ThinkBusiness Today - June 8th

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

Workers earning salaries or civil servants being paid social security allowances!

The implications of the removal of fuel subsidies in Nigeria was always going to be huge and extensive. But one of the ramifications I know very few may have thought about is that it will lead to other fiscal reforms in the country.

So, as States begin to discuss how their staff should work only two or three days, I think it is about time we ask: what is the work that each worker do in the States? How are they employed? Does their employment match the needs of the State? How are they promoted? Should a State continue to depend on federal allocation to keep going?

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Markets

• The benchmark NGX All-Share Index (ASI) pared 13.29 (-0.02%) points to close at 56,025.56, a 1-week gain of 0.46%, a 4-week gain of 6.5%, and an overall year-to-date gain of 9.32%. Major price decline include NGXGROUP (-3.11%), FLOURMILL (-4.20%), UBN (-8.86%)

• Oil prices rose early on Wednesday following better than expected Chinese data. Chinese data showed crude imports into the world’s top oil importer jumped in May, recovering from a weak April. WTI Crude prices were up by 0.99% at $72.45. The international benchmark, Brent Crude, traded at $77.25, up by 1.06%.

• The naira depreciated by 0.02% 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.

• Building on positive finishes in the previous three sessions, Natural Gas contract was up another by 2.34% or 6.0 cents to $2.322/MMBtu.

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National Headlines

• Uber and Bolt drivers on Strike – Oh, there is a union! Following the removal of fuel subsidies and consequent increase in the price of fuel, the umbrella union for App based Transport Workers of Nigeria (AUATWON) has protested the 20% – 30% increases in fares by the operators, rather than 200% demanded. They also demanded 50% reduction in commission. Currently, Uber and Bolt receive about 25% commission on rides to cover the use of software, collection and transfer of fares, credit card commission and distribution of invoices to clients. But it is more because of some hidden fees and depending on how far the ride is. The challenge for both the App based companies like Uber and Bolt and their drivers is that it is intensely competitive. In Nigeria, it is driven by unemployment and flexibility. Drivers bypass the commission also by requesting offline trips from passengers, and many oblige (we play the system in Nigeria). No doubt, Uber and Bolt have the upper hand because they have secured the data, and it is keeping these passengers that is paramount to them, and it is the reason why the fares are relatively cheap compared to international prices.

• State workers or social security workers? – As we continue on the reform journey started with the removal of fuel subsidies, we will soon arrive at the question of whether a large number of workers in States and local governments receive salary for work or as a form of social security. In response to the removal of fuel subsidies, Governors Godwin Obaseki and Abdulrahman Abdulrazak of Edo and Kwara have reduced the number workdays to three a week. In Oyo State, as expected in every other State and in the federal, salaries are being reviewed upwards. Soon though, we will start to ask reform questions such as what is the work that each worker do in the States, how are they employed, does their employment match the needs of the State, how are they promoted, should a State continue to depend on federal allocation to keep going?

Global Headlines

• Latest Snapshot of global economies – The third largest economy Japan grew 2.7% in Q1 2023, better than estimates of 1.6%. Japanese Yen strengthened 0.14% to 139.98 against the US dollar. Inflation is at 3.4%. The Bank of Japan meets next week to decide on lending rates. The Bank of Canada hiked its lending rate to a 22-year-old high of 4.75%. Before pausing in January 2023, it had raised rates 8 times since March 2022 to reach 4.5%, a 15 year high. The U.K. is set to report a headline inflation of 6.9% this year, above the OECD average of 6.6% for 2023. Only Argentina and Turkey are expected to have higher inflation numbers this year, according to OECD economic outlook. Australia’s first-quarter gross domestic product expanded by 2.3% year-on-year, just slightly below analyst expectations. This is the sixth straight rise in quarterly GDP, but the slowest growth since the Covid-19 Delta lockdowns in September quarter 2021.

News Analysis – As expected, extensive ramifications of the fuel subsidy removal

I remember a conversation I had with a friend, arguing why fuel subsidy removal is the most critical fiscal policy of our generation. I said that “fuel subsidy removal is important because it has the most extensive distortionary linkages in the economy”. As expected, there will be short, medium, and long term economic and social responses to the shock. Let me it get it out quickly, it will be largely negative in the short term.

So far, what do we know?

• There is still confusion in the supply process – With increased prices, it is still possible that there may disruptions to supply. This is because there are now changes to the supply model. Though the queues last week have since vanished but it may takes months before a new process is fully established.

• Price range remain stable – the price range of N480 – N550 that emerged after the removal of subsidy has remained stable.

• Transport fares are up 30% – 100% - Transport fares have increased by from between 30% - 100%. Our investigations show that fares for short distant trips went up by as much as 100%, but about 30% - 50% for long distance trips. Food and other prices are up too.

• Arbitrage gaps reduced considerably – As expected, and a major reason for the removal of fuel subsidies – to reduced smuggling, the gap for arbitrage across the West Africa corridor is now reduced considerably. Graph below shows data sourced from Global Petrol Prices, showing comparative fuel prices at the pumps.

PMS Prices in selected African countries

• Finally, prices of PMS are up in some countries – Without access to subsidized and smuggled fuel, prices are up in some neigbouring countries – Republic of Benin, Cameroon, and Niger. Citing sources, the BBC reported that prices of petroleum products are being sold for 700 CFA or 800 CFA in the Benin Republic, nearly double the previous price of 450 CFA. In Cameroon, fuel from Nigeria sells for 350 CFA while fuel from Cameroon sells for 650 CFA in petrol stations.