macroafricaintel | Banks in West Africa: Struggling amid tighter regulatory grip

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Banks in West Africa have been in the news for the wrong reasons lately. In Nigeria, four banks, of which three have foreign affiliations, namely Standard Chartered, Citibank and Stanbic IBTC Bank and Diamond Bank, were in total fined 5.65 billion naira by the Central Bank of Nigeria (CBN) for illegally facilitating the transfer abroad of $8.134 billion for MTN, a South African telecoms firm. The Nigerian central bank has also increased its scrutiny of some of the practices of banks that are clearly exploitative. In September, for instance, it instituted a fine for erring banks that fail to reverse failed electronic transfer transactions within 24 hours. In neighbouring Ghana, five banks, namely Unibank, Sovereign Bank, Construction Bank, Beige Bank, and Royal Bank, failed and had their licenses revoked by the Bank of Ghana, the central bank, in early August. The failures were largely due to weak corporate governance systems, with widespread fraud and insider dealings alleged. In Unibank, for instance, hitherto Ghana’s sixth largest bank, directors and their associates availed themselves of depositors’ funds to the tune of $1.1 billion, according to the BoG. Consolidation Bank Ghana, a resolution vehicle set up by the Bank of Ghana, to assume the assets and liabilities of the failed banks, is believed to be adequate to prevent a crisis, however. Stringent punitive measures against the directors of the failed banks are also expected. Nonetheless, poor banking supervision by the BoG is also a reason why the banks failed. That said, remedial measures by the central bank have proved to be effective. S&P Global Ratings, a rating agency, seems to think so, at least. In September, it raised Ghana’s sovereign rating to B from B- in part because it assessed the country’s banking sector to be largely stable. Regardless, there is a general lack of confidence by Ghanaians in the banking sector at the moment. It is also important to note the continued divide in the banking sectors of anglophone and francophone countries. “In West Africa generally, there continues to remain a deep divide between the banking systems in English and French West Africa,” says Andrew Nevin, chief economist at PwC, a consultancy, in Lagos. “Apart from Ecobank – a truly pan-Sub-Saharan African bank, the players are different in the 2 regions, and certainly, English-speaking banks have not had great success when they entered Francophone markets,” he adds.

De-risking, increased mobile banking, and tighter regulations
So what are the notable banking industry trends in the region over the past year, especially in Nigeria, Ghana, and Ivory Coast? “We have noted three trends,” says George Bodo, head of banking research at Ecobank, a pan-African bank, in London. First, we have generally seen a balance sheet de-risking trend in West Africa, where banks, in Ghana, Nigeria and UEMOA, increased the pace at which they purchased Central Government debt compared to lending to the real economy. In 2017, the share of Central Government debt to total banking sector assets rose sharply by 400bps y-o-y to 21%. In the same period, the share of customer loans rose by 200bps y-o-y. This is largely a risk-off trend informed by the elevation in credit risks (as gross NPL ratio rose to 16% in 2017, from 11% in 2015).”

“Second, there is an increasing adoption of mobile phone as a distribution channel-especially in Ghana and UEMOA. In Ghana, the value of mobile money transactions (primarily deposits and withdrawals) hit USD35bn in 2017, from USD18bn in 2016. In UEMOA, the value of mobile money transactions hit USD21bn in 2016, a sharp growth from the USD2.9bn transacted in 2013.”

“Finally, regulations seem to be tightening. In Ghana, commercial banks have until end of 2018 to increase their minimum fully paid-up share capital to a new regime of GH¢400mn (from GH¢120mn). In UEMOA, the regional central bank, BCEAO, has, effective January 1, 2018, rolled out a mix of Basel II and III inspired regulatory reforms. Some of the key reforms include: (i) introduction of operational and market risks in the calculation of risk-weighted assets; (ii) a capital conservation buffer surcharge – mainly 2.5% surcharge of core capital; (iii) a reduction in the single large exposure limit to 25% of core capital; and (iv) regulation and supervision of financial holding companies on a consolidated basis by the BCEAO and the Banking Commission.”

PwC’s Nevin provides additonal views on the Ghanaian banking sector: “With respect to Ghana, the number of banks was very high in a small market and it is not surprising there is a consolidation. The costs of banking technology – particularly with the Fintech challenge – and the increasing demands of regulatory compliance mean that small banks are going to be more and more uncompetitive. In the Ghana market, you have Ghana Commercial Bank as a huge player, and a number of very successful African Banks (GT, Ecobank, UBA, Absa for example). So it is not a surprise that small, poorly capitalized players cannot survive. The Bank of Ghana is doing an excellent job of resolving these banks and making sure the banking system in Ghana is robust.”

QE to the rescue?
And how does Ecobank’s Bodo see the banking industry in the region evolving over the next year or so; especially in the key countries Nigeria, Ghana, and Ivory Coast? “In Ghana and UEMOA, we are anticipating increased partnerships between traditional banks and mobile network operators (MNOs) especially in regards to liability mobilization. In Nigeria, we still anticipate increased risk-off liquidity deployment strategies.” How so? “In 2017, banks bought FGN-issued debt securities worth NGN245bn, while only lending NGN183.6bn to the real economy. This kind of asset allocation was bound to concern the CBN. However, we broadly believe that for balance sheets to grow, banks have to move up the risk curve. But this risk spectrum, which holds the right price incentives, still lacks the right ingredients that banks are looking for.” To push them along, the CBN announced a number of stimulus measures in August. It offered to release some of the funds kept by banks with it as reserves for lending to agricultural and manufacturing firms at the single-digit rate of 9 percent. Additionally, it offered to buy long-tenored bonds of corporates that demonstrate their activities would create jobs. But would these be enough to nudge the banks towards more lending to the real sector? Ecobank’s Bodo is sceptical: “CBN’s direct intervention in deposit intermediation will still not avail the ingredients.”

Innovate, innovate, innovate
“In the [Nigerian] banking sector, the environment remains very challenging. The uplift in oil prices has taken some pressure off non-performing loans in the oil & gas sector (but not the power sector). [And] there continues to be a widening gap between the major banks and the middle-tier banks in terms of return on equity and cost-to-income ratios. [Therefore,] middle-tier banks will need to find distinctive strategies to create value because if they do what other banks do, they will not earn adequate returns,” says PwC’s Nevin. Besides, banks all over the world and indeed Africa, are facing disruptions from new technologies at the behest of industry outsiders. At their current pace, financial technology companies could easily displace banks in the very near future. For the Nigerian experience, PwC’s Nevin provides some perspective: “all [Nigerian] banks (even the top tier banks) are challenged by FinTechs and they need to create new, innovative products if they want to appeal to a very young, connected population in Nigeria. FinTechs are very strong in the payment space – Interswitch, Paga, [and] Flutterwave, [for example] – and are increasingly strong in the consumer credit market. There are also new players trying to create savings vehicles for retail clients. The banks carry significant legacy costs and the FinTechs will find ways to take revenue at a much lower cost.” Clearly, short of innovation, banks in Nigeria and broader West African region, might find the times even more challenging yet.

An edited version was published in the Q4-2018 issue of African Banker magazine

macroafricaintel | Ghana: Need for stronger banking supervision

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

After the failure of a couple of banks recently, the public is on edge. That is, even as the Bank of Ghana, the central bank, has provided assurances that depositors’ funds are safe. Not that a banking crisis is at hand. Far from it; although some might argue otherwise. But there is definitely a lot more that the BoG could and must do to restore confidence. For instance, culprits behind the failure of Unibank, hitherto Ghana’s sixth largest bank, where directors were found to have helped themselves to depositors’ funds to the tune of $1.1 billion, about 75 percent of the bank’s assets, should in addition to being relieved of their positions, also be prosecuted to the full extent of the law. Loan defaults have also become rampant, with non-performing loans (NPLs) accounting for 21.3 percent of all loans in August 2018; albeit largely unchanged from the same period last year when they were 21.9 percent of loans. Naturally, banks are reluctant to lend, preferring to buy government treasuries and bonds instead. Consequently, the government accounts for a great deal of banks’ exposure. And although private sector credit extension (PSCE) has been growing in real terms, at 5.4% in August 2018 from -5.0% in same month last year, it is not the case when compared to GDP in nominal terms; based on Bank of Ghana data. In August 2018, nominal private credit extension was 14.7% of GDP from 15.2% in the same month last year. A great deal of regulatory drive would be required for a turnaround. Thus, the central bank’s directive in September 2017 for banks to beef up their capital base to a minimium of 400 million cedis from 120 million cedis hitherto should be pursued with the utmost determination. And there should not be a shifting of the end-December 2018 deadline. Better capital adequacy reporting via Basel II at the direction of the central bank in July is also laudable.

More consolidation & liquidation
To date, the BoG has taken the following actions to clean up the banking system and restore confidence. It liquidated and gave control of UT Bank and Capital Bank to Ghana Commercial Bank in August 2017 “due to severe impairment of their capital.” A year later, it revoked the licenses of Unibank, Royal Bank, Beige Capital, Construction Bank, and Sovereign Bank and put them together under Consolidated Bank Ghana Ltd, a special purpose vehicle, which it capitalised to the tune of 450 million cedis. The authorities also issued a 5.8 billion cedi ($1.2 billion) bond to cover their liabilities. Considering when put together, the five banks have pending obligations that require funding of about 5.8 billion cedis, the measures put in place by the central bank should suffice for now. Much more funds would probably be needed in due course, however, as more information is discovered and perhaps other banks are found to be in less than ideal positions.

Not only were the failed banks found to be struggling but some obtained their licenses fraudulently; Sovereign Bank, Beige Capital and Construction Bank for instance. With the benefit of hindsight, the BoG was not quick to act. Unibank and Royal Bank were known to be significantly undercapitalized as far back as 2016. Almost 80 percent of Royal Bank’s loans were non-performing, it was discovered. It is certainly curious that it was only until 2018 that Unibank was declared to be “beyond rehabilitation.” Surely, there was no need to wait that long. The reason might not to too hard to determine. Unibank had some influential board members, including former Ghanaian finance minister and central bank governor Kwabena Duffuor, the founder. In early September, KPMG, an audit firm and receiver for the now defunct Unibank, asked a High Court to declare unlawful, loans made to Mr Duffuor, other named shareholders and their so-called related interests. KPMG is also asking Mr Duffuor et al. to pay back 5.7 billion cedis ($1.1 billion), about 75 percent of the defunct bank’s assets, of allegedly misappropriated funds of Unibank. According to Bloomberg, a news wire service, Nii Amanor Dodoo, a partner at KPMG in Accra, says Mr Duffuor and co. have committed to the repayment; albeit Daniyal Abdul-Karim, Mr Duffuor’s attorney, raises doubt about that when he remarks in the same report that “[KPMG’s] claims are extremely weak…[and]…are defeated both on facts and the law.” And in a report by Reuters in mid-August, Mr Duffuor disputes the figures: “We believe the figures the central bank is putting out are not right.

Other banks would definitely not want to become part of “Consolidated Bank.” Thus, there is almost certainly going to be more consolidation in the industry, as smaller banks or those not able to raise enough capital in time to meet the BoG end-December deadline, merge with bigger ones or come together to become bigger and stronger. Others are looking to raise capital on the stock market. But considering the supposedly lucractive 1.14 billion cedis ($238.5 million) initial public offering (IPO) of MTN Ghana, a telecoms firm, in late August underwhelmed below its 3.47 billion cedis target, there are doubts about how successful the banks looking to take this route would be. That is not deterring them, it seems. In September, just weeks after the MTN listing, Energy Commercial Bank secured approval from the Securities and Exchange Commission (SEC) to raise 340 million cedis via an initial public offering to enable it meet the new minimum capital requirement. There should probably be a few more before the December deadline. Additionally, a couple of merger talks are ongoing; some not so well, though. In late July, for instance, there were reports Premium Bank and BSIC Ghana were abandoning merger plans with GN Bank. A merger proposition between Sahel Sahara Bank, GN Bank and Premium Bank also fell through. Instead, Sahel Sahara Bank chose to go with Omni Bank in mid-August, making it the first potential merger since the scramble to meet the new capital requirements, having since received a no objection nod from the central bank.

Firm up oversight
The recent bank failures are evidence of poor banking supervision by the central bank. If confidence is to be restored, the prominent people found to be responsible for the mess in the banking sector should not only be required to pay back the depositors’ funds they misappropriated but also face the full wrath of the law. Their collaborators at the central bank should also be punished severely. It is heartening to know that the authorities’ rhetoric reflect this sentiment. In mid-August, the BoG told Reuters, a news agency, that it planned to prosecute the errant executives of the failed banks. More specifically, BoG deputy governor Elsie Awadzi said the central bank was “working very hard on submitting a dossier on each of these banks to the law enforcement agencies…to further investigate criminal behaviour or what could potentially be criminal behaviour and to prosecute,” adding further that the regulator was “going to ensure that integrity is returned to the financial sector by ensuring that persons whose conduct contributed to the banks’ failure will not be shielded.” According to Moody’s, a rating agency, the new state-owned bad bank would raise the already worryingly high indebtedness of Ghana to 70 percent of GDP from 64 percent in May. The authorities’ words must be backed by action to matter.

An edited version was published in the Q4-2018 issue of African Banker magazine

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz.

macroafricaintel | Nigeria: Cautious economic outlook as politics weigh

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

A man walking, albeit all too slowly, and hitherto virtually paralysed, would be greeted with joy by well-meaning friends. As expectations are raised afterwards, a tinge of disappointment welcomes less than expected progress. Surely, he should be able to walk briskly by now, some would wonder aloud. This is perhaps a fitting allegory of the Nigerian economy at the moment. Incidentally, it is also characteristic of its many contradictions. With wealth palpably abundant, from oil and gas to numerous other natural resources of note, most Nigerians are poor. And there is a lot of them that would argue that even when the economy was booming at above 5 percent levels some years back, their lives during today’s supposedly sluggish times are not much different from then. Out of a five-quarter recession since Q2 2017, growth remains sluggish. Most recently, in Q2 2018, real GDP growth was 1.5 percent from almost 2 percent in the first quarter of the year; a slowdown. It was a little heartening, of course, that the main driver of growth in the second quarter was the non-oil sector, which rose by 2 percent year-on-year; thus helping to fill some of the gap that an almost 4 percent contraction in oil sector GDP created. With elections due in a couple of months, and the consequent slowdown that tends to ensue, as investment decisions are delayed or postponed till afterwards, hopes are down on any significant revival. Add to that the recently forced resignation of former finance minister Kemi Adeosun over a certificate forgery scandal in September, and you might be forgiven for being so dour.

Officials would probably take comfort in the fact that the prospects of another recession are relatively slim. South Africa was not so lucky, entering into a recession in Q2 2018. Still, but for unnecessary and avoidable holdups, there certainly should have been more spring in the steps of the Nigerian economy by now. The central government’s 9.1 trillion naira ($29.8 billion) budget, after a half a billion naira increase by legislators, was not passed until May, for instance; well into the year, and about seven months after it was submitted in November for legislative approval by President Muhammadu Buhari. And now, a request for virement of some components of the budget to ensure proper funding of the upcoming elections has become a source of tensions. Why? Mr Buhari proposes that funds hitherto allocated for constitutency projects of federal legislators should instead now be used to fund the polls. And with the president of the Nigerian Senate now aiming to unseat the incumbent at the State House and many of his colleagues looking to become governors or retain their seats, there is little chance of much governance till after the polls. Naturally, the economy would likely be a casaulty. In July, the International Monetary Fund (IMF) put it succinctly: “Under current policies, the outlook remains challenging…[Thus] a coherent set of policies to reduce vulnerabilities and increase growth remains urgent.” But how likely are the chances of that with the 2019 polls top-of-mind of policymakers? African Business asks two leading Africa economists for their views.

Better growth on reforms
Gaimin Nonyane, head of economic research at Ecobank, a pan-African bank, in London says “the outlook is for a stronger recovery despite the recent slowdown seen in Q2 2018.” But if that is the case, why is the economy still sluggish? “The slowdown in Q2 real GDP growth was owing mainly to challenges in two key pipelines (Trans-forcados and Nembe Creek) in May 2018, security challenges in major agricultural belts in North-East and North-Central regions, slower-than-expected recovery of the trade sector and administrative inertia in implementing structural reforms,” says Ecobank’s Nonyane. “With efforts to resolve the technical difficulties in the pipelines underway, we expect the oil sector to move back into positive territory in the coming quarters (barring any major disruptions to foreign oil installations), while the non-oil sector will continue to drive growth driven by strengthening activity in the utilities, construction, ICT and transport sectors,” she adds. The authorities’ ambitious spending plans also underpins relative optimism about growth. Real GDP growth should be closer to 3 percent in 2019, according to Ecobank; from about 2 percent estimated by the IMF for 2018. This is below potential, for sure. Thus, if growth is to be restored to pre-crisis levels of 5-6 percent, reforms would have to be deepened, Ms Nonyane avers. The probability of major policy actions in this regard during an election season already in high gear is quite slim, however.

Cautious markets due to political uncertainty
Investors are understandably taking precautions. Ecobank’s Nonyane shares insights from her observations of the markets and note-sharing with clients: “From a financial market perspective, we have certainly seen investors being a lot more conservative with risk taking on NGN assets over the past six months on the back of the rising political risk. Andrew Nevin, chief economist at PwC, a consultancy, in Lagos agrees: “Investors are obviously slowing down as we head into a complex election season. Outsiders certainly cannot be expected to understand all the players and issues and this election is highly uncertain. In this environment, they will prefer to wait. In addition, high profile incidents that put regulators and major players in conflict will also cause investors to be cautious.” There is already evidence of this. “The Nigerian equity market is currently amongst the worst performing in the world in local currency terms, indicating that beyond the EM/FM risk aversion, there is an element of political risk in the pricing of Nigerian equities, says Ecobank’s Nonyane. “Furthermore, portfolio inflows via the IE Window dropped to a one year low in August (USD546m), just a third of the monthly average over Q1 2018 (USD1.6bn), [with] FDI inflow [falling] to a 13-month low in July (USD11.4m) and [setting] a new record low in August (USD8.7m),” Nonyane adds. Ecobank’s head of economic reseach believes “investors are also cautious, partly due to…[the] absence of policy reforms, which has subdued the outlook for growth.”

An edited version was published by New African magazine in October 2018

macroafricaintel | Manufacturing in Nigeria (3)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Manufacturing in Nigeria is beset with quite a few challenges; chief among them is power supply. Most firms rely on “emergency” power generators to run seamless operations, adding to costs. There are also regulatory issues, a multiplicity of taxes, and trade facilitation issues, among others. The country’s infrastructural deficiencies are also a major constraint. Export processing zones and special economic zones are the government’s workaround towards removing or mitigating this constraint. The challenges faced by manufacturers are probably best put by Frank Jacobs, president of the Manufacturers’ Association of Nigeria, in remarks to the media in April 2018: “A situation where you generate your own power for production does not make you competitive, because whatever is produced in this country is produced at a higher cost when compared to other parts of the world. The same goes for the transportation system as we still move our good via roads, even the heavy duty goods. Such goods which should go by rail lack enough rail lines to carry them. There is need to develop the transportation sector to the point where it can support the manufacturing sector and also support the economy”.

For more light on these challenges, a report on the Nigerian manufacturing sector by the National Bureau of Statistics (NBS) in 2014 put them as follows: inadequate and epileptic power supply, high taxes, poor infrastructure, and supply variability of rain-dependent agricultural inputs. There are some strengths, the NBS observes, though; labour is cheap, domestic demand is buoyant, and some inputs are available and cheaper domestically.

Government initiatives
In the ERGP, the government highlights the following policies to boost manufacturing. It aims to “provide incentives to support industrial hubs, review local fiscal and regulatory incentives to support development of industrial cities, parks and clusters, especially around existing ports and transport corridors.” Furthermore, the government plans to “revitalize export processing zones by reviewing local fiscal and regulatory incentives, rationalize tariffs and waivers on the equipment and machinery imports required for agro-industry, establish special economic zones (SEZs) to provide dedicated infrastructure to support hub productivity and acquire suitable premises for SEZs.” Other highlights of the ERGP specifically targeted at the manufacturing sector around SEZs are as follows: The authorities would ensure connection to power and water infrastructure, facilitate technology acquisition and transfer in the SEZs by making available research output from local research institutes, ensure connection and access to critical ICT facilities.

Lekki Free Trade Zone in Lagos, Nigeria’s commercial capital, is perhaps the leading example of the efforts of the government in this regard. In its three years of existence thus far, more than $700 million worth of finished goods have been exported by the 18 manufacturing enterprises situated within it. Foreign direct investment to the tune of $500 million has also been recorded by the firms operating in the FTZ. To reduce the types of bottlenecks faced by firms at the ports, a customs processing centre is situated within the zone. And although finished goods for export still have to be transported to the Apapa port downtown at the moment, that would not be necessary in a few years’ time when the Lekki Deep Sea Port in the FTZ would have been completed. In fact, the authorities reckon the port should berth its first ship by the first quarter of 2020.

More broadly, the authorities desire to “build adequate transportation network (road, rail, ports), improve access to finance, expand the capabilities of the Bank of Industry to enable it to support manufacturing firms through low cost lending, enhance access to the N250 billion CBN MSME fund by reviewing its design and implementing enabling initiatives to encourage on-lending”, and the provision of micro-loans to women “through the Government Enterprise and Empowerment Programme (GEEP) and Women Empowerment Fund.

Launched in 2013, the central bank’s MSME development fund, provides long-term loans to micro, small and medium enterprises at a single-digit interest rate of 9 percent. To access it, interested MSMEs apply to participating banks. There have been reports of favouritism, secrecy and other malpractices related to the fund, however.

For GEEP, under the aegis of the Bank of Industry, its “MarketMoni” scheme has given out more than 350,000 micro credit loans thus far. And in mid-August 2018, bankers and the CBN agreed to provide 7-year fixed-rate loans of 9% (with a 2-year moratorium on principal payments) to firms in the agriculture and manufacturing sectors. There are also discriminatory foreign exchange policies by the Central Bank of Nigeria in favour of manufacturing firms.

Furthermore, the authorities’ Nigerian Industrial Policy and Competitiveness Advisory Council established in March 2017, with membership including leading African industrialist Aliko Dangote, assists “the government in formulating policies and strategies that would enhance the performance of the industrial sector.” The Presidential Enabling Business Environment Council established in July 2016 also monitors and assesses key sectors of the economy to ensure doing business in the country is easier; with tangible improvement in the country’s ranking in the World Bank Doing Business survey.

The Nigerian government is also promoting local content by encouraging the sourcing of raw materials and spare parts locally, “leveraging public procurement of locally manufactured goods (with targets for MSME participation), and via a “Made in Nigeria” campaign. For the promotion of innovation and technology-led industries, the government’s plan includes the provision of fiscal incentives for private investment in research and development (R&D), improvement of intellectual property enforcement procedures, promotion of science parks and innovation hubs, encouragement of private equity and venture capital players through an attractive fiscal and regulatory framework, and the promotion of youth entrepreneurship and innovation through the “You-Win-Connect” programme. Controversy recently trailed the YouWiN Connect programme, though, with participants complaining about not getting the funding that was promised for their businesses.

Clearly, manufacturing is challenging in Nigeria. But there is a clear desire by the government to encourage more of it through import bans, facilitation of cheaper funding, discriminatory foreign exchange policies, and so on. The government’s ERGP focus labs are also one of the ways the authorities are using to accelerate more investment in production. Interested companies, whether local or foreign, would do well to key into these government’s initiatives to ensure they get the support they are definitely going to need to succeed. A good place to start for any firm looking to invest in manufacturing is certainly the authorities’ imports prohibition list. And like the case of cement manufacturing earlier highlighted, there is clearly a strong correlation between the sector’s boom and protection measures by the government.

The author, Dr Rafiq Raji, is a consultant at the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation. This article was specifically written for the NTU-SBF Centre for African Studies. This article was published on How We Made It In Africa on 27 September 2018.

Also published in my BusinessDay Nigeria newspaper column. See link viz.

macroafricaintel | What are Buhari’s chances?

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

In September, the Nigerian government took issues with HSBC, a British bank, over the conclusions of a research note to its clients. Simply put, HSBC reckons a second four-year term for President Muhammadu Buhari would not be favourable for the Nigerian economy. Although, the note was meant for internal distribution, it somehow made its way to the wider public. In an unusually aggressive response towards a foreign private institution, a bank at that, Buhari’s officials went literally all guns blazing, asking HSBC to instead return looted funds by past Nigerian leaders and officials in its vaults. Garba Shehu, a spokesman for the president, cited the example of more than $100 million laundered through the British bank by General Sani Abacha, one of Nigeria’s former military dictators.

The administration’s ultra-sensitivity to criticisms and unfavourable prognostications about the prospects of Mr Buhari winning a second term in office and in fact making a success of it, is certainly a sign of the heated political times. Likely to secure the ruling All Progressives Congress (APC) party’s presidential ticket unopposed, as contenders hitherto members of the party have since decamped to the leading opposition People’s Democratic Party (PDP), Mr Buhari’s real competition would probably be the record of his administration thus far. Knowing this, his competitors have been picking at his supposed achievements and discrediting them one by one.

Exaggerated truths?
On one recent occasion, Senate president Bukola Saraki, a leading contender for the presidential ticket of the PDP and a proverbial stone in the shoe of Mr Buhari, described the situation of things in September at a rally to woo voting delegates of his party in southeastern Nigeria as follows: “Nigeria has never been this divided. People are afraid to be called Nigerians. Ethnicity and religion have taken over. There is no inclusion anymore, no fairness, no federal character, no job and businesses are dying. Survival of businesses is survival of the country. Poverty is everywhere.”

At first glance, there is a tendency to think some of these assertions probably border on exaggeration. On further scrutiny, they are bizarrely nearly accurate. Although poverty is certainly not everywhere in the country, since some of the wealthiest Africans are Nigerians, including the richest Aliko Dangote, it is pervasive. 87 million Nigerians, about half of the estimated 190 million population live in extreme poverty, according to a recent report by The World Poverty Clock; in essence making it the “poverty capital of the world,” after surpassing India.

Accusations of insularity and ethno-religious bias can also be evidenced in key appointments to government positions by Mr Buhari. The security cluster of the government, from the heads of the army and navy to the chiefs of the police and secret service, are largely in the control of Nigerians from the predominantly Muslim north. The rebuttal of the administration tends to be that there is at least one federal minister from each of the federating states in the cabinet. But that is the law. Mr Buhari’s opponents argue his open-mindedness or lack thereof can best be adjudged from his discretionary appointments. The president does not seem particularly perturbed by the outcry. After the firing of his kinsman Lawal Daura as head of the secret service by vice-president Yemi Osinbajo, while acting as president in his absence on holiday in the United Kingdom, albeit with his reported concurrence, Mr Buhari appointed another person of his ilk in the place of the acting replacement, Mathew Seiyefa, who happens to hail from the predominantly Christian south.

That said, Mr Buhari is probably the least corrupt head of state Nigeria has ever had. In fact, his supporters would take umbrage at even the slightest suggestion that he could ever accommodate bending ways. His incorruptible image also makes him vulnerable. In what was clearly an eventful September for the administration, erstwhile finance minister Kemi Adeosun was forced to resign over a certificate forgery scandal. She could have kept her job if the president wished. But if he also wished to secure a second term on the back of his adminstration’s anti-corruption stance, he could not afford to wish for her to stay. And in what turned out to be perhaps a difficult decision, Ms Adeosun stayed in her job for at least a month after news broke of her indiscretion; which she purports to be inadvertent.

The point is that what ordinarily would be considered exaggerated political jibes by Mr Buhari’s opponents are, when analysed, close to reality. Even so, Mr Buhari remains widely popular. Pundits, however, believe that not only would his core support base in the north be eroded by increasingly attractive and younger candidates from the region, but that when his unpopularity in the south-east and south-south regions of the country are coupled with likely gains here and there by the opposition in the southwest, where his allies are largely in control, he could lose. And were Mr Buhari to win, it would likely be by the slightest of margins.

Too little, too late?
There is certainly a realisation in the Buhari camp that a win in the upcoming polls would not be easy. Efforts are now in high gear to win the hearts and minds of key political leaders in the restive southeast and south-south regions. But his officials are not entirely helping matters. In early September, the police raided the Abuja residence of Edwin Clark, an influential politician and elder statesman from the Niger Delta region, for arms and ammunition. They did not find any. In an unusually swift response, police chief Ibrahim Idris declared the search to be a rogue raid by errant officers and dismissed them with almost the same alacrity as the disturbing raid itself. That singular action, in addition to longrunning grumblings by dissatisfied former Niger Delta militants with a great deal of influence over the voting public in the region, suggest Mr Buhari’s chances there are not bright.

And even though, southeasterners are not known to vote as a bloc, there is a great deal of them who do not like the president for largely excluding their kinsfolk from his administration. Of course, it did not help that Mr Buhari did not also hitherto hide his displeasure about their not voting for him in the 2015 election that he won. (Apart from one state where he scored 18 percent of votes cast, Mr Buhari secured less than 5 percent of the votes cast in most of the other southeastern states.) With such deep aversions on both sides, it would be tantamount to a miracle for Mr Buhari to secure a decent number of votes from the region this time around. Thus, if Mr Buhari is to win, he would have to use state power disproportionately against his opponents and indeed the electoral process itself. This tend to involve the jailing of opponents on corruption charges, declaration of states of emergency in areas of unpopularity, and election rigging. As an “incorruptible” Mr Buhari would be reluctant to do such despicable things, he may lose.

An edited version was published by New African magazine in October 2018

macroafricaintel | Manufacturing in Nigeria (2)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

According to Nairametrics, a business intelligence firm, five local vegetable oil brands currently dominate the Nigerian market due to the government’s import ban. They are Sunola Oil, Grand Oil, Power Oil, Mamador and Devon King’s. To increase patronage and accessibility to their products, local vegetable oil producers have been implementing bulk-breaking strategies, adding sachet packs to their array of packaging.

There is not similar success with the cocoa processing sector, however, which is currently burdened by debt and utilizes less than 20 percent of its installed capacity. As Nigeria is the fourth largest exporter of cocoa, this is probably an opportunity for financially buoyant foreign investors. There is certainly at least 80 percent of the industry’s 150,000MT capacity that could be filled momentarily. This could be done by either taking over existing firms or setting up greenfield operations. Incidentally, even at full capacity utilization, there is much more cocoa processing that could be done for export and thus rival neighbouring Ghana and Ivory Coast, which have been coordinating their efforts lately. Besides, the authorities’ import ban of cocoa butter, powder and cakes ensures almost guaranteed domestic custom for the output of the existing processing capacity.

For spaghetti manufacturing, the government’s import ban has not been as effective as would be desired. Foreign spaghetti brands occupy as much shelve space as local ones. Local noodles manufacturing has been a huge success, however. At about 1.8 billion servings annually, Nigeria is now the 12th world’s largest instant noodles market. Owing largely to the government’s import ban on instant noodles, almost all of the noodles consumed in the country are locally produced. In fact, the success of the policy in the instant noodles manufacturing sector is believed to be one of the reasons why the Nigerian government has been hesitant to sign the African continental free trade area agreement (AfCFTA).

Fruit juice production is another venture of interest that could be worth the while of interested investors. According to the Raw Materials and Research Development Council (RMRDC), local firms currently meet less than 25 percent of the 550 million litres local fruit juice demand. With imported concentrates accounting for most of the currently meagre local production, a noted preference by consumers for naturally produced fruit juice should be a boon for manufacturers with local resources and capacities across the entire value chain.

Local cement production is perhaps the best example of how the authorities’ import ban policies have benefited local industry and entrepreneurship. Africa’s richest man, Aliko Dangote, owes his stupendous wealth to cement manufacturing in Nigeria. Dangote Cement accounts for more than 60 percent of the estimated 33 million metric tonnes (MMT) local cement demand in Nigeria, with margins as high as 70 percent when the cement import ban was first instituted; albeit they are now below 50 percent. With local producers now churning more cement than is needed, Dangote Cement, in addition to exporting its excess cement to neighbouring countries, has since broadened its horizons further afield, with operations in numerous African countries.

Government efforts to encourage local tomato paste production has not met with similar success. As Nigeria imports at least 400,000 tons of tomato paste annually, there is a huge opportunity for the manufacturer that can get it right. Incidentally, Dangote Industries is making an attempt at local tomato paste production. It set up a plant in northern Nigeria in March 2016 and entered into suppliers’ agreements with 5,000 farmers to guarantee supply of tomatoes. Shockingly, even as it agreed to pay above the market price, the local farmers could not deliver the goods. In one season, for example, the produce was destroyed by a pest. And that is beside the fact that half of the output tend to get spoilt en route factories from farms due to bad roads. The Dangote experience in this regard is not an isolated one. Its example is, however, significant because if there is one local conglomerate that can make a success of tomato processing, or any other local manufacturing venture for that matter, it is the Dangote Group.

The author, Dr Rafiq Raji, is a consultant at the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation. This article was specifically written for the NTU-SBF Centre for African Studies. This article was published on How We Made It In Africa on 27 September 2018.

macroafricaintel | The experience of businesses in Nigeria during the 2015-16 FX scarcity (2)

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Return to normalcy can take a while
About a month after the Central Bank of Nigeria (CBN) adopted a more flexible FX regime, liquidity was yet to return to the market. This was in part due to the CBN’s continued domineering role. At below 300 naira to a US dollar in mid-July, the naira was believed to be still overvalued. Market participants, especially foreign ones, asserted that the CBN needed to allow the naira to depreciate further – that is, hands off a little bit – if it hoped to restore liquidity and attract much needed foreign portfolio and capital flows. The country’s apex bank finally let go later in July 2016, allowing the naira exchange rate to be determined by market forces. Expectedly, the naira weakened further, albeit boosting confidence. Not that there were no immediate gains from the liberalisation move hitherto. There was less uncertainty, for instance. And longrunning negative views by prominent economists and development partners like the International Monetary Fund (IMF), the World Bank and the United States (US) became positive by and large afterwards. The US government, in particular, hitherto implored President Muhammadu Buhari to reconsider his intransigent stance on the naira. Still, the country’s leader did not conceal his continued scepticism of the naira float move thereafter. It was later revealed that Mr Buhari’s reluctance was a major reason why the CBN sought to support the naira at below 300 to the US dollar after it announced its flexible stance. When it became clear that foreign investors were still being cautious, Mr Buhari had little choice but to see reason.

In the period prior to its adoption of a flexible FX regime in June 2016, the CBN insisted it could meet genuine and productive requests for foreign exchange. Its assertion was in the face of obvious constraints. Quite naturally, it couldn’t keep its word. Dwindling foreign exchange reserves – US$26.6 billion (5 months of imports) in May 2016, a 10.7 percent year-on-year drop then – due to lower crude oil prices was why. An earlier ban on the sale of foreign exchange to importers of some forty-one items – ranging from packed sardines to toothpicks and which remained in place as at July 2016 – was one of a series of measures the country’s apex bank took to manage demand. The evidence from market participants was that even when the CBN approved FX purchase requests, they were not supplied on time – the US$4 billion demand backlog cleared by the CBN in June 2016 was accumulated over months. Consequently, foreign trading partners refused to do business with some Nigerian importers – after letters of credit were not being settled on time and foreign banks increasingly took precautions in their dealings with Nigerian banks. Inflation rose consequently, to double-digits: the annual headline rose to 16.5 percent in June 2016 from 9.6 percent at the beginning of the year.

Fuel shortages hitherto were due to foreign exchange scarcity as well. As fuel marketers no longer received subsidy payments from Nigerian authorities, there was not much incentive for them to import products if they couldn’t also secure foreign exchange from official sources in a timely manner – the official fuel pricing template assumed the overvalued official exchange rate: this was eventually reviewed upwards in May 2016 to reflect the higher blended cost of acquiring FX from the official and parallel markets. Consequently, the retail price of petrol was capped at 145 naira per litre, a 67 percent increase. With the exchange rate now ‘market-determined,’ it is expected that this would be reviewed as needed. To get an idea of the extent of the FX scarcity back then, consider this: half of Nigeria’s crude oil earnings of US$550 million in April 2016 was required to meet fuel import requirements in that month alone, an all too risky move the authorities chose not to make in light of other very important obligations – foreign debt service, for instance. Until the two-third price increase in the retail pump price of petrol, marketers were not able to transfer the higher FX costs to consumers. The upward price revision was forced when the national oil company could not meet demand fast enough, as it became the sole importer of petroleum products in the absence of private sector participation. Add to that power shortages on the back of gas supply shortfalls due to vandalisation of pipelines – incidents have increased due to renewed agitations by aggrieved residents of oil-producing areas who feel marginalised by the central government and then low water levels at rivers – due to inadequate rains – that fed hydroelectric dams. Businesses had to deal with a myriad of constraints.

Adapted from a paper by the author in July 2016 for the NTU-SBF Centre for African Studies at Nanyang Business School, Singapore