ThinkBusiness Today - June 16th

E kaaro o, Ututu Oma, Barka de Safe - 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.

It is going to get worse before it gets better

The National Bureau of Statistics (NBS) released its May inflation data yesterday. Inflation went up to 22.4 %, driven by prices of food and utilities. Next month, the NBS will release inflation data that will give us the first indication of the impact of fuel price shock on prices of goods and services.

I say indication because it will take longer than a month – perhaps 18 – 24 months, for the shock to permeate the price system. Indeed, there are at least three layers of the shock. The first is the direct cost on transport and logistics. The second layer is the indirect cost on the prices of goods, especially food. The third is the indirect cost on businesses and households adjusting to the first two shocks. For instance, through salary increases or reinvestment allocations. Those these shocks can be layered; they are happening simultaneously as well. It has now been compounded by the foreign exchange shock.

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Markets

• NGX All-Share Index (ASI) declined 789.89 (-1.32%) points to close at 59,195.21, a 1-week gain of 5.66%, a 4-week gain of 12.93%, and an overall year-to-date gain of 15.5%. Top gainers include TOTAL (+10%), MRS (+10%), GUINNESS (+9.90%), and top losers include MTNN (-3.83%), ACCESSCORP (-9.24%), GTCO (-5.49%) and NB (-5.97%).

• Oil prices gained about 3% to close a one-week high on Thursday. Brent futures rose US $2.07, or 3.69%, to $75.90 a barrel while U.S. West Texas Intermediate (WTI) crude rose $2.59, or 3.79%, to $70.86.

• The Naira continues to decline at the I & E window, down 15.08% to N702.19, but appreciated at the street market, up 0.98% to N755. This brings the difference between the two rates to 7%, or N53.

• US natural gas futures extended gains above US $2.50/MMBtu, the highest in three weeks buoyed by a smaller-than-expected stock build, along with increased demand and decreased supply. A projected heatwave from June 23-30 is expected to drive up demand for gas, particularly for power generation used in air conditioning.

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National Headlines

• Inflation rose to 22.41% - Nigeria’s inflation rate rose to 22.41% in May 2023, marking the fifth consecutive increase, and a 17 year high. The rise in inflation is driven by rise in energy prices (not fuel price shock yet), supply shortages, and currency rate pass through. To control inflation, the CBN had recently strengthened its orthodoxy approach by raising rates to 18.5% in its last meeting. As I have said in my introduction, it’s going to get worse before it gets better. The shock to prices, following the fuel price shock still has considerable journey through the price system. Combined with the foreign exchange shock, we are entering potentially socio-economic conditions last seen in the 1980s and 1990s.

Global Headlines

• ECB raised rates to a 22 year high - The European Central Bank raised euro zone borrowing costs to 3.5%, its eight consecutive raises, and their highest level in 22 years on Thursday. It says it will raise rates again at least once this year to fight the zone’s stubborn inflation. The latest inflation reading showed prices cooling down at a faster-than-expected pace, with headline inflation coming in at 6.1% in May and core inflation which excludes volatile items at 5.3%. This remains well above the ECB’s target of 2% headline inflation.

What I read this week

Title – The Oil Curse: How Petroleum Wealth Shapes the Development of Nations

Author – Michael L. Ross

Did you know that Nigeria’s real per capita income has rarely changed since independence? The graph below shows Nigeria’s per capita income 1960 – 2019, before Covid – 19 and the Russia / Ukraine shocks. It shows that the average Nigerian is better off by just US $1,000, compared to 1960. The global average is three times better. The per capita income was US $1,367 in 1960 and was US $2386 in 2019. Over a 60-year period, average per capita income increased by a mere US $0.16 cents annually, equivalent of less than N80 in today’s Naira. The data is adjusted for inflation using 2010 constant prices.

Figure III Nigeria’s GDP Per Capita 1960 – 2019 in 2010 constant prices

The reason for this poor economic performance is lucidly explained by Michael Ross. As it was over the last two weeks, this is one of the books I have had since 2016 but decided to go back to this week. It is relevant because, since the 1970s, we have been trying to deal with the “curses” that oil wealth brought to Nigeria. We have a new President trying to do give it another impetus.

This book is an inglorious description of all that has gone wrong with Nigeria and many other developing nations that stumbled into oil wealth in the 1970s. It is a political economic explanation of how a combination of factors led to the oil price shock of 1973, including the decline of the powers of the oil majors, squeeze in supply, and the rising nationalization of oil companies in that period, especially after OPEC was established.

The historical context was a good reading, but perhaps the most ingenious part of the book is how it explains how oil revenue, as a source of government revenue, the size and scale of it, the secrecy of it, and the capital-intensive nature of it helps shifts economic and social changes in oil wealth developing nations that overall benefit is suspect. Its effects include less democratic institutions, gender inequality, violence, and poor growth.

Reading the book, you will understand how the size of Nigeria’s government grew, the indigenisation and nationalization policies of industries in the 1970s, the rise of the military in the 1970s through the 1990s, the low ratio of taxation to government revenue, corruption, and the inequality it propels. The good news is that democracy gives us a chance to leverage on the oil wealth, and minimise the curses associated with it. It is a good book to read at this time, so mistakes of the past are not repeated again and again.