• Wednesday, June 12, 2024
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BusinessDay

Five factors to look out for in second half 2023 — Yemi Kale

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Appointment of cabinet members to lead key reforms across sectors, is one of the key factors to look out for in the second half (H2) of the year, according to Yemi Kale, partner & chief economist, KPMG Nigeria.

Other factors include, the CBN management of FX reforms, the commencement of operations of Dangote refinery, ability to address oil theft and improve oil production in the short term, and government’s fiscal and trade agenda.

Kale, who spoke at the BusinessDay CEO Forum on Thursday, said attracting FX inflows will remain a major policy goal in H2 2023.

Weak inflows have been one of the reasons for continued decline in external reserves.

Year to date (July 6), Nigeria’s official reserves lost 8.2 percent of its value due to high demand for foreign currency and weak inflows.

However, total inflows into the importers and Exporters (I&E) forex window increased by about $270 million to $1.41 billion in June 2023, following the unification of exchange rates.

This represents a 23.8 per cent increase month-on-month to $1.41 billion in June from $1.14 billion recorded in May, data from the FMDQ showed.

He noted that the removal of the exchange rate peg saw a convergence of official and parallel market rates.

However, he said limited inflow has led to depreciation of the naira vis a vis major currencies, adding that autonomous FX flows are the dominant sources of FX inflows in Nigeria.

Empirically, he said a 1 percent increase in the foreign exchange gap reduces autonomous flows by 0.4 percent.

The naira converged at around N756/$, before diverging slightly after, due to existing FX restrictions, he said.

Naira falls further

Naira on Friday fell by 1.21 percent as the dollar was quoted at an average rate of N821, as against N811 quoted on Thursday at the parallel market.

The naira depreciation followed increased demand for dollars by summer holiday seekers, one of the traders said on Friday.

At the Investors and Exporters (I&E) forex window, Naira appreciated by 4.82 percent as the dollar was quoted at N746.28 on Thursday as against the previous close of N782.29 on Wednesday.

Kale said the Naira is fundamentally undervalued in the official market at current levels (FVE:N650 – N700).

He said external reserves could remain on the decline without substantial multilateral

support/external fundraise, considering FX backlog and Eurobond redemptions.

Key challenges affecting investment inflows include: infrastructure challenges, insecurity, FX policies/scarcity and uncertain policies.

“The government will need to raise interest rates to attract portfolio investments in the immediate term and stem the downward trend of the reserves,” Kale said, adding that foreign direct investment (FDI) and export earnings require that structural problems are

addressed.

According to to him, financial markets rally will moderate, noting that financial markets have responded positively to recent reforms of FX and petrol subsidies.

The NGX Market Capitalization increased from N28.85 trillion on May 26 to N34.3 trillion on July 7.

There has been an increase in foreign inflows into the market, he said.

“Government’s ability to increase foreign

investment inflows will depend on interest rates, level of reserves and FX policy consistency,” Kale said

On government finances, he said revenue challenges will remain in H2 and that the removal of petrol subsidy is expected to raise government revenues in H2, although this has already been factored in, in the 2023 budget.

A weaker currency, efforts to control oil theft, as well as tax reforms raise revenue prospects in H2.

However, oil output is likely to remain below budget figures while tax reforms are expected to impact revenue in the medium term.

In the short term, the weak currency will have a positive impact on government revenue.

Following proposed tax reforms, revenue projection for 2024 is expected to be higher than the World Bank’s 8.4 percent of GDP, he said.