FGN borrowing from the CBN – curse or blessing?
There has been so much talk about the federal government’s dependence on its overdraft with the CBN to bridge the deficit financing gap and its negative consequences. As Nigeria plans to issue another Eurobond ($3bn) soon, fiscal consolidation and sustainability will be a condition precedent to efficient pricing of the coupon. Therefore, a widening fiscal deficit and funding it unconventionally by ways and advances (overdraft), may easily become a deal breaker. The DMO has indicated its willingness to securitize its overdraft at market rates of interest, which will bring to an end the speculation about printing cash to fund government activities.
Forex availability and exchange rate depreciation- A manufacturer’s nightmare!
Nigeria’s forex market is plagued with two major problems – the price and supply of forex. Recently, dollar scarcity has forced many manufacturers to the parallel market to source for over 90% of their forex needs, leaving them with a blended and more expensive rate around N460/$. In the last three years, the naira has depreciated by 33.88% to N485-486/$ at the parallel market and 14.35% to N412/$ at the I & E window. The CBN’s forex rationing and uncertainty surrounding its exchange rate policy have exacerbated the problem and increased the risk of capital flight. The Nigerian manufacturing sector which contracted by 1.5% in Q4’20 could slip deeper into negative territory if the forex rationing continues indefinitely.
Interim forex solution preceding a floating regime
Empirical data suggests that a sale of approximately $4bn in the spot and forward markets by the CBN, could lead to a 4% convergence (appreciation), bringing the parallel market rate to N470/$ in a very short period. Also, maintaining a supply pipeline of approximately $2bn a month could stem the exchange rate haemorrhaging in the near term.
In this edition of the FDC Bi-monthly publication, the FDC Think-Tank analyses these issues and their implications on businesses and the economy at large.
Enjoy your read!