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UPDATE: Naira Dips, Now Pegged At N495/$ - Nairaland / General - Nairaland

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UPDATE: Naira Dips, Now Pegged At N495/$ by gistongist: 1:09pm On May 28
Naira crashed yesterday to N495/$ at the parallel market, losing N14 to the dollar within within few days. It closed on Tuesday at N481/$.

The sharp depreciation came a day after the Central Bank of Nigeria (CBN) devalued the naira at the official market to N410.25/$.

The fall in the currency rate has been linked to dollar scarcity and the hoarding of available greenback by forex speculators to maximize profit.

In an e-mailed guide to investors, Financial Derivatives Company Managing Director Limited Bismarck Rewane, said delayering (unification) of the multiple exchange rate system which had bedeviled the Nigerian economy had been a subject of controversy for a long period.

He said: “Now that it appears settled, we should expect a crawling peg method and an increase in forex supply to ensure equilibrium in the market. That notwithstanding, the CBN’s attempt to mop up excess liquidity could serve as a temporary antidote to consumer price inflation which still remains stubbornly high (18.12 per cent).”

Rewane had earlier attributed the naira’s continued decline to heightened forex supply shortage, demand pressure and rationing.

He said naira rates’ convergence would require adoption of a full floating exchange rate system determined by the forces of demand and supply.

Also, the International Monetary Fund (IMF) said exchange rate rigidities have constrained the economy’s ability to absorb external shocks.

According to the IMF, restrictions on access to foreign exchange for certain categories of goods and multiple exchange rates create distortions in both private and public sectors decision making. They discourage long-term investment, encourage smuggling and provide avenues for corruption.

As a way forward, the IMF suggested removal of foreign exchange restrictions and full exchange rate unification, in line with the authorities’ Economic Recovery and Growth Plan (ERGP), will help keep the parallel market premium low in a more sustained manner.

It therefore called for unified exchange rate for the naira to promote growth and attractive foreign capital.

According to the IMF, foreign exchange backlog and shortages are intensifying Balance of Payment (BoP) pressures insisting that exchange rate unification was imperative to reduce BoP risks.

It said that fiscal deficit would stay elevated in the medium term, while additional domestic revenue mobilisation is required to reduce fiscal risks.

Forex Trading Associate, AZA, global forex trading dealer, Oghenefejiro Eduviere, said exchange rate volatility will persist, with inflation concerns mitigated by the rise in crude oil prices this year with Brent Crude now selling at $66.1 per barrel.

He said that rising oil revenue and increased remittance inflows following the ‘Naira for Dollar’ incentive policy have helped boost foreign exchange reserves from $34.845 billion to $35.22 billion so far this month, according to the CBN.

“Amidst the swings, we expect the overall trend will be a weakening on the parallel market towards N490 on inflation concerns.


Re: UPDATE: Naira Dips, Now Pegged At N495/$ by budaatum: 1:48pm On May 28
Our subsidy on forex is similar to our subsidy on petrol. Allowing the market to determine price will initially see a spike in both with the Naira likely doubling to about ₦900 to the $, which will increase inflows as remittances increase to benefit from the more ₦ you get for the $. Unfortunately, inflation will initially kill you there, as they say, before ₦ finds its true level, and we Nigerians don't like pain even if we'd be painless afterwards.

I so love electrical tomatoes is all I can say


Electrical Tomatoes

The emboldened is about the only bit of this that got my attention but I notice it caught no one else's.

"Price controls"! It means a product is kept at a price set by government, and in Nigeria, we know it's kept low and very likely beneath the cost at which it can be sold at a profit. Like petrol really. But we can at least claim a reason for petrol with our crude oil and our ineptitude at running refineries. Electric though!?

Imagine it were tomatoes. You invest in land and fertiliser and labour and grow them, and when you get them to the market, government sets the price. I'm absolutely certain if that price is higher than the cost at which you grow your tomatoes, you wouldn't mind much. You'd likely be delighted if it's high enough for you to make a tidy profit. And if you're fortunate and the price set is so high, you'd likely invest in more land and more fertilizer and more labour and grow even more tomatoes. But this is Naija, where the price set by government is more likely to be way below your costs so that after you sell your tomatoes, you would have lost money.

Now think, you lost money on your tomatoes. Are you going to plant tomatoes next season? If you're into the charity business or you're stupid, you just might. But if you're not and have rent and school fees for your kids to pay and you want to eat and pay the interest on a loan I very much doubt you'd be stupid enough to throw your money away growing unprofitable tomatoes!

Well, that's the case with electricity in Nigeria I'm afraid. You generate it, transport it along unreliable transmission wires, lose a large chunk of it to illegal use and theft and what you do get paid for does not cover the cost of producing it. Now tell, would you plant electricity next season? I very much doubt it unless you're into the charity business or you're stupid, of course, but somehow, I just can't imagine you'd be either.

So, what's the solution you might wonder. Increase the price of electricity of course. But come on people, increase the price of electricity so electricity planters can earn more money and plant more and sell more? Surely you must be cursing me by now, or haven't you noticed you'd have to pay more for my electric if you want it?

Ok, perhaps you're all nice civilised folks and don't want to curse me so let's try a different way of looking at this. Imagine Buhari removes the price control so I can sell my electricity at a market determined price like I currently sell my tomatoes no doubt at a profit high enough for me to want to plant more next year. Are you cursing me yet? I'm sure you would be if it was the subsidy on petrol I were talking about removing. Hell no! You'd likely stone me if you could get your hands on me!

Well, that's what this piece is saying where it says "The private sector is given little incentive to invest.” After all, I'm in the electric planting business for the money and the profit and not because I love you all as Adam Smith would say, so why give you light if you aren't paying me for the priviledge! And you wanna complain you're in darkness?!

When you pay me enough to cover my planting of tomatoes after paying for the land and the fertilizer and the labour and the interest on a loan and cover what I lose to theft and illegal harvesting, and still make a tidy profit to reinvest, I will plant 12000megawatts of tomatoes and I will sell 12000megawatts of tomatoes and even more megawatts of tomatoes than you can eat even because you would be incentivizing me to invest what you pay me in more land and more fertiliser and more labour to plant more tomatoes so I will have more tomatoes to sell you and make more money. But if you want cheap electric, keep your price controls and don't incentivize me but don't expect me to waste my time labouring in the sun just so you can have light because, like you, I ain't that stupid nor into the charity business!

Anyone cursing me yet, because I am telling you, we are too cheap!

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