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Naira tops agenda as MPC meets Thursday

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The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), which commences its 245th meeting this Thursday is expected to take critical decisions that would determine the fate of the naira, which has been under intense pressure at the parallel market in the past few weeks.

The two-day meeting holds in Abuja. The MPC, which has operational independence in determining monetary policy will be meeting for the fourth time this year. The naira, which sells for N196.95 to a dollar on the interbank market, goes for about N240 to a dollar at parallel market points across major cities in the country.

The pressure faced by the naira at the parallel market was provoked by the CBN’s restriction of importers of 41 products from accessing forex at the official foreign exchange market. Some of these items include rice, wheel barrows, head pans, cement, margarine, palm kernel/vegetable oil, meat and processed meat products, vegetable and processed vegetable products, poultry, private airplanes/jet, Indian Incense, toothpicks, tinned fish in sauce (Geisha/Sardines), among others.

The depreciation of the naira had heightened the debate on the devaluation of the naira. While the central bank has maintained that its decision not to undertake a further devaluation of the naira was as a result of the need to safeguard the Nigerian economy from the shocks and negative impact this would have on the economy, some analysts and agencies have intensified their call for the devaluation of the nation’s currency.

Nigeria’s consumer price index, the basket used in gauging inflation rate, increased to 9.2 per cent at the end of June.

However, analysts at Financial Derivatives Company Limited (FDC) anticipated that the CBN will increase use of administrative measures in its quest to protect the nation’s currency. These administrative tools are the cash reserve ratio (CRR) and Open Market Operations (OMO).

According to them, the CBN has already reached the upper limit of its tightening cycle, predicting that a probable outcome at the MPC meeting would be for the CBN to maintain the status quo and use more administrative measures in preserving the forex reserves.

“Even though the CBN is committed to defending the naira, the currency pressures facing Nigeria are becoming more intense. The spread between the interbank rate and the parallel market creates an arbitrage corridor for speculators, and is now a round tripper’s paradise. Another issue that is of concern is the consistent decline in oil receipts as a result of falling oil prices, when the sanctions on Iran are finally removed,” it stated.

Similarly, analysts at the WSTC financial Services stated:”We believe the CBN’s tight monetary stance aimed at ensuring stability in the forex market and curbing inflation will continue to support attractive yields in the fixed income market. Also, we expect the surging inflationary pressure and uptrend in inflation, and the ensuing effect of shrinking real returns to drive investors’ demand for higher returns on fixed income investments in the second half of the year.”

A financial market analyst who pleaded to remain anonymous, however, advised the MPC members to retain the interest rate and other monetary tools, but devalue the naira.

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BUSINESS

U.S. Treasury yields start the week higher as traders assess rate hikes, recession risk

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U.S. Treasury yields were higher to start the week as market players assessed the prospect of central banks implementing more interest rate hikes to curb soaring inflation.

The yield on the benchmark 10-year Treasury note was trading higher by 4 basis points at 3.164% at 3:30 a.m. ET.

Meanwhile, the yield on the 30-year Treasury bond also rose around 4 basis points to 3.301%. Yields move inversely to prices.

On the data front, traders are expecting the latest reading of durable goods orders to come out Monday before the opening bell. They are also watching for the pending home sales report, which is expected at 10 a.m. ET on Monday.

On Thursday, Federal Reserve Chairman Jerome Powell reaffirmed the U.S. central bank’s “unconditional” commitment to reining in 40-year high inflation levels.

Speaking at the U.S. House of Representatives Financial Services Committee, Powell acknowledged that sharply higher interest rates could push up unemployment but said that restoring price stability is “something that we need to do.”

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Stock futures rise as Wall Street looks to snap losing streak

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Stock futures gained on Friday morning as Wall Street looked to grind out a rare positive week in what has been a rough first half of the year.

Futures tied to the Dow Jones Industrial Average rose 102 points, or 0.33%. Futures for the S&P 500 were 0.51% higher, while Nasdaq 100 futures advanced 0.78%.

The moves in futures come as the stock market appears to have found some stability this week, at least for the short term. After an afternoon rally on Thursday, the S&P 500 is up 3.3% for the week, while the Nasdaq composite is up 4% and the Dow is 2.6%.

All three averages are looking to snap three-week losing streaks.

Economic data will be a key focus on Friday, as investors try to determine if the U.S. economy is falling into a recession. New home sales data is due out at 10 a.m. ET and the final University of Michigan consumer sentiment report for June will follow later in the day.

“Recession talk remains the focal point on Wall Street and that means whatever stock market rebounds emerge will probably be short-lived,” Oanda senior market analyst Ed Moya said in a note. “Wall Street won’t have any answers anytime soon for the questions on when will inflation peak, how soon will we see a recession, and how high will the Fed raise rates?”

The consumer sentiment reading could be particularly important for investors, as Federal Reserve Chair Jerome Powell said that a surprise drop in the preliminary reading was one of the reasons the central bank hiked its benchmark interest rate by three-quarters of a percentage point earlier this month.

On the corporate front, shares of FedEx moved higher in extended trading despite a mixed fourth-quarter report after the logistics company delivered an upbeat earnings forecast. Carnival Cruise Line is scheduled to release a business updated on Friday morning.

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States to lose N19bn in oil, gas revenues in 2022 – World Bank

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The World Bank has said that Nigerian states will likely lose N18.8bn in oil and gas revenues in 2022, as worsening revenue collection at the federation level increases budgetary pressures for the states.

The Washington-based bank said this in its Nigeria Development Update report, titled, ‘The Continuing Urgency of Business Unusual’.

According to the lending bank, the declining revenue from the federation level had put many states in a precarious fiscal position.

The bank warned that many states would be unable to meet up with their expenditures, adding that there was an increase in debt servicing expenditures of States.

The report read in part, “With net oil and gas revenues stagnating, most states will not be able to achieve their intended levels of expenditures in 2022.

“In addition, debt servicing expenditures at the state level are also mounting due to a decline in gross statutory account revenue transfers from the federation account allocation committee, which comprises oil and non-value added tax, non-oil revenues.”

The bank further said that the expected higher VAT collection or improvements in independently generated revenues would not compensate for the lower transfers from the Federation Accounts Allocation Committee in 2022.

The financial institution also warned that there would be a 2.7 per cent decline in FAAC transfers in 2022 when compared to 2021, adding that this decline would push states to borrow more and slash discretionary expenditure.

“Stagnating net oil revenues will significantly affect the fiscal situation at the state level. State governments are projected to collectively receive 2.7 per cent fewer revenues than in 2021, as federal transfers are estimated to decline by 10 per cent against 2020 levels.

“Lower transfers will cause state governments to incur debt or drastically slash discretionary expenditure. Although states receive the majority of VAT revenues, VAT increases would not make up for the loss of net oil revenues.

“As a result, in 2022, the average state in Nigeria will lose N18.8bn in oil and gas revenues, while optimistic projections place average gains from VAT and the electronic money transfer Levy at N7.1bn per state, and average increases in each state’s independent revenues at N6.7bn. As a result, the average state can expect to lose N5bn in revenue in 2022,” the report stated.

The Nigerian National Petroleum Company Limited (NNPC) might deduct over N1tn in the next six months from the Federation Accounts Allocation Committee, following the decision of the Federal Government to continue subsidising Premium Motor Spirit, popularly called petrol.

Figures obtained from the oil firm on its subsidy deductions in 2021 indicated that the amount deducted monthly from FAAC by the NNPC was higher during the periods of higher crude oil prices.

This was also confirmed by economists, who explained that the higher the international price of crude oil, the higher the amount to be deducted by the NNPC from FAAC.

“Of course, the NNPC will spend more on subsidies this year because crude oil price has been increasing and the higher the price of crude, the higher the amount to be spent on subsidy,” the Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, said.

He added, “In fact, about N2.5tn might be spent on subsidy this year, meaning that about half of that amount could be spent in six months and this means hard times for states because the funds will be deducted from FAAC as usual.

“Some states would struggle to pay salaries, especially states that are heavily dependent on federal allocation. Some may have to lay off some of their work force. Many will struggle to meet their financial obligations as sub-nationals.”

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