ThinkBusiness Today - July 20th

E kaaro o, Ututu Oma, Barka da Safiya - Good morning, and a warm welcome to ThinkBusiness Nigeria, your Monday – Friday dose of commentary, contexts, and insights on business and economic news that matter to you.

Nigerians are beginning to see the huge ramifications of the twin economic reforms of the government in the first two weeks of President Bola Tinubu. Over the next six months, the three tiers of government will see revenues increase by as much as 40% in some instances. For the States, it is a huge windfall. It also means that, going by this year’s budgets, there will be no deficits expenditure because none of them have near that percentage in planned deficits.

Great. But in the past, windfalls have been wasted, squandered, and led to extreme “drunken sailor’s” lifestyle. I do not hold my breath that it will be different this time.

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Markets

• The equities market largely remained flat Wednesday, as the NGX ASI (Nigerian Exchange All-Share Index) dropped by 0.01%, concluding the day at 63,757.23 points, a decrease of 9.49 points from Tuesday. It means a loss of 0.45% over the past week, a gain of 8.04% over the past four weeks, and an overall year-to-date gain of 24.4%. Key share price movements include Geregu Power (- 10%), Prestige Assurance Company (-10%), FTN Cocoa Processors (-9.61%), and Linkage Assurance (-9.09%).

• Oil prices gained on Wednesday, buoyed by tighter U.S. crude supplies, China's pledge to reinvigorate its economic growth and expectations that the U.S. Federal Reserve will stop raising interest rates soon. Brent futures were up 27 cents at US $79.90 a barrel while U.S. West Texas Intermediate (WTI) crude rose 21 cents at US $75.96.

• Naira weakened further at the I & E and on the streets, reflecting a depreciation trend, 6.36% at the I & E, closing at N793.73 against the US dollar, and 2.34% on the streets, reaching a value of N820.

• Natural gas futures experienced a slight decline of 0.11% on Wednesday, prices remaining relatively stable, hovering around the mid-point of their 45-day range.

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National Headlines

• CBN and Bureau de Change – The Central Bank of Nigeria (CBN) has cut the numbers of bureau de change dealers by about 40%. The apex bank withdrew the licences of 2,698, leaving 2,991 operators. The number of operators were 74 in 2005 and risen to 5,689 in 2021. According to the data, the number grew by over 100% in the last 8 years under the suspended CBN Governor Godwin Emefiele. There is no doubt that the CBN has been irresponsible, fueling rent seeking, arbitrage, and distortions in the exchange rate market. It is only in Nigeria, fueled by macroeconomic instability that the exchange rate market is so fragmented, informal, and an all-comers affair.

• The fruit of reforms – It is estimated that the three tiers of government will have N1.92 trillion for the month of July, nearly three times the value shared in June (N786.1 billion). (See News Analysis)

• Nigeria’s rigs count up by 27.3% - Nigeria’s rig count, a measure of activities in the upstream sector of the petroleum industry rose by 27.3% June 2023 compared to a year ago. Nigeria also recorded improvement in oil production as output rose by 5.5% to 1.249 mbpd in June 2023, from 1.184 million mbpd in May 2023. However, compared to last year, oil output fell by 17.6%.

• Promoting stability in food exports and prices – The Ukrainian Ministry of Agrarian Policy and Food has signed a Memorandum of Understanding (MoU) with Lagos Free Zone, a venture of the Tolaram Group, to construct a grain terminal at the Lekki port in Nigeria. This will establish the essential infrastructure required for uninterrupted supplies of Ukrainian grains and wheat to Nigeria and serve as the route to other African countries.

Global Headlines

• UK inflation down - U.K. inflation cooled significantly in June, coming in below consensus expectations at 7.9% to 6.9%, falling from a 31-month high of 7.1% in May. Notwithstanding, it shows that inflation remains sticky and well elevated beyond the 2% target range of the Bank of England.

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News Analysis - The fruit of reforms

Latest Federal account Allocation Committee (FAAC) report shows that the three tiers of government are set to share N1.959 trillion in July 2023, highest since 2014, and nearly triple the N786.161 billion shared in June. Statutory collections make up N1.7 trillion of the federally collected revenues, followed by N293 billion from VAT and N12 billion from electronic money transfer charges.

FAAC distributions in N billions

The dramatic increase in the share is fueled mainly by the exchange reforms of the government, adding about 40% to what would have been available at the previous N460 to the US $. FAAC used N436.38/$ for June 2023 compared to N750/$ in July. Also, the savings on the removal of subsidy, expected to remain at about N4 trillion if all prices remain at the current level. That is the availability of N333.33 billion in a month.

Some additional points:

• At the level of these reforms, FAAC distributions are now elevated, a revenue shock to all tiers of government. Indeed, given existing 2023 budgets across the country, all tiers of government are now experiencing a windfall of 40% – 50 % of initial budget.

• Given these dramatic increases in revenue, it should mean no deficits expenditure for the States and the local governments.

• The impact on the lives of Nigerians depends on what the windfall is used for. Money is fungible. Expenditure on infrastructure, education, health etc. will have impact on the lives of Nigerians. Expansion of government and its associated largesse will only add to the fury, frustration, and deplorable conditions of Nigerians.