Last week, the Nigerian Naira consistently closed below the $/N1,600 benchmark at the end of each business day. The Naira traded as high as $/N1,607.50 on Tuesday, as low as $/N1,495.00 on Wednesday, and closed for the week at $/N1,579.89.
The performance of the Naira follows the recent Retail Dutch Auction System (RDAS) conducted by the Central Bank of Nigeria (CBN), which played a significant role in stabilising the exchange rate. During the RDAS, a substantial amount of $876 million was sold, with a cut-off rate of $/N1,495. This intervention by the CBN aimed to boost the Naira and provide a significant boost to its value against the Dollar, contributing to the Naira’s improved performance below the $/N1,600 threshold.
At the beginning of the week, the liquidity in the financial system was notably tight by over N478 billion. However, the liquidity situation improved significantly between Wednesday and Friday, and the week closed at over N32 billion long.
The Federal Government of Nigeria is set to launch its first dollar-denominated domestic bond today, seeking to raise $500 million from both local and international investors. This pioneering bond will feature a bullet repayment structure, with the full principal amount due for repayment in US dollars at the end of five years.
The first dollar-denominated domestic bond auction is scheduled to be held today, Patience Oniha, the Director General of the Debt Management Office (DMO) has indicated that the settlement for this bond is expected to occur approximately ten (10) days following the auction.
Investors will be able to participate by committing a minimum of $10,000. The proceeds from this bond issuance are anticipated to be allocated exclusively to critical sectors designated by the President, based on recommendations from the Minister of Finance and subject to approval by the National Assembly (NASS). The bond will enjoy income tax exemptions on the interest earned by bondholders. Additional tax reliefs are outlined in the exemption notice issued by the Federal Inland Revenue Services (FIRS).
According to data from the National Bureau of Statistics (NBS), there was a bit of moderation in the inflation rate in July 2024 – moving from 34.19% (in June) to 33.40%. This represents a decline of 79 basis points from the previous month. However, it remains 932 basis points higher compared to its July 2023 rate when inflation was 24.08%.
Even though this is the first decline since December 2022 (where it was at 21.34%), this is still a notable increase over the past year. On a month-to-month basis, the inflation rate for July 2024 was 2.28% from the 2.31% recorded in June 2024, showing a slight decrease of 3 basis points. This suggests a modest deceleration in the pace of price increases from the previous month.
In the fixed income market, a moderation in inflation may lead to expectations that the CBN may ease its monetary policy or slow down interest rate hikes. Essentially, a lower inflation rate can reduce the pressure on interest rates, which can benefit fixed income securities as these tend to be more attractive when rates are stable or declining.
Typically, bond prices and yields move inversely. Where inflation decreases, nominal bond yields could also decline, as investors demand higher yields as compensation for higher inflation. With reduced inflation, the risk premium for holding bonds decreases, potentially leading to lower yields.
With lower inflation, the real return on fixed income securities improves. Inflation erodes the purchasing power of interest payments and principal repayments, so a decrease in inflation enhances the actual return on bonds and other fixed income investments. Thereby improving investor sentiment and stability in the fixed income market as it may attract more investors to bonds, making them a more attractive investment relative to other assets. Overall, moderate inflation is typically favourable for the fixed income market as it can lead to lower interest rates and better returns for investors.
In a recent development, the Federal Government of Nigeria has proposed raising the Ways and Means limit from 5% to 10% of the Federal Government’s budgetary allocation. A member of the Monetary Policy Committee (MPC), Murtala Sabo Sagagi, has given his opinion on the proposed move by the FG. Further to Mr Sagagi’s opinion, a very valid concern is that increasing the limit could lead to a substantial rise in excess liquidity in the system, potentially giving rise to inflationary pressures and countering the CBN’s efforts to stabilise the economy through its aggressive monetary policy stance.
While acknowledging that the CBN’s current monetary policies have achieved some success in moderating inflation and stabilising the Naira, Mr Sagagi warned that additional liquidity from increased government borrowing could negate these gains. The injection of N22.7 trillion in Ways and Means financing in 2023 into the economy had already caused considerable economic disruption.
For better coordination between the monetary and fiscal policies, Mr Sagagi recommended that the Federal Government should reconsider its plan to raise the Ways and Means limit and instead focus on enhancing fiscal discipline to build investor confidence and maintain economic stability.
Given the recent decline in inflation from 34.19% in June 2024 to 33.40% in July 2024, the Central Bank of Nigeria (CBN) could view this as a sign of progress in their efforts to stabilise prices and take a more measured approach in the upcoming MPC meeting, scheduled to hold in September 2024 (on the 23rd and 24th). Further to the minimal hike by 50 basis points in the last meeting, the CBN could decide to hold on further interest rate hikes or adopt a more cautious stance; allowing time to assess whether the observed downward trend is consistent and sustainable.
The future movement of inflation will depend on several factors, as the CBN’s monetary policy decisions will play a crucial role; where implemented policies remain tight, this could further reduce inflation. However, premature easing of policies could risk reversing the gains made. Additionally, government fiscal policies, including spending and borrowing, will impact inflation dynamics. Further, increased liquidity from higher spending could counteract the effects of monetary tightening.
Global economic conditions and supply chain issues also influence inflation. Stable external factors and effective management of supply chain disruptions will be important for
maintaining a downward inflation trend. Predicting the exact duration of the decline or potential acceleration in inflation is complex, as this hinges on how various elements interact over time. The Bonds and Bills auction this week should see yields lower than their positioning at the last auctions.
