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DMO and Strategy for Economic Recovery

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US economy
  • DMO and Strategy for Economic Recovery

Perhaps at no time in the history of Nigeria has the federal government come under such intense pressure to deliver on the economy as now, and this is understandable. 2016 closed with Nigeria recording its worst GDP figure in 25 years as low oil prices, tight monetary liquidity and militant attacks on oil infrastructure rocked the economy.

The Consumer Price Index, which measures inflation also increased by 18.72 January this year. National budgets have continued to run into deficits as oil revenue dwindles. The federal government and many state governments find it increasingly tough paying salaries of their workers.

The private sector has not fared better. Since the government is the biggest spender in the economy, a drastic cut in revenue means less money in the system. Many companies that depend hugely on government patronage are bearing the brunt of the recession and laying off staff to reduce overhead. The result is that more Nigerians are finding themselves in the unemployment market with no hope of immediate engagement.

President Buhari came to power on the promise of change, and he is under an unprecedented pressure to deliver economic change at a time the country faces its worse economic challenges. In economic matters, there are no miracles, but conscious, calculated and strategic intervention through policies and measures that can bring the economy out of recession.

All eyes are on the government to stimulate the economy by doing whatever is needed to bring it quickly out of a debilitating recession. That is why institutions such as the Debt Management Office, DMO, the Security and Exchange Commission, SEC, and the Nigerian Economic Summit Group, NESG, among others, are increasingly in the headline news.

The DMO is a government agency established to coordinate the management of Nigeria’s debts in such that is healthy for the economy. Anyone who has followed developments in that office will readily admit the DMO has been a work horse for this admiration. Watching Dr. Abraham Nwankwo, Director General of the DMO talk on Nigeria’s debt management is like listening to a lecture in an ivory tower.

The man seems to be at his best when defending some of the interventions of this administration, especially when talking about the government’s borrowing plan to finance the growing budget deficit. But this is to be expected from the head of the debt management office since he is also an important part of the equation. It is like a man defending his own actions before a sceptic audience.

What has fascinated me about this man is how he breaks complex economic issues down into bits and pieces that can be easily digested by the lay man. For instance, the Buhari administration’s plan to seek loan to finance development projects in the country as a result of shortfall in government revenue. Nwankwo has tried to convince Nigerians on why borrowing is good for the economy; why loan properly utilised is a sort of investment that is capable of reflating the economy of any country.

A three year Debt Management Strategy (2016-2019) initiated by the DMO better illustrates how debt management has become a key component of Nigeria’s economic recovery effort. It is a broad-based strategy that inspires confidence in the economy and in the managers of the economy. One major aspect of the strategy is that over the medium term, Nigeria will strive to remix the public debt portfolio from 84% domestic and 16% external to 60% domestic and 40% external. And the reason, which may not be obvious to many, is that external loans seem to come cheaper than domestic borrowing.

The DMO DG said during one of his interviews that for Nigeria to pull the economy out of recession, government must embrace what he called a “conventional public borrowing” to fund critical infrastructures. This is not a loan to be disbursed at the whims and caprices of the presidency; it is loan tied to specific and strategic projects to give the economy a rebound. This he said could easily be tracked by the public and the legislature.

This thinking informed the decision by the Buhari administration to decide on a three-year borrowing plan to fund deficits in the budget from 2016-2019. In the words of President Buhari, it is a “prudent” borrowing plan to bridge the financial gap created in the budgets, stressing that the funds would largely be applied to key infrastructure projects namely power, railway and road project amongst others.

The DMO recently facilitated the approval of the issuance of $1 billion Eurobond and appointment of six transaction parties for the bond by the Federal Government. The bond is part of the country’s plans to borrow a total of N1.8 trillion ($5.8 billion) from abroad and locally to fund an estimated 2016 budget deficit of N2.2 trillion. Apart from the fact that it is a good deal for the country, it will also prevent the emasculation of local investors.

Now, the DMO is in the news again. This time it is promoting a novel product and one that benefits majority of Nigerians. This is the newly floated Federal Government Savings Bond, (FGSB). This is the first time one has heard about this type of bond. Of course bonds are debt instruments in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. The owners of such a bond are creditors or debt- holders.

Although the federal government regularly churns out bonds to raise fund from the capital market, this one is different. The FGSB is a retail savings product accessible to all income groups, and it will enable all citizens participate in and benefit from the favourable returns available in the capital market which had hitherto been an exclusive preserve of big players. Every Nigerian who has N5,000 can subscribe to this bond that will be issued monthly for a tenure of two to three years.

The minimum subscription amount is N5,000.00 with additions in multiples of N1,000.00, subject to a maximum ofN50,000,000.00. And there is no fee or charges for subscription. No matter the tenure of the bond, interest will be paid quarterly to holders. The payment will go to the Central Securities Clearing System (CSCS) Accounts of investors and text alerts will be sent to investors on Settlement Day.

The purpose of this bond, aside being a source of diversified funding for government, is to also help deepen the national savings culture. Anyone who earns income is able to participate in this unique investment opportunity.

This is an alternative for many Nigerians who have taken to the Ponzi schemes as investment option. The FGSB, like all government bonds, is backed by the full faith and credit of the Federal Government of Nigeria. It is a scheme Nigerians must take advantage of to help themselves and their country. It is another innovation from the rich bag of the country’s economic managers.

Isaac wrote in from Ilorin

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.

Crude Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

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Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

Oil retreated from an earlier rally with investment banks and traders predicting the market can go significantly higher in the months to come.

Futures in New York pared much of an earlier increase to $63 a barrel as the dollar climbed and equities slipped. Bank of America said prices could reach $70 at some point this year, while Socar Trading SA sees global benchmark Brent hitting $80 a barrel before the end of the year as the glut of inventories built up during the Covid-19 pandemic is drained by the summer.

The loss of oil output after the big freeze in the U.S. should help the market firm as much of the world emerges from lockdowns, according to Trafigura Group. Inventory data due later Tuesday from the American Petroleum Institute and more from the Energy Department on Wednesday will shed more light on how the Texas freeze disrupted U.S. oil supply last week.

Oil has surged this year after Saudi Arabia pledged to unilaterally cut 1 million barrels a day in February and March, with Goldman Sachs Group Inc. predicting the rally will accelerate as demand outpaces global supply. Russia and Riyadh, however, will next week once again head into an OPEC+ meeting with differing opinions about adding more crude to the market.

“The freeze in the U.S. has proved supportive as production was cut,” said Hans van Cleef, senior energy economist at ABN Amro. “We still expect that Russia will push for a significant rise in production,” which could soon weigh on prices, he said.

PRICES

  • West Texas Intermediate for April fell 27 cents to $61.43 a barrel at 9:20 a.m. New York time
  • Brent for April settlement fell 8 cents to $65.16

Brent’s prompt timespread firmed in a bullish backwardation structure to the widest in more than a year. The gap rose above $1 a barrel on Tuesday before easing to 87 cents. That compares with 25 cents at the start of the month.

JPMorgan Chase & Co. and oil trader Vitol Group shot down talk of a new oil supercycle, though they said a lack of supply response will keep prices for crude prices firm in the short term.

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Crude Oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

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Crude oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

Oil prices rose on Monday as the slow return of U.S. crude output cut by frigid conditions served as a reminder of the tight supply situation, just as demand recovers from the depths of the COVID-19 pandemic.

Brent crude was up $1.38, or 2.2%, at $64.29 per barrel. West Texas Intermediate gained $1.38, or 2.33%, to trade at $60.62 per barrel.

Abnormally cold weather in Texas and the Plains states forced the shutdown of up to 4 million barrels per day (bpd) of crude production along with 21 billion cubic feet of natural gas output, analysts estimated.

Shale oil producers in the region could take at least two weeks to restart the more than 2 million barrels per day (bpd) of crude output affected, sources said, as frozen pipes and power supply interruptions slow their recovery.

“With three-quarters of fracking crews standing down, the likelihood of a fast resumption is low,” ANZ Research said in a note.

For the first time since November, U.S. drilling companies cut the number of oil rigs operating due to the cold and snow enveloping Texas, New Mexico and other energy-producing centres.

OPEC+ oil producers are set to meet on March 4, with sources saying the group is likely to ease curbs on supply after April given a recovery in prices, although any increase in output will likely be modest given lingering uncertainty over the pandemic.

“Saudi Arabia is eager to pursue yet higher prices in order to cover its social break-even expenses at around $80 a barrel while Russia is strongly focused on unwinding current cuts and getting back to normal production,” said SEB chief commodity analyst Bjarne Schieldrop.

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Crude Oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

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oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

Oil prices rose to $65.47 per barrel on Thursday as crude oil production dropped in the US due to frigid Texas weather.

The unusual weather has left millions in the dark and forced oil producers to shut down production. According to reports, at least the winter blast has claimed 24 lives.

Brent crude oil gained $2 to $65.47 on Thursday morning before pulling back to $64.62 per barrel around 11:00 am Nigerian time.

U.S. West Texas Intermediate (WTI) crude rose 2.3 percent to settle at $61.74 per barrel.

“This has just sent us to the next level,” said Bob Yawger, director of energy futures at Mizuho in New York. “Crude oil WTI will probably max out somewhere pretty close to $65.65, refinery utilization rate will probably slide to somewhere around 76%,” Yawger said.

However, the report that Saudi Arabia plans to increase production in the coming months weighed on crude oil as it can be seen in the chart below.

Prince Abdulaziz bin Salman, Saudi Arabian Energy Minister, warned that it was too early to declare victory against the COVID-19 virus and that oil producers must remain “extremely cautious”.

“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious,” he told an energy industry event.

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