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As US Federal Reserve Commences Tapering, How Does It Affect Nigeria?

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Fed tapering

The United States Federal Reserve on Wednesday announced it will start cutting down (tapering) on some of the support (quantitative easing) it has given to the economy since the COVID-19 pandemic struck in 2020. What this means is that the central bank will start reducing the size of the bonds it purchases monthly to improve access to funds and support new job creation in order to gradually allow the economy to partially self-function.

According to available data, the FED was spending $120 billion on asset purchasing program (the means by which funds are injected into the economy) per month and slashed interest rates to near-zero to ensure businesses could access loans at an affordable rate to encourage job creation.

But following a V-Shape recovery that suggested that the American economy is on its way to full recovery, the FED officials at the Federal Open Market Committee on Wednesday unanimously voted to start tapering, especially after the size of the asset-buying program rose to over $8 trillion in 2021.

To begin, the committee will start cutting net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities in November 2021.

While another $15 billion would be reduced in December and “that similar reductions in the pace of net asset purchases will likely be appropriate each month”. The committee announced it is “prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”

Without devaluation, a strong American dollar has no effect on a pegged currency like Naira as an increase in Dollar value without a simultaneous decline in counterpart value leaves zero room for arbitrage.

What Does These Means

It means the money in circulation will decline in relation to the adjustments made to the asset-purchase program. However, this is where it gets tricky, why several market experts and individuals expect the FED to raise interest rates in justification of a better economy and to control inflation, the FED is likely not to toll that line given the factors responsible for the high inflation rate. Supply constraints being experienced as a result of rising demand in the US and the world at large, rising oil prices, among others, are the underlying factors bolstering consumer prices.

Consumer Price Index, which measures inflation rate, rose to 5.4 percent year on year in September on the back of rising oil prices, supply constraints, limited labour force to match demand and other increases recorded on input materials due to COVID-19 damages. To better sustain support for the economy while simultaneously managing inflation, the FED is unlikely to raise borrowing costs in the near term as that will simply escalate inflation further, drag on job creation, hurt consumer spending, etc.

Again, it would be in line with some of the FED’s suggestions in recent times that tapering does not mean interest rates increase.

“We noticed from the Fed communication that they would like to de-link the taper from the rate hike,” said Erik Nelson, macro strategist at Wells Fargo Securities in New York. “But it will take a lot of convincing and frankly a lot of time for the market to change its reaction function. For now, a taper timeline is closely linked to a rate hike timeline in the market.”

How Do These Affect Naira and the Nigerian Economy

Until the FED raises interest rates, all these will have no effect on the Naira or the Nigerian economy at large. For one single reason, the Naira is not free floated. In other economies, where the value of their local currencies are determined by market forces, this news will have a significant effect – either trigger demand for US Dollars, especially with the global market projecting dollar scarcity and subsequent strong greenback.

Nigerian Naira only responds to the Central Bank of Nigeria’s actions. For instance, if the central bank devalued the Naira against the United States Dollar, the foreign exchange differential automatically widened and increase arbitrage opportunities for hoarders and speculators.

Without devaluation, a strong American dollar has no effect on a pegged currency like Naira as an increase in Dollar value without a simultaneous decline in counterpart value leaves zero room for arbitrage. It is the same reason an increase in American Dollar value does not affect the price of US import items in Nigeria but Nigerian factors.

However, once the FED increases interest rates, Nigeria’s American Dollar-denominated loan obligations become more expensive to finance.

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

World Bank Lauds Kogi’s 2020 Financial Statement

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The World Bank has heaped praise on the Government of Kogi State concerning the state’s audited financial statement for 2020. The financial institution was said to have described the financial report as a standard to look up to concerning transparency and accountability in the public sector.

In a statement which was dated November 21, 2021 it was said that the bank made the commendation in a letter which was sent to the Accountant General of the state.

As said in the statement, the letter which was taken by the Kogi State Accountant General on November 2025 was signed by Deborah Hannah Isser, the Task Team Leader of the States Fiscal Transparency, Accountability and Sustainability Programme (SFTAS), Nigeria Country Office, Western and Central African Region.

SFTAS is a $750 million programme which has been set up to reward states for meeting any or every one of the indicators which demonstrate improvements in fiscal transparency, sustainability and accountability.

The indicators, which are nine in number were a byproduct of the former Fiscal Sustainability Plan of the federal government where States would be rewarded for meeting up to 22 targets.

The World Bank had previously backed the federal government to give incentives to the states in order to properly execute the 22-point Fiscal Sustainability Plan, which has now gone under a revamp as the nine Disbursement Linked Indicators under SFTAS.

Some of the criteria on which judgement will be based on are: improvement in financial reporting and budget reliability, improved cash management, increased openness, citizen participation in the budget process, reduced revenue leakages through the execution of State Treasury Single Account (TSA), a strengthened Internally Generated Revenue (IGR) collection, biometric registration and Bank Verification Number (BVN) used to reduce payroll fraud.

The World Bank commended the Kogi State government for preparing its audited financial statements in line with the basis of the International Public Sector Accounting Standards.

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Nigeria’s Rigid Forex Policy Discouraging Investors, Fueling Inflation – World Bank

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The World Bank has blamed the Central Bank of Nigeria’s rigid forex policy for the drop in Nigeria’s capital importation and rising inflation rate.

The bank disclosed in its November report, Nigeria Development Update.

Explaining modalities for its position, the World Bank stated that there had been constant pressure on the Nigerian Naira with the current forex policy, forcing the central bank to consistently increase its nominal official exchange rate in an effort to ease some of the pressure.

This, it blamed on the rigid foreign exchange management system of the Central Bank of Nigeria, saying the system has also been responsible for the rising inflation rate in Nigeria.

The report read in part, “The government’s exchange rate management policies continue to discourage investment and fuel inflation. Exchange rate stability is a key CBN policy objective, and to preserve its external reserves the CBN continues to manage FX demand and limit the supply of FX to the market.

“Pressure on the naira remains intense, and while the CBN has raised the nominal official exchange rate three times since the start of the pandemic (by 15 per cent in March 2020, five per cent in August 2020, and seven per cent in May 2021), FX management remains too rigid to respond to external shocks. Meanwhile, exchange-rate management has emerged as one of the key drivers of inflation.”

The World Bank further stated that the central bank foreign exchange system needs to be more flexible to withstand external shocks, especially given Nigeria’s mono-product nature. It added that the NAFEX rate does not reflect the true market rate but the central bank managed rate.

It read in part, “While the CBN supplied an average of $2.5bn to the Investors and Exporters forex window in the months just prior to the COVID-19 crisis, it only supplied an average of $0.5bn in the months thereafter.

“The NAFEX rate, which is now the guiding exchange rate for the economy, continues to be managed and is not fully reflective of market conditions. The parallel market premium over the NAFEX rate reached 29 per cent in August 2021 after the CBN cut off its weekly supply of $20,000 per bureau de change. The CBN has intermittently supplied forex to BDCs since 2005, providing ample opportunities for currency round-tripping.”

The institution however advised that Nigeria adopt a more predictable, transparent and flexible foreign exchange management system in order to attract and sustain private investment flows.

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Nigeria’s Non-oil Revenue Now N1.15 Trillion – Minister of Finance

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Mrs. Zainab Ahmed, the Minister of Finance, Budget and National Planning, has said that Nigeria’s non-oil revenue is now N1.15 trillion, representing 15.7 percent above the country’s target. This, she claimed, was a result of the federal government’s efforts at diversifying the nation’s economy.

Mrs. Ahmed disclosed this at the Institute of Directors (IoD) 2021 Annual Directors Conference which was held on Wednesday in Abuja.

According to the News Agency of Nigeria (NAN) the event with the theme: “Creating the Future: Deepening the Corporate Governance Practice through Multi-Sectoral and Multi-Generational Collaborations,” was meant to discuss economic development.

Mrs Ahmed added that the recent development was in line with President’s commitment to further diversifying the Nigerian economy which is heavily dependent on oil. She observed that Nigeria was showing resilience in recovery from recession from coronavirus (COVID-19) pandemic which intensely affected global economies.

The minister said the federal government alongside the private sector had implemented a wide range of monetary measures to stimulate economic recovery, growth and development, job creation and improved standards of living.

She also explained that the government was doing everything to improve and diversify Nigeria’s revenue generation.

Nigeria was quickly able to exit recession and is on her way to path of sustainable growth and we are intensifying efforts to grow and diversify our revenue sources to grow revenue from the current 8 per cent.”

“Our non-oil revenues have grown to N1.15 trillion, representing 15.7 per cent above set target. We are working on the 2021 finance bill and it’s nearing completion. Also, the recent approval of the medium-term national development plan is an important milestone of Buhari’s commitment to delivering sustainable growth and we require strong support and monitoring during implementation,” she said.

Mrs Ahmed reinforced the government’s decision to do something about infrastructure and reduce the cost of production for businesses in the country.

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