CBN move closer to its single-digit inflation target

Consumer Price Index (CPI) published by the National Bureau of Statistics (NBS)showed 11.61% headline inflation year- on-year in May 2018, representing the 16th consecutive decline in the CPI since January 2017 and 0.87% decline month-on-month, when compared to 12.48% in April 2018

According to experts, the sustained decline in year-on-year inflation brings the Central Bank of Nigeria (CBN) closer to its single-digit inflation target and perhaps, could strengthen the argument for possible rate cut in the second half of the year 2018 as pointed out in our earlier publications.

For instance, the decline in May was attributed mainly to the sustained easing in the prices of food products, and base effect from the 2017 CPI figures. We expect the base effect to continue in the coming months, hence our inflation model forecasts further, albeit subtle, moderation in the headline inflation to c.11% for June 2018.

However, with expected expansionary fiscal activities as the Federal Government begins 2018 Budget implementation, anticipated electioneering spend especially towards the end of the year could elevate inflationary pressures in the coming period and remains a key risk to the declining trend in inflation. The streamlining of the country’s FX windows contributed to the stabilisation of FX rates in the first half of 2018 amid healthy accretion to the nation’s foreign reserves ($47.6billion: June 13, 2018).

The SME, Retail and Investors & Exporters windows have been key for exchange rate normalization in 2018, all trading within NGN360/USD – NGN363/USD range as at June 2018. Sustained improvements in FX distribution through bank branches was key for shifting demand away from the parallel market consequently narrowing the gap between the official and parallel markets to NGN57.00 as at June 2018 from NGN195.00 as at year end 2016.

The Naira-Yuan swap agreement between Nigeria and People’s Republic of China is positive for NGN/USD exchange rate stabilisation in the medium term as aggregate demand for US Dollar (USD) for international trade settlements will be diversified into the Chinese Yuan (CNY). Thereby improves FX situation buoyed by the currency swap deal will be key to the revival of the domestic non-oil sector especially the Manufacturing and Trade sectors in H2-2018.

Furthermore, the impacts of the Naira-Yuan swap deal on Small and Medium Scale businesses (SMSBs)in Nigeria.

The CBN issued regulations during the month of June for the commencement of bi-weekly biddings for Chinese currency transactions following the recent Naira-Yuan swap deal. The regulations which include transactions that are denominated in the Renminbi (Yuan) under the swap arrangement, will serve to control the financing of trade and direct investment to sustain the current stability in the FX market.

The swap agreement allows for banks in both Nigeria and China to among other purposes, make available liquidity in their respective currencies for the facilitation and promotion of bilateral trade and investments across the two nations, through the purchase, sale and subsequent repurchase and resale of the Chinese Yuan (CNY) against the Naira and vice versa.

CBN believe this recently signed the $2.4bn currency swap deal with the People’s Republic of China will be positive for SMEs and local manufacturers. Currency traders envisage strengthening of the Naira in the near term as aggregate FX demand is expected to shift further away from the parallel market.

In particular, the currency swap deal should translate to good transaction cost savings for SMEs.

For instance, payment for Letters of Credit (LC) under the currency swap deal will not be required unless routed through the bank of the supplier/beneficiary to the issuing bank. However, Bills for Collection must be routed through issuing banks directly or through offshore correspondent banks and lastly, there will be no spot foreign exchange transaction charges for transactions executed through the CBN intervention window.

Furthermore, SMEs are not required to open Renminbi (Yuan) domiciliary accounts where they will be subjected to account opening requirements, charges and maintenance procedures. The currency swap deal also offers opportunity for Nigerian SMEs to expand their scale and scope of operation through strategic partnerships that could positively impact their credit worthiness.

Nigerian enterprises remain plagued with issues regarding credit worthiness which is a barrier to accessing much needed financing for business expansion and revenue growth. The Naira-Yuan swap operational framework presents opportunities for SMEs to forge partnerships with bigger Chinese firms towards improving their cash flows, business going-concern profile, and by extension their credit worthiness.

On a national scale, Nigeria accounts for 8% of China’s trade volume in Africa and overall, this deal is positive for Nigerian businesses as the country’s strategic positioning as an economic powerhouse raises its commercial viability as a strong trading hub in Sub-Sahara Africa. The currency deal is set to increase China’s Naira (NGN) asset base valued at c.₦1tn.

The Chinese government currently has major investments in Nigerian infrastructure projects including Rail, Road, Airports and Power. Some of these projects have been stalled due to tight funding. Notwithstanding, the Chinese government is expected to utilise the funds towards financing interested Chinese businesses in Nigeria at concessional interest rates (usually single digit) to enable them carry out their contractual and trade obligations.

This presents opportunities for strategic partnerships between SMEsin Nigeria with Chinese industries/contractors and major suppliers. The completion of key infrastructure will naturally trigger growth in key sectors of the economy, generate employment, enhance productivity and sustain efforts of the Federal Government in diversifying economic output and consequently, fiscal revenue. The potential multiplier effect for businesses is enormous. The value chain opportunities should be compelling for Nigerian SMEs and manufacturers as economic outlook for H2-2018 remains benign.

Naira-Yuan Deal – Positive for SME Development in Nigeria

Banks offers trade financing under the following modes of payment:

An international trade transaction unlike a domestic transaction involves a longer period of time to conclude. This extended period can create financial strains on importers and exporters. While the exporter may require financial support to cope with the time lag between the procurement of raw materials, processing of same, shipment and eventual payment, the importer may require support to pay for imports pending when the imported goods can be processed further if required, and sold in exchange for cash. Banks provides financial support to aid qualified customers towards meeting their Trade obligations.

In Payment in Advance, the importer sources for fund not from official market (CBN/Interbank). The funds are remitted to the exporter before the goods and all necessary documents are shipped to importer/buyer. It is the most secure for the exporter and it provides the exporter with cash flow before shipment of goods. The importer bears the sellers risk and seller’s country risk. Hence, in most cases it is treated as a cash and carry transaction to mitigate the risk.

BILLS FOR COLLECTION: This is a trade transaction that enables the seller to send goods to buyer and rely on the buyer’s bank to assist in collecting the payments against the acceptance of a bill-of-exchange drawn on the buyer by the seller. It provides a relatively cheap source of import finance and is usually used when the seller trusts the buyer’s ability to honour their payment liabilities. The buyer’s bank does not bear any payment liability unless it fails to follow the seller’s instructions as by the seller’s bank. Bills for Collection transactions are governed by ICC Uniform Rules for Collections, Publication 522.

LETTERS OF CREDIT: Letter of credit is a definite undertaking by the issuing bank on behalf of any buyer (buyer) to effect payment against the presentation of complying documents by a beneficiary (seller). It is the most secured payment method in international trade because at every point in time in the transaction cycle both the buyer and the beneficiary’s risks are covered. It is irrevocable i.e. can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary (Article 10 UCP 600).

Post Comment