ThinkBusiness Today - June 7th

E kaaro o, Ututu Oma, Barka da Safiya - Good morning, and welcome to ThinkBusiness Nigeria.

Are the times faster? As I write this, I could not just stop thinking that we are in June already! Time waits for no one and certainly not for nations.

So, for the President, it is second week already and I hope that the pace of reforms will be quick, though carefully sequenced, and balanced.

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Markets

• The benchmark NGX All-Share Index (ASI) climbed 232.14 (0.42%) points to close at 56,038.85, a 1-week gain of 0.54%, 4-week gain of 6.58%, and an overall year-to-date gain of 9.34%. Major price movement include ETERNA (9.85%), STANBIC (5.46%), CONOIL (3.97%), and AIRTELAFRI (1.96%).

• Oil prices were little changed on Tuesday. Brent crude was trading at $76.52 per barrel, with West Texas Intermediate at $71.93 per barrel, both down, although by less than half a percentage point from yesterday.

• Naira remains flat closed at N464.67 per dollar at the I & E window on Tuesday but at the street market, Naira depreciated by 1.35% closed at N752.50 per dollar.

• Natural gas futures fell about 2% to US$2.28 on Tuesday on lower gas flows to liquefied natural gas (LNG) plants due to maintenance, forecasts for milder weather and less demand over the next two weeks than previously expected and a drop in global gas prices.

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National Headlines

• The Finance Act 2023 and Nigeria’s Fiscal Policy Process – On the eve of his departure, President Muhammadu Buhari signed into the law the 2023 Finance Act. Among the highlights are the 10% gains tax on digital assets including cryptocurrency, deletion of investment allowance on plant and equipment, and 0.5% levy on imported goods into Nigeria from outside of Africa. The Finance Act is a great fiscal policy initiative of the last administration because it allows for flexible changes in signals in taxation to the private sector. However, I expect that there should be time lags in the implementation. For instance, the Finance Act of 2022 released to the public in June 2023 is implemented since May 2023 and the Finance Act of 2021 signed December 31, 2021, started implementation January 1^st , 2022. Rather, there should a time lag in the implementation of Annual Finance Acts. Private sector requires time lag to adjust to new government policies and legislation. Also, the Finance Acts should be part of the budgetary process.

Global Headlines

• Saudi Arabia in global sports – Yes, Saudi Arabia, the largest oil producer in the world, accounting for 15%, has been making bold moves to soften the cultural image of the country, attract tourists, and diversify its economy from oil. One of the approaches has been investments in sports. Yesterday, its backed LIV Golf has announced plans to merge with PGA Tour. LIV Golf was established in 2021, playing its inaugural season last year, but was able to sign big names such as Phil Mickelson, Sergio Gracia, Brooks Koepka etc. because of the big monies on offer. The merger will unify golf and end all suits between the associations. Also in football, every superstar in the twilight of their careers have been linked to one or two Saudi clubs in this close season. After Christiano Ronaldo joined the league early this year, other big names are joining ahead of a new season, including Karim Benzema, who has just signed for Al Ittihad, who just won the league.

• The World Bank on global growth – According to the Global Economic Prospects June 2023 report released yesterday by the World Bank, growth is expected to be 2.1% this year, down from 3.1% in 2022, following tight global financial conditions. It has also revised its projection for 2024. It now expects growth to be 2.4% compared to the 2.7% expected six months ago, citing the lagged effects of central bank monetary tightening and more restrictive credit conditions that were reducing business and residential investment.

• Weakening Yuan against the US Dollar – The Chinese currency Yuan has weakened by about 4% since January 2023 and entered the 7 Yuan to the US dollar range three weeks ago. It follows the steep rise in the Fed Rate in the last year to reach 5.25% last month, while interest rate remained at 3.65% in China this June. To bolster China’s Yuan, a self-regulatory body overseen by the country's central bank has told major state-owned banks to lower dollar deposit interest rates. This could encourage Chinese firms, especially exporters, to settle foreign exchange receipts in Yuan, instead of hoarding dollar receipts. This is like the arguments regarding Nigeria’s I & E window, which currently has a 65% gap with the street rate of Naira / US $.

News Analysis – Structure of Exports has not changed since 1960

Yesterday, the National Bureau of Statistics released its quarterly report for Nigeria’s trade with the world. This data is important, and you can read the latest about it on the NBS website. The point of this analysis is to show that the structure of Nigeria’s trade with the world has not changed since independence, despite self-boasts by the Buhari government about diversifying Nigeria’s exports.

Figure below shows the summary of the dynamics of exports since independence in 1960. It shows two major distinct trajectories. The first is that the period since independence until the oil price spike of 1972 was dominated by agriculture exports. The second is the post-oil price spike period, where crude oil export has continued to dominate the nation’s export numbers, consistently accounting for over 80% of export receipts. 50% of government revenues, but less than 10% of Nigeria’s Gross Domestic Product (GDP).

Structure of Nigerian Export

There are also other interesting features as revealed by the dataset, showing deep insights into how the nation’s exports have trended over time. The third, following from the first two features, is that Nigeria’s exports have been dominated by primary goods exports (crude oil + agriculture) since independence. It thus means that Nigeria has not ‘graduated’ into the industrial phase. Therefore, meaningful structural transformation has yet to take place. Fourth, it also shows that Nigeria’s exports are non-reflective of the structure of production (GDP) in the economy. While the oil and gas and agriculture combined account for about 34% of GDP between 2015 and 2020, they account for about 90% of exports. This sometime means that much of the gains of Nigeria’s export, including value additions are made outside the country.

The motivation for changing the trajectory is quite clear: Nigeria cannot continue to expose itself to the massive concentration risk inherent in such revenue position. The ways to do that, though not exhaustive, are as follows:

• Macroeconomic (price) stability. This will improve Nigeria’s savings and investment conditions.

• Reduce costs of exports – This means improving productivity across all sectors, especially by reducing transaction costs through improvements in infrastructure. Also, by reducing administrative costs.

• Improve the quality of exports – Exports require that we meet the standards of importers all over the world and not the other way round.