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Nigeria’s Gradual Road to Economic Recovery
By Lukman Otunuga, Senior Research Analyst at FXTM
Africa’s largest economy has displayed resilience over the past few months.
From defending against the Covid-19 menace to battling untamed inflation and shouldering domestic risks. Initially, the economic outlook was bleak during 2020 after the economy sunk back into its second recession in less than five years. Lockdown restrictions caused significant disruptions in the value chain, halted most aspects of the economy while crippling the manufacturing sector. A growing sense of alarm and unease over surging coronavirus cases added to the uncertainty, ultimately fanning fears around Nigeria experiencing a prolonged economic recession.
However, the economic expansion of 0.11% in Q4 2020 came as a breath of fresh air and offered some light at the end of the tunnel. Although the economy contracted 1.92% for the full year, the rebound during the final quarter raised hopes that Africa’s largest economy was exiting from the Covid-19 induced recession.
World Bank projects Nigeria to expand 1.1% in 2021
According to World Bank, economic growth is expected to expand by 1.1% this year while Bloomberg forecasts GDP to contract by 1.5% in Q1 2021. Nigeria certainly has the potential to exceed these growth estimates due to rising oil prices and improving global economic conditions. It must be kept in mind that earnings from oil exports account for over half of government revenues and about 90% of foreign-exchange earnings. As oil prices appreciate, this provides the government with ammunition to attack domestic risks threatening the country’s fragile economic outlook. In regards to other key metrics, inflation is seen averaging around 14% while the Central Bank of Nigeria (CBN) is forecast to hike interest rates at least once this year as economic conditions improve.
No love for the Naira
The past few months have certainly not been kind to the local currency. It has weakened considerably on the black-market exchange, trading around 482N per Dollar compared to the 380N official rate. An unappetizing combination of depressed oil prices, dollar shortages, and rising inflationary pressures exposed the emerging market currency to downside risks.
Devaluation third time lucky?
Unfavourable domestic conditions forced the Central Bank of Nigeria (CBN) to devalue the Naira twice in 2020 with CBN governor Godwin Emefiele recently confirming another devaluation to N410 against the dollar. Indeed, a weaker rate would boost government revenue from oil exports – a welcome development for the energy producer. If the Naira weakens, this could bolster revenues from crude, which is sold in Dollar but converted to Naira.
It does not end here. Nigeria’s economic prospects could brighten if the devaluation opens doors to fresh discussions with the World Bank regarding a $1.5 billion loan. Confusion around Nigeria’s multiple exchange rates has hindered investor attraction with major institutions requesting currency reforms to rekindled investment.
Inflation remains a cause for concern
But a weaker Naira may lead to untamed inflation…
Inflationary pressures have punished consumers and threatened the country’s fragile recovery. In January, consumer prices jumped to 16.47% more than double the target of 7.5% thanks to supply disruptions, dollar restrictions, and removal of oil subsidies.
Nigeria is dealing with a cost-push inflation scenario where overall prices have increased due to the rising cost of production and raw materials. The government could pursue deflationary fiscal policy or monetary authorities could increase rates, but this may do more damage than good.
Diversification & oil reliance
It is widely known that diversification has the potential to cure Nigeria’s dependence on oil. However, the country’s economic outlook remains heavily influenced by the commodity’s performance. The good news is that oil prices have appreciated over 25% since the start of 2021 thanks to OPEC+ cuts, optimism over US stimulus, and robust demand from China. But the bad news is that West Africa’s biggest oil producer has seen its shipments fall in recent months thanks to infrastructure issues with production falling to 1.50 mbpd according to data from Bloomberg.
OPEC+ meeting in focus
The OPEC+ meeting in March may indirectly impact Nigeria’s economic outlook.
While Saudi is publicly urging fellow members to be extremely cautious despite prices rebounding to pre-pandemic levels, Moscow on the other hand is indicating that it still wants to proceed with a supply increase. Another question is whether Saudi Arabia will continue its voluntary production cuts of 1 million barrels per day. Market expectations are rising over OPEC+ easing supply curbs after April thanks to rising oil prices. But given the nature of OPEC+ and the outcome of previous meetings – anything could be on the table.
Even if oil prices appreciate following the OPEC meeting, gasoline prices will remain unchanged in March indicating that the costly fuel subsidies are back. With inflation at a 12-year high, rising fuel costs could pour fuel into the fire – leading to further uncertainty.
CBN rate hike in 2021?
The million-dollar question is not “if” but “when” the CBN will hike interest rates.
Globally, fiscal policy has been labelled as a more effective weapon against covid-19. However, a large share of Nigeria’s revenues is spent on repaying debts. This has left little room for critical social and infrastructure spending to shield the economy from the negative impacts of Covid-19.
Monetary policymakers remain in a tricky spot after the Covid-19 menace spread its poisonous tentacles across the economy. The pandemic resulted in lockdowns, reduced activity, a weakened Naira, and stagflation. While a rate hike will increase the cost of borrowing, effectively reducing inflation – this may result in a bigger fall in GDP. However, the options are limited within the monetary policy toolbox with unconventional tools such as loan to deposit ratio, liquidity ratio, and cash reserve ratio in focus.
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Obaseki Commissions Edo State Data Center
Governor Godwin Obaseki of Edo has said that reforms by his administration in the digital and technology space over the last eight years have revolutionised the state.
The Governor who stated over the weekend at the launch of the Edo State Digital Policy and Edo Data Centre, disclosed that was the first data centre owned by a state in Nigeria.
According to him, his reforms had repositioned Edo as a leading state in digital inclusion in Nigeria, adding that his government was leveraging technology as a catalyst for socio-economic development and inclusive growth.
He said: “I welcome you to the only data center owned by a state in Nigeria. This event is significant because we have started a revolution in Edo State, a digital revolution. We are rounding up with a policy statement that will guide this revolution into the future.
“The population of Edo is scaled towards the youths as they are born in a digital age. The future is digital. It will be difficult to navigate the world today without technology. If you want to develop and grow rapidly, you must begin to think of how to use technology.
“The pace of the advancement of technology in the world today is scary. So, just imagine those who have not started yet; I don’t think they can live in the future world. In Edo, we have always been ahead in our history. We have been a knowledgeable people as we interacted at a global level over 500 years ago on our own level.
“To catch up, we had to do something else and different. That was why from the beginning it was clear to us that we had to introduce technology and make sure that we begin to retrain our young ones, the youths, to own this digital world and the confidence in it.”
Obaseki added: “We have moved Edo into the digital superhighway and to operate on that superhighway, they must know the rules and must be guided by certain rules and practices. That is what we are doing today and incorporating in this policy document. This will enable everybody to understand the shape of this high way and what they need to do on this high way.”
The governor continued: “I had the privilege of working with young people in Edo State and working together, we set up EdoJobs and the Edo Innovate Hub as these have helped our young people and till date, over 50,000 young men and women have benefited from various training and programmes from Edo Innovate. We have been lucky to build a digital ecosystem which has grown rapidly.
“Years ago, as the Chairman of the State’s Economy Team, we set up the ICTA but we struggled all through but we kept it alive, and set up the law governing it. The agency is principally responsible for providing technology for the government.
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FG Offers Nine-month Amnesty for Illegal Dollar Holdings
Federal Government on Thursday announced a nine-month programme beginning on October 31 that allows individuals to deposit dollar bills held outside the formal banking system without scrutiny.
It said the new initiative aims to address the rising costs of commodities influenced by the foreign exchange rate, driven by demand and supply dynamics.
Wale Edun, finance minister and coordinating minister of the Economy, revealed this after the 144th meeting of the National Economic Council, the country’s highest economic advisory body, chaired by Vice President Kashim Shettima at the State House, Abuja.
“There will be no penalty; there will be no taxes, and there will be no questions,” he told journalists at a briefing after Thursday’s conclave.
Edun said that, under this programme, individuals can bring in U.S. dollars in cash without facing penalties, taxes, or scrutiny, provided that the funds are not linked to criminal or illicit activities.
Participants will only need to meet the standard Know-Your-Customer requirements set by banks to secure these funds, integrate them into the financial system, and make them accessible for legitimate economic activities.
He explained, “One element of the cost increase is the foreign exchange rate, which is demand and supply. There will be a programme starting today, October 31, and lasting nine months that will allow people to bring in cash outside the banking system.
“[Such cash] is unsafe, insecure and outside legal limits. They will be allowed forbearance to bring dollars cash. Let me emphasise once again: it is to bring dollars that they are holding outside the system to get them in and credit it to their bank accounts, as long as it is not proceeds of crime or illicit money.
“They should just meet the standard Know-Your-Customer criteria of banks and have an opportunity to bring in those funds, making them safe, secure, and available through regular economic activity.
Edun said his ministry will first issue guidelines for the programme, followed promptly by additional guidelines from the Central Bank.
According to the Minister, this measure offers law-abiding individuals a way to formalise their cash holdings. It also provides the financial system with additional dollar reserves, which may help to stabilise the exchange rate.
“This is an opportunity, not just for people who would normally like to comply, to be compliant with the laws and normal business practice, but of course, it allows us to bring those dollars from where they are doing nothing to where they are within the financial system, they add to our reserves, and of course can help with the exchange rate,” he added.
Edun equally gave an update on government economic relief measures, saying 25 million Nigerians have benefitted from federal social protection initiatives, including digital outreach, microenterprise loans, and sector-specific support for power, agriculture, manufacturing, health, and compressed natural gas initiatives.
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Wema Bank Launches Export Trade Academy to Empower Nigerian SMEs
Wema Bank has announced the launch of the Wema Export Trade Academy, a comprehensive training programme designed to equip Nigerian Small and Medium Enterprises (SMEs) with the essential skills and tools needed to succeed in the competitive landscape of global trade.
Moruf Oseni, the Managing Director and Chief Executive Officer of the bank, this initiative represents Wema Bank’s commitment to enhancing the capacity of Nigerian businesses, supporting their ambitions to thrive on an international scale.
Oseni said the Wema Export Trade Academy is designed as a solution to these challenges faced by Nigerian SMEs when entering international markets.
The Academy is specifically structured to address each critical aspect of global trade, providing SMEs with targeted guidance on compliance, documentation, financial planning, and risk management.
Through the Wema Export Trade Academy, SMEs will benefit from expert-led sessions, mentorship from industry professionals, and practical insights into international business practices, positioning them to make significant contributions within global markets.
The programme also places emphasis on building a network of Nigerian exporters, encouraging peer support and collaboration, while fostering connections between businesses and international trade facilitators.
Oseni said: “This holistic approach to export training will enhance efficiency and productivity, empowering Nigerian businesses to become competitive players in the global economy.
“The Wema Export Trade Academy reinforces Wema Bank’s dedication to building the capacity of Nigerian businesses and supporting their evolution into formidable global competitors.
“By addressing the barriers in export trade, we are enabling Nigerian SMEs to seize new opportunities in international markets, which aligns with our vision to empower lives and support sustainable business growth.
“The Wema Export Trade Academy embodies Wema Bank’s pioneering spirit and commitment to providing SMEs with practical, impactful solutions.
“With comprehensive training on export processes and access to strategic financial products, the program stands as a testament to Wema Bank’s role as an enabler of growth for Nigerian enterprises.
“Wema Bank continues to set the standard for innovation within Nigeria’s financial services industry, supporting individuals and businesses across various sectors to achieve sustainable growth.
“The Wema Export Trade Academy represents the latest stride in Wema Bank’s mission to empower Nigerian SMEs, further strengthening its reputation.”
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