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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.”

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

Federal Government Halts Cooking Gas Export to Lower Local Prices

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In a bid to stabilize domestic prices and meet rising demand for cooking gas within Nigeria, the Federal Government has announced a temporary halt on the exportation of Liquefied Petroleum Gas (LPG), commonly known as cooking gas.

This decision follows a significant surge in the cost of cooking gas, which has placed a strain on consumers across the country.

According to reports, the halt in LPG export aims to increase the availability of the commodity within Nigeria’s borders, thereby reducing its local price.

The move is part of broader efforts to address the challenges faced by consumers grappling with the high cost of living.

In recent years, the demand for cooking gas has steadily increased in Nigeria, driven by urbanization, population growth, and a shift towards cleaner energy sources.

However, despite being a major producer of LPG, Nigeria has struggled to meet its domestic demand due to insufficient local production and distribution infrastructure.

Data from the Nigerian Midstream Downstream Petroleum Regulatory Authority reveals that while the total consumption of cooking gas in Nigeria has been on the rise, the country has relied heavily on imports to bridge the supply gap.

The recent decision by the government underscores its commitment to prioritizing the domestic market and ensuring that Nigerians have access to affordable cooking gas.

Consumers have been grappling with escalating prices, with reports indicating a significant increase in the cost of refilling a 12.5kg cylinder of cooking gas in major cities like Abuja, Lagos, and Kano.

The decision to halt LPG exports signals a proactive measure by the government to mitigate the adverse effects of rising prices and alleviate the financial burden on households across the nation.

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Manufacturing Sector Records 7.70% Quarter-on-Quarter Growth in Q4 2023

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In the fourth quarter of 2023, Nigeria’s manufacturing sector grew by 7.70% year-on-year, according to the National Bureau of Statistics (NBS).

The surge in growth reflects a significant uptick from the preceding quarter and underscores the resilience of the manufacturing industry amid economic challenges.

This growth trajectory indicates positive momentum and signals potential opportunities for economic recovery and development.

The manufacturing sector, comprising thirteen key activities ranging from oil refining to motor vehicles and assembly, demonstrated notable dynamism across various subsectors.

This growth surge is attributed to increased production, enhanced operational efficiencies, and strategic investments across the manufacturing value chain.

Despite facing headwinds such as supply chain disruptions and regulatory uncertainties, the sector’s robust performance underscores its pivotal role in driving economic diversification, job creation, and industrialization efforts in Nigeria.

Moving forward, sustaining this growth momentum will require continued policy support, investment in infrastructure, and efforts to address key bottlenecks hindering the sector’s expansion.

By fostering an enabling business environment and promoting innovation and technology adoption, Nigeria’s manufacturing sector can further catalyze inclusive economic growth and contribute significantly to the nation’s development agenda.

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Economy

Nigeria’s GDP Grows by 3.46% in Q4 2023, Driven by Services

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Nigeria’s Gross Domestic Product (GDP) grew by 3.46% in the fourth quarter (Q4) of 2023 on the back of robust performance of the services sector, according to data released by the National Bureau of Statistics (NBS).

The GDP expansion though slightly lower than the 3.52% recorded in the same period of 2022, reflects a positive trajectory for the Nigerian economy amid ongoing challenges.

The growth rate surpassed the 2.54% recorded in the preceding quarter, indicating a rebound in economic activity.

The services sector emerged as the key driver of growth expanding by 3.98% and contributing 56.55% to the overall GDP.

This sector’s resilience underscores its pivotal role in Nigeria’s economic landscape, encompassing diverse industries such as telecommunications, finance, and real estate.

Also, the agriculture sector experienced growth, expanding by 2.10% compared to the same period in 2022.

Meanwhile, the industry sector recorded a notable improvement, growing by 3.86%, a stark contrast to the -0.94% contraction observed in the fourth quarter of 2022.

On an annual basis, Nigeria’s GDP expanded by 2.74% in 2023 compared to 3.10% in the previous year, reflecting sustained but moderated growth.

The positive trajectory in GDP growth reflects resilience in the face of various economic challenges.

However, sustaining and accelerating growth will require continued efforts to address structural bottlenecks, foster investment, and promote inclusive economic policies across sectors.

Nigeria’s Oil Sector Growth

During the fourth quarter of 2023, Nigeria’s oil sector posted a real growth rate of 12.11% year-on-year, signifying a significant improvement from previous periods.

This was driven by the surge in average daily oil production to 1.55 million barrels per day (mbpd), a positive shift in the sector’s performance.

Despite challenges such as global market fluctuations and production constraints, the oil sector contributed 4.70% to the nation’s total real GDP in Q4 2023.

Nigeria’s Non-Oil Sector

Nigeria’s non-oil sector sustained growth momentum, posting a 3.07% real growth rate in Q4 2023.

This growth was primarily attributed to key industries including finance, telecommunications, agriculture, manufacturing, and construction.

Accounting for 95.30% of the nation’s GDP in the same quarter, the non-oil sector continues to drive economic diversification efforts and reduce dependence on oil revenues.

Despite facing challenges, such as infrastructure deficits and regulatory bottlenecks, the sector’s resilience underscores its pivotal role in fostering sustainable economic development and inclusive growth agendas.

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