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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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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:

  • 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?

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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.

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.

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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

Power: Nigeria’s deal with Siemens – the birth of a new era?

Siemens’ position in the power value chain remains unclear given the huge investment it is committing.

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Power: Nigeria's deal with Siemens - the birth of a new era?

Recently, the Minister of Power, Sale Mamman disclosed that the power deal between Nigeria and Siemens AG, a renowned German firm, will lead to the upgrading of 105 power substations and construction of 70 new substations across the country. The Minister also disclosed that the Federal Government had made an initial N8.6bn commitment in the transaction. We recall in July 2019, Nigeria and Siemens signed a power sector deal which provides a blueprint on improving power generation and fixing the archaic transmission and distribution infrastructure in the sector. Notably, the president set a goal of achieving 7,000MW and 11,000MW of reliable power supply by 2021 and 2023.

READ MORE: Chinese Loans: Clauses are international standard terms – Amaechi

Siemens’ position in the power value chain remains unclear to us given the huge investment it is committing to make. Currently, the Transmission Company of Nigeria (TCN) is 100% owned by the government while the Gencos and Discos are privately controlled. While we see a possibility of Siemens getting a stake in TCN, we struggle to see how that will work for the discos and gencos given that Siemen’s huge invesments may mean they have to cede
control. Also, government’s desire to maintain a stranglehold on the power sector in bid to regulate electricity tariffs remains a key risk to any investment in the sector. We are also sceptical on Siemen’s ability to recoup its investment given that the liquidity squeeze in the sector attributable to non-cost reflective tariffs remains unresolved.

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Over the years, the widening deficiency in on-grid supply of power has forced consumers into costly off-grid alternatives, which account for 52% of electricity consumption, based on IMF estimates. According to the world bank, about 80 million people still lack access to grid electricity, making Nigeria the country with the largest access deficit in Sub-Saharan Africa. The institution further puts the national electrification rate at 55%, with rural electrification rate at a meagre 39%. Clearly, a lot of work is required in improving the supply of power across the country and ensuring its availability to unserved and underserved households and businesses.

READ ALSO: Delay in passing PIB creating uncertainties in Petroleum Industry – WEIN 

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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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Columnists

No trophy for International Breweries after bland Q2 results

Brewing companies have found few and fewer opportunities to consolidate and generate quality turnover.

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No trophy for International Breweries after bland Q2 results

International Breweries Plc closed with a net loss in the second quarter (Q2) of 2020. They made a revenue of N25.3 billion, 28.5% shy of their achievements in the opening quarter (Q1) of the year.

Cost of sales consumed virtually all the revenue generated, taking as much as 86% in Q2 and 82.5% in Q1. This has been the sad trend/trajectory for International Breweries which ultimately almost guarantees that they close their books with a loss.

READ ALSO: Guinness Nigeria boss reveals factors pulling company’s profit

International Breweries Plc is a brewery company in Nigeria with its flagship product being the Trophy Bottle. Other products include Hero Lager, Eagle lager, Eagle Stout, and Beta malt. They have managed to improve revenue but haplessly struggles with rising costs of production and expenditures. The effect of government regulations, with the new excise duty implemented in 2018 hasn’t been palatable. Brewery companies generally do not have the luxury of tweaking their prices at any point in time to improve their topline. This is as a result of the immense sensitivity of the industry where increasing the price of a bottle instantly delivers the customer to the competition, albeit on a silver platter.

COVID-19 stalled operations and interrupted the accustomed seamless flow of activities around the world. Brewing companies have found few and fewer opportunities to consolidate and generate quality turnover. April 2020 ushered in a lockdown of vehicular movements and operations across major cities in the country. Bars, Clubs, Weddings, and other avenues for merriment, which hitherto are hubs for amassing turnover were given secondary attention until further notice. For companies in the industry, sales ordinarily would plunge, in light of these factors. Whilst we acknowledge and recognise the negative impacts the pandemic has wrought, it isn’t entirely accurate to allot all of International breweries travails to this.

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READ ALSO: Apple market capitalization nears $2 trillion, as Apple’s CEO becomes a billionaire

International Breweries, with the figures generated appears, nears its demise. Retained earnings for H1 showed a negative of N12.2 billion, this suggests that the company has made consistent losses. It also has borrowings amounting to over N107 billion naira secured by corporate guarantee with interest ranging between 7%-13%.  And with the ever-increasing negative value for retained earnings, death has been slow but consistent and almost inevitable.

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The statement of cash flow for H1 2020 exposes the true sources of cash inflow for International Breweries Plc. Only 5% were derived from operations, 0.8% from investing activities, and over 90% representing N162 billion from financing activities particularly rights issues.

International Breweries is in sinking sand and must devise new solutions quickly if it entertains any hopes of prolonging its longevity.

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Columnists

Telecoms sector remains resilient as broadband subscriptions climb

Broadband penetration grew to 41.3% in June 2020 from 33.31% in June 2019 and 40.1% in May.

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Telecoms sector remains resilient as broadband subscriptions climb

Despite the adverse impact of the global pandemic on various sectors in the economy, the Nigerian telecoms sector has remained resilient. According to recent data on key industry fundamentals published by the Nigerian Communications Commission (NCC), the total number of broadband subscriptions grew 23.9% y/y and by 2.8% m/m in June 2020 to 78.8m subscriptions.

Similarly, broadband penetration grew to 41.3% in June 2020 from 33.31% in June 2019 and 40.1% in May. In addition, the number of internet subscribers continued to grow in June 2020, up 1.8% m/m and 17.2% y/y to 143.7m subscribers. We believe the m/m uptick in broadband penetration could be due to gradual reopening of the economy.

READ MORE: Exxon Mobil, Chevron record their worst losses in history

We recall that subscriptions declined on a m/m basis in April but showed recovery in May & June, reflecting the resilience of the sector. Industry players in the telecommunications sector continue to invest heavily in internet infrastructure in a bid to improve 4G LTE coverage across the country. Heightened competition among industry players for market share has also forced bundle prices lower, making internet usage very attractive to the average Nigerian.

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READ MORE: Federal Government to introduce new laws for online businesses  

With the advent of the global pandemic, we believe the growing use of digital channels for daily routine activities ranging from telecommuting, entertainment and social engagement bodes well for continued growth in internet penetration. This will be further supported by increasing smartphone penetration, favourable country demographics and a fledgling social media culture. Nevertheless, we believe the sector still requires more investment to bring it at par with more developed climes. With internet penetration still below 50% (39.58% as at April 2020), we think significant potential exists for telecom and internet service providers in Nigeria.

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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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