Businesses expect the Naira to firm up in six months – CBN Survey
Responders to the Central Bank of Nigeria (CBN) Business Expectation Survey for October 2024 expect that the Naira will continue to depreciate in the coming months but appreciate in six months. The naira exchange rate to the US dollar hovered between N1650 to N1700 in the period. The latest naira volatility started in June 2023. Since then, the naira’s official rate has dropped in value from $1 = N450 to its current level of nearly $1= N1650. The rapid decline in the value of the Naira over the past year has caused significant challenges to businesses and industries. The chart below shows how the Naira has evolved against the dollar over the last 10 years. When the parallel rates widened greatly from the official rate and then government policy needed to stabilize the currency. While the naira volatility had been significant, the CBN, under the leadership of Olayemi Cardoso has been able to achieve convergence. Be elimination the gap between the official and street rates, the CBN has improved the confidence in the currency, eliminated distortions, and plugged arbitrage and corruption holes previously rife in the market. Figure 1 Naira Exchange Rate to the US Dollar Jan 2014 to July 2024. The survey also shows that businesses in the services sector are the most optimistic while businesses in the manufacturing sector have negative expectations, followed agriculture and construction. The survey also show that optimism was higher ahead for the next six months, in line with the expectations that the Naira will firm up then. The confidence Index on the macroeconomy was 21.8 for the next six months, 14.5 for the next three months, 4.8 for the next month, and 1.4 for the current month (October), reflecting a stronger economic outlook for the second quarter of next year. Not surprising, agriculture sector indicates highest expansion plans for November given it is harvest season, while the optimism for October is attributed to agriculture and service sectors. Notwithstanding the stronger outlook for the second quarter of next year and optimism by some sectors in the coming months, the survey shows that the top six business constraints are high interest rates, insecurity, high multiple taxes, inadequate power supply, unfavourable climate changes, and financial problems.
NELFUND should support Nigeria’s professional needs and not certificates for the sake of it
There is a sense that every measure of what constitute reforms under President Bola Ahmed Tinubu seeks to deal with the metrics rather than the conditions. For instance, there have been two sets of broad changes made under his presidency. The first set is the market based economic changes of the removal of fuel subsidies during his inauguration speech and the liberalisation of the foreign exchange market two weeks after. Those two changes focused on the prices rather than the market conditions that drive the underlying prices. Rather than seek to understand and change the market conditions that deliver the unacceptable prices, the President had proceeded to change the prices and expected the market conditions to align. Of course, that did not happen. The other set of “reforms” is the different categories of financial support provided to different groups of people on the back of worsening economic crisis under his leadership. We now have a deepening and broadening of the social support programmes first introduced under President Muhammadu Buhari. In this case also, rather than focus on the underlying challenges around production and productivity, the president has focused on providing different forms of cash transfers which invariably chases the same amount of goods in the economy. However, there is something entirely new about the student loans support. The Nigeria Education Loan Fund (NELFUND) established last year with an initial N5 billion is a great initiative but requires reforms. The loan is expected to provide increasing access to higher education to those that cannot afford it. With a monthly allowance of N20k and payment of relevant tuition fees, it is expected that 1.2 million students will benefit in the first phase. So far, an estimated near 300,000 students have already applied. But access to higher education has never been a serious problem. Access to quality and relevant higher education is the national problem we face. As it is, the loans are used by any student that needs it, but this does not necessarily means that it is used by the student that really needs it. Since the loans are not means tested, it is not necessarily the most indigent that gets it. So, rather than focus on expanding access to just any course in any higher institution in the country, the resources should be used to support the professional needs of the country. Rather than focus on the financial handicaps of students, the loans are better off supporting the growth and expansion of the professional areas most needed by the country – medical, biological, and technological sciences. These are areas where Nigeria can most benefit in the medium and long ter, using the loans as incentives. It is time for Nigeria to move beyond elements of socialism and the democratisation of poverty. The scarce resources available for scholarships should be used to solve Nigeria’s problems and not for personal egos. Spending four years doing courses and attending universities classes that do not add anything serious to knowledge and skills should not be our priority but how to fill the enormous gaps in the fields of medicine, pharmacy, technology, labs science, electrical, civil, and other forms of engineering fields. These are those that require incentives to study those courses. Indeed, because of the length of some of these courses, the relative higher costs of studying them, and the perceived faint interests by the government in these areas, many intelligent and brilliant students avoid them. By also focusing on the excellence of students, irrespective of financial background, which the government is not able to judge in the applications anyway, the government will be providing incentives for excellence. In conclusion, Nigerians have always loved education. Though that has metamorphosed into the erroneous love for certificates, rather than knowledge. It has also led to the rapid increases in the number of universities without commensurate increase in knowledge and skills. A corollary of that is the many degrees in our universities that have no further implications than the certificates awarded. It is no wonder that the managing director of NELFUND, Akintunde Sawyerr believes the students should be further supported with job opportunities if they do not get one two years after their service year. NELFUND should not preoccupy itself with that. It should be about supporting the best students to be relevant to Nigeria’s economic growth and development. So, instead of providing across all kinds of courses in all kinds of higher institution, the fund should support Nigeria’s priorities and expected outcomes. I thank you.
How not to remove fuel subsidies
17 months is a short time in a country’s history, but it can also be a long time. 17 months after the casual statement by President Bola Ahmed Tinubu during his inauguration, many Nigerians are in utter shock. They are shocked that fuel prices have moved from N185 per litre in May 2023 to between N1,100 and N1,300 across the country. That is a staggering 550 percent increase. Some have described it as their worst nightmare. Fig. 1. The dynamics of PMS and diesel prices since June 2017 Wale Edun, the Minister for Finance, and the coordinating minister for the economy said last week that the government no longer pays subsidies on fuel and the foreign exchange. Recently also, the Group Managing Director of the Nigeria National Petroleum Company (NNPC), Mele Kyari argued that the prices of fuel in Nigeria and across West Africa trade corridors needed to match to prevent smuggling from Nigeria, supposedly stressing the motivation for the removal of fuel subsidies in the country. It follows that those in government, whenever they speak, spill two narratives. They argue that the reforms were necessary and there is no alternative. They also argue that Nigerians needed to pay this price for a greater future. However, what is clear, both in government and in public, is that no one could have predicted the dramatic increases in the price of fuel in the last 17 months. The expectation was that the increase in the price of fuel will be a one-off. However, fuel prices have gone up four distinctive times and the expectation is that there will further increases. And the simple reason is not just because the subsidies were not removed in full in June 2023, but because of the volatility of the exchange rate in the period. Combined, there are three dimensions to the crisis that are often absent in most analysis. First, there is no clear path or destination in President Tinubu’s reforms. For many months now, the President and his team have been at pains to explain the rising costs of living as a necessary pain for future growth, as part of a downturn of the global economy, and a necessary adjustment for the future growth in the country. However, these statements are made without context and explanation of the future they see. No one in government has been able to explain how the removal of fuel subsidies and the liberalisation of the foreign exchange will lead to investments, growth, and jobs. The argument here is not that there are no paths, but that the government has not figured that out. Nearly 18 months after the reforms, the government has not provided a concrete path to investments, growth, and jobs. The reason the government has not been able to provide these paths is because it has become obvious that those in government assume that those announcements are the reforms themselves and that “ right pricing” is sufficient to improving market conditions. Second, the floating of the Naira on June 14th have been done without understanding its implications on fuel prices. The government, after supposedly removing fuel subsidies at the start of June last year did not think through the implications of another policy before going ahead. It shows a gross lack of understanding of reforms that President Tinubu and his team thought that the two policies could not be contradictory in the short term. Without the exchange rate volatility that followed exchange rate reform, the removal of fuel subsidy would have been a one shot increase in price. Finally, the hasty, casual, and pedestrian way the removal of fuel subsidy was done also meant the necessary conversation, consultation, and preparation for what replaces or what the resources could be used for was not done with State governments. The outcome is a disparate and incoherent expenditures of newfound windfalls in governments, especially State governments. Fig. 2. State governments have been the largest beneficiary of FAAC since the removal of fuel subsidies The outcome is now different from the many arguments that were constructed by many in favour of the removal of subsidies, including by ThinkBusiness Africa. The argument was that the removal of fuel subsidies will allow greater level of expenditure on education, health, and infrastructure. However, there is no evidence that these expenditure ratios on these items have been significantly more than when the fuel subsidy was in place. These situations persist. The government is not having a debate within itself about what can be done. The federal government is not having the debate or consultation with State governments about what can be done to improve market conditions and not spike the foreign exchange markets. And the government continues to believe the “right pricing” will bring about the investments, growth, and jobs. That same partial analysis has made the World Bank Chief Economist Indermit Gill suggests that it will take 15 years of continuous reforms for Nigeria to break the cycle of low growth. But Gill did not tell his hosts that this is not the way reforms are done.
Business confidence rises on expectations of monetary policy stability
The Central Bank of Nigeria (CBN) business survey for July 2024, released last week, has thrown up optimism for increased business confidence in the economy as the Naira is expected to stabilize over a six-month period. Outlook for August, October, and January 2025 shows indices of 7.6, 19.3, and 30.7, respectively, with businesses expecting greater levels of improvement in macroeconomic conditions later in the year. While the Naira is expected to continue to weaken in the coming months, the data shows an expectation that it will appreciate by the end of the year. The survey also shows positive employment outlook. The indices show different employment optimism levels, with agriculture the highest at 14.5, followed by construction at 13.9, and market services the lowest at 4.4. However, the immediate expectation is weak. The index shows a 0.1 for July 2024, down from 3.0 in June. The survey included 1600 businesses across services, industries, and agriculture. It covers expectations for August, October, and January 2025. According to the report, insecurity was the highest constraint to growth and business activity. Other factors are high interest rate, insufficient power supply, and high and multiple taxes. The overall confidence of 0.1 points to a decline of 2 points from June, showing the impact of raise in interest rates in May, given that the survey was taking days ahead of the July monetary policy committee meeting. Nigeria is going through one of the most difficult moments in history, with last year’s macroeconomic conditions and costs of living crisis the worst in a generation. The two-year inflation trajectory that started in April 2022 at 16.82% peaked at 34.19%, after July inflation recorded is 33.4%.