ThinkBusiness Today - June 22nd

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.

Our democracy is evolving, maturing, and technology is helping. Within hours of the news breaking that the salaries of political service holders, judicial and public office holders were increased by 114%, the government, led by the Revenue Mobilisation, Allocation and Fiscal Commission (RMARC), has scrambled to deny it.

In the past, who knows, who cares? Of course, in substance, this does not mean much, especially because only a fool thinks that public officers care about their salaries. But it shows that no government is willing to toy with the emotions of Nigerians any longer. So, two ingredients are still required for a very vibrant democracy in Nigeria – greater level of transparency and serious and sustained political “opposition” process.

Finally, and ultimately, those two, with the support of technology will ensure that government appointment is not as lucrative as it currently is.

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Markets

• NGX All-Share Index (ASI) climbed 213.93 (0.36%) points to close at 59,323.95, a 1-week loss of 1.1%, a 4-week gain of 13.28%, and an overall year-to-date gain of 15.75%. Afromedia led the gainers with 10% share price appreciation closing at NGN 0.22 per share, followed by E-Tranzact International (+9.91%), FTN Cocoa Processors (+9.88%) and Neimeth International Pharma (+9.88%), CONOIL (+9.5%), MRS (+7.64%).

• Oil prices gained over a dollar a barrel on Wednesday after some analysts predicted a drawdown in U.S. stockpiles and Federal Reserve Chair Jerome Powell reaffirmed the central bank's fight to bring inflation down to its 2% target. Brent futures rose US $1.27, or 1.67%, to US $77.17 a barrel and U.S. West Texas Intermediate (WTI) crude was up US $1.44, or 2.02%, at US $72.63 a barrel.

• The Naira depreciated at both markets. At the I & E window, Naira was down 4.89% to N763.17, also, depreciated at the street market, down 0.61% to N760.60. This brings the difference between the two rates to 0.32%, or N3. At some point, Naira traded at over N800.

• US natural gas futures increased by 2.73% to $2.56/MMBtu as investors continue to monitor the amount of gas flowing to US LNG export plants and weather forecasts. Meteorologists forecast the weather would turn from mostly near normal from June 20-23 to hotter than normal from June 24-July 5 driving up demand for power generation used in air conditioning.

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National Headlines

• Rice for Lagosians – Yesterday, Governor Babajide Sanwo – Olu was at the Lagos Commodities and Futures Exchange (LCFE) to launch the Five Billion Series 1 of the 30 billion Eko Rice Contracts Programme. This means that every three months, 15,000 metric tonnes of paddy will be milled and sold to the public through the exchange. The private listing excited brokers and investors in the market, as first 5,000 contracts issued on the exchange was traded at the value of N195 million. The LCFE trades other commodities as well, including gold.

• Are you traveling for summer? – As schools begin to close early next month, and the 2023 wave of Japa, on the back of study variety begins, airlines are bracing for the surge in demand for international travel. However, recent exchange rate reforms will only mean high ticket prices for Nigerian travelers. The International Air Transport Association (IATA) has, on Wednesday, pegged US $1 to N770. In the last year, international airlines had struggled to repatriate ticket receipts, and Nigeria became the country with the most trapped funds in the world, at $2.27 billion as at April 2023.

Global Headlines

• Ghana’s Growth – The Ghanaian economy expanded by 4.2% in the first quarter of 2023 compared to the 3.2% reported in Q4 2022, the highest since Q4’ 2021. It is also the 10th consecutive quarter of economic growth recorded by the country. Overall, in 2023, the IMF projects that Ghana economy will expand by a weak of 1.6%, after 3.1% in 2022. Fiscal austerity, high inflation and restrictive financial conditions is dampening private consumption and investment through 2023, clouding economic growth prospects.

• UK public debt reach 100% of GDP – Britain's public sector net debt excluding that of state-controlled banks, hit 2.567 trillion pounds (US $3.28 trillion), equivalent to 100.1% of gross domestic product in May as borrowing came in higher than expected. This is the first time that debt stood above 100% of GDP since 1961 although it was temporarily recorded as passing that threshold during the COVID-19 pandemic before being revised lower. The high debt will likely drive-up spending through increased debt interest payments and inflation-linked benefits and tax credits. Meanwhile, UK inflation remain unchanged in May at 8.7%. Market expects that the Bank of England will raise rates to reach 5% before the end of the year, currently 4.5%.

News Analysis – What is the motivation for PBAT’s reforms?

In the last three weeks, as explained yesterday, the federal government has carried out three economic reforms that have implications for government revenue and the monthly Federal Account Allocation Committee (FAAC) disbursement. Let me remind you of those changes:

• The removal of fuel subsidies

• Aggregation of all CBN’s exchange rate windows into the I & E window

• The implementation of the 7.5% VAT on diesel

The figure below shows the trend in the FAAC distribution over a period of 16 months. The statistics shows that Nigeria FAAC distribution peaked in August 2022 when N1.26 trillion was shared among the three tiers of government. However in 2023, the distribution declined dramatically, almost halved to N656 billion in April from N1.18 trillion in December, 2023.

Federal Accounts Allocation Committee (FAAC) disbursements

All the economic reforms carried out so far will improve government finances. It is one of the strongest and visible antecedents of President Bola Ahmed Tinubu as governor of Lagos State. However, as we look forward to further reforms, I believe the strongest motivation is a shift towards market determined realities to promote investments and growth.