Nigeria Content Online

The fate of the
Excess Crude Account (ECA) speaks to the need for clarity on the
reasons why we held funds in the account in the first instance; and why
we should look forward to keeping it (or anything that looks like it,
including through a Sovereign Wealth Fund – SWF). Two things matter in
considering these dimensions of the ECA. First, was the seeming
hurriedness with which government ran through the accounts; and second,
the purposes for which it was run down. Both these considerations have
fed popular angst over the spendthrift policies of managers of the
economy. Yet, the ECA started life as a fairly decent idea.

Convinced that the
thirty years during which the story of public infrastructure decay in
this country was told, and the economic waste that accompanied the
1970s oil boom could have been avoided if managers of the economy had
been more circumspect, the second Obasanjo administration (after 2003)
agreed an “oil-price-based fiscal rule”. According to the then finance
minister, the proximate goal of the rule “was to constrain spending by
transferring oil revenues to the budget in accordance with a reference
price,

together with a
ceiling on the non-oil deficit”. What remained of all revenues from
crude oil sales after this, ended up in the ECA.

Part of the problem
with the rule however, was that between 2004 when the rule was adopted,
and the enactment by President Umaru Yar’Adua in November 2007 of the
Fiscal Responsibility Act, the oil-price-based fiscal rule operated in
a legal vacuum. In other words, until this enactment, the only defence
all this time,

against bad governance and entrenched corruption were the good intentions of those in power.

We have since seen
that good intentions clearly would not do for managing an economy like
ours. Nonetheless, the volatility of our main revenue source makes
saving a portion of our earnings a wise choice. First (the
stabilisation function) to address the volatility associated with oil
prices and volumes in the international markets. Then (as part of a
trans-generational compact), to ensure that future generations benefit
from current consumption of what is essentially a non-replenishable
resource.

Having agreed to
save, the next query is what kind of instruments we should be looking
to put the savings in. The stabilisation part of this responsibility
recommends a short-term investment horizon, ensuring that funds are
available as needed; while the trans-generational compact demands a
longer horizon. Across this asset allocation spectrum, though, lies a
plethora of instruments into which we could put our national savings.

A couple of
arguments then matter. One, as argued by a recent IMF working paper on
the “Investment Objectives of Sovereign Wealth Funds”, “If a country’s
income is dependent on one (or even a few) real assets, it would be
natural according to portfolio theory to diversify this dependency by
investing in financial assets that have a negative or low correlation
with the real assets”.

In other words, we
must seek to put our national savings in investment vehicles whose
prices or yields move up when that for crude oil is down; and vice
versa.

Second, given that
national savings of the type contemplated here would be funded almost
100% from crude oil sales, asset allocation decisions would have to
factor in the country’s proven reserves of crude, the risk outlook for
oil prices on the international markets, and oil market cycles.

Worried by all of
this, it became important to understand what government is proposing to
do through the sovereign wealth fund (SWF). If the draft bill to
establish the Nigeria Sovereign Investment Authority serves any
purpose, the SWF has been set three investment objectives: a “Future
Generations Fund”; the “Nigeria Infrastructure Fund”; and the
“Stabilisation Fund”. In this sense, the proposed sovereign wealth fund
is everything that an SWF should be, bar being a pension reserve fund.
It aims in this regard to “establish a diversified portfolio of
appropriate savings and growth investments for the benefit of future
generations of Nigerians”; a “portfolio of investments specifically
related to and with the object of assisting the development of critical
infrastructure in Nigeria”; and a “portfolio of liquid investments to
provide supplemental stabilisation funding based upon specified
criteria and at such time as other funds available to the Federation
for stabilisation need to be supplemented”.

Egypt’s AlexBank said on Sunday it had ended its first open day
after a week-long bank closure caused by political unrest with a net cash
surplus of 4 million Egyptian pounds.

Bankers had been bracing for chaos at the counters as panicky
Egyptians withdrew cash with fears that their deposits could be restricted
again.

“I will tell you something I think you will not believe, we have
a surplus of 4 million at the head office. I don’t know about the rest of the
branches yet. We have a positive balance,” AlexBank Chairman Mahmoud Abdel
Latif said by telephone.

He said his bank, which is controlled by Italy’s Intesa Sanpaolo
SpA, had unofficially opened for companies for several days during the bank
closure to provide salaries and accept deposits.

“Because there are plenty of companies,especially in the food
business, that have been making tonnes of money and, as you know, everything
has been in cash in the last few days, people were flooded with cash and they
need to deposit,” he said.

He said his bank had provided about 14 million pounds for
salaries, but had received about 19 million pounds of cash.

Abdel Latif, who spent the day focused on the counters in the
lobby of his bank’s head branch, said that at least at his bank the feared run
on cash had not materialised. “It went extremely well, and I mean it. We had
more than 3,000 clients. The queues were very well organised, the people were
cooperating and our people were kind of speedy.”

The maximum withdrawal at his branch was 32,000 Egyptian pounds,
below the maximum withdrawal limit of 50,000 pounds set by the central bank, he
said.

About 90 percent of the dollar withdrawals were for settlements
under letters of credit in the normal course of business, and 10 percent were a
few individuals taking out somewhere between $5,000 to $10,000”,he said.

The central bank had set a limit of the equivalent of $10,000
for foreign currency cash withdrawals.

“I personally was downstairs, and the people who want the
dollars are all travelling. So they genuinely need the dollars or the foreign
currency for their trips,” he said.

He said the bank only opened about 20 branches as part of an
agreement with the central bank to move gradually and because banks were having
logistical problems getting employees to their offices.

REUTERS

Nigeria’s state-run oil firm used its unique trading position to
make profits at the expense of the government between 2006 and 2008, according
to an independent audit of Nigeria’s oil sale payments. The report, released
this week, said the Nigerian National Petroleum Corporation (NNPC) waited to
analyse oil market movements before choosing the most favourable pricing option
to buy Nigeria’s crude oil, while all other oil companies picked the pricing
option in advance.

“NNPC is taking advantage of its position as both buyer and
agent for the seller (the government) to make profit at the expense of the
Federation,” the report by British accountants Hart Group and Nigerian firm
S.S. Afemikhe & Co said.

“Restructuring of NNPC should ensure arm’s length dealing
between the Federation and NNPC in relation to the sale of crude,” the report
commissioned by the Nigeria Extractive Industries Transparency Initiative
(NEITI) said.

Nigeria, which produces more than 2 million barrels per day
(bpd) of crude oil, is ranked by transparency watchdogs as one of the most
corrupt countries in the world. Analysts say mismanagement at NNPC has made it
one of the major blackholes in the country’s public finances.

The NEITI report highlighted discrepancies in dividend payments
made by NNPC to the government, noted unresolved oil sale revenues and
discovered large gaps between how much oil NNPC and energy companies said was
being produced.

NNPC figures showed 2.6 million barrels less oil was pumped in
2007 than oil firm accounts. The missing oil would have had a value at the time
of more than $150 million. NNPC officials were not available for comment. NEITI
is a unit of a project launched in a number of countries by former British
Prime Minister Tony Blair in 2002, aimed at improving transparency by getting
companies to publish what they pay and governments to disclose what they
receive.

Oil reforms

Problems of inefficiencies and conflicts of interests within
NNPC have been acknowledged by Nigeria’s government, which has ordered a
comprehensive audit. Many of the issues are supposed to be addressed by
wide-ranging reforms contained within the Petroleum Industry Bill (PIB)
currently before parliament. But the PIB has been repeatedly delayed and although
President Goodluck Jonathan pledged the law will be passed by May, frequent
amendments have left question marks over what the final version will include
and successfully achieve. Delays have put billions of dollars of potential
investment on hold and while many stakeholders are concerned it could increase
the cost of operating in Africa’s largest oil industry, there is growing
appetite for closure on the reform process.

“There is no certainty as to how a new system might improve
transparency,” said Antony Goldman, head of London-based PM Consulting.

“But more and more people seem to be saying that any law would
be better than no law at all. The many stakeholders may not like all elements
of new legislation in whatever final form it emerges, but they like the current
uncertainty even less.” The president’s commitment to a May deadline combined
with NEITI’s report could put more pressure on parliament to pass the bill
which some feared may never become law.

REUTERS

The performance of equities at the Nigerian Stock Exchange (NSE)
during the past week was dominated by negative sentiments as profit takers
maintained sell pressure on the back of gains recorded in the previous week.

While the market only witnessed an upturn on Wednesday, low
bargain activities were recorded in the remaining trading days of the week as
equities shed weight considerably across the board closing all market
indicators in red with aggregate loss of 2.17 per cent.

Analysts at Proshare Nigeria, an investment advisory company,
said the intense selling activities witnessed in the banking, insurance, food
& beverages sectors coupled with profit taking on some blue chips impacted
the negative posture recorded in the week to depress year-to-date market
performance to 6.62 per cent from 8.98 per cent position.

The NSE All-Share Index during the week dropped by 2.17 per cent
to close at 26,763.84 basis ponits as against a decline by 1.18 per cent
recorded in the preceding week to close at 27,365.59. Similarly, the market
capitalisation depreciated by N189.45 billion to close at N8.55 trillion as
against depreciation of 104.77billion recorded in the previous week to close at
N8.74 trillion.

Meanwhile, analysts at Renaissance Capital, an investment bank,
said it is expected that the Nigerian market will be “a strong performer” this
year. “We believe the Nigerian market, which lagged other emerging markets in
2009-2010, still has strong catch-up potential. Issues which have dogged the
banking sector can be put behind us after Asset Management Corporation of
Nigeria completes its purchase of non-performing loans,” they said.

They added that equities remain an “attractive asset class to be
in during an economic recovery and Nigeria’s growth trajectory places it in the
recovery state of the business cycle.”

Low turnover

The total volume traded in the week closed at 1.75 billion units
valued at N19.43 billion compared with 2.62 billion units valued at
N24.95billion in the previous week.

The banking sector emerged the most traded sector in the week in
terms of volume. The volume traded in the sector closed at 1.31 billion units
valued at N11.31billion exchanged in 18,750 deals compared with 1.88 billion
units valued at N16.18billion exchanged in 20,403 deals in the preceding week.
The volume traded in the sector accounted for 74.76 per cent of the entire
market. Zenith Bank led the market volume for the week to displace First Bank
shares which topped the transactions volume chart in the previous week.

Insurance sector followed with 88.78 million units valued at
N101.48 million exchanged in 1,326 deals compared with 144.87million units
valued at N167.57 million recorded in the sector the preceding week.

The number of gainers in the week moved down to 38 compared with
the 45 appreciations recorded the previous week. Neimeth International
Pharmaceuticaltopped the gainers chart for the week with 19.83 per cent
appreciations. A total of 46 stocks recorded price decline of different magnitude
in the week compared with the 43 stocks that declined in the previous week.
Niger Insurance topped the losers chart for the week with13.33 per cent
depreciation.

In the mean time, the management of Access Bank, last Friday,
notified the Exchange that it intends to completely divest from its non-banking
subsidiaries namely, United Securities Limited and Access Investments and
Securities Limited, and integrate the operations of its Mortgage Banking
subsidiary, Access Homes and Mortgages Limited, into its Retail Banking
Division.

“The Bank’s decision followed the approval it received from the
Central Bank of Nigeria (CBN), to bring its operations in conformity with the
provisions of CBN’s regulations on the Scope of Banking Activities and
Ancillary Matters No. 3. 2010,” it said.

Why Nigeria is still in debt after exiting Paris and London Clubs in 2006

A country’s sovereign debt is a macro-economic variable, just as the gross domestic product (GDP), savings, investments, money supply, employment and unemployment. As variables, they are dynamic, and must be looked at in context, relating only to themselves, in attempting to know how appropriate their levels or rates of growth affect the economy.
Public debt stock has to be related not just with the statics of the economy, but its dynamics, particularly economic growth rates and the GDP. After exiting the Paris and London Clubs debts, Nigeria’s debt stock got to a very low and sustainable level.

However, though the country’s debt stock has been growing after that, particularly on the domestic front, it is in context, within the capacity provided by the overall growth of the economy. The GDP figures since then has maintained a commendable growth rate till date, averaging between 6 and 7 per cent. The country’s debt-to-GDP ratio at the end of 2010 was about 17 per cent, which is within the 40 per cent threshold, like countries in her peer group.

Revised debt management strategy

Though the DMO is a public service organisation, it appreciates that its job is essentially an investment banking job – to manage, perhaps, the biggest financial investments in the country. The DMO believes it can do its job effectively and efficiently only if there are clear guidelines, goals, vision and mission statement as well as broad strategic objectives.
Between 2002 and 2006, the DMO rolled out the first five-year strategic plan, with the central objective of making the country’s debt sustainable. The strategic plan was to help define the minimum goals as well as specifying the ways, cost and resources, institutional framework, organization, manpower and training that would be required to achieve them within the period.

After 2006, a new strategic plan became necessary, to enable the country play a more proactive role in contributing to the growth and development of the economy. Therefore, in 2007, a new 5-year strategic plan was finalised, to run between 2008 and 2012, with the vision of utilising debts as assets for the country’s growth and development.

The goals specified in the new plan included the development of the domestic debt market, to enable the private sector access long term funds to develop agriculture, mining, solid minerals, transportation, manufacturing, power, and so on.

Within this period, we have created the type of market envisaged. Now, there are funds of up to 20 years in the Nigerian capital market, through the issuance of FGN bonds, to encourage the market to begin thinking, acting, saving and investing long term. Today, if any private entity wants to issue a bond to raise five, seven, 10, 20 years money for investment in agriculture, manufacturing, power sector or other infrastructure will succeed.

Similarly, the vision under the new plan was to ensure that every state of the federation has a debt management department. Today, we are at the stage where every state has advanced towards the final stage of having a fully functional debt management department.

We are democratizing public debt management, institutions and capacities, to ensure that in the next two to three years Nigeria would be ranked among the strongest countries in terms of public debts management knowledge, not just because the DMO knows about public debt management, but because there are 36 other institutions with similar capacities. Part of the democratisation process is also to make every Nigerian very knowledgeable about public debt management issues.

State’s accumulation of debts

In a fiscal federalism, such as Nigeria’s, where every state has very strong powers of fiscal autonomy, the Constitution does not prohibit states from taking loans. Rather, it provides terms and conditions under which they can access loans.
With that constitutional reality, the DMO decided to help states in building appropriate capacities as well as establish and develop the necessary institutions, including the legal framework, to help them be prudent in their procurement and utilisation of borrowed funds. The DMO provides them with the information that would enable states take informed decisions at the right time and the right sources to borrow, if they have to.

In the next two years, when effective public debt management institutions would have been established in the states, they would be in a position to understand and accept DMO’s advice on when and when not, how and how not, where and where not to borrow. It will not be a situation where the DMO, from the centre, is imposing itself on them, but that they, on their own, appreciate the need to borrow from sources in a manner that would enable them apply to projects that would generate maximum value in terms of better standard of living for their people, while being able to service their debts as and when due.
So, the issue is not about dissuading states from borrowing, but to help them make optimal and efficient decisions about borrowing for the right purposes.

DMO’s role in the Asset Management Company of Nigeria (AMCON)’s objectives

AMCON is to buy over the non-performing assets (loans) of banks. So far, it is issuing paper bonds to the affected banks at a price in exchange for those bad loans, so that in future it would be in a position to realise value from them and be able to redeem the issued bonds.
For the bonds to have the impact and improve the bank’s balance sheets, they need to be backed up by a sovereign guarantee by the DMO, which is the country’s agency responsible for managing the country’s crystallized, direct debts or contingent liabilities.

In other countries, the government faces a risk with such guarantees when non-performing loans are taken over, to the extent that when the asset management company wants to realize value from the assets, it may not be able to do so 100 per cent, and would not be able to pay fully for the bond issued without some money coming from government.
But here, the Central Bank of Nigeria (CBN), Federal Ministry of Finance and AMCON, based on the DMO’s position, have arranged it in such a way that there is virtually no risk on the taxpayer, because the CBN and the banks are contributing into a sinking fund that would ensure that if, at the end of the period, the value realised by AMCON from the sale of the loans is not enough, it will be made up from these contributions.

Economic impact of the $500million Eurobond on Nigeria

First, the benefit of the Eurobond for the country is that it helps Nigeria establish its presence in the international capital market as a benchmark to facilitate private sector borrowing. Currently, Nigeria has a huge infrastructure deficit, which requires a huge financing gap, taking into account investments required in the power, agriculture, transportation sectors, and so on.

Even with all the country’s oil wealth, Nigeria is no way near having all the resources to close the deficit and grow her economy, to become one of the top 20 world economies by the year 2020.

Therefore, government desires an active role by the private sector in this direction. What government has done through the Eurobond issue is to open a new window to facilitate Nigeria’s private sector to go into the international capital market to issue their own debt instruments and raise long term monies to fund the country’s various needs in the real sector and infrastructure.

What this means is that it will help government to avoid excessive borrowings, since the private sector could take over the funding of most of the projects the government has been borrowing money to do when they did not have access to the capital market.

Today, because the country is there at the international capital market, it would become conspicuous to investors all over the world as an option for foreign direct investment (FDI), in terms public-private partnerships (PPPs).

Similar, because Nigeria appreciates that she belongs to the centre stage, the country is under obligation to adopt international best practices in all its activities, from politics and economic management to social development, to help accelerate her growth and development as well as establish a path for sustainable prosperity.

Diaspora Investment Fund and national economic growth

Details on the initiative are currently being worked out. But, the broad outline is that Nigeria appreciates that she has a huge Diaspora population. Most Nigerians living in Europe, United States, Latin America, Asia and South Africa are high net worth professionals and individuals in various businesses, including schools, hospitals and so on. Some are working in the biggest multinational companies and foreign governments. They have huge capacities to repatriate part of their savings to invest in Nigeria.

In terms of debt management, rather than encouraging government to borrow to solve the myriad of infrastructure and development challenges, government could be saved the pressures by encouraging other economic agents, like Nigerians in the Diaspora, to lead the way in investment.

Therefore, the DMO wants to design appropriate funds that Nigerians in the Diaspora can pool their resources together to target the development of various sectors of the economy, like agriculture, specialized educational and medical institutions, housing projects, which they would own, in order to meet the challenges of a growing population like Nigeria’s.

That way, they would be own businesses in Nigeria and contributing to the growth and development of the country as well as helping to reduce the pressure on the government to continue borrowing for these projects.

Tangible impact of a sustainable debt profile

It is important for Nigerians to see convincingly the impact arising from the use of borrowed funds by government. That is the way government is looking at the issue of debt going forward. In the past, much of what was borrowed was used in the execution of tangible projects.

About 92% of the country’s total external debts of $4.5billion as at December 31, 2010 are as a result of borrowings from the World Bank and other multilateral sources, like the African Development bank (ADB) for specific projects, like the FADAMA agricultural scheme that enables farmers to farm all the year round.

Over the years, several initiatives in the education and health sectors, like the Universal Basic Education (UBE) and anti-malarial campaigns, were funded with monies borrowed from these institutions.

In the domestic front, such programmes as the N200billion commercial agricultural credit programme by the CBN and commercial banks, revival of the cotton and jewelries industries by the Bank of Industry (BOI), the ongoing reactivation of the country’s rail transportation system, are funded from monies borrowed from the domestic bond market.

But, going forward, government is insisting on getting greater value from the use of borrowed funds. That is why the Ministry of Finance has not only established a very strong monitoring group to regularly monitor these projects once they commence, but also established a risk management desk as well as introduce performance budgeting process as a strategy to ensure maximum value for borrowed monies.

The DMO is committed to ensuring that the country does not stray into a situation of debt unsustainability again. DMO’s advice to government is to avoid borrowing beyond the threshold of 40% of GDP by limiting it to not more than 25% in the next 4 to 5 years.

Assessing the economic impact of a compulsory holiday is definitely complex but at least, it can be partially explained by the long faces of traders that were seen on streets of Lagos last Thursday, after being ordered not to open their stalls till 2 pm.

The order from the Lagos State government obviously did not go down well with the traders, some of who had been loitering at the walkway of their shops before 10am.

Such is just one among the scenarios created by the various holidays that have been declared by state governments which had affected both the private and public sector of the economy.

No fewer than eight states have declared public holidays in the last one month. Abia, Ekiti, Kano, Niger, Ondo and Kaduna states have declared public holidays for the voter registration, disregarding its economic implications.

Some finance experts however say the holidays have impacted on national productivity and economic growth. Opeyemi Agbaje, a senior consultant at Resources and Trust Company Limited, a business advisory firm says the nation’s productivity has been affected by the registration process.

“Even before holidays were declared, the inefficiency of the process had already started affecting the productivity level of the nation,” Mr Agbaje said. “The day I registered, I virtually did not work. If you multiply that by all the people that have not worked or are presently not even working because of this registration process, we might be coming close to measuring the impact and knowing how much the nation has lost.”

He said it is the inefficiency of the process that should be blamed and not those declaring the holidays, as there was hardly any other feasible way to go about it. “This is something that should have been done in less than 10 minutes, if the procedure was efficient so that people can just stop by on their way to work or when they are back. I had to give some of the employees time off to go and register. I can’t really blame those calling for and declaring these holidays. It is because the process itself is inefficient” he said.

David Oke, an economist said when a nation’s output or productivity drops, its economic growth also falls. “During holidays, people don’t work and the nation loses its output because there is no productivity and because we don’t engage in any economic activity, economic growth declines.

According to him, countries try to avoid declaring holidays sporadically because of its economic implications. “In economics, when a nation’s output increases, economic growth increases and vice versa. The country must have lost lot of money from the declared holidays. That is why some countries hardly declare holidays because they know the implications” Mr Oke said.

Akinbamidele Akintola, a research analyst at Renaissance Capital, an investment banking firm says such declared strikes or compulsory holidays are not positive for a nation as it could cripple the entire system especially if it affects the banking sector, ports, airports, schools, oil and gas segment, transport and other segments.

“It is however a short term setback and it is not expected to pull the economy into a complete shutdown,” he said, adding that private companies were expected to continue their business activities as usual.

Adesoji Solanke, a banking analyst at a finance firm said such holidays could possibly save banks from the running costs of operations.

“For banks, it obviously partly saves them a day of running costs. Yes, the holidays may hinder some transactions from being processed, but Nigerian banks increasingly utilise e-banking channels nowadays, such that physical presence is not always necessary in banking halls, ultimately limiting any downside impact from the holiday. The holidays being declared are for the greater good, and that is how they should be viewed – an attempt to optimise citizens’ participation and achieve fair representation in the elections” Mr Solanke said.