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Gentleman’s disagreement between the IMF and FGN on naira devaluation

Top of the list in the IMF’s recommendations in its latest Article IV review for Nigeria is exchange rate policy reform and a downward adjustment of the naira – which it estimates is overvalued by 18%. This would ease external imbalances and clear the dollar demand backlog. However, the FG is of the contrarian view that another naira devaluation, after the two in 2020, will further stoke inflationary pressures. We believe the CBN will eventually give in and allow a more market determined exchange rate policy while easing off on its forex rationing strategy. It is likely to lean towards the adoption of a crawling peg which will allow the naira fluctuate within a band (managed depreciation) rather than a one-off devaluation.

Higher interest rates –necessary but not sufficient to curb inflation

A tightening of its monetary stance is the last card in the CBN’s armoury as it shifts its focus back to price stability. We forecast that inflation could climb to a 17-month high in January 2021 (16.2%) on the back of insecurity and forex restrictions to food imports. Higher interest rates will increase savings and in turn investment. This would boost output and aggregate expenditure. The rise in interest rates will increase the real rate of return and drastically reduce capital outflows while tapering inflationary pressures.

Multidimensional poverty and insecurity are inextricably linked

Nigeria is currently grappling with security challenges ranging from farmer/herder clashes, cattle rustling, banditry, kidnapping and the Boko Haram insurgency. Growing insecurity has coincided with Nigeria’s descent down the poverty ladder as it is now regarded as the world’s poverty capital, with an estimated 91 million people (43% of its population) living in extreme poverty. Insecurity is reinforced by poverty and is also one of the major causes. Any plans to combat one without tackling the other would be dead on arrival.

Vaccine bungling and NIN run-around

South Africa and Kenya have ordered a total of 44mn doses of covid-19 vaccines but Nigeria is still bungling whilst contemplating a risky second lockdown. We do not know when the vaccines will arrive or if Nigerians would be optimistic enough to take it. However, there is clearly a health care problem that if left unchecked will spiral especially with the NIN run-around. So, does Nigeria want to cure or prevent an uncontrollable spread of the virus?

Stock market sizzle is fizzling

The dollar illiquidity limited capital outflows and compelled FPIs to reinvest in the NSE. Meanwhile, the outrageously low interest rates also ushered the PFAs into the bourse. But with the looming rise in interest rates on possible tightening and increase in dollar inflows in the near term what will be fate of the NSE? The bubble may be about to burst.

In this edition of the FDC Bi monthly publication, the FDC Think Tank provides indepth analysis to these and other issues and what to expect in the next six to eight weeks.

Enjoy your read!