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Official Exchange Rate Redundant, Soludo Tells CBN

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Chukwuma Soludo
  • Official Exchange Rate Redundant, Soludo Tells CBN

A former Governor of the Central Bank of Nigeria, Prof. Charles Soludo, says the apex bank’s official exchange rate of N306 to the dollar has become redundant, describing it as an instrument for rent seekers and arbitrary allocation of scarce foreign exchange in the country.

As a result, he said the CBN must achieve a unified market-determined exchange rate by eliminating the current multiple exchange rates as a matter of urgency.

Soludo spoke in a keynote address at the eight annual Pan-Africa Investor Conference organised by Renaissance Capital, an international investment bank, in Lagos on Wednesday.

He said, “The general price level has already adjusted because that’s the primary price indicator in the market. The prices that people hear, i.e. the exchange rate that people talk about is the parallel market rate. Anybody who says it is irrelevant is not discussing Nigeria as an economy. The official one is like the time when you had the price control regime.

“Even those who had accessed forex at the official rate, when they are fixing their prices, they are fixing their prices in comparison with the imported ones, which are taking signals from the parallel market rate. So the general price level has adjusted there. The official exchange rate is redundant; it is just for rent and for arbitrary allocations.”

Soludo also advised the CBN to dump its current import substitution policy and adopt an export-oriented industrial strategy if it hoped to take Nigeria out of its present economic woes.

According to him, the country is implementing import substitution is a crude way and it must remove the ban placed on importers of some 41 items from accessing dollars at the official interbank foreign exchange window.

The former CBN governor said, “Every regime comes to ban and the next unbans it. That is not the way to protect an economy. If you have a market-determined exchange rate regime and you do not want certain items, you put tariffs. The exchange rate plus the tariffs will make, for instance, the imported tomatoes uneconomical.

“That is where you deal with it on a sustainable basis. There is a need to think of a life beyond crude oil. We need not just import substitution; we need infrastructure and export-oriented industrialisation strategy. We cannot do that with this kind of crude inward look.”

According to Soludo, China has over one billion population and has become a successful country through export-oriented industrialisation, adding, “China was not doing import substitution.”

“That’s why they have built trillions of dollars in foreign reserves with weak currency that makes import into their country expensive and makes exporting very rewarding,” he added.

The former CBN governor said many companies that needed some of the 41 items had folded up and that thousands of jobs had been lost.

“Yet there is a better, sound, transparent and sustainable way of achieving what you intend to achieve. To create prosperity for all and lift millions out of the job market, we need industrialisation; we need to be exporting. We must fix the infrastructure,” he added.

Soludo also said that Nigeria’s public finance was broken because the country’s total expenditure was in excess of its total revenue.

He said, “In a regime where you have the total recurrent expenditure in excess of your total revenue, there is an issue. You know people talk about recurrent expenditure being 70 per cent of the budget; they are including the debt. As a percentage of your total revenue, you recurrent expenditure is a hundred and something per cent, which means as it is today, part of our borrowing is actually to finance recurrent expenditure.”

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

Nigeria’s Inflation Rate Moderates to 17.93 Percent in May

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consumer price index - Investors King

Inflation in Africa’s largest economy, Nigeria, moderated from 18.12 percent year-on-year in April to 17.93 percent year-on-year in May, according to the latest report from the National Bureau of Statistics (NBS).

On a monthly basis, headline inflation grew by 1.01 percent in May. Representing an increase of 0.04 percent when compared to 0.97 percent filed in April.

Core inflation, which excludes the prices of volatile agricultural
produce stood at 13.15 percent in May 2021, up by 0.41 percent when compared with 12.74 percent recorded in April 2021.

On month-on-month basis, the core sub-index increased by 1.24 percent in May 2021. This was up by 0.25 percent when compared with 0.99 percent recorded in April 2021.

The highest increases were recorded in prices of Pharmaceutical products, Garments, Shoes and other footwear, Hairdressing salons and personal grooming establishments, Furniture and furnishing, Carpet and other floor covering, Motor cars, Hospital services, Fuels and lubricants for personal transport equipments, Cleaning, repair and hire of clothing, Other services in respect of personal transport equipments, Gas, Household textile and Non durable household goods.

The average 12-month annual rate of change of the index was 11.50 percent for the twelve-month period ending May 2021; this is 0.25 percent points higher than 11.25 percent recorded in April 2021.

Food index rose by 22.28 percent in the month of May 2021, up by 0.06 percent points from 0.99 percent recorded in April 2021.

The average annual rate of change of the Food sub-index for the twelve-month period ending May 2021 over the previous twelve-month average was 19.18 percent, 0.60 percent points from the average annual rate of change recorded in April 2021 (18.58) percent.

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Economy

In Six Years Buhari’s Administration Borrowed $2.02B From China

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Muhammadu Buhari

According to data obtained from the Debt Management Office, Buhari’s administration has borrowed a total of $2.02 billion in loans from China since 2015 till date.

The Statistics obtained from DMO also revealed that Nigeria’s total debt from China as of 30th of June 2015 stood at $1.38 billion.

As of 31st of March 2021, the country’s total debt portfolio with China has surged to $3.40 billion.

According to the DMO, loans from China are concessional loans with interest rates of 2.50 percent per annum, a tenor of 20 years and a grace period (moratorium) of seven years.

The debt office said that the terms of the loans were compliant with the provisions of Section 41 (1a) of the Fiscal Responsibility Act, 2007.

The loans from China are tied to projects. The projects, (eleven in number as of March 31, 2020), include the Nigerian Railway Modernisation Project (Idu-Kaduna section), the Abuja Light Rail Project, Nigerian Four Airport Terminals Expansion Project (Abuja, Kano, Lagos, and Port Harcourt), Nigerian Railway Modernisation Project (Lagos-Ibadan section) and the Rehabilitation and Upgrading of Abuja-Keffi-Makurdi Road Project.

The DMO revealed that the low interest rates on the loans reduced the interest cost to the government while the long tenor enabled the repayment of the principal sum of the loans over many years.

Since the third quarter of 2015, the nation’s total debt service payment made to China stood at $719.61 million as of 31st of March. $332.03 million or 46.15 percent of the total debt service was paid to service the interest on the loans.

In the first quarter of 2021, $102.19 million was used to service debt to China. This is about 11 percent of the total $1.0 billion used to service external debts within the period.

The DMO recently disclosed that Nigeria had more than $5.83 billion foreign loans that had been approved but not yet disbursed as of December 31, 2020.

Out of this amount, $1.25 billion is supposed to come from the Export-Import Bank of China. Apart from multilateral agencies, China has remained the nation’s largest creditor.

There had been fears among Nigerians that the country may forfeit some of the projects in case of loan defaults.

The fear grew when the Minister of Transportation, Rotimi Amaechi, in August 2020, confirmed that the country waived its sovereign immunity to obtain Chinese loans.

The minister, however, added that as long as debts were repaid, there would be no need for China to claim any infrastructure.

“We must learn to pay our debts and we are paying, and once you are paying, nobody will come and take any of your assets,” he had said.

Despite the assurance, fear persists that the Chinese loans contain some obnoxious clauses that could breach the nation’s sovereignty especially as the loan agreements are not available in the public domain.

Amaechi denied knowledge of any clause that hands over a national asset to China in case of any default in an AriseTV interview on Monday.

When asked about the plans of the Federal Government to pay back the loans so as to avoid the Zambian experience where some national assets such as the Kenneth Kaunda International Airport, the Zambia National Broadcasting Corporation and the National Power and Utility Company were reportedly used to settle Zambia’s financial obligations to China, Amaechi said borrowers should meet their obligations.

He said, “When you take loans, you are expected to pay back. Today we are paying back. Under the regime of President Goodluck Jonathan, the loan for Abuja-Kaduna was taken. It was about $500m. Today, we have paid about $150m on that loan.

“Nigeria has never defaulted when it comes to repayment. I do not also expect that we should default on any other loan that we have taken.”

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Despite COVID-19, Global Financial Wealth Soared to Record High of $250T in 2020

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Boston Consulting Group (BCG)- Investors King

Global financial wealth reached an all-time high of $250 trillion in 2020 as household savings rose and markets showed unexpected resilience in the face of the protracted COVID-19 pandemic, according to a new report by Boston Consulting Group (BCG).

The report, titled “Global Wealth 2021: When Clients Take the Lead”, reveals that despite the pandemic’s enduring financial impact, global prosperity and wealth grew significantly throughout the crisis and are likely to continue to expand significantly over the next five years, in line with the emerging economic recovery.

According to the report, North America, Asia (excluding Japan), and Western Europe will be the leading generators of financial wealth globally, accounting for 87 percent of new financial wealth growth worldwide between now and 2025.

Many wealth management clients in 2020 embraced alternative investments in their quest for higher returns, shifting away from low-yield debt securities. As part of this trend, real assets, led primarily by real estate ownership, reached an all-time high of $235 trillion. Nevertheless, Asia, which has the largest concentration of wealth in real assets ($84 trillion, 64 percent of the regional total) will see financial asset growth exceed real asset growth (7.9 percent versus 6.7 percent) in coming years. In particular, investment funds in the region will become the fastest-growing financial asset class, with a projected compound annual growth rate (CAGR) of 11.6 percent through 2025.

In the report, BCG identifies two attractive markets for wealth managers. One consists of individuals with simple investment needs and financial wealth between $100,000 and $3 million. This “simple-needs segment” comprises 331 million individuals worldwide, holds $59 trillion in investable wealth and has the potential to contribute $118 billion to the global wealth revenue pool.

Anna Zakrzewski, a BCG managing director and partner, global leader of the firm’s wealth management segment, and a co-author of the report said, “Wealth managers often underserve those in the simple-needs segment with a standardized set of products, and the result is a poor client experience with no “wow” factor.

This is essentially a missed opportunity. To better serve this key segment, wealth managers must embrace a new approach that lets them reach a larger audience in a cost-effective and scalable way, but with a highly personalized offering.”

Retirees, one of the world’s fastest-growing demographics, are another appealing market. Many are underserved and adversely impacted by the “advisory gap” that prevails during the retirement phase of life. Today, individuals over 65 own $29.3 trillion in financial assets accessible to wealth managers.

That figure will grow at a CAGR of close to 7 percent over the next five years, enabling wealth managers globally to target nearly $41.1 trillion in financial wealth by 2025. By 2050, 1.5 billion people globally will fall into the 65+ category, representing an enormous source of wealth.

In addition to the simple-needs and retirees segments, the “ultra” wealth category—individuals whose personal wealth exceeds $100 million—expanded in 2020, with 6000 people joining the 60,000-strong cohort, which has seen year-on-year growth of 9 percent since 2015. The category currently holds a combined $22 trillion in investable wealth, 15 percent of the world’s total.

According to the report, China is on track to overtake the US as the country with the largest concentration of ultras by the end of the decade. If investable wealth continues to rise there at its current annual rate of 13 percent, China will host $10.4 trillion in ultra assets by 2029, more than any other market in the world. The US will be close behind, with a forecasted total of $9.9 trillion in such wealth by 2029.

The faces of the ultras are changing too, with the rise of the next-generation segment. These individuals, between 20 and 50 years of age, have longer investment horizons, a greater appetite for risk, and often a desire to use their wealth to create positive social impact as well as earn solid returns. Many wealth managers are not yet ready to serve these new ultras.

“High-growth markets represent a massive opportunity, but wealth managers must build a genuine understanding of local differences and also key demographic changes,” said BCG’s Zakrzewski.

“For example, women now account for 12 percent of ultras, most of whom are based in the US, Germany, and China. The next-gen segment is also going to be an influential driver of future growth in the next decade or so. Whether it’s a simple-needs or ultra-high-net-worth client, managers need to offer a personalized service in order to effectively capture the next wave of growth.”

A copy of the report can be downloaded here.

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