ThinkBusiness Today - June 15th

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.

Nigeria is now the third largest economy in Africa

Well, the summary of all that happened yesterday is that Buhari was a disaster, a careless and reckless President, and a joke that should never have happened. Since 1995 when he first left office, he never ran an NGO, did not read a book, never wrote one, did not run a business, not even set up a foundation to pretend he was learning anything new. But his supporters, including some of those in government today, publicly doubled down while privately admitting he was the worst president Nigeria ever had.

Consequently, he presided over Nigeria’s demotion from the largest economy in Africa to third, revealed after the Central Bank of Nigeria (CBN) adjusted the exchange rate yesterday (See Analysis). Also yesterday, any pretense of him fighting corruption has been extinguished by his successor when he removed the highly immature, ill prepared and incompetent Chairman of the EFCC Abdulrasheed Bawa.

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Markets

• Another bounce in the market, following changes to the exchange rate market by the Central Bank of Nigeria (CBN). NGX All-Share Index (ASI) increased 1,821.51 (3.13%) points to close at 59,985.10, marking gains of 7.04% for the past week, 14.85% for the past four weeks, and 17.04% for the year yet. Dangote Sugar Refinery, International Breweries, Sterling Bank, and Seplat were top gainers.

• Oil prices fell by almost 1% on Wednesday after the U.S. Federal Reserve projected more interest rate hikes this year, and hours after government data showed an unexpected, large build in US crude oil stocks. Brent crude futures settled 61 cents, or 0.68%, lower at $73.68 a barrel, while U.S. West Texas Intermediate (WTI) crude closed 63 cents, or 0.91%, lower at $68.79.

• The removal of cap on the I & E window rate pushed it lower by 40% to N664.04/$ from N475.04 in the previous trading day. However, at the street market Naira appreciated slightly by 0.33% closed at N762.50 / US $.

• Natural gas prices edged up slightly by 0.3% to US$2.34 on weather on forecasts that hot weather will boost air conditioning demand in late June.

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National Headlines

• Exchange Rate Adjustment – The Central Bank of Nigeria (CBN), yesterday collapsed all “windows” into the I & E window. The banks will serve as buyers and sellers of foreign exchange on behalf of their clients. This is the first step towards stability of the exchange rate market. But it is not a sufficient condition (See Analysis).

• “Bawa has been bawaed” – Do you remember the last EFCC chairman? How about the one before him? Ok, now you understand that Bawa has been bawaed. So, let me get it out quickly. EFCC is a flawed agency. It cannot fight corruption. It has never fought corruption. As constructed, it will never be able to fight corruption. All the corruption fights since independence are like quenching fires after the whole building is burnt. To fight corruption successfully, you must build a system that fights corruption, and not a “system” that fights opposition using corruption as a decoy. See some of my articles on corruption - https://businessday.ng/columnist/article/we-are-all-corrupt-revisited-1-2/

  https://businessday.ng/columnist/article/we-are-all-corrupt-revisited-2/

  https://businessday.ng/columnist/article/why-we-are-all-corrupt-3/

• Subsidy, Dangote, and importation of PMS – News has surfaced that Dangote Refinery has been granted the licence to import petroleum motor spirit (PMS) ahead of the completion of the refinery. It follows the debate of whether the refinery is completed and ready for refining or not. The uncertainty around this question is what is fueling the debate. With importation licence, then it becomes difficult to differentiate between refined PMS in Nigeria and imported PMS. That will be grossly deceptive. As I have argued in the past – see https://businessday.ng/columnist/article/removal-of-subsidy-semantics-half-truths-and-dithering/, we cannot build great businesses behind licences. Let every company that wants to import be allowed to and only subject to product standards.

Global Headlines

• Fed holds rate, China cuts rates – The US Fed concluded its two-day meeting yesterday and decide to pause on rate hikes. It had raised rates in the last 10 meetings. The expectation, though, is for two further rates rise before the end of the year, raising expectations of further pressure on financial conditions in emerging markets like Nigeria. Meanwhile, the People’s Bank of China have cut rates for the first time in 10 months, from 2.75% to 2.65%. It came amidst data showing China’s youth unemployment 16 – 24 year old rose to 20.8% in May and general unemployment rate of 5.2%.

News Analysis – Currency Peg and the future direction of Nigeria’s Naira

Yesterday, the Central Bank of Nigeria (CBN) gave commercial banks and dealers in the forex market the green light to sell forex freely at a “market”-determined rate. Immediately afterwards, the Naira lost about 40% of its value at the I & E window. It came two weeks after the President said at his inauguration that the Naira will be allowed to adjust to market conditions, and almost a week after the removal of the Central Bank Governor Godwin Emefiele. Data from various sources from the street market showed that rate remains stable at N760-N765/$. With this, the gap between the two rates reduced to 15% from around 55%.

What happens next? Before then, let us look at the short-term key implications of the 40% depreciation of the Naira at the I & E window.

• First, and this is what you do not want to hear – Nigeria is no longer the largest economy in Africa. Based on the current I & E window and the projected growth rate of 3.2%, the size of the Nigerian economy is estimated at US$311.69 billion in current US$, lower than that of Egypt ($486.35billion) and South Africa (US$411.4 billion).

• Government revenues will rise. Good news. Government debt in Naira in US $ will rise. Bad news. So also, is the US $ denominated debts by banks.

Now, the aggregation of the exchange rate windows is an important first condition to removing the huge market distortions in exchange rate in Nigeria. No doubt, it stifled investment and supply of US $ dollar receipts, while providing perhaps the greatest scale of rent seeking in the country’s history.

But it is not a sufficient condition for improved supply.

• First, the reason why mere devaluation and depreciation has not worked in the past is the same reason it will not now. The price elasticity assumption – fall imports and rise in exports, does not work quite yet in Nigeria. See my article https://businessday.ng/columnist/article/devaluation-1/

• We need further round of fiscal and trade reforms to boost investment and productivity. Exchange rate adjustment will help but it must be supported by fiscal measures.

• The root cause of balance of payment problems in Nigeria is fiscal. How? It is how the government responds to oil price shocks that leads to severe foreign exchange adjustment.

• Two additional elements are critical – improved savings and price stability. Without dealing with those two, we will not be able to attract the investment and boost productivity required to prevent another round of volatile exchange rates.