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The Chicago Boys of Nigeria

President Mohammed Buhari has announced a new economic team that will offer him economic advice on a timely basis.

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No foreign exchange for food and fertilizer importers - Buhari, Gas project, Buharinomics, Buhari, metric, FG okays N100 billion for the completion of Kano Free Trade Zone , Nigeria saved N670 billion from Petrol Importation in half year 2019  , The Chicago Boys of Nigeria, Buhari signs Production Sharing Contract (PSC) Amendment Bill into law , Nigeria generates N876.09 billion in 9-month, as revenue shortfall poses threat 

Quote 1: Every leader is only as effective as the advisers that surround the leader.” Anonymous

Quote 2: “The trouble with good advice is that it usually interferes with our plans.” Croft Pentz

President Mohammed Buhari has announced a new economic team that will offer him economic advice on a timely basis for managing and directing the Nigerian economy. This new team will report directly to him.

This is a positive development, especially when one looks at the composition of the new team — almost all the members are economists. The team includes Dr Doyin Salami, Prof Charles Soludo and Bismark Rewane. Quality.

As with every advisory team, their success is based not just on the quality of sound advice given, but by the amount of their advice that gets taken and implemented by their principal. In Chile, a group of economists were also given the task of advising the President on turning around a Chilean economy that had stalled. They were called the Chicago Boys (because they attended the University of Chicago).

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The Chicago Boys implemented a broad programme of economic reforms that liberalized the economy and slowly reduced the over-controlling hand of government. Their policies achieved some success. The World Bank stated, “Between 1990 and 2000, poverty was reduced from 40% of the population to 20%. 60% of this reduction can be attributed to GDP growth, with the remaining 40% attributable social policies.”

The economic reforms implemented by the Chicago Boys were studied and adopted by subsequent governments — for instance, the Chilean model of Defined Contributory Pension Scheme was adopted by Nigeria.

To me, there are three economic issues that hang over the Nigerian economy at the moment. They are:

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  • Should the naira be devalued to reflect fair prices outside the CBN official window of N306.90?
  • Should the Nigerian government keep subsidizing the price of imported PMS?
  • Should Nigeria pass and implement the Petroleum Industry Bill PIB?

The debate on these policies are not new; every economic decision has a cost and a benefit. President Buhari has his own personal economic ideologies which he has to reconcile with Nigeria’s fiscal realities, and it is the job of the new economic team to not just present the facts, but to guide the President into making those right decisions. Let’s delve into these decision points.

Devalue naira?

Nigeria currently has multiple exchange rates: the official rate, the Investors and Exporters forex window, the Inter-bank window, the window for Small and Medium Enterprises (SMEs), Business Travel Allowance (BTA), Personal Travel Allowance (PTA), etc.

These multiple rates allow the Central Bank of Nigeria (CBN) to offer devalued naira at N360 on the Investors and Exporters window, while maintaining N306.90 at the official rate window. So what is the CBN policy on naira? Devalued? Strong? Both?

The reason for the multiple rates is a lack of forex inflow. A strong naira has not attracted enough Foreign Portfolio Investment into Nigeria. Thus, CBN has configured fx rationing via a list of 43 items banned from accessing the CBN Forex market. Bismark Rewane, a member of this new team is quoted in June 2019 as saying, “Unifying the exchange rate will impact the Nigerian economy more positively than the current multiple exchange rate regime does, which creates opportunity for arbitrage.”

Remove the PMS subsidy?

The Nigerian National Petroleum Corporation (NNPC) stated that it spent N650.2 billion in subsidizing petrol from April 2018 to March 2019. To put this in perspective, the amount is more than what the Federal Government spent on Power, Works and Housing, Health, Water, Education and Agriculture COMBINED in 2018 budget year.

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Is there really a debate about whether Nigeria should spend more on education and agriculture than PMS imports? The Economic Team will need to articulate this imperative to a President who is clearly not keen to remove subsidies on PMS because the removal “will hurt the poor.” However, we have another member of the team Prof Charles Soludo speaking on PMS subsidies. “I am convinced that President Buhari has the moral authority and legitimacy to quickly remove the (PMS) subsidy and privatize the refineries. The fundamental case against subsidy removal is not economic. It is the fact that the citizens do not trust the government to optimize the use of the proceeds for their welfare. If President Buhari does not deal with these issues NOW, I wonder when, if ever.”

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Pass Petroleum Industry Bill

The Petroleum Industry Bill (PIB) aims to bring in sweeping reforms to the entire petroleum sector in Nigeria. We cannot go into detail on this vast law but the summary is that existing laws governing the petroleum sectors are now outdated, in terms of fiscal arrangements and cost sharing. The PIB increases the Nigerian government take from oil and gas assets while reducing direct ownership.

Former Chairman of the NNPC, Ike Kachikwu, said that the non-passage of the PIB was costing Nigeria N3 trillion a year. You would think any bill that guarantees $15 billion a year in investment would have been passed 18 years ago but the PIB has been stuck in a holding pattern of legislative and executive wrangling. Dr Doyin Salami has made the case that Nigeria is an “oil dependent nation” not an oil rich nation.” if that statement has any value, then a PIB to boost investment in the oil and gas sector in Nigeria is welcome.

In Chile, advice from the economists and experts was not only given but also heard, accepted and implemented, and the results were positive and apparent.

The Nigerian economic think tank has to ensure that their own recommendations, which are based on economic realities and past positions held by the economists, are heard, understood and acted upon.

Success comes from action.

3 Comments

3 Comments

  1. Jerry

    September 29, 2019 at 10:10 am

    Excellent article. These guys are known for their vast knowledge and have no qualms about execution. I hope the president actually acts on their advice

  2. Anonymous

    September 29, 2019 at 6:46 pm

    Excellent article. The way the writer passed the message was on point. On the article, I do hope that Buhari will develop the political will to drive this country to greater heights. He should probably dwell on how to build a legacy of a greater Nigeria not the current state we are in now.

  3. Expressivejoy

    December 16, 2019 at 10:01 pm

    Quality articles or reviews is the key to interest the visitors to go to see the web page,
    that’s what this website is providing.

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Columnists

How Cash flow, Liquidity, and Leverage impacts your financial plans

Aja discusses how Cash flow, Liquidity, and Leverage impacts your financial plans.

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cash flow

It is key to discuss cash under the three themes of Liquidity, Leverage, and Cashflow. These concepts are interrelated, but each has different impacts on your financial plan.

Cashflow

It captures only cash transactions and is simply the amount of cash flowing in and out of your business or person. Hence, if you buy an asset and issue a Purchase Order to pay a supplier in 90 days, that transaction will not show up on your cash flow.

As an illustration, if Emeka buys a TV with N200,000 but issued a cheque for N100,000 cashable in 90 days; only N100,000 will be captured leaving his cash position. Thus, Emeka has positive cash flow and negative leverage, because his debt has gone up.

For Okafor, the seller who received half of the proceeds in cash, he may be liquid but cannot replace his stock due to lack of enough cash flow. He may have to leverage to generate cash. Should he need cash, he can create liquidity from his paper check of N100,000 by discounting to cash before 90 days, but at a cost.

You must be aware of negative and positive cash flow and avoid as much as possible, generating cash from financing activities i.e. borrowing to fund non-income generating assets or activities.

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Liquidity

It is determined by how fast an asset can be converted into cash. If Okafor gets a cheque offer from Dangote Cement and another from Emeka to pay for a TV, which do you think he will accept all things being equal? Most likely the Corporate cheque, because he perceives that it is easier to discount to cash; thus, more liquid than the individual cheque.

Federally issued bonds are said to be less risky than State or Corporate bonds of similar tenor because the issuer (the FGN) is more liquid than the States or even Corporates.

The same can be said of Equities. Stocks that are traded more often and held by more investors are more liquid and commands a better premium to the bonds of a similar company. This is one reason large blue-chip stocks command higher market prices, the investors are also paying for the ease of liquidity.

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A good metric for measuring liquidity has to be the Acid Test liquidity ratio that determines how easy it is for you to generate cash in an emergency. It is calculated by dividing your assets by your liabilities, but the key is that the assets are stripped off all hard assets and will include only cash and easily marketable securities and commodities like gold that can be sold. The higher the ratio the better.

Leverage

Simply put, leverage is borrowing. You can borrow to increase potential profits or to meet an obligation that is due. When cash is borrowed, it must be paid back with a cost called interest. Leverage can produce cash flow and liquidity, but no firm or household can remain a going concern solely on cashflow financed by leverage.

Eventually, the interest cost will swell and more of future operating cash generated by the firm or household will be earmarked to pay off interest, leaving the principal to remain and generate more interest cost.

In the earlier example, Emeka used leverage to buy the TV and gave Okafor a cheque, who will in turn generate cash flow by liquidating the instrument from Emeka.

Bottomline

A good leverage analysis is to calculate your Leverage Ratio. To determine your leverage ratio, list out all your liabilities, divide by your total assets, and multiply by 100. The answer tells you how much of your assets are financed by debt i.e. leverage ratio.

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Hence, you can have positive cash flow, be liquid but be highly leveraged, which is not ideal. The rule of thumb says the lower the leverage ratio, the better.

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Summarily, with cash, you must be aware of the implication in terms of cash flow, liquidity, and leverage.

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Columnists

#EndSARS: Analyzing the economic prospects of another lockdown

Decisions taken in the next few days will determine how soon the issues surrounding the #EndSARS protests will be resolved.

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#EndSARS: Analyzing the economic prospects of another lockdown

The past five to seven days in Nigeria have been nothing short of fictional for the Nigerian people.

One would be hard-pressed to describe the events without seeming to take sides with either part of the standoff as emotions, euphoria and sometimes, unfounded principles have seemed to become the order of the day. Logic, accountability and common sense being on vacation as they often are in such matters.

If there were negotiations (of which there are none presently), parties involved may likely disagree on a couple of things ranging from the sincerity of the other party, approach to a peaceful resolution, what amounts to a peaceful resolution and how to forge ahead.

READ: COVID-19: How CBN policies helped prevent the collapse of the Nigerian economy – Oscar Onyema

READ: CBN removes “third parties” from buying forex routed through Form M

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There would be accusations and counter-accusations, more so, as the chasm of discord between stakeholders continues to widen with each passing day of the #ENDSARS protest across major cities and towns of the Country. Nonetheless, one thing both parties would agree on is that their continued standoff and reluctance to resolve the complex issues around the protest is ruinous to the economy.

Nigeria’s real GDP growth for 2019 was estimated at 2.3% by the AfDB. It was an improvement on the 1.9% estimate for 2018 and an achievement of the 2019 expert projections despite the uncertainty about the 2019 election outcomes, policy implementation slowdown and sell-offs by foreign investors in 2018.

READ: $70 billion per annum will be needed to tackle pandemic induced poverty – World Bank

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READ: Manufacturers receive N459.69 billion from banks, thanks to CBN’s lending policy 

Household consumption was the key growth driver in 2019, followed closely by growth in transport, the oil sector and information and communications technology. Agriculture, for all its Government patronage could not withstand the floods that heralded a climate change while suffering from the conflicts between herdsmen and farmers- it flopped, and so did manufacturing which could not be reckoned with due to a lack of financing. Estimated inflation for 2019 was 11.3%.

After a turnaround from –1.6% in 2016 to 0.8% in 2017, 2020 was supposed to be the year where Nigeria consolidated on the steady GDP growth of previous years by implementing its Economic Recovery and Growth Plan with an emphasis on economic diversification.

READ: Nigeria’s $1.5 billion steel plant set to produce 1 million MT of steel annually

The CBN’s proactive decree that banks hold loan–deposit ratios of 60% was geared to increasing lending to the real sector, even as they eased the risks of lending to small businesses.

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An increase in the value-added tax from 5% to 7.5% was implemented to shore up domestic non-oil revenues, and agro-industrial support from the Government was supposed to make 2020 a year to surpass growth forecasts even as oil revenues began to improve and drive foreign exchange reserves. Then came COVID-19.

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READ: CBN wades into the bank vs Fintech debate

Lacking a clear nationwide pandemic framework, coupled with a nonexistent welfare system and weak healthcare infrastructure, the Nation did a relatively impressive job in managing the pandemic but did lose the economic advantage it started the year with. Negative GDP growths were projected for Q2 and Q3 even as oil prices slumped to an all-time low.

Diaspora remittances (which accounted for 83% of the FG budget in 2018) had reduced to a trickle because of the pandemic, and unemployment surges. The World Bank predicted a recession by Q4, it would be Nigeria’s worst in four decades.

READ: CBN clears air on Diaspora Remittances, official inflows $2.6bn not $26bn 

Once again, Nigeria beat the odds. A series of monetary and fiscal policies saw to it that more funds were made available to the real sector; delinquent loans were restructured to keep from becoming bad; the free fall of the Naira was staved off and key industries were supported through Government’s special intervention programs. A few optimists were beginning to think we had rounded the corner, then came #EndSARS protests.

In the few days since the protests have begun, the Nation is estimated to have lost billions of Naira with Lagos state, understandably, being the biggest loser so far hosting the largest protests. Manpower hours have been lost, properties have been destroyed and worst of all lives have been lost.

READ: CBN knocks airline and shipping firms over non-compliance with form NXP

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Household spending, transportation and manufacturing cannot continue to thrive in these unrests. September inflation was pegged at 13.7%, its highest since February 2018 there is already considerable strain on healthcare due to the pandemic and the exposure of the populace during the #endsars protests and counter-protests could spike up the COVID-19 numbers once again.

The peculiarity of the nature of the protest has seen Nigerians in the Diaspora channel their funds to supporting the protests in Nigeria while organizing theirs in their host country. Another significant loss of diaspora remittances which represent a substantial percentage of the GDP. Also, the protests are beginning to weigh in on stock market activities and could affect other economic indices if tensions escalate further.

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READ: Nike stocks post gains, women’s apparel division grow by 200%

The unfortunate resolve of both sides to fight to the finish without giving room for dialogue could lead to another lockdown of economic activities as witnessed in Edo, where a 24hr curfew has been declared; Lagos where schools and businesses have shut down; Osun, Ekiti, Plateau, Imo and the FCT where business activities have come to a grinding halt.

The cyber warfare being threatened by both sides could also have far-reaching effects on the liquidity of our financial institutions as their customers opt for crypto wallets as safe haven for their funds and as punitive measure for brands they perceive as not being supportive towards their cause.

READ: Leaked memo: CBN instructs banks to block bank account of 38 companies for “forex abuse”

Of course, decisions taken in the next few days will determine how soon the issues surrounding the protests will be resolved, but for a country on the precipice of serious economic repercussions, both parties seem a little too comfortable in staring down the opposition when serious gains could be made by coming to a round table.

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Columnists

More agriculture loans but longstanding bottlenecks remain

Despite the flurry of funds provided via intervention policies, long-standing bottlenecks in the agric sector still exist.

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Nigeria’s agricultural export, Nigeria’s top 10 agricultural exports rose to N206.16 billion in 9-month 

According to local media reports, the Minister for Agriculture, Sabo Nanono through an information official of the Agric ministry announced plans by the ministry to provide relief for farmers in form of interest-free loans, and effective input subsidisation. According to the statement credited to the minister’s representative, the relief is for the recent covid-19 disruptions to farming activities and flooding in Kebbi, Jigawa and Kano states. In addition,
the minister stated the interest-free loans would be provided through a partnership of the Agric ministry and the Central Bank of Nigeria.

We acknowledge that farming activities have been significantly affected in 2020 due to covid-19 movement restrictions during the planting season as well as abnormal rainfall patterns which led to flooding of farmlands. That said, we note that the farmers/herders clashes remain a significant threat to agricultural productivity. These unfortunate events have led to a spike in food prices refelected in the food inflation rate of 16.66% in September according to the National Bureau of Statistics (NBS). Thus, we consider provision of reliefs for farmers important to restore farming activities and output level back to pre-covid levels.

However, we note that the agriculture sector remains plagued with long-standing structural challenges which if ameliorated, would significantly improve output level and drive the country towards its goal of achieving self-sufficiency in food production. Some of the long-standing bottlenecks include; poor transport network to connect farmlands with main markets, poor storage facilities, sub-standard farming inputs, crude agricultural techniques
etc. These in our view, are the reasons why the funds that have been pumped into agriculture via different intervention schemes such as Anchors Borrowers Program (ABP) and Commercial Agricultural Credit Scheme (CACS) have yielded limited results and remain riddled with repayment controversies.

In our opinion, while short term relief for farmers is necessary to immediately alleviate some of the pressures on food prices in the short term, we think some of the flurry of funds provided via intervention policies should be directed at resolving long-standing bottlenecks to truly maximise the full potential of Nigeria’s agriculture promise.

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CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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