CBN and the management of inflows of foreign exchange

The Central Bank of Nigeria (CBN) has been playing active role in the management of inflows of foreign exchange into the nation’s economy. The provisional cumulative inflow of foreign exchange into the economy, at US$33.02 billion, was 13.3 per cent above the level in the first half of 2016. Of this amount, inflow through autonomous sources accounted for 62.3 per cent, while inflow through the CBN accounted for 37.7 per cent. Total foreign exchange outflow from the economy rose by 14.8 per cent to US$13.64 billion from the level in the first half of 2016.
The rise in outflow was mainly attributed to the increase in the interbank forwards settled in the second half of 2016. The economy recorded a net foreign exchange inflow of US$19.38 billion, representing 12.21 per cent rise above the level in the first half of 2016. The CBN governor, Godwin I. Emefiele stated this in the Financial Stability Report published recently.
The total autonomous inflow according to him rose by 0.7 per cent to US$20.58 billion, compared to the level in the first half of 2016 due mainly to rise in invisibles by 2.5 per cent, of which 62.3 per cent was accounted for by ordinary domiciliary accounts.
“Foreign exchange inflow through the CBN rose by 42.9 per cent above the level in the first half of 2016 to US$12.45 billion, due to increases in crude oil and non-oil export earnings. Receipts from crude oil sales rose by 22.7 per cent to US$5.66 billion, in the first half of 2016,” he said.
This according to the CBN chief is attributable to the gradual increase in domestic production and international crude oil prices.
The non-oil receipts rose by 65.5 per cent to US$6.79 billion in the second half of 2016, due mainly to increase in other official receipts.
Of this amount, interbank utilization he said accounted for US$7.99 billion, of which inter-bank forwards, inter-bank sales and others stood at US$4.17 billion (52.14%), US$0.72 billion (8.92%) and US$3.11 billion (38.9%), respectively. Overall, the total foreign exchange transactions through the Bank resulted in a net inflow of US$0.58 billion in the second half of 2016, compared with a net inflow of US$0.96 billion in the corresponding half of 2015. This is, however, in contrast to a net outflow of US$2.03 billion in the first half of 2016.
Foreign Exchange Transactions through the CBN (Second Half 2016, US$’ Billion) 1.2.4 Fiscal Operations Federal Government Retained revenue for the second half of 2016 increased to N2,558.0 billion, above the levels of N1,898.21 billion recorded in the first half of 2016 and the half year budget estimate of N2,024.90 billion for 2016.
The increase in the retained revenue relative to the first half was mainly attributed to increase in non-oil receipts. The breakdown of the retained revenue showed that the Federal Government’s share of the Federation Account was N1,262.4 billion (49.4%); the VAT Pool Account, N90.7 billion (3.5%); the Federal Government Independent Revenue, N267.8 billion (10.5%); share of excess crude Account, N141.4 billion (5.5%); Exchange Gain, N316.4 billion (12.4%) while others (including NNPC Refund) accounted for the balance of N479.3 billion (18.7%). The fiscal stance of increased spending to address the challenges of the negative growth (recession) led to higher government expenditure in the second half of 2016.
“Consequently, Federal Government expenditure grew by 10.3 per cent to N4,024.8 billion, above N3,650.33 billion in the first half of 2016. It was, also higher than the budgeted expenditure of N3,127.27 billion for the second half of 2016. Recurrent expenditure component of the total expenditure accounted for N3,496.5 billion (86.9%) while capital and statutory transfers components accounted for N264.9 billion (6.6%) and N263.4 billion (6.5%), respectively.
“The fiscal operations of the Federal Government in the second half of 2016 resulted in an overall deficit of N1, 466.8 billion, compared with the N1,752.11 billion recorded in the first half of 2016 and the budgeted deficit of N1,102.37 billion for the second half of 2016. The deficit was financed through domestic sources including issuance of government securities ,” says the report.
The consolidated domestic debt stock of the Federal Government at end-December 2016 was N11,738.62 billion. This represented an increase of 10.8 per cent over N10,606.33 billion at end-June 2016.
“The Central Bank of Nigeria (CBN) will continue to encourage lending to the critical sectors of the economy and provide incentives for lending to SMEs and households as they are the engine of growth in the economy. The continued demand pressure on the naira and persistent supply constraints remained a key challenge in the foreign exchange market. Inflationary pressures compounded market conditions necessary to attract foreign capital required for the sustenance of exchange rate stability,” stated the CBN boss.
However, In Nigeria, output performance remained benign at negative 1.5 per cent in 2016, although the economy is expected to grow by 0.8 and 2.3 per cent in 2017 and 2018, respectively. Generally, credit to the private sector grew during the review period but household credit reduced marginally reflecting dwindling income and high domestic prices.
“In Nigeria, the adverse macroeconomic conditions remained the major challenge to sustaining economic growth and financial system stability. Specifically, the supply constraints and demand pressure in the foreign exchange market, rising inflation and the declining output growth have threatened the sustenance of price stability and attraction of foreign capital,” he stressed.
However, the strengthening of regulatory and supervisory measures according to him has significantly moderated the negative consequences of the prevailing economic conditions on the banking sector and the financial system.
He pointed out that the continued resilience of the banks was buttressed by the results of the shocks scenario of the banking sector stress tests. To address the challenges in the industry, countercyclical measures were adopted to ensure that the banks remain resilient.
Specifically, efforts were focused on ensuring that systemic risks are curtailed and that banks continue to contribute to real sector growth.
“As Government continues to address the adverse macroeconomic conditions, it is the goal of the CBN to ensure that banks provide support for fiscal initiatives. Microprudential and macroprudential supervisory tools will continue to be used in surveillance and oversight of the banking sector. As appropriate structures are entrenched for the implementation of Basel II and III and IFRS 9, it is expected that the overall capacity of the banks to manage the risks in their business environment will be enhanced,” he said.
The Governor noted that it will also help ensure that Nigerian banks have systems in place for prevention of money laundering and financing of terrorism.
The Bank continued the implementation of the PSV 2020, registering a majority of account holders in the banking system under the BVN scheme, which has proved to be effective in fraud prevention and investigation.
In Nigeria, output growth improved from negative 1.8 per cent recorded at end-June 2016 to negative 1.5 per cent at end-December 2016. The Nigerian economy remained in recession in 2016, due to low oil receipts and inadequate power supply, among others.
Activities in the equities market remained subdued as the key indices decreased compared with the preceding period. This arose mainly from the uncertainties in the macro-economy, poor corporate performance due to tougher operating environment and rising operating costs, as well as depressed household demand.
However yields in the fixed income market increased, and hence attracted investors to that market. The Bank continued to operate its risk mitigation and insurance schemes as well as the credit support schemes with the main aim of providing support to the real sector. Key financial soundness indicators showed a decline in asset quality as the ratio of nonperforming loans (NPLs) to gross loans deteriorated in the second half of 2016 by 2.3 percentage points, compared with the levels at end-June 2016. Capital adequacy indicators declined marginally, but remained above the regulatory thresholds. A solvency stress test of the banking industry at end-December 2016 showed that the


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