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Blurb

5 things Buhari’s new Finance Minister must do within 100 days

5 things @MBuhari’s new Finance Minister @ZShamsuna must do within 100 days

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Finance Minister, President Muhammadu Buhari, AFCTA

Nigeria’s President Muhammadu Buhari will likely assign portfolios to ministers this week. Among the most anticipated appointments will be the office of the Minister of Finance.

In Nigeria, the Minister of Finance oversees setting and implementing the economic policies of the government. Under Buharinomics, this portfolio has been characterized by controversies and (perhaps this sounds harsh) incompetence.

Whomever President Buhari decides to appoint to that portfolio this week will have his or her work cut, out and could be expected to remain in the portfolio for the next four years. Never before, in the democratic dispensation ushered in since 1999, has the portfolio of the next Minister of Finance been so important.

Thus, it is crucial that whoever is appointed sets the ball rolling immediately, making a mark in the first 100 days in office. Nairametrics surveyed opinions from economists and analysts on what their expectations are from the Minister. Unfortunately, most of the requests instructively laid down by our analysts may not be acceded to, nevertheless, it still is important to lay down the marker.

[Read Also: Difference between FGN Savings and Treasury Bills]

Fiscal Quagmire: According to Wale Okunrinboye, the Head of Research at Sigma Pensions, the Minister will need to produce a credible plan for improving Nigeria’s fiscal revenues. Nigeria is yet to recover fully from the 2014 crash of the price of oil, as the government has had to rely on increased borrowings to finance capital and recurrent expenditure.

  • Since President Buhari assumed office in 2015, the country’s debt profile has increased by almost 107% in naira value.
  • In the first quarter of 2015, Nigeria’s total public debt stood at N12.4 trillion or $64.2 billion, while it rose to N24.9 trillion or $81.27 billion in March 2019.
  • Analysis of data obtained from the Debt Management Office also shows that Nigeria has spent a total of N7.04 trillion to service both domestic and external debts under President Muhammadu Buhari’s administration alone.
  • Nigeria currently spends over 50% of its revenues on debt servicing.

Unfortunately, the government plans to fund the 2019 budget with even more borrowing. We do not expect the Finance Minister to go against this plan.

Relationship with CBN: According to Yomi Fawehinmi, an Oil and Gas expert and Economic commentator, the new Minister will have to secure better coordination with the Central Bank of Nigeria. During the last regime, Nigeria’s Minister of Finance, Kemi Adeosun, had a cordial relationship with the Governor of Central Bank in the eye of the media, but often differed on policy coordination.

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  • While the government pursued economic expansion via monetary handout to the poor, the Central Bank towed the way of the hawkish monetary policy.
  • The Buhari government has spent billions on grants to farmers as it pushed through its agricultural policies.
  • While it favoured the way of grants and soft loans to farmers and other preferred sectors of the economy, the Central Bank often raised lending rates to discourage excessive borrowing, part of a grand plan to stifle demand for forex.
  • In the case where there was coordination, it was a disaster. Case in point, the way the government handled the exchange rate crisis and its synergy on pseudo banning of importation of 41 items.

[Read Also: Access Bank Unveils Smartphone Device Financing Scheme]

Yomi believes that the government will have to focus more on policy coordination if it encourages private sector investments. He also believes that transparency in public finances is key in improving investor confidence in the management of economic coffers, especially the CBN.

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Unfortunately, this too is unlikely to happen, as the president is more inclined towards interference. Just last week, the president declared that he had instructed the CBN Governor to stop providing forex to suppliers of food.

Budget Implementation: Nigeria’s 2019 Budget has its fair share of positives, even if most critics of the government still highlight its shortcomings. Nevertheless, the new Minister will have to ensure that the budget implementation plan is robust and cash-backed.

  • Out of the N8.9 trillion earmarked for the 2019 Budget, N2 trillion was budgeted for Capital Expenditure.
  • Critical sectors such as Power, Works, and Housing are badly in need of funding to complete projects across the country and initiate new ones.
  • Massive infrastructural work across the country can help stimulate its economy.

Ighodaro Alonge, a Fund Manager, and Financial Analyst believe that the government should reduce its wage bill, particularly recurrent expenditure. It is however unlikely that the government will cut down on recurrent expenditure.

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[Read Also: CBN is no longer independent – Moghalu]

In fact, over the years, the government has achieved 100% spending on recurrent expenditures but far less on capital expenditure. It could also be beyond the purview of the Minister of Finance to implement budget across the economy.

CBN Ways and Means: In 2016, the Emir of Kano Sanusi Lamido Sanusi accused the CBN of contravening section 38.2 of the CBN act by borrowing more than the required threshold to the Federal Government. This has not deterred the CBN, as the apex bank has continued to lend money to the government.

  • As at May 2019, the CBN has lent a whopping N6.8 trillion to the FG in the form of “overdraft for Budgetary Expenses” as contained in its data.
  • The CBN Ways and Means, which the Emir of Kano alleged was being violated, is also drawn to the tune of about N277 billion only.
  • The government is likely to continue to rely on the CBN to fund its budgetary expenses, hoping to repay someday from oil receipts.

Dr. Nonso Obikili, an Economist, believes that the new Minister should rein in on the indirect financing of the FG by the CBN. With oil prices falling and the government increasingly failing to achieve its budgetary targets, it is unlikely that the new minister will have the balls to stop this ill-advised policy.

It is interesting to note how similar all the recommendations are including that of @Ugodre, the founder of Nairametrics.

See the table below:

Finance Minister, Buhari

What the new Finance Minister must do

[Read Also: History repeating itself as President Buhari grounds work on capital projects]

The "Blurb Team" is the official conveyer of the opinions of the Nairametrics Research & Analysis Board on matters of financial reports, macroeconomic data, and economic policies.

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    Blurb

    Central Banks Digital Currencies (CBDCs) – a Gift or a Curse?

    Should we expect a CBN announcement on e-Naira soon?

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    China recently became the first MAJOR economy to create its Central Bank Digital Currency (CBDC).

    Specifically, China’s CBDC has gone from the testing phase to actual implementation. Such that the digital yuan is now ready for use in regular transactions. The expectations are that by the time athletes gather for the upcoming Winter Olympics, visitors to the country can pay for a wide range of goods and services using the Digital Yuan. (Think about using government digital currency to settle Hotel and Restaurant bills, Taxi rides, etc.).

    Across the world, Central Banks are racing to implement Central Bank Digital Currency (CBDC). The latest BIS 2021 survey identified that 86% of Central banks are engaged in developing a CBDC.

    In this article, we ask the question: What exactly are Central Bank Digital Currencies (CBDCs), and why are so many central banks are working towards their implementation?

    READ: Very few nations permitted to issue their Crypto – IMF

    What is a Central Bank Digital Currency (CBDC)?

    Specifically, CBDCs are legal tenders issued by a country’s central bank which will only ever be available in digital format AND will be acceptable from day one for payments of goods and services once implemented.

    Fund settlement will be facilitated by the issuing Central bank who may / may not choose to partner with an approved list of institutional counterparties. The Bank of International Settlements (BIS) has a more technical definition here.

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    READ: U.S Central Bank leader says no rush into crypto dollar

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    For the avoidance of doubt, CBDCs are neither the same as Electronic Funds Transfers (EFTs) nor are they Cryptocurrencies. Despite many similarities such as contactless settlement between counterparties, key differences are that Central Bank Digital currencies are legal tender AND represent a direct claim on a central bank by end-users.

    • So, if you are one of those people who likes to “spray” very crispy notes at Owambe… better be prepared as with digital currency, you will never see any physical notes to “spray”.

    READ: Leader of world’s most powerful central bank says Crypto unreliable for wealth preservation

    Which countries have CBDCs on the horizon?

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    The latest BIS 2021 survey of 65 central banks identified that 86% of Central Banks are engaged in developing digital currencies. Out of which 60% of central banks have begun research work whilst 14% of central banks are already in the pilot and proof of concept phase.

    For a list of countries at various stages of CBDCs implementation, you can click here and here or view the image below.

    READ: U.S. dollar share of global currency reserves rose to 61.9% in Q1 2020 – IMF

    How will the CBDCs work?

    For now, each Central Bank is determining its own scope and CBDC functionality as there is no standard global framework regarding infrastructure requirements and functionality scope (e.g. some central banks simply want to focus on domestic payments whilst others want both domestic and international payments focus).

    However, having said that, the underlying workflow will likely be similar across the world, in the sense that workflow will include solutions on distribution and utilization.

    READ: Computers might steal Satoshi Nakamoto’s Bitcoin fortune

    • Distribution: Central Banks will create the digital currency and permit a list of commercial banks to access to the central payment network for onward distribution to end customers. Given that CBDCs are digital, the Central Banks will be able to track exactly who is holding how much of their currency and how exactly their currency is being spent.
    • Utilization: End-users will have a tool (e.g. digital wallets) to help them be aware of their CBDCs balances. Further, these wallets can be presented (i.e. scanned) at participating locations for transaction settlements (think QR codes on a phone app).

    In other words, as a CBDC end-user, you only need access to the internet and electricity for spending. Intermediaries such as SWIFT will be bypassed. (You can read more about how the digital yuan will work here).

    READ: Former Access Bank CEO, Aigboje Aig-Imoukhuede, launches new book, Leaving the Tarmac: Buying a Bank in Africa

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    Why are so many Central Banks rushing into CBDCs?

    Firstly, faster cross-border trade settlements / International Trade ambitions:

    The widely accepted use of CBDCs will facilitate faster cross-border settlements between participating counterparties. Regardless of your location, there will be less need to convert from local currencies into reserve currencies such as USD, GBP, EUR, and vice versa via financial intermediaries.

    Additionally, for a country such as China which has long sought to expand its global reach in international trade, the digital yuan provides mouth-watering opportunities.

    • As a simple example, for international trade facilitation, end-users of smartphones built by Chinese-owned phone companies can potentially be enabled to access the Digital-Yuan, and that digital yuan can be spent with Chinese-owned firms across the world. These payment transactions can take place on the People’s Bank of China (PBOC) controlled network and bypass any existing financial intermediary (you can read more about digital yuan opportunities here).

    Secondly, from a domestic perspective, CBDCs will be a potential game-changing macro-economic tool.

    For countries not interested in global trade dominance, digital currencies offer Central banks an exciting opportunity to transform monetary policies. Specifically with regards to financial relationships and money transmission mechanisms (too much grammar but we have all heard of stimulus and intervention funds!!)

    Under the current state, when a Central Bank wants to increase or decrease money going into the hands of consumers, it does so via a range of tools (i.e. alter interest rates, set reserve ratios, buy/sell short-term instruments, etc.). Unfortunately, this current approach has some limitations which include:

    • Transmission mechanisms: Despite all the tools available to Central Banks, they ultimately rely on financial intermediaries (i.e. banks). Existing monetary policy tools simply aim to influence commercial banks to increase or decrease the amount of money/funds available for onward lending to end consumers.
    • These tools, as well as, associated end-user responses may not often work as fast as Central Banks would like. As an example, most bank customers will tell you that loan application processes can be extremely cumbersome and sometimes subjective.
    • Also, think about folks in remote areas who truly need credit for their business expansion but are not financially included or are not able to complete the plethora of loan application forms or are missing IDs for authentication, etc.
    • All these limitations create latency challenges for Central Banks looking to influence macroeconomic indicators quickly.
    • Monitoring: Under the current approach, it is cumbersome for Central Banks to continually track existing money in circulation and utilization purposes. Think about CBN intervention funds and how difficult it is for the CBN to know exactly how its intervention funds are being spent once the funds are disbursed to applicants.

    Fortunately, with digital currencies, given that they leave digital footprints, Economic Surveillance is facilitated (i.e. Central banks can monitor exactly who owns how much and what it is being used for); arguably giving Central Banks an opportunity to better direct funds to parts of the economy requiring support.

    Thirdly, Technology advances driving the growth of the Digital Economy and lowering operating cost dynamics.

    • The unrelenting growth of the Digital Economy: The use of physical cash continues to decline driven by the exponential growth of contactless services such as e-commerce (Amazon, Alibaba, eBay), contactless interaction (Zoom, Facebook-Portal, Google-Nest), etc.
    • Global eCommerce is now projected to be over 25% of total retail sales across the world and the US estimates that Digital Economy accounted for 6.9% of 2017 GDP which made it the seventh (7th) largest component of GDP and still growing.
    • Given that no one needs physical cash for transactions in the digital economy, Central banks are warming up to the need to implement CBDCs for transactions in this emerging digital economy.
    • Changing unit cost dynamics: From a central bank perspective, there are significant costs incurred for maintaining oversight of existing payments and settlement systems. Furthermore, there are additional costs for creating cash, transporting, storing, and securing existing stock of physical cash. As existing systems become outdated and population growth continues apace, there will be an inflection point for when it will simply be cheaper to create digital currencies to drive financial inclusion. Especially as cloud computing processing capacity continues to expand at a cheaper unit cost.

    Are there risks/issues to be concerned about with Digital Currencies?

    The answer is yes, whilst there are benefits, there are also some risks and concerns such as the risk of excessive Economic Surveillance, Privacy concerns, ease of implementing, and Negative Interest (aka financial wealth tax).

    Economic Surveillance can easily be a double-edged sword especially in the hands of an authoritarian regime, as an increased level of economic oversight can easily lead to financial repression or targeting opponents. However, just like with CCTVs, the risk of misuse cannot be a unilateral reason to discredit the opportunities available with CBDCs. (You can read more about concerns here)

    So, what about Nigeria?

    The Central Bank of Nigeria (CBN) was not included in the BIS 2021 survey, additionally, the CBN has not formally outlined its position on whether it plans to implement a Central Bank Digital Currency in the future (e-Naira).

    However in February 2021, (as part of its explanation of its regulatory directive on Cryptocurrencies), the CBN acknowledged the emerging trend of Central Banks’ ability to issue legal tender digital currencies.

    Nairametrics founder, Ugodre mentioned on his Twitter Spaces show “OnTheMoney” that a senior official at the CBN informed him that the Apex bank was seriously considering digital currency and had put together a team to explore its possibilities.

    So, should Nigerians expect an e-Naira soon?

    Firstly, with regards to innovation, the Nigerian payments landscape continues to evolve rapidly as the CBN drives innovation as part of its National Financial Inclusion Strategy (NFIS). Thus far, this strategy has resulted in the deployment of new products in the Nigerian payments space such as Money Market Operators (MMOs), Payment Solutions Service Providers (PSSPs), Agent/Super Agents, Payment Service Banks (PSBs), etc.

    Furthermore, the CBN is keen to leverage its regulatory sandbox for more innovations and has very recently in 2021 issued new guidelines on open banking, as well as, QR codes.

    Consequently, having a digital Naira should not be ruled out as an additional tool to drive financial inclusion in Nigeria,

    Secondly, based on industry statistics, Nigerians are quick to adopt technology that facilitates convenience at minimal cost to end-users.

    • Specifically, CBN payments statistics reports show that the use of cash and ATMs in Nigeria continues to decline rapidly. The latest annual report shows Cash/ATM usage has declined from 18% of transactions in 2015 to 6% of transactions in 2019. In other words, 93% of activity was done electronically (across platforms NIP, REMITA, MMO, etc).
    • Furthermore, NCC reports show high penetration rates for mobile technology with over 195 million active mobile phone subscribers (95% penetration) and 150 million internet subscribers (73% penetration rate).

    These reports lend credence to the perception that Nigerians are quick adopters of new technology where the technology enhances convenience at minimal cost to end-users.

    Consequently, a digital Naira will likely have high adoption rates to the extent that end-users do not expect to incur additional onerous charges.

    Finally, from a CBN perspective, we already know that the APEX bank prefers direct interventions as part of its macroeconomic toolkit. Arguably having a digital Naira (e-Naira) allows the CBN to better facilitate direct transmission to target beneficiaries in key sectors, whilst monitoring the use of the funds disbursed, and expedite recovery when funds are due for repayment.

    So, should we expect a CBN announcement on e-Naira soon? Your guess is as good as mine.

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    Blurb

    Why SEC should support democratization of sale of foreign securities

    In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position.

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    The directive of the Nigerian Securities and Exchange Commission (SEC), issued 8th of April 2021, has been met with consternation and a straightforward (but hopefully simplistic) interpretation that; “the government is out to stifle innovators, again.”

    These perspectives aren’t unfounded, as innovators of all shades have taken a heavy beating lately due to a number of direct government policies or interpretations of these policies – irrespective of how well-intentioned these policies may be. On the contrary, micro-investment platforms deserve a fair shot within Nigeria’s capital market.

    This is especially true considering that the recent regulatory fervour coincides with a period where the innovation ecosystem is recording new milestones and gaining traction, solving problems for users in all walks of life, democratizing wealth creation, and creating high-value jobs, all of which Nigeria desperately needs.

    READ: Crypto market surges above $2 trillion, as Bitcoin stages a huge comeback above $60,500

    In the last six months alone, Nigerian startups have gained the confidence of some of the best investors locally and globally, leading to never-before-seen innovations, acquisitions, and investments into the economy. This promotes interest in the Nigerian innovation ecosystem from foreign market actors and increases its relevance as a high-value job creator. Some now wonder if our regulators want more or less of this positive momentum.

    This latest notice from the SEC warned Capital Market Operators (CMOs) to desist from selling securities not quoted or registered, as only registered securities in Nigeria can be issued, sold, or offered for sale. Ostensibly, the directive requires CMOs registered with the SEC to offer only securities listed on any exchange in Nigeria to the public.

    READ: XRP posts a big bang, as legal tussle with SEC lingers

    The challenge here is that High Net worth Nigerians (HNIs) have always had access to foreign securities offered or acquired through registered CMOs for the apparent benefit of the upside available in markets such as the United States. This should be democratized to allow Nigerians with smaller incomes to have access to valuable global stocks within fair rules, and this is what the likes of Trove, Chaka, Bamboo, and Risevest have done. In fact, this democratization should be applauded as one of the outputs of a thriving innovation ecosystem that provides practical
    palliatives for the stifling inflation and erosion of value we have all experienced as Nigerians.

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    After all, what is suitable for Dangote should also be good for Musa, who earns NGN50,000.00, and thanks to any of the apps mentioned above, can today invest in shares of Dangote sugar while also adding a quarter of a Google stock to his portfolio every month. This “magic” of innovation is a poverty alleviator that should be encouraged and nurtured while ensuring that the public is protected from any harmful financial practices.

    READ: Flour Mills shares surge by 6.9%, lifting the miller’s capitalization by N8.2 billion

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    It is important to acknowledge at this point that the SEC has been a positively progressive regulator, generally engaging its public fairly. The issuance of the guidelines for crowdfunding and accommodation of FinTechs within the capital market was encompassing and engaged stakeholders of all hues. This should be commended. The SEC’s position classifying crypto as an asset class is also fair, refreshing, and proactive. We need more of this and not less.

    At a time when we are exploring how the Nigerian capital markets can become a viable option for listing tech startups, this latest body language of the SEC, and the Nigerian government as a whole can be further misinterpreted.

    In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position, as these innovations are widespread, publicly accepted, and valuable. Furthermore, these innovations support some of the registered and regulated CMOs by offering white-label solutions that are accelerating the ability of these legacy CMOs to better serve their HNI customer base, with local and foreign securities. The emergence of these innovative micro-investing platforms has triggered investments into local Nigerian securities in multiple folds. The volumes these innovative platforms channel into Nigerian stocks are arguably the most significant development in Nigeria’s capital market in a decade.

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    By virtue of the existence of these innovators, their combined strength has introduced over 150,000 new market participants who are primarily millennials: a majority of whom purchased their first set of stocks through these platforms. Before now, they had no active interaction with the capital market. These new entrants are now trading in excess of NGN10,000,000,000 (Ten Billion Naira) monthly through these apps. Note that a good chunk of the highlighted trade volume is routed through local CMOs to purchase Nigerian securities on the Nigerian Stock Exchange(NSE). Long term, these innovations would also serve as a channel to offer Nigerian guarantees to a global audience which would be a massive positive for the economy.

    The quest for diversification of portfolios to include foreign securities can only be good overall. It underscores the global trend in cross-border trade in securities as disintermediated by technology and the need to enhance portfolios’ value globally.

    Rather than curbing the practice of offering Nigerian and international stocks in a basket, this micro-investing trend should be allowed to flourish within reasonable regulatory frameworks. These platforms make investments attractive, easier, and affordable. Micro investing will curb the menace of pyramid and Ponzi schemes while introducing a new generation into Nigeria’s securities market in parallel with their appetite for global securities. Regardless of what we decide, the world has gotten smaller, and information that enables people to easily seek the best economic outcomes is readily available. While other nations gain from micro-investing, shouldn’t our people do too?

    The ultimate beneficiary of increased wealth for Nigerians is the Nigerian economy. Rather than shutting Nigerians off from the rest of the world, we should be accelerating global access for our millions of people; hence this is the time for dialogue, not shutdowns.

     

    Kola Aina is the Founding Partner at Ventures Platform and writes from Lagos, Nigeria.

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