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Economists Urged CBN To Reappraise Forex Policy And Eliminate Arbitrage

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The decision of the Central Bank of Nigeria (CBN) to suspend dollar sales to the Bureau de change operators has “disrupted one of the juiciest gravy trains in the Nigerian economic racket,” according to the a renowed economist, Bismack Rewane and his team.

In its economic note, Rewane and his team at the Financial Deravatives Company believed that though BDCs are licensed by the CBN, the point had been reached where the program was no longer tenable and surely not sustainable.

“A country whose total exports and receipts were approximately $59.8bn, was spending $5bn to subsidize supposed Nigerian tourists during a covid year.

“In other words, spending more on tourism rather than debt servicing. Therefore, the structure of the forex market needed sanitization,” the team of economists led by Rewane at the FDC said in the note.

The team, however, disagreed with the CBN on its decision to divert dollar meant for the BDCs to banks, saying such an amount to “handing over the yam barns to goats to secure.”

They said such interim solution of substituting BDCs with banks is hardly going to achieve much.

“The question that arises is what is the optimal solution? Administrative controls or market pricing? The interim solution of substituting BDCs with banks is hardly going to achieve much.

“You are virtually handing over the yam barns to goats to secure. In the end, there will be no yams nor goats.

“One of the options is to simultaneously allow banks to retail dollars as they have done in the past and make BDCs engage in retailing same but at a buy rate different from today’s subsidized rate, i.e buy dollars from the CBN at the parallel market rate less a N10 premium.

“For example, if the parallel market rate is N500/$, the purchase rate from the CBN will be N490/$. If the BDCs sell at N550/$, the CBN increases its rate for BDCs to N540/$.

“That will be the same retail rate at the banks. This eliminates the arbitrage corridor and abuse. It will certainly reduce the demand for dollars and it must coincide with an increase in dollar supply from the CBN.

“This way, the naira will appreciate towards the ever-elusive fair value or the REER (Real Effective Exchange Rate), which today is anywhere between N470 and N490/$,” FDC team stated.

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Naira

Naira Slips Further Against the U.S. Dollar, Exchanges at N740

Naira traded at N740 to a United States Dollar, a decline of N3 from the N737 it exchanged on Friday

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Naira - Investors King

The exchange rate of the Nigerian Naira to a United States Dollar declined further at the parallel market, the Nigerian black market for foreign exchange (forex), on Tuesday.

The local currency traded at N740 to a United States Dollar, a decline of N3 from the N737 it exchanged on Friday.

At the Central Bank of Nigeria (CBN) regulated forex section, the Naira traded at N432.87 to a U.S. Dollar, slightly below N432.54 it was sold on September 28, 2022.

Similarly, the Pounds Sterling gained some ground against the Naira, appreciating by 2.47%, or N11.34 from N458.5357 to N469.8804.

Against the Euro common currency, the story is not different as the embattled Naira dropped 1.63% or N6.7656 to N420.7496 from N413.984.

Persistent forex scarcity amid growing economic uncertainty ahead of the 2023 general elections continues to drag on the local currency. Also, a series of economic policies instituted to arrest the situation had either compounded the woes of the local currency or generally ineffective.

In an effort to rein in inflation and simultaneously lure foreign investors into the Nigerian economy, the CBN-led monetary policy committee raised interest rates by 150 basis points to 15.5%, a position widely contested by most economic experts and stakeholders.

However, the CBN had insisted that to sustain capital inflow at a period when global economies are aggressively raising interest rates, Nigeria also must improve borrowing costs to ensure global investors look the country’s way, especially given that foreign revenue from crude oil had dropped significantly with rising oil theft.

Still, experts think it would hurt new business creation, new job creation, new investment and generally, the state of the economy as evident with the stock market in recent weeks.

Crude Oil

Brent crude, oil against which Nigerian oil is priced, dipped by 29 cents or 0.29% to $91.51 a barrel in the early hours of Wednesday. While the U.S. West Intermediate oil shed 40 cents or 0.46% to $86.12 a barrel.

Slowing demand, rising global interest rates, high inflation, strong U.S. Dollar amid Russia Ukraine unrest are some of the factors hurting the oil outlook.

China, the world’s largest importer of the commodity, is struggling with growth following reports of COVID-19 lockdown and strict restrictions in key commercial cities. Few of the economic data released in recent weeks pointed to declining growth in the world’s second-largest economy.

Cryptocurrency

The cryptocurrency space remains bearish despite a few gains here and there. Bitcoin, the world’s most dominant cryptocurrency, appreciated by 0.53% in the last 24 hours to $20,078.66 a coin.

Eth, a token of the Ethereum protocol, remains largely subdued. Trading at $1,342.93 a coin, representing a decline of 0.60%.

Ripple (XRP), BNB, Stellar and Solana gained 3.70%, 0.49%, 0.48% and 0.68% to $0.478528, $292.53, $0.117434 and $33.72, respectively.

 

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Pound

Pounds Rebounds as Kwasi Abandons 45% Tax Cut

The British Pound rebounded against the United States Dollar following an announcement by Kwasi Kwarteng, Chancellor of the Exchequer, that the plans to abolish the 45% tax rate for people earning more than 150,000 pounds ($168,000) has been abandoned.

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The British Pound rebounded against the United States Dollar following an announcement by Kwasi Kwarteng, Chancellor of the Exchequer, that the plans to abolish the 45% tax rate for people earning more than 150,000 pounds ($168,000) has been abandoned.

In a statement published on his official Twitter handle @KwasiKwarteng, the chancellor said “from supporting British business to lowering the tax burden for the lowest paid, our growth plan sets out a new approach to build a more prosperous economy.

“However, it is a clear the abolition of the 45 percent tax rate has become a distraction from our overriding mission to tackle the challenges facing our country.

“As a result, I am announcing we are not proceeding with the abolition of the 45 percent tax rate. We get it, and we have listened.

“This will allow us to focus on delivering the major parts of our growth package.”

He explained that his administration’s energy policy will support households and businesses with their energy bills. While the decision to cut taxes to put money back in the pockets of 30 million hard-working British people would help grow the economy.

The British Pounds responded positively to the news as it gained against the United States to close at 1.1333 on Monday.

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Naira

Independence Day: How Naira Fell Against Dollar From 65 Kobo in 1973 to N737 in 2022

In 1987, you will need N4 to buy $1. In 1989, it was N7.39 kobo to $1. By the time General Ibrahim Babangida left power in 1993, the naira had dramatically stumbled against the dollar, exchanging at N17 to $1. 

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Naira to Dollar Exchange- Investors King Rate - Investors King

On this day, 62 years ago, Nigeria got her independence from the defunct British Empire. The country did not however adopt a new currency until 1973. On the 1st of January 1973, the British pound was officially changed to the Naira as Nigerian currency at an exchange rate of £1 to N2. 

Nigerian naira was very strong at the time that it was ranked ahead of the U.S Dollar. To buy one dollar in 1973, you needed just 65 kobo. Between 1973 to 1985, the Naira was so strong that you never needed up to a naira to buy a dollar. 

In fact, in 1980, all you needed to buy a dollar was just 55 kobo. 

However, in 1986, as a twist of fate, Nigeria found itself in a perilous situation. The economy started declining after the military regime of General Ibrahim Babangida requested a bailout from multilateral financial institutions. 

The International Monetary  (IMF) was Babangida’s point of call. However, like a devil, IMF would not give him something without taking something in return. IMF gave him a Second Tier Foreign Exchange Market (SFEM) as part of the reform that Nigeria must undertake. 

As a military desperado who was looking for a bailout and international acceptance, Babangida obliged to the conditions. 

SFEM, thereafter, served as Nigeria’s second official foreign exchange market which was opened to both Nigerians and foreigners. 

Before SFEM, it was the sole duty of the Central Bank of Nigeria (CBN) to fix the exchange rate. The CBN at the time was meticulous in its job by restricting importation and implementing closely monitored foreign exchange control. These had helped the naira to trade fairly strongly against the dollar in the 1970s and early 1980s. 

It was popularly believed that IMF was not comfortable with the CBN’s oversight over the foreign exchange. 

By and large, by the end of 1986, the dollar had risen against the naira by more than 100%. In 1987, you will need N4 to buy $1. In 1989, it was N7.39 kobo to $1. By the time General Ibrahim Babangida left power in 1993, the naira had dramatically stumbled against the dollar, exchanging at N17 to $1. 

The Naira decline did not stop with the exit of General Ibrahim Babangida. By the time he left the Aso Rock, Nigeria’s economy was already in shambles. His exit which people hoped will bring some relief only brought more hardship as General Sanni Abacha overthrew the interim government of Chief Earnest Shonekan.

Abacha’s regime was characterised by widespread embezzlement of public funds in dollars. There was corruption in almost all facets of the economy. From government offices to banking institutions. Little wonder the country still receives some of his oversea stash funds to date. 

General Sanni Abacha closely monitored the CBN and ensured the dollar was majorly made available to himself and his friends. The CBN introduced the Autonomous Foreign Exchange Market in 1985 to closely monitor the movement of dollars. The thirst for importation drastically reduced which made the official rate of naira to dollar stand around N22 to $1 for five years which Abacha used in power before his death.

However, the commercial banks picked a flaw to exploit AFEM. Since the CBN’s AFEM requires all commercial banks to request dollars from the CBN, bankers came up with what was known as ‘blended’ rate. 

For instance, if an importer requests $2 million from its bank, the bank will inflate the figure to $5 million knowing full well that CBN will likely not approve the full request. If CBN approves $3 million, the bank thereafter will pay their client and take the remaining $1 million to the black market where they can make more profit from dollar arbitrage. 

At this time, the black market otherwise known as the parallel market was booming and striving hard. Many banks made fortunes from this dollar arbitrage. 

In 1999, when Nigeria returned to democracy, the Olusegun Obasanjo regime met naira to dollar exchange at N22 but by the time he left in 2007, you will need N125 to buy $1. The fall of naira has since then continued till date. 

At the close of the market on Friday 30th of September 2022, $1 was sold for N432 at the Importers and Exporters Window (I&E) while $1 was sold for N737 on the black market. 

It would be recalled that the present administration met dollar to naira exchange at the rate of N197 to $1. 

Investors King had earlier reported that naira has lost more than 100% of its value since the beginning of this administration. Little wonder it was ranked 11th worst performing currency in the world and 3rd worst performing currency in Africa. 

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