Price of Gold increased by 53% in 5 years but grow by 6% year to date
Over the past five years, the price of Gold has seen an increase of 53%. Starting from an average of US$1,240 in July 2018, it has climbed steadily to reach approximately US$1,900 in early July 2023. Gold Price in US $ July 2018 – Date Gold has exhibited a modest increase of approximately 6% year-to-date despite high inflation in many economies. But over the last five years, it has shown its resilience during a combination of rise in producer prices, money supply and bank deposits. Compared to other components of the Bloomberg Commodity index, gold has emerged as a top performer on an annualized basis. Gold is still expected to endure as the global economy moves past the Federal Reserve’s hawkish monetary stance, significant levels of uncertainty and volatility, and global weak growth. Data shows central banks in emerging markets (EM) are actively acquiring gold, driven by geopolitical risks and the trend of de-dollarization, supporting its trajectory for price appreciation, albeit potentially at a slower pace than previously witnessed. Notwithstanding, the market does not expect gold price to return to the peak of US $2074 of August 2020, given the interest rate dynamics today. In summary, the outlook for gold suggests a positive upward trend, albeit with a more gradual progression, as market conditions evolve, and the Federal Reserve’s monetary policies come into play.
Nigeria releases Surprising Inflation Numbers
Nigeria’s National Bureau of Statistics (NBS) released inflation figures for June yesterday, with surprising numbers after the removal of fuel subsidies at the start of the month. Inflation was 22.79% in June, a mere 0.38% from May figure of 22.41%, 4.19% points higher compared to last year. Though it is the sixth consecutive month of increases in inflation, and a 17 year high, and well beyond the 6% – 9% target of the Central Bank of Nigeria (CBN), it was widely expected that the impact of the removal of fuel subsidies that led to the increase in fuel prices by about 200% will be greater in the first month. Inflation Dynamics in Nigeria June 2022 to June 2023 While it was always expected that the shock may take 12 – 24 months before the shocks fully works itself through the price system, it was also expected that the first impact will be greater than what its reported. The three layers of impact are through transport and logistics, food prices, and then salary and wage adjustments. In the report released, food inflation accelerated to 25.25% in June compared to 24.82% in May 2023 while core inflation increased from 20.06% to 20.27% during the same period. Besides the removal of fuel subsidies in June, it was also expected that the inflation data would reflect the pressure occasioned by the Eidel-Kabir celebration and the planting season effect. Notwithstanding, there are still many dynamics ahead, following the removal of fuel subsidy. It is also possible that inflation was about to peak before the removal of fuel subsidy. In that context, the removal of fuel subsidy has merely triggered another round of increases in prices of goods and services and will reflect in the inflation data going forward. It may also reflect the weights in the data and especially that the impact on the other weights in the basket will become prominent in the coming months and not the initial impact. So, we expect inflation to remain elevated in the coming months but may not reach the 25% before the year end, which was consensus number.
Nigeria’s foreign reserves decline
According to data from the Central Bank, Nigeria’s external reserves have seen a decline from US $37 billion to US $33.9 billion as of July 2023, a decline of US $3.1 billion, following significant and rising macroeconomic risks – crude oil theft, weak foreign direct investment (FDI), and rising uncertainty. Meanwhile, demand and supply have remained inelastic, even after exchange rate adjustments while there are debt repayments, capital flights and continuous inflationary pressures. In the last two months, since the inception of the Tinubu administration on May 29th, 2023, external reserves have dropped by almost US $billion dollars. This decrease occurred despite efforts to unify the Naira’s exchange rates and implement a managed exchange rate float. The external reserve typically relies on funding from crude oil proceeds, external debts, and foreign investor inflows. This is the largest half-year decline since 2015 when the external reserves fell from US $34.4 billion at the year’s end of 2014 to $28.1 billion by the end of the first six months of June 2015, following dramatic declines in oil prices. Nigeria’s central bank attributes current decline in reserves to a lack of external debt financing. The country is unlikely to tap into the foreign debt market this year due to higher global interest rates, particularly affecting emerging market Eurobonds, though this has started to fall.
‘Security is affecting every area of our lives’: The Media is critical to awareness and solutions
In the last 15 years, security in Nigeria and West Africa started to receive considerable attention, following Boko Haram’s escalating atrocities in the North Eastern part of the country. At a point, this crisis threatened Nigeria’s indivisible existence since 1914. However, in the last decade, other dimensions have emerged in Nigeria’s worsening security situation, ranging from banditry in the North West, to terrorism, farmer herder clashes and banditry in the North Central and North East, while communal conflict, kidnaping and cult activities appear prevalent in South West and South South, and the South East faces violent secessionist struggle. It is this context and background that RDF strategies, with support from the Ford Foundation brought together top media personnel, business leaders, top security actors, civil society, and social media owners for a high-level workshop on insecurity in Nigeria and West Africa. As Catherine (Chichi) Aniagolu – Okoye, the regional director for Ford Foundation in West Africa summarised, “Ford Foundation is focused on challenging inequality in West Africa with a particular focus on natural resources and gender based violence, but we have increasingly realised how the issue of insecurity intersects with almost every aspect of life, from trade, free movement of people, gender equality, natural resources and climate change, education, to living standards and so on. Indeed, our most basic human rights are deeply impacted, and therefore the Foundation is also interested in intersectional solutions that help to improve collaboration between key actors in the ecosystem”. Not surprising, the conversations showed that the impact of insecurity is extensive. Often, there is the human angle of deaths, displacements and dislocations, abductions, and wealth losses; the business angle because of costs escalation associated with doing business, either in the locality, region, or industry affected; and the investment angle as the rising perception of insecurity only means declining investment attractiveness in the country. Coincidentally in the last decade also, insecurity stories, just like all other stories, are no longer the exclusive production of traditional media as it was in the past. Today, citizens journalism has led where traditional media used to lead. Social media now plays a huge role in the dissemination of insecurity stories, but often, sensational, without context, and no reference to data. Consequently, it creates panic and gaps between reality and perception. “The role of the media and the methodology has to be more thoughtful and considered”, says NkiruBalonwu, the convener of the parley, stressing, “therefore this high-level meeting is important. With increased security we unlock potential for greater socio-economic growth, along with greater opportunities for domestic and international business. Torealize this, collective action is necessary, and the media is one of the preeminent tools for inspiringbuy-in and driving action. The media plays a critical role in connecting all stakeholders, amplifying theright messaging for peacebuilding, and countering violent extremism, and providing needed platformsfor dialogue and improved understanding”. A first of its kind, RDF is already planning a series of these meetings. Ahead of the meetings, trying to build an effective coordination of the dissemination of stories and reporting of insecurity issues, it was clear that the greatest danger is distrust. It became obvious that the matter of distrust must be effectively dealt with if security personnel are going to trust the media and vice versa. While everyone called for deeper collaboration between security agencies and the media, improvement in the knowledge and capacity of the media, constant communication between the media and security agencies, it was equally understood that the bigger opportunity was in tackling the underlying root causes of insecurity including poverty, food insecurity, unemployment and youth disenfranchisement amongst others, and the gap in political leadership that must be filled as well.
Why is Nigeria’s monetary orthodoxy not saving it from escalating inflation?
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has increased the benchmark interest rate (MPR) by 25 basis points to 18.75% from 18.5%, highest interest rate in 22 years. This is the conclusion of the first meeting under President Bola Tinubu, the first under the chairmanship of the acting governor FolashadeShonubi. Before the July meeting, NBS released the June surprising inflation numbers of 22.7% that showed lower than expected impact of the fuel subsidy removal. Inflation is expected to rise further following second and third order impact of fuel subsidy removal. Notwithstanding, demand’s response to price changes is weak due to structural issues and further interest rate hikes only worsen the situation. First, a chunk of the Nigeria economy is not dependent on credit. Second, the major pass through of inflation is the exchange rate. Third, there is extremely accommodative monetary policy through fiscal deficits and significant supply constraints. The major impact of the rate hike will be on businesses with bank loans. They receive letters about what the rate hike means for the interest they pay on their bank loans.Currently, the prime lending rate which stood at 14.71% and the maximum lending rate which is 28.31% will be adjusted upward with the new hike in the MPR. Thishigher borrowing costs for businesses is weakening businesses and the banks and slowing down economic activity. Few weeks ago, we analysed here how there has been a shift by the businesses towards commercial papers, with an average rate of about 14% – 16%.
Nigeria’s Inflation reaches a 20 year high
The National Bureau of Statistics (NBS) unveiled the inflation data for the month of July, shedding light on the evolving economic landscape. Headline inflation rate for July 2023 surged to 24.08%, marking a substantial increase from the June 2023 rate of 22.79%. This translates to an uptick of 1.29% points in the span of just one month, `underscoring the rapid pace of inflationary pressures following the removal of fuel subsidies.On a year-on-year basis, the headline inflation rate exhibited an even more pronounced ascent, standing at significant 4.44% points higher than the corresponding period last year, which recorded a rate of 19.64%. Factors driving up prices are amplified energy prices, depreciation of the Naira, and the surge in money supply. These factors have collectively contributed to the overarching inflationary pressures that we see. The July inflation figures also provides a comprehensive snapshot of the impact of the removal of the exchange rate cap, directly impacting core inflation, which soared to a rate of 20.47%.The persistent rise in food inflation further exacerbates the overall inflationary landscape. In July 2023, food inflation registered at a substantial 26.98%, compared to previous month’s rate of 25.25%, following increases in transportation costs, agricultural planting season, and the prevailing security challenges that have impacted supply chains. The outlook is further rise in inflation. The ongoing reforms are anticipated to exert substantial upward pressure on consumer prices throughout the latter half of 2023. As a result, inflation is projected to average over 25% for the entirety of 2023, marking the most substantial annual rate since the 1990s. The rising cost and volatility of the exchange rate is the greatest driver of Nigeria’s inflation. Acknowledging this, the acting governor of the Central Bank of Nigeria (CBN), after meeting with the President says they will embark on measures to stabilise the Naira. He warned speculators that the Bank will take measures over the next few days which he did not spell out that he expects will improve the position of the Naira on the streets. As of the following Monday, the rate at the I&E window stood at N744.41/$ and the street market rate stood at N935/$, this shows a gap of 25.6% or N190.59. Fuel imports is another, but also dependent on the Naira’s exchange rate to the US dollar. Fuel imports into Nigeria fell to 106,000 barrels per day (bpd) in July 2023, from the 205,200 barrels per day recorded in May 2023, a near 50% decline in fuel imports. It follows the removal of fuel subsidy by the government on May 29th. Since then, transports costs have increased by as much as 100% in some instances and raised food prices. The data is provided by S&P global commodity insights. It is consistent with the data from the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) that fuel consumption in Nigeria dropped to 46.38 million litres per day following the removal of the subsidy. Meanwhile, fuel prices are expected to rise further following volatility and the weakening of the Naira. The expectation is that fuel price will reach N700 per litre in the coming weeks based on a Naira to US $ of N900. The government has now directed that fuel prices should not rise beyond N600 per litre. As expected, the National Bureau of Statistics ((NBS) has shown that the average fare paid by commuters for bus, motorcycle, air, and water journeys went up, increasing by as much as 97.88% for inner city and 42% for intercity bus journeys in June, compared to May 2023. It reflects the observation that, after the near 200% increase in fuel prices on May 29th – shorter trips doubled in prices while longer trips did not increase as much.To control inflation, the CBN had recently strengthened its orthodoxy approach by raising rates to 18.5% in its last meeting.
Nigeria’s National Oil Company borrow US $3 billion from Afreximbank to support the Naira
The Nigerian National Petroleum Company Limited recently announced it has secured a US $3 billion emergency loan from Afreximbank. The loan will be used in supporting the ongoing fiscal and monetary policy reforms of the President. The Naira has been on free fall since the aggregation of all the Central Bank of Nigeria’s exchange rate windows into the I&E window, depreciating about 27%, after an earlier about 40% devaluation two weeks after President Bola Tinubu assumed power. The Naira currently trades to the US $ at N922 on the streets. This unsettling trend was accompanied by a steady reduction in the country’s external reserves, further contributing to the currency’s weakened state. The aggregation of all exchange rate windows into the I&E window and the removal of the restrictions on the exchange rate has led to a depreciation of about 27% in two months. Before June 13, 2023, the I&E window had witnessed an average exchange rate of N465/$ in May 2023. Following the lifting of the restrictions, we now have fluctuations in the range of N740-795/$ at the I&E window. Worse, the arbitrage that was eliminated has reappeared, with theNaira exchange rate to the US dollarnow N930-950/$ on the streets. In the same period, the external reserve declined to US$33.86 billion as of August 14, 2023, 9% or US $3.22 billion since the start of the year. The driving forces behind the depreciation of the Naira and the resultant widening of the exchange rate premium are multifaceted. The key point though is that both demand and supply are not responding to price changes in the short term. The source of supply that is largely within the control of the government – crude oil supply – is in grave danger, with July production barely above 1 million barrels a day. Meanwhile, capital importation has exhibited a prolonged decline, with data from the National Bureau of Statistics (NBS) showing a 45% reduction, from US$2.19 billion in Q4 2021 to US$1.32 billion in Q1 2023.
Buy Now, Pay Later: Buhari’s 8 years of fiscal policy
The recent revelation that President Buhari had presided over a N22 trillion (US $51 billion) borrowings from the Central Bank of Nigeria (CBN) is a classic summary, and encapsulates fiscal policy in the last eight years – buy now, pay later. After the revelation, the rubber stamp Senate approved the President’s controversial ways and means as debt. As expected, the Nigeria Labour Congress (NLC) and the Trade Union Congress (TUC) found the approval disgusting. The N22 trillion loan from the CBN was extra budgetary spending by the government without approval by the Senate and the House of Assembly, and an unprecedented scale of inflation tax on Nigerians and businesses. Also, the government contravened the CBN Act 2007 that stipulated that “ways and means” should not exceed 5% of the previous year revenue. Worse, Nigerians were lied to and data on budget and deficits were manipulated for eight years. Three months after, there is no indication yet if there will be ever a probe. The ramifications of the buy now, pay later policy could not have come sooner after President Buhari left office as virtually all the loans raised under his watch are due after he left office. One of such debt is the International Monetary Fund (IMF) US$3.4 billion collected in the thick of the Covid – 19 dynamics of 2020. According to IMF position on Nigeria, the country is expected to repay most of the capital and interest payments on SDR drawings between now and 2025 – SDR 373.81 (US $497.17 million) is due this year, SDR 1,322.01 (US $1.76 billion) is due next year, and SDR 650.58 (US $865.27 million) due in 2025, based on US $1.33 to 1 SDR. Calculated daily, the SDR is determined by summing up the value in US dollars based on market exchange rates of a basket of major currencies – US dollar, Euro, Japanese Yen, UK Sterling, and Chinese Renminbi. Nigeria’s Debt in US $ in Billions The graph shows the trajectory of debt in over 20 years, but there is now a sense that this data may not have captured all of Nigeria’s debt in the last eight under President Buhari.By the close of December 2022, the country’s total public debt had surged to N46.25 trillion or $103.11 billion, according to the Debt Management Office (DMO). This figure represents a substantial 14.46 percent increase when contrasted with the N39.56 trillion (USD 95.77 billion) recorded on December 31, 2021. This upward trajectory in public debt is attributed to fresh borrowings undertaken by both the Federal Government of Nigeria (FGN) and sub-national governments. These borrowings have predominantly been employed to bridge budget deficits and fund various developmental projects. As debt levels rise, concerns about Nigeria’s creditworthiness increases. This could lead to higher borrowing costs for the government in the form of higher interest rates on new debt issuances. It might also make it more difficult for the country to secure favorable terms for international loans. This can increase the risk of sovereign default, which would have severe consequences for the country’s reputation and ability to access international financial markets in the future. Considering these implications, managing and reducing the public debt burden becomes imperative for Nigeria’s economic stability and sustained growth. Effective debt management strategies, prudent fiscal policies, and measures to enhance revenue generation are crucial to mitigating the potential negative consequences of rising public debt.
Skyrocketing Ticket Prices, Trapped Funds and Worsening International Investment Conditions
Travelers from Lagos and Abuja international airports in the last three months have been confronted with about 300% – 400% difference in prices compared to those that fly from Cotonou airport in Republic of Benin and Kotoka airports in Accra, Ghana. It became common for Nigerians to pay an average of about US $2000 – US $3000 for return trips to Europe in the busy months of August and early September. It follows the lingering airlines trapped funds, now estimated at close to a US $1 billion. Speaking to an attendant in one of the airlines offices in Lagos, he said the airlines, not sure of when they will recover their trapped funds, are not only charging more in case they are not able to recover the trapped funds, but also that passengers are paying in US dollars. The new aviation minister recently said he will work on the matter in relation to Emirates. However, it is not only airlines that have their trapped funds in the country. Fast Moving Consumer Goods (FMCG) companies and portfolio investors are also caught up in Nigeria’s severe macroeconomic challenges and resultant capital flow restrictions. Indeed, they were perhaps the most delighted after the Central Bank aggregated all foreign exchange windows into the importers and exporters (I&E) window. They had expected that the policy will make it easier for their estimated US $10 billion to recovered. For portfolio investors that exited the capital market or sold some of their shares, their trapped funds accrued on the back of their inability to exit Nigeria. For the FMCGs, they borrowed foreign currencies from parent companies for their inputs and raw materials. Even before June 40% devaluation of the Naira, it was difficult to estimate how much was trapped in the country, as some may have been converted it into other uses until there is an opportunity for them to exit. That brings us to what is likely to happen to the data below. Foreign airlines were the most agitated. Following the trapped cash, they provided windows for Nigerians to buy tickets using their US dollar or Sterling Cards, raising the costs of international tickets as explained above. Naira Exchange Rates with the US $ at the I & E and the Parallel Market To reflect changing economic conditions and mitigating exchange rate risks, they raised exchange rates applied to flight tickets multiple times. For instance, in May, they raised Rate of Exchange, (RoE) from N610 per dollar to N634 per dollar. It was as a continuous fall out of about US $800 million trapped funds in the country. From March 2023 – N460 / $, to N551 / $, to N610 / $, and in May to N634 /$. Foreign airlines trapped funds increased from $744million in March to $802 million in April despite several means deployed to avoid collection of their funds in Naira, to reduce the amount of money trapped in Nigeria. The stampede that followed the aggregation of all exchange rate windows and devaluation reflects downside risks to international investments in Nigeria, including the concession of some major airports in the country. Second, E-commerce that relies on aviation for speedy delivery were impacted by the trapped funds in Nigeria. Also, and it is already the case, Nigerians are paying far more for equivalent international travel tickets, and worse since June. In matters of economic decisions, especially relating to investments, the greatest costs are usually the opportunity costs. Nigeria is increasingly losing its hard-earned credibility won in the 2000s and early 2010s for relatively macroeconomic stability, the minimization in investment distortions, and general sound macroeconomic management. The new government have started all over again and grind to regain any sort of credibility before the investments will start to come in again. Why? There are many reasons, but the bottom line is the increasingly weakening and worsening macroeconomic environment that means, currently in Nigeria, investment flows are largely one-way traffic out of the country, including by domestic residents.
Nigeria’s Crude Oil Production dropped nearly 40,000 a day in March
Nigeria’s crude oil output dropped by 38,102 barrels per day in March 2023, translating to a cumulative loss of about 1,181,162 barrels in the month, and signaled the first plunge in oil production in seven months. In monetary terms, average cost of Brent, the international benchmark for Nigeria’s oilwas US $78.43/barrel. Therefore, by losing 1,181,162 barrels in March, Nigeria failed to earn a total of US $92,638,535.66 (N42.71bn at the official exchange rate of N461/US $), during the period under review. Nigeria’s Crude Oil Production The major cause of the decline was a pipeline explosion at a major export pipeline in Rivers State, the 180, 000 barrels per day Trans Niger Pipeline that passes through the Rumuekpe community. It was gathered that the explosion happened after a crude oil pipeline that belong to Shell Company in the community was tampered with by vandals. Second, the drop in oil output volume is also ascribed to the general overhauling and maintenance of oil pipelines across Nigeria’s key oil production locations, which may have resulted in the closure of several pipes during significant repairs. Ahead of the release of the April monthly oil market report (MOMR) of the organisation of the petroleum exporting countries (OPEC), the focus was on what happened to crude oil output in March 2023. It was thought that the fall in oil production in March was only temporary and will not jeopardize the country’s foreign earning. Notwithstanding, there was an urgent need for the country to improve on its production output by addressing oil bunkering and theft as well as illegal refining if it does not want to miss the output level needed for the 2023 budget, which stands at 1.69 million bpd for the year.
