The week ahead – The squeeze

Nigeria’s economy, which ranked as Africa’s largest in 2022, is set to slip to fourth place this year after a series of currency devaluations, International Monetary Fund (IMF) forecasts show. As reported by Bloomberg, the IMF’s World Economic Outlook estimated the country’s gross domestic product at $253 billion based on current prices this year, behind North African powerhouses Algeria at $267 billion, Egypt at $348 billion, and South Africa at $373 billion. The report added that South Africa will remain the continent’s largest economy until Egypt reclaims the mantle in 2027.

For decades, economists have argued that the Naira was overvalued, and that had caused Nigeria to become an import-dependent economy, basically because a strong currency makes imports cheaper while a weak currency disincentivises imports. Before the CBN floated the Naira in 2023, economists suggested that the true value of the Naira based on purchasing price parity was around ₦950/$. As of 24 April 2024, the Naira is exchanging at ₦1,240/$, meaning it is slightly undervalued and is a key reason why Nigeria’s economy is estimated at $253 billion, the lowest in decades. Meanwhile, Nigeria’s drop in GDP is a testament to the country’s disastrous economic management over the last decade. A total inability to improve productivity, enhance competitive advantage and drive new landmark growth areas that can open up the economy, like the GSM revolution and banking reforms from the early to mid-2000s, led the country here. Policymakers’ failure to decisively tackle insecurity, resolve bureaucratic bottlenecks, curb corruption and do the hard work required to build a 21st-century economy has led to this decline in economic status. The implications of this will be felt in multiple dimensions: What will be Nigeria’s selling point to foreign investors, and how will we cater to our large population? What’s worse is that the GDP per capita, at $1,100, is now lower than its previous record low – during the civil war in 1968, at $1,268, half of what it was when the All Progressives Congress (APC) came to power. These are the economic numbers that truly matter. The policy choices over the last decade have left Nigeria and Nigerians poorer. Sadly, the leadership keeps repeating those choices. Except Nigeria unlocks another goldmine as it did with telecommunications in the early 2000s, the road to recovery will be long and painful—especially with the unravelling situation in the Middle East and the fast-paced growth of other African economies.

The Central Bank of Nigeria (CBN) has issued a new directive to all Deposit Money Banks (DMBs) introducing a reduction in the loan-to-deposit ratio (LDR) to 50%, marking a 15%-point decrease from the previous rate. The change aligns with the CBN’s recent shift towards a more contractionary monetary approach, which is in sync with heightened Cash Reserve Ratio (CRR) requirements. It underlines the CBN’s ongoing commitment to refining its regulatory framework in response to evolving economic conditions. With this reduction, all deposit money banks are restricted in the amount of credits and loans they can offer to businesses and individuals.

There are several tools that the Central Bank uses to fight inflation: interest rate hikes, Open Market Operations (OMO) operations, increasing the cash reserve ratio of commercial banks and adjusting the asymmetric corridor. There is also the aspect of altering the loan-to-deposit ratio. As inflation continued to climb, reaching 33.2% in March 2023 from 31.7% in the previous month, the Central Bank of Nigeria has doubled down on attempting to use monetary policy tools to tackle the problem. Recently, the CBN has hiked interest rates, increased the cash reserve requirements for banks, and reduced the percentage of deposits that can be given out as loans. These steps basically reduce the amount of money within the system. The logic behind these is to reduce borrowing and demand (due to less money in circulation). Reduced demand will cause prices to fall and inflation to slow down. However, in an economy like Nigeria, where consumer credit is not popular, and the biggest borrowers are manufacturers, high interest rates inhibit borrowing and the ability to expand operations. Considering the high food inflation rate, currently above 40%, and the widening gap between core and food inflation, it is clear that factors other than monetary policy are the primary drivers of inflation. The CBN directive on LDR is in line with reality. With CRR now at 45%, banks only have access to 55% of their balance sheet for lending and other activities. Thus, it is reasonable for the CBN to lower the LDR to 50%. Unfortunately, this is not good for the real economy as banks will likely cut down on loans to the private sector. Recall that in 2017, CBN raised the LDR of banks to 65% to ensure increased credit to the private sector and drive economic growth. Now, it has become clear that the CBN is focused on tackling inflation and exchange rate volatility but at the expense of economic growth in the short term. And it will achieve the impact of reducing liquidity and constricting lending, making it more expensive. Already, banks have raised lending rates on some loans by nearly 100% in response. In all, Nigeria will only be on the path of economic recovery if these policies are combined with commensurate efforts to reduce government spending, increase productivity, and invest in infrastructure.

The Plateau State University situated in Bokkos Local Government Area has been shut down following the killing of a 200-level student of the university after gunmen attacked the Chikam community close to the university. Meanwhile, the Inspector-General of Police, Kayode Egbetokun, has rejected the state police proposal, warning that governors can abuse the outfit for political or personal gains and compromise human rights and national security. He proposed that “The Nigeria Security and Civil Defence Corps and Federal Road Safety Commission should form a department under the Nigerian police’’ instead. However, the Federal Government insisted there was no going back on the initiative.

The genesis of last week’s crisis in Bokkos that culminated in the school’s shutdown is a direct fallout from the perennial indigene-settler conflict that has pitted Hausa/Berom natives against nomadic Fulanis. Since the crisis began in the third quarter of 2023, communities in Bokkos, Barkin Ladi and Mangu have carried out retaliatory attacks on herders, exacerbating the cycle of violence and ongoing land disputes linked to Fulani attacks. The latest incident is a tragedy of at least two acts. First, the killing of the student–Dading James Jordan–was preceded by the deaths of a woman and child around the same vicinity. Residents in some communities in the LGA noted that several times, attack intel had been shared with security forces before an attack, but there was usually no response, allowing the attackers to act freely. Second, the penchant for the state’s suppression of dissent inflates tensions in many ways than necessary. The build-up to the army’s shooting of one of the protesters bears a marked resemblance to the protest management techniques deployed by the Nigerian military, especially the Lekki Massacre of 2020. In Lekki, the military used live rounds and fired directly at protesters, and as in Lekki, they also took the victims away. Lastly, this raises the issue of campus security in Nigeria. Student communities around the country are facing a security crisis, shifting from youth gang violence to organised national security threats due to policing failures. While the Inspector General’s opposition to state police has merit, he may be in the minority as Nigeria moves towards this change. It is an anomaly that a unified police force serves Nigeria’s federal arrangement. However, the IG’s argument falls short in his failure to recognise that even with its current structure, the police are still being used and abused by special interests with government and state access. To prevent state policing from elevating state governors to god-like status, power should not be centralised at the state level. Instead, it should be decentralised to the community level with mechanisms of accountability that are independent of government control.

Ghana’s Public Utilities Regulatory Commission’s (PURC) validation reports on the Cash Waterfall Mechanism (CWM) have revealed that the Finance Ministry owes some power generators about GH₵1.28 billion. JoyNews’ checks and analysis of the PURC’s validation reports from August 2023 to February 2024 show that the Finance Ministry has not complied with its “top-up” role under the revised CWM, bringing the total arrears to approximately GH₵1.28 billion. According to the Commission’s February validation report, the Finance Ministry “has not made up for the shortfalls since August 2023.” The most recent failure occurred in February 2024, when the Ministry of Finance was “expected to release an amount of GH₵197,112,973.25 in accordance with the CWM guidelines and the approved CWM model,” PURC stated. Since October 2023, the top-up amount has remained above GH₵200 million before dropping slightly to GH₵197.11 million in February 2024.

Ghana’s energy sector is almost on its knees as fiscal constraints restrict its ability to generate the needed capacity to meet the ever-growing electricity demand. This year, the West African country’s energy sector shortfall is expected to surpass GHS23 billion cedis (about $1.8 billion). The government introduced the Cash Waterfall Mechanism (CWM) to address this issue in 2020, which was further revised in 2023. Under the revised Cash Waterfall Mechanism, top-up payments by the Ministry of Finance address energy sector shortfalls in the Level B category (state-owned enterprises involved in power generation, transmission, distribution and fuel supply). However, since August 2023, the Finance Ministry has failed to pay some Level B players about GH₵1.28 billion (about $98.5 million). Due to the adverse effects of the recent Domestic Debt Exchange Programme, all financing sources, including the local bonds market, have dried up for the government. Ghana lost access to the internal Capital Market nearly three years ago, hindering its ability to benefit from the annual annual inflow of about $3 billion in Eurobonds. Additionally, the Bank of Ghana is prohibited from providing financial assistance to the government while it is under its current IMF programme. In 2024, natural gas is expected to continue as the primary fuel for Ghana’s thermal power plants, accounting for over 64% of the country’s dependable capacity. Despite a projected natural gas need of 137.5 TBtu for power generation in 2024, supply has fallen short of demand, leading to a widening deficit. Ghana heavily relies on the West African Gas Pipeline for fuel imports from Nigeria to supplement its gas needs for power generation. Yet, due to foreign exchange challenges and debt repayment issues, WAPCo ceased fuel supply to Ghana earlier this year. The Ghana Energy Commission has emphasised that total fuel expenditure for this year is estimated at some US$1.15 billion, with US$1.12 billion expected to be used to procure natural gas. The Commission does not expect power imports in 2024, but emergency imports may be needed due to short-term capacity shortages from faults or fuel supply issues. Disruptions in fuel supply could make some thermal plants inoperable, affecting supply reliability. Securing an alternative fuel supply is crucial to offset any gas supply shortfall. The critical question is, where, how and when will the government find this alternative gas supply to end the current power crisis?