Dear Subscriber,

The endless roller coaster of the Naira in 2021

The naira has been a victim of speculation, fear, greed, panic and hoarding. This is as a result information asymmetry, lack of policy clarity and market skepticism since the exclusion of BDCs from access to CBN dollars in July. The resulting bottleneck pushed the naira sharply lower in the parallel market plunging to as low as N590/$. But in the last week alone, the naira has appreciated by 4% to N574/$ (albeit temporarily) because of two things. The first being the CBN allowing the naira to depreciate by 1% at the I&E window to N415/$ and the second being a gradual increase in forex supply to the official market.

The major lesson from this gradual convergence of rates is that no matter the amount of administrative controls on the nominal price of any commodity, the effective price will be determined by the market at the end of the day. Therefore, the next logical step is for the CBN to aggressively allow the I&E window rate to crawl up to N420/$ and increase the supply to the market by $1-2bn. This will accelerate convergence towards N490/$ at the parallel market in October. The appreciation of the naira in the market, which has started albeit slowly will push the speculators to the sidelines and give the naira some breathing space for now.

Nigerian bond issue 4 times oversubscribed but pricing expensive

The Euphoria of creditor enthusiasm with the four times oversubscription of the recently closed Nigerian bond issue ($4bn) has known no limits. However, a cursory look at the terms shows that the Nigerian paper is priced higher than that of Benin Republic by an average of 201 basis points for almost identical maturities. Benin’s economy (GDP) is 4% of the size of that of Nigeria and does not have “oil blessing”!! That notwithstanding, the guidance of the Fed and the Bank of England suggesting that policy rates will likely increase in 2022, points to the fact that debt servicing in an increasing interest rate environment may pose a serious problem for the incoming government in 2023.

In this edition of the FDC Bi-Monthly publication, the FDC Think-Tank analyzes these issues and their implications on businesses and the economy at large.

Enjoy your read!