19 May

The week ahead – Thinking for Government 101

Nigeria plans to raise $3.5 billion in foreign loans including from the World Bank and from international debt markets, to help fund its 2017 budget deficit. Budget Office Director General, Ben Akabueze said $2 billion of the foreign borrowings would come from concessionary loans with the balance of $1.5 billion from commercial markets including the Eurobond market. He said Nigeria has a shortfall of $7.5 billion for its 2017 budget expenditure. “We would look at which options gives us the best value including Eurobonds,” he told Reuters in an interview. The government will raise $4 billion from the local debt market, Akabueze said. The Debt Management Office sold fewer bonds than expected at its last auction in May as the yields on offer failed to attract foreign investors worried about currency risk. The National Assembly signed off on a ₦7.44 trillion ($24 billion) budget for 2017 last week, aiming to drag the country out of its first downturn for a quarter of a century.

The Central Bank of Nigeria on Wednesday published a list of items for which importers can source foreign exchange from the market. The regulator sent the list, which has 36 categories, to all authorised dealers, Nigeria Customs and the public. According to its Director, Trade and Exchange, W.D Gotring, the list became necessary, following misconceptions and enquiries across market on items that are “Valid for Foreign Exchange”. The items in this new list include animal or vegetable fats and oils fractions, some pharmaceutical and manufacturing materials, textile yarn equipment and fabric among others. The regulator had earlier denied reversing a ban forbidding access to forex through the official forex window when importing 41 named items.

Oil minister, Ibe Kachikwu, has said a number of steps have been taken to maintain the pump price of petrol at ₦145 per litre despite significant challenges in the downstream sector. Kachikwu said the issue of freighting and docking was addressed last month. He said the ministry would continue to work with the CBN to make foreign exchange available to marketers for the importation of petroleum products. Kachikwu stated, “We are also working very hard with the NNPC to reduce some of the charges on products such as the usual five percent provision on proforma invoices as allowed for ship-to-ship operations. We are doing all these to help manage and maintain the current price ceiling of ₦145 per litre in the face of very significant challenges.”

On May 16, the European Commission updated the EU Air Safety List, a list of non-European airlines that do not meet international safety standards, and are therefore subject to an operating ban or operational restrictions within the European Union. In its latest update, all airlines certified in Benin and Mozambique were cleared from the list, following further improvements to the aviation safety situation in these countries. On the other hand, Med-View (Nigeria), Mustique Airways (St. Vincent and the Grenadines), Aviation Company Urga (Ukraine) and Air Zimbabwe (Zimbabwe) were added to the list due to unaddressed safety deficiencies that were detected by the European Aviation Safety Agency during the assessment for a third country operator authorisation. One of Nigeria’s five major domestic carriers, Med-View commenced commercial flights from Lagos to London in November 2016 with new routes to be opened to Dubai in July and Washington DC later this year.

Suggestions

  • One of the many concerns we have is a lack of oneness in the communications of strategic members of the Buhari government. Mr Akabueze’s statements contradict the Minister of Finance, Mrs Kemi Adeosun’s recent statements that Nigeria would borrow less in 2017 than it did in 2016. The biggest concern expressed is what this new debt will fund. If the government’s antecedents are anything to go by, it will mainly fund ever expanding recurrent expenditure and not go into capital investments. When GDP is right-sized using current exchange rates to $288 billion from the height of $575 billion achieved when Nigeria rebased, debt to GDP ratio becomes much more than official documents which put it at about 12%. A third worrying factor is the continuing domestic borrowing by government meaning cost of fund to private sector remains high and availability remains low. The APC government needs to take drastic measures around the mix of capital to recurrent expenditure to reduce budget deficits while doing the hard work of increasing tax coverage from the current paltry 6% to a minimum of 15% as proposed by the ERGP.
  • One complaint given about the CBN in the past is its failure to provide clarity on its various circulars and guidelines. The circular released on 17th May, 2017 did not reverse the ban on 41 items, but rather validated several items which remain valid for foreign exchange. This action seeks to reduce the confusion which trailed the ban. While such clarification is commendable, we maintain that a full liberalisation of the foreign exchange market and elimination of other subsidies on consumption are needed to unleash the Nigerian economy and achieve developmental targets set by various administrations.
  • The FG made a strategic error when it increased the pump price of petrol in 2015 but maintained price controls. Our counsel at SBM has always been the elimination of price controls to enable proper price discovery for petrol. Unfortunately for the government, a price increase at this time is not politically expedient. Kachikwu’s statement means that the government will continue the back-end subsidies provided to the oil marketers via the FX market, and continue the distortion in the FX market by cornering supply for this market. All of these constitute digging into an already faulty policy position and shrinking the policy manoeuvre space for the FG. We repeat our call to allow the markets determine prices, from petrol to FX, and also to eliminate consumption supporting subsidies. The maxim holds true that the best time to plant a tree is 20 years ago and the next best time is now.
  • The EU blacklisting of Med-View will no doubt come as a blow to an airline firmly in the midst of an aggressive expansion programme. It became a publicly listed company on February 1 and posted record revenue of ₦25.96 billion for the year ended December 31, 2016 with revenue targets of ₦58.49 billion by 2020. The announcement is sure to turn off the significant number on Nigerians who travel to Europe with the summer high season set to commence in weeks, leading to reduced traffic on the Lagos-London route – traditionally one of Africa’s most lucrative. In a wider context, this development is yet another signal that Nigerian companies, especially those with a primary export or international focused business component will need to learn to abide by international rules and norms in other to remain competitive and ultimately profitable in the new global economy.