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Exchange Rate Unification Will Instill Confidence In Nigeria Economy- FSDH Reports

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A report by the First Securities Discount House (FSDH) Research has described the recent move by the Central Bank of Nigeria (CBN) to achieve exchange convergence a positive impact regulation, saying it would ensure clarity and improve market confidence in the economy.

The report also stated that the move would enable Nigeria to unlock funding from several multilateral organisations such as the International Monetary Fund (IMF) and the World Bank and ease the pressure on the exchange rate in the medium term.

It further stated that the central bank’s current move towards a unified exchange rate was expected to ensure flexibility and market-determined rate, which is stated to a large extent would, reduce arbitrage, round-tripping, and could move the naira towards its fair value.

“However, exchange rate unification is not a sufficient factor in attracting significant capital into the country. What should follow the CBN’s recent actions, in our view, are a set of consistent forex policies that seek to improve market liquidity and prevent every form of forex arbitrage and unnecessary forex subsidies.

“The CBN will also need to clear forex backlogs to further instill confidence in the market. In February 2021, the IMF estimated backlogs at US$2 billion. We believe this will be done gradually,“ FSDH explained.

“The CBN’s move is expected to instill confidence in the market as foreign investors are more likely to participate in a less fragmented market that can be fairly predictable.

“Given this framework, the options available for the CBN include raising the interest rates to incentivize inflow of capital into the economy that may hurt economic recovery in subsequent quarters or relax capital control rules/restrictions and simultaneously increase market interventions to prevent significant depreciation of the naira that may result in external reserves depletion,” the report stated.

The report, which was titled “Nigeria’s Foreign Exchange Policy Note- Navigating through the Tides of Uncertainty,” adding that: “As much as Nigeria needs effective management of foreign exchange and unification of exchange rate to boost confidence, the supply shortage of foreign exchange is still a major problem.

“Increasing foreign exchange supply from non-CBN sources is vital in maintaining exchange rate stability in the I&E window and reducing speculative activities.”

The report predicted that the CBN would be faced with, “policy trilemma” to explain Nigeria’s foreign exchange and monetary choices.

The ‘trilemma’ refers to the trade-offs a government faces when making crucial monetary policy decisions because only two out of the three objectives could be achieved at a time.

It added: “With COVID-19, Nigeria maintained the two objectives of having a fixed/managed official exchange rate and monetary autonomy at the expense of free movement of capital. This was evident in the capital controls and forex backlogs.

“The recent move by the CBN to adopt the I&E market rate as the official rate will enable the CBN to control interest rate while capital controls can be relaxed, but the exchange rate will have to be flexible.

“Whether the naira appreciates or depreciates will depend on the level of capital inflows and outflows, CBN’s involvement in the market and the external reserves position.

“This means the only way to maintain a stable exchange rate is to attract even more capital into the economy or intervene heavily in the forex market using the external reserves.”

It added that the planned issuance of Eurobond by the government would provide some relief in the market and boost external reserves in the short term.

“From the fiscal and trade perspective, Nigeria will need to leverage the African Continental Free Trade Area (AfCFTA) Agreement to boost non-oil exports and increase forex inflows. Providing direct incentives for businesses to produce for exports, implementing port reforms as well as developing comprehensive industrial and trade strategies are important steps that the government must take.

“We believe that the Naira will settle around N430 per dollar in the latter part of 2021. Forex inflows are expected to also improve, especially when the Eurobond is issued, but increasing demand pressures from imports and other payments will continue to exert pressure on the rate,” FSDH stated.

FSDH further reported, “Our 2021 forecasts for key indicators include real Gross Domestic Product (GDP) growth of 1.3 percent, an average exchange rate of N430/$ and an inflation rate of 16.6 percent.”

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Economy

Nigeria Records Trade Deficit of 8.9 Trillion in Nine Months

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The National Bureau of Statistics (NBS) released a report that showed that Nigeria recorded a trade deficit of 8.9 Trillion Naira between January and September 2021. 

A trade deficit occurs when a country’s imports exceed its exports over a period. Within the period, foreign trade was 35.09 Trillion Naira which comprised imports of 22 Trillion Naira and exports of 13.1 Trillion which led to an 8.9 Trillion trade deficit.

A breakdown of the data by quarters shows that trade stood at 9.76 Trillion Naira in the first quarter, which represented imports of 6.85 Trillion Naira and exports of 2.91 Trillion Naira, this resulted in a trade deficit of 3.94 Trillion during the period.

The data went on to show that the majority of the goods imported in the first quarter were from China (valued at 2 Trillion), the Netherlands (valued at 726.09 Billion) the United States (valued at 608.12 Billion), India (valued at 589.1 Billion), and Belgium (valued at 238.5 Billion) while the majority of exports were to India (valued at 488.1 Billion), Spain (valued at 287.2 Billion), China (190.1 Billion), the Netherlands (160.0 Billion) and France (133 Billion).

In the third quarter, Crude oil dominated exports with 78.47% of exports, this was followed by natural gas with 9.5%. Imports were mainly motor spirit with 12.91% of imports, Durum wheat with 3.87%, gas oil with 2.77%, and used vehicles with 2.27%.

A renowned economist, Pat Utomi said the country’s huge appetite for imports was because of insufficient domestic production which is driven by worsening insecurity and stringent government regulations. He went on to say that although there were interventions introduced by the Government and the Central Bank of Nigeria to reduce imports and increase exports, the initiatives are fraught with inconsistencies and corrupt practices that prevent any real impact.

He went on to say that it was scandalous that Nigeria’s top imports were food products and motor spirits as those are products the country should be exporting because Nigeria is a food-producing nation and has oil in abundance.

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World Bank Calls on Nigeria to Impose Special Taxes on Alcohol and Tobacco

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The World Bank Group has made a call to the Federal Government of Nigeria, urging the government to impose special taxes on alcohol, cigarettes and beverages that are highly sweetened in order to improve primary healthcare conditions in the country.

Shubham Chaudhuri, who is the Country Director for Nigeria in the World Bank Group, said that an improvement in healthcare in Nigeria will come by taxing the things that are “killing us.” He said that the economic rationale for the action is quite strong if lives are to be saved and a healthier Nigeria achieved.

Chaudhuri made the call on Friday, at a special National Council on Health meeting which was organized by the Federal Ministry of Health in Abuja. Chaudhuri stated that placing special taxes on tobacco, sweetened beverages and alcohol would reduce the health risks which come with their consumption and expand the fiscal space for universal health coverage after COVID 19.

The country director also said that investing in stronger health systems for all would make significant contributions to the fight against inequality and the rising poverty situation in the country. He went on to add that increasing health tax would provide an extra advantage of reducing healthcare cost in the future, by hindering the growth of the diseases which are caused by tobacco, alcohol and sugar-sweetened beverages.

The representative of the WHO in Nigeria, Dr Walter Mulombo said that he could confirm the large health needs of Nigerians, as well as the efforts being made to meet those needs. He said this was based on the fact that he had been to over half of Nigeria’s states in less than two years of being in the country.

Mulombo then noted that although the coronavirus exposed weaknesses in the global economy (not excluding health), it could be considered as a unique opportunity for a thorough examination of existing resources and mechanisms to prepare for a more resilient future.

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Nigeria’s VAT Revenue Falls to N500 Billion in Q3 2021, Manufacturing Sector in the Lead

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In the third quarter of 2021, Nigeria generated a total sum of N500.49 billion as value-added tax which represents a 2.3% decline when compared to the N512.25 billion recorded in the second quarter of the year.

This is as seen in the VAT report which was recently released by the National Bureau of Statistics (NBS). The report revealed that the manufacturing sector was in the lead as it remitted a total of N91.2 billion, representing about 30% of the total local non-import value added taxes in that period.

In spite of the quarter-on-quarter decline of VAT collections in the reviewed period, it grew by a further 17.8% when compared to N424.7 billion generated in the same period of the previous year. The report also shows that an amount of N1.5 trillion has been generated from value added taxes from January 2021 to September 2021.

That is 40.2% higher than the N1.08 trillion recorded in the same period of 2020, and 72.3% higher than what was recorded in the same period of 2019.

To break it down, the Value Added Tax collected in the first, second and third quarter of 2021 was recorded at N496.39 billion, N512.25 billion and N500.49 billion respectively. It is higher than the corresponding figures of 2020, which sat at N324.58 billion, N327.20 billion and N424.71 billion for the first, second and third quarters respectively.

In the third quarter of 2021, the Manufacturing activity accounted for the largest share of total revenue collected across sectors, with a huge 30.87% (N91.2 billion) coming from that sector. The Information & Communication sector came in second with 20.05% (N53.9 billion) contributed, while the Mining & Quarrying sector came in third with 9.62% (N28.4 billion).

Nigeria has continued to ramp up its efforts to increase revenue from non-oil sectors by increasing its tax collection rates, which has recorded largely significant growth since the federal government increased the VAT rate from 5% to 7.5% in the 2019 Finance Act, which was signed and made effective in 2020.

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