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Inflation may rise as AMCON retires N2tn bond

By BusinessNews Staff on December 24, 2013

There are indications that the repayment of N2tn maturing bonds by the Asset Management Corporation of Nigeria as well as pre-2015 election spending, among others, will increase inflation rate early in 2014.

AMCON had issued a three-year zero coupon bonds with a principal amount of N3.9tn and a face value of N5.7tn, which enabled it to fulfil its mandate of acquiring bank assets and also to recapitalise the banking system.

Calculations show that the plan by AMCON to liquidate N2tn of its bond liabilities at the end of this year will inject N4.7tn liquidity into the financial system.

This can lead to a rise in money supply to about 47 per cent year-on-year, which is three times the current estimated run rate of 16 per cent, according to experts.

The Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said the N2tn AMCON bond, which is 13.92 per cent of the money in circulation, could cause a rise in inflation rate.

Rewane said, “The country and the markets should brace for a spike in inflation in 2014 and the involuntary monetary adjustments that will accompany the revenue shortfalls associated with oil market gyrations and the side-effects of the elaborate oil bunkering enterprise.

“This will include but will not be limited to a depreciation of the naira in the currency markets.”

The Nigerian Economic Summit Group, in a report released recently, said that the plan would solve AMCON’s short-term challenges as it would reduce over one-third of the corporation’s debt burden.

The report, however, said the plan to retire the bond would extend the associated risk into the medium to long term.

It added that the monetary policy would remain tight towards the first quarter of 2014, stating, “Such expected huge liquidity could mean sustained monetary policy tightening by the CBN into 2014 in order to reduce anticipated inflationary pressures.”

The Monetary Policy Committee has since the beginning of this year retained the Monetary Policy Rate at 12 per cent with the interest rate corridor of ± two per cent; maintained the Cash Reserve Requirement for non-public sector deposits at 12 per cent, and 50 per cent for public sector deposits.

The Liquidity Ratio has been maintained at 30 per cent and Net Foreign Exchange Open Position at one per cent. These have brought about price and exchange rate stability, even though at the expense of credit to the real sector of the economy as banks became averse to the creation of risk assets.

“We think that given the tight monetary policy environment that has persisted for almost two years, underlying pressure on the exchange rate and upcoming elections, the MPC is highly unlikely to allow these funds to flow into the financial system without some form of conditions attached. This could delay the liquidity boosting impact some banks had hoped for from the maturity of the bonds,” analysts at Renaissance Capital said in their update on AMCON.

Analysts at FSDH had said that despite the single-digit inflation rate, the MPC might not cut rates because of its focus on maintaining foreign exchange rate stability, adding, “It is expected that the MPC will ponder on the state of the global and domestic economy in order to determine the appropriate policy response that will impact the financial system and the Nigerian economy in the short-to-medium term.”

Similarly, emerging markets strategist at Standard Bank, London, Mr. Samir Gadio, said that the MPC’s stance was in line with the formal policy stance since October 2011, adding that even though inflation reached a multi-year low of 7.8 per cent year-on-year in October and the exchange rate had remained resilient in recent weeks, the CBN was unlikely to cut policy rates ahead of a pre-electoral year, which could see a significant deterioration in Nigeria’s consolidated fiscal position.

He added, “Yet, the CBN has been less aggressive in its sterilisation efforts lately as evidenced by the sizeable naira liquidity surpluses in the system.

“This seems to mirror the positive performance of the exchange rate, but shows concern about the liquidity position of some financial institutions should, for example, the CRR on public or private sector funds be increased further.”

The nation’s currency, the naira, has been under pressure in recent times at the inter-bank market due to the resurgence of dollar demand occasioned by what the CBN refers to as the “dollarisation of the economy and sharp practices” at the foreign exchange market.

Meanwhile, the Deputy Governor, Corporate Services, CBN, Mr. Suleiman Barau, has insisted that the value of the naira is not falling.

He said the nation’s currency had only depreciated ‘mildly’ in the Bureau de Change segment, which, according to him, constitutes less than five per cent of the overall demand for foreign exchange.

Barau, who spoke at the Hallmark Public Policy Forum in Lagos recently, said there had been a steady depreciation in the value of the naira at the parallel market, where it currently sells for over N170 per dollar.

He said, “Naira is not falling. The important segments of the market are the Retail Dutch Auctions and the interbank market. The naira has not depreciated in that market. We have had a mild depreciation in the area of Bureau de Change segment, which is expected because of the measures we have taken. It is temporary.”

[Punch]

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