01 Jun

The week ahead – Watching the needle

Transparency International said the FG has in the run-up to elections expanded the use of opaque $670 million-a-year funds that fuel graft. The funds, known as “security votes”, are a relic of military rule, mainly disbursed in hard cash and nominally released for dealing with unexpected security issues. According to Transparency International’s report, they have become “synonymous with official corruption and abuse of power”. It said federal-level total spending on items identified as security votes increased by 43 percent in 2018’s budget from 2017 and included payments to a university, a museum commission and a dental technology school. Most of the estimated $670 million of security votes is disbursed by state governments, with federal spending making up only $51 million, Transparency International said.

Three states, Ekiti, Rivers and Cross River, have opposed a bill on water resources sent to the Senate by President Muhammadu Buhari. Prominent Niger Delta leaders, under the aegis of The Pan-Niger Delta Forum also joined in rejecting the bill, saying it was insensitive to the wellbeing of the people of the oil-rich region. The bill, which seeks to concentrate the control of water resources in the Federal Government, divided senators along regional lines. The spokesman to the Cross River Governor, Christian Ita, said the Ben Ayade government was not in support of the executive bill.

The prices of imported goods might increase after shipping companies like Maersk and Mediterranean Shipping have announced a hike in rates. Both companies attributed the increased rates to increased bunker fuel (the fuel used to power ships) prices which are a result of higher oil prices. In an import-dependent country like Nigeria, this might lead to increased prices. The increased rates, some media reports say, will affect the landing cost of petrol and other petroleum products. Crude oil prices have returned to 2014 highs on rising tensions between the US and Iran after the former backed out of a nuclear deal. Maersk is the world’s largest container ship and supply vessel operator with Mediterranean Shipping Company the second largest. Maersk said the emergency bunker surcharge will take effect from 1 June. In a notice on its website, MSC said the worldwide temporary emergency bunker surcharge will be with immediate effect.

Bureau de Change operators say they are not comfortable with the new Central Bank of Nigeria foreign exchange purchase directive. In a statement on Sunday, the CBN had said banks must now attend to customers’ forex needs over the counter and BDCs must purchase forex three times a week. Commenting on the issue, Aminu Gwadabe, president of the Association of Bureaux de Change Operators of Nigeria said the directive is not acceptable. “The CBN’s directive at this time of our operational difficulties is no doubt precarious and vague and was intended to emasculate a sector that has helped the system to stabilise and thus unacceptable,” he said. Gwadabe said BDCs are heavily regulated despite being a small unit of the financial sector.

Suggestions

  • The glue that holds up the inefficient political system in Nigeria, and skews it against both the will of the people and a level playing field for better candidates to emerge, is the existence of slush funds that warp campaign funding. Security votes rank high up in upholding this system. When the existence of the security votes is taken along with the abysmal security situation across the country, the irony is not lost on observers. Until funds like these are unavailable to governors and the federal government, not much progress will be made in reforming our political system.
  • The proposed bill, the latest front in the raging debate over the appropriate amount of federalism and devolution necessary for Nigeria’s development, is not only causing a rift between federal lawmakers, it appears to be splitting states along what appears to be regional lines. Rivers, in the South for example, says that “states have conceded so much in Nigeria, particularly those ones in the Niger Delta.” Ekiti, also in the South, has called the bill “a subterfuge to achieving another version of the failed cattle colony” and an effort in “recolonising the states for the benefits of the few.” Bauchi, in the North, is not only in support, it plans to create a regulatory unit. Others such as Kwara (Middle Belt) and Osun (South) declined to state their official positions. PANDEF, on its part, said the bill was provocative. As more southern states continue to weigh in on this issue and northern lawmakers and states double down, expect the political rhetoric to sharpen and legal challenges to be prepared – land and natural resources are nominally vested in the state governors via the 1978 Land Use Act. Two things are clear – the FG is large and increasingly unwieldy yet still possesses the appetite to expand its responsibilities even more; and most states will double down in order to protect their legal turf. In the inevitable clash of interests, ordinary Nigerians are certain to profit little.
  • While these price pressures will arrive at our shores, Nigeria’s government is unlikely to allow prices rise in a season of electioneering, especially the price of petrol. Hence we expect the subsidy bill currently borne via NNPC back-channels to rise dramatically, with further pressure on exchange rate to rise upwards. Balancing the price of petrol and the exchange rate will lead to policy decisions which will be short term expedient, but damaging in the longer term. When the government is finally left with no choice but to pass the price increases to Nigerians in one go, the impact will be swift and heavy.
  • Recent happenings in the global markets are clearly spooking Mr. Emefiele who has made it clear that his primary goal is price stability. Internationally, the US dollar has been strengthening due to a host of factors – political turmoil in Italy and other Eurozone countries, easing trade animosities between the U.S. and China, the U.S. withdrawal from the multilateral nuclear pact with Iran and continued Brexit talks. On the local scene, an exit of foreign portfolio investors and the approaching summer holiday break and minor Hajj are pushing the demand for dollars. These factors and more have forced the CBN to act in order to minimise exchange rate fluctuations. As for the BDC operators, they see the CBN’s increased FX sales from $40,000.00 per week to $60,000.00 per week as insufficient, while loosening the requirements for banks to sell FX to customers over the counter as hostile to their survival. The overall outlook is not pretty.