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UPDATE 3-Nigerian lawmakers urge measures to close gap to black market naira
January 18, 2017 / 12:17 PM / a year ago

UPDATE 3-Nigerian lawmakers urge measures to close gap to black market naira

* Senate approves 2017 borrowing of 2.321 trillion naira

* Projects GDP growth of 2.5 pct for 2017

* Projects annual inflation of 12.92 pct vs 18.55 pct in Dec (Adds details from senate document)

By Chijioke Ohuocha

LAGOS, Jan 18 (Reuters) - Nigerian lawmakers have adopted an official exchange rate of 305 naira per dollar for the 2017 budget but have asked the central bank to initiate measures to close the 40 percent spread with the black market, the deputy senate president said on Wednesday.

Members of the upper house of parliament said during a review of the budget on Wednesday that they were worried about the differential, which they described as damaging to the economy and said had led to a loss of investor confidence.

“We are worried by the huge gap. The central bank needs to do something about it and stabilise the currency. We must find a way of bridging the gap and restore investor confidence,” the deputy senate president, Ike Ekweremadu, read out in the house.

The naira’s official rate, controlled by the government, has hovered just above 300 to the dollar since it was devalued in June. But the gap with the parallel market is discouraging investment from overseas and leaving Nigeria starved of foreign currency.

By basing its budget on the official exchange rate, even though most individuals and businesses source dollars from the parallel market, the government is at risk of struggling to fund its economic plans.

“The sustained and widening gap between the official exchange rate and the parallel market has created several loopholes in the system,” said the senate document, the recommendations of which were passed.

International financial institutions, among others, have argued that Nigeria must allow its currency to float freely to solve its foreign exchange woes, a measure which has met opposition from President Muhammadu Buhari.

The lawmakers’ calls ramp up pressure on Buhari to address the forex gap, and echo comments on Tuesday made by his own vice president.

Last year, Buhari told a gathering of business leaders that he did not see the benefit of the naira’s currency peg against the U.S. dollar being removed, saying he failed to appreciate the economic explanation.

BORROWING APPROVED

The senate also approved 2.321 trillion naira of borrowing domestically and overseas, but cautioned: “In borrowing more, government must remain focused and ensure it is used to fund critical projects that will increase productivity and also contribute to financing such debt.”

The upper house passed a projected gross domestic product growth rate of 2.5 percent for 2017, suggesting optimism about a recovery despite Nigeria entering its first recession in 25 years last year.

Also approved was a projected inflation growth rate of 12.92 percent for 2017, far lower than December’s rate of 18.55 percent year-on-year, the 11th straight monthly rise and the highest inflation in over a decade.

But despite the improved projections, the issue of the currency remains. The naira now has multiple exchange rates, which have created inefficiency and opportunities for corruption, analysts at Exotix said in a note.

“The belated de-pegging of the currency in June 2016 failed to remove investor concerns over the conduct of economic policy and the ‘free float’ didn’t happen,” they said.

In an attempt to stop up the foreign currency shortfall, Buhari’s government has been in talks with financial institutions, including the World Bank, for loans.

But those efforts to secure funds have stalled because Nigeria has not submitted the required economic reform plans, according to one of the banks and sources close to the matter. (Reporting by Chijioke Ohuocha; Additional reporting by Paul Carsten and Camillus Eboh in Abuja; Editing by Alison Williams)

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