With Reserves Inching Upward, Nigeria on Path to Stability, Growth and Recovery

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The strong accretion of the foreign reserves signals better and efficient management of resources and the economy in general and could be considered a lead to strong and sustainable economic growth. Kunle Aderinokun and Obinna Chima report

Last week, the Central Bank of Nigeria (CBN) disclosed that the country’s foreign exchange reserves have risen to a 31-month high of $33 billion.
It was also positive news for Nigeria from the oil markets where during the week, crude prices touched a five-month high, with Brent, the benchmark crude, up one per cent at $55.72 a barrel, after a session high of $55.99, its highest since April 13.

The accretion in reserves, derived mainly from the proceeds of crude oil earnings, represented an increase by $7 billion, compared with the $26 billion at the beginning of the year

The Nigerian economy, which recently exited from a debilitating recession, with data from the National Bureau of Statistics (NBS), had shown that the economy expanded by 0.55 per cent in the second quarter (Q2) of 2017 and was driven mainly by the performance of the oil and three other sectors.

In the second quarter, the oil sector grew significantly by 17.04 percentage points from -15.40 per cent recorded in Q1 2017 to 1.64 per cent, reflecting the relative peace in the Niger Delta, increased oil output from the region and increase in oil prices.

In April 2017, the Central Bank of Nigeria (CBN) introduced the Investors & Exporters (I&E) window and gradually introduced further measures to improve dollar liquidity

It also intervenes actively to support the currency while keeping domestic liquidity conditions tight.
In addition, higher oil prices and increased portfolio and FDI inflows have enabled the CBN to increase its provision of forex liquidity to the market.

As a result, the parallel exchange is dead as currency users no longer have course to patronise them as currency users are now accommodated in the regulated forex markets.

In fact, most activities now occur on the I&E window. In continuation of its intervention, the CBN had last Monday injected $250 million in the interbank forex market.

CBN spokesman, Mr. Isaac Okoroafor, said with the sustained interventions, the central bank had been able to push forex demand away from the parallel market into the formal regulated market.
According to him, CBN had taken measures to check the activities of speculators and shield the currency from attacks, while also maintaining the value of the naira.

Okorafor maintained that authorised dealers had enough funds to meet the forex needs of customers and urged all to adhere to the extant guidelines on the sale of forex in the Nigerian forex market.

He advised those in genuine need of forex to continue to approach their respective banks for purchase, adding that the CBN remained optimistic that the Nigerian currency will fare strongly against other convertible currencies.

On the convergence target of the bank, he said the goal would be attained if all stakeholders played by the rules.
For Nigeria, there has also been a significant increase in oil production levels reported at 1.75 million barrels per day in August.

On the international oil markets, crude oil prices rose Thursday, with the global benchmark crude, Brent, touching a five-month high, a day the International Energy Agency (IEA) predicated that the oil market would continue to tighten as fuel demand increases.

Path to Sustainable Accretion
Analysts at Lagos-based CSL Stockbrokers Limited noted that increasing forex reserves bodes well for the currency and implies the CBN can continue to support the naira at current levels.
According to them, low liquidity on the currency market has been the biggest culprit in stifling economic activity and the ability to sustain the improved liquidity on the currency market would also support the fragile growth the economy has begun to witness.

A stable and liquid forex market also has a positive effect on inflation, they added.
“While things may be playing out the way the CBN wants with respect to a stable exchange rate, we continue to question its ability to keep interbank forex rates stable over the medium-to-long term.
“Higher forex reserves in recent months, have been built on stronger oil prices and relative peace in the Niger Delta,” they stated.
The firm further pointed out that Nigeria’s exposure to any oil-related shocks therefore remains a cause for concern.
“Indeed, the risk that FX reserves could once again fall to alarming levels on account of militant attacks on crude pipelines and/or weaker oil prices still exists. “Nevertheless, we believe the CBN will be able to maintain the naira at current levels for the short-to-medium term without being forced to adjust due to market fundamentals.

“We forecast that Nigeria’s external accounts net outflow will remain manageable in the context of $33 billion worth of reserves and as we expect reserves to remain at this level in the short to medium term,” they added.

Also, the Chief Executive Officer of the Economic Associates, Dr. Ayo Teriba, recently advised the federal government to open up the economy to foreign direct investment opportunities in order to get Nigeria out of economic recession and keep it on the path of sustainable economic growth.

Teriba cited an example with Saudi Arabia and India, saying opening up the economy to investors would help unlock vast and latent opportunities in the country.

He urged the federal government to learn how to manage cyclical shock such as the remarkable drop in oil earnings which led to the depreciation of the naira in 2016, high level of inflation, among other economic challenges.
Also, the President of Lagos Chamber of Commerce and Industry, Mrs. Nike Akande, noted that with the Nigerian economy highly import dependent, consumption driven and undiversified, there was need for government to draw a roadmap for economic diversification that would drive sustainable growth and development.

Akande also said it had become imperative for the federal government to create initiatives that would stimulate growth, bring about a competitive economy and provide an enabling business environment that would empower the private sector in delivering its mandate towards the actualisation of the EGRP.

Akande observed that while the Economic Recovery and Growth Plan (ERGP) was perceived as a laudable initiative, commitment to its implementation was critical if the plan would foster growth in the economy within the next couple of years.

Similarly, CEO, Global Analytics Consulting, Tope Fasua, noted that strong accretion was a great achievement. “We have seen a steady reversal in the depletion of reserves even before the economy pulled out of recession,” he pointed out.
In fact, Fasua posited that, “Accreting reserves is a good signal to domestic and foreign investors alike as it gives the confidence that the government can fulfill its debt obligations as well as maintain adequate import cover such as to prevent the economy from going into a tailspin resulting from adverse balance of trade.”

“I believe that beyond crude oil price increases, this is also a sign of better economic management and that our economic managers are getting a handle on things. We should be looking at the $50billion mark as a target, given concerted efforts,” he added.

Fitch Ratings also stated recently that its negative outlook on Nigeria reflected the downside risks from rising government indebtedness in the country, the possibility of a reversal of recent improvements in foreign currency liquidity, and a faltering of the still fragile economic recovery.
Fitch had forecast that the Nigerian economy would grow by 1.5 per cent in 2017 and 2.6 per cent in 2018, following the country’s first contraction in 25 years in 2016.

Improved financing will see a stronger execution of capital expenditure plans in 2017 and subsequent years, Fitch stated.
As oil production rises and the overall economy recovers, the ratings agency said that higher revenues would drive a narrowing of the general government deficit to 3.4 per cent in 2018.

“Nigeria’s general government debt stock is low at 17 per cent of GDP at end-2016, well below the ‘B’ median of 56 per cent of GDP, and Fitch expects only a moderate increase to 20 per cent of GDP at end-2017,” it noted.
However, Fitch stressed that the country’s low revenue presents a risk to public debt sustainability, pointing out that Nigeria’s total government debt to revenue, at 297 per cent at end-2016, was already above the ‘B’ category median of 227 per cent.

The agency, in this regard, projected an increase in the debt to revenue ratio to 325 per cent in 2017.
“Nigeria’s ratings are constrained by weak governance indicators, as measured by the World Bank, as well as low human development and business environment indicators and per capita income,” it stated.
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Crude Oil Price
The price of crude oil stabilised at $54.25 as the Organisation of Petroleum Exporting Countries predicted increased stability of the market. OPEC said the price stabilised at that level because of the near balance of demand and supply in the market. Specifically, the price of Brent and WTI stood at $54.25, while that of WTI stood at $48.38 per barrel. Also, the price of OPEC basket of 14 crudes, including Nigeria’s Bonny Light, stood at $51.82 per barrel on Monday, compared with $52.53 the previous Friday. According to OPEC, “The OPEC Reference Basket of Crudes (ORB) is made up of the following: Saharan Blend (Algeria), Girassol (Angola), Oriente (Ecuador), Zafiro (Equatorial Guinea), Rabi Light (Gabon), Iran Heavy (Islamic Republic of Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE), and Merey (Venezuela).”

Road Infrastructure
The N100 billion targeted by the federal government from the Islamic bond, Sukuk, will be spent on critical road infrastructure across the country, the Debt Management Office said. Director-General, DMO, Patience Oniha, said this at various stops of the road show organised to drum support for the bond, according to a statement issued by the agency in Abuja. Oniha, alongside officials of the Ministry of Power, Works and Housing, told stakeholders in Lagos, Port Harcourt and Abuja that the N100 billon was dedicated to building critical road infrastructure across the country.

Ranch Operators
The federal government would provide insurance cover and agro-rangers for ranch operators to curb cases of cattle rustling as well as clashes between farmers and herdsmen. Vice President Yemi Osinbajo said this in Abuja at a national conference on the transformation of the livestock industry. Osinbajo said, “We have now put together a new security group called the agro-rangers. These rangers are being trained by the Ministry of Interior, they are heavily armed. Three thousand of them are being trained. “If you start a ranch or you have a big agricultural project, approach us, we will post them to you at no cost to protect your investment.”

Ajaokuta
Nigeria has recovered ownership of Ajaokuta Steel Company and National Iron Ore Mining Company Limited, Itakpe, following the resolution of a protracted legal dispute. The Minister of Mines and Steel Development, Kayode Fayemi, said Nigeria and Global Infrastructure Nigeria Limited had signed a “Modified Concession Agreement” resolving their protracted dispute over the two companies located in Kogi State. “With this development, both NIOMCO and Ajaokuta Steel Company Limited have now reverted to the Federal Government Nigeria, and we can now proceed to engage a new core investor with the financial and technical capacity to run the steel complex,” Fayemi stated.

Foreign Exchange
The Central Bank of Nigeria would not consider any review of the 41 items affected by the policy on restriction of access to foreign exchange through the official window for imports. The CBN governor, Godwin Emefiele, stated this in his keynote address to the opening session of the 24th annual seminar for Business Editors and Finance Correspondents in Awka. “The CBN is not thinking about reviewing the policy or removing any of the 41 items on the list. We had the choice of allowing the Naira to crash to over N1, 000 to the dollar. But, we chose to prioritise our area of need in our economy as a nation,” Emefiele said.