin American country to do so.

Minister-president of the Cuban central bank, Marta Sabina Wilson González explained during the roundtable discussion that Cuba had no choice but to make the decision. “We had no choice but to take this measure, which we are explaining at the Round Table, as we always do when it is a measure that affects the people, who will understand that there is no other option,” the minister detailed.

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Kenya Receives $750 Million Loan from World Bank to Boost Economic Recovery

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Kenya has received a $750 million loan from the World Bank to support its budget and help the East African economy recover from the effects of the COVID-19 pandemic, the multilateral lender said on Friday.

The Kenyan government has been pushing hard to secure foreign funding to fill a wide budget deficit before its financial year closes at the end of this month.

The $750 million disbursement is part of World Bank’s Development Policy Operations (DPO), which lends cash for budget support instead of financing specific projects.

The bank said some of the funds would go towards setting up an electronic procurement system for government goods and services to improve transparency.

The World Bank said the concessional loan will have a 3.1% annual interest rate. Typically, World Bank loans have zero or very low interest rates and have repayment periods of 25 to 40 years, with a five- or 10-year grace period.

On Thursday, Finance Minister Ukur Yatani presented to parliament the 2021/22 budget, with a deficit of 7.5% of gross domestic product, reduced from 8.7% for the current fiscal year ending this month.

The finance ministry forecasts a economic growth of 6.6% this year, recovering from 0.6% in 2020 when sectors like tourism and related services collapsed due to restrictions imposed to curb the spread of COVID-19.

The World Bank forecasts Kenya’s economy will grow 4.5% this year, and 4.7% in 2022.

President Uhuru Kenyatta, who took the helm in 2013, has overseen a jump in public borrowing. Total debt stands at 70% of GDP, up from about 45% when he took over – a surge that some politicians and economists say is saddling future generations with too much debt.

The government has defended the increased borrowing, saying the country must invest in its infrastructure, including roads and railways.

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FG Spends N612.7 Billion on Domestic Debt Servicing in Q1 2021

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Naira Exchange Rates - Investors King

The latest report from the Debt Management Office (DMO) has revealed that the Federal Government spent a total sum of N612.71 billion on domestic debt servicing in the first quarter (Q1) of 2021.

In the report released on Wednesday, the DMO said the Federal Government paid holders of mature Nigerian Treasury Bills (NTB) N17.23 billion in January, N12.3 billion in February and N5.49 billion in March 2021. Indicating that the Federal Government paid a combined sum of N35.03 billion to NTB holders in Q1 2021.

Similarly, the Federal Government paid N537.783 billion to holders of Federal Government of Nigeria bonds in three instalments of N201.95 billion in January, N79.26 billion in February and N256.58 billion in March 2021.

The Federal Government also paid N308.38 million in three tranches to subscribers of mature FGN Savings Bond. FG paid N111.65 million in January, N97.074 million in February and N99.65 million in March 2021.

Another N8.16 billion was used to settle FGN Sukuk Rentals in March 2021. No payment was made in January and February 2021.

The Federal Government released N31.44 billion as principal repayment “in respect of promissory notes during the quarter under review.

A monthly breakdown revealed that a total sum of N219.29 billion was released to service domestic debts in January, N123.09 billion in February and N270.33 billion in March. Therefore, bringing the total amount spent on domestic debt servicing in the first quarter of 2021 to N612.71 billion.

Nigeria’s total debt rose to N33.1 trillion in the first quarter of 2021, according to the report released by the DMO.

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