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Reduction in PMS: A nod to the deregulation of the downstream sector?

The Presidency yesterday announced a reduction in the price of Premium Motor Spirit (PMS) to N125 from the current price of N145.

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FG battles 6 oil firms for failure to remit N20 trillion , ExxonMobil, Shell, Chevron delay $58.4 billion oil and gas investment in Nigeria, Crude Oil: Nigeria’s oil production slips for the third consecutive month , Tax reform, policy uncertainty to cause oil drop as foreign firms look outside Nigeria, Nigeria plans to support oil price with lower production cost per barrel, Oil price slumps further to $30 pb, as Nigeria grapples with high production cost, Reduction in PMS: A nod to the deregulation of the downstream sector?

The Presidency yesterday announced a reduction in the price of Premium Motor Spirit (PMS) to N125 from the current price of N145, necessitated by the fall in crude oil prices. Brent crude oil prices have fallen by c.64% since the beginning of the year, implying a reduction in the landing cost of PMS.

The pricing template puts the total landing cost for a litre of petrol at Nigerian port at N137/litre as of February 12, 2020, when Brent crude price stood at US$55.79/bb. This has however declined to N64.33/L as of 16 March 2020 following the dip in crude oil price to US$30/bbl.

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Reduction in PMS: A nod to the deregulation of the downstream sector?

The decision has been lauded by many as a signal towards deregulation of the downstream sector. While we see the rationale behind the move, we are concerned that the government is giving up an opportunity to prop up its already slumped revenue prospect given the significant drop in crude price. That said, the decrease will likely ease inflationary pressures at a time when inflation is on the rise. Headline inflation stood at 12.2% y/y in February, up from 12.13% in January.

READ MORE: Nigeria in trouble as rising subsidy cost exacerbates revenue crisis

On May 11, 2016, petrol pump prices were hiked by around 68% from N87/litre to N145/litre and many assumed this signalled full deregulation. This wasn’t the case however as the subsidy regime was still in place. The exchange rate factored into the landed cost of fuel was between N280 and N285/US$1.

A steep devaluation in the currency and an increase in crude prices in the international market, implied an increase in the landing cost which necessitated the continuation of the subsidy regime, though now booked as under-recovery losses in the books of NNPC.

The removal of the subsidy is a critical free-market reform, in our view, and we believe it is beneficial to the economy and government finances, though it will almost certainly put pressure on consumers and small businesses.

READ MORE: FG to reduce N1.5 trillion from 2020 budget due to coronavirus

Beyond the impact on government revenues, the removal of the subsidy also removes disincentives to refine petroleum product and may improve the balance of payments through import substitution. We, however, refrain from labeling this price reduction move as any sign of deregulation as the price of fuel is likely to remain regulated in our view.

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CSL STOCKBROKERS LIMITED CSL Stockbrokers,

Member of the Nigerian Stock Exchange,

First City Plaza, 44 Marina,

PO Box 9117,

Lagos State,

NIGERIA.

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Columnists

Covid-19 & Smart Food Markets for the Future

The COVID-19 pandemic has revealed that while open markets are a key component of a sustainable food system, they aren’t built for a crisis like this one

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Covid-19 & Smart Food Markets for the Future

Nothing excites me more than visiting an open-air market and sampling some succulent, juicy pineapple, or a yellow-ripe sweet banana amidst small chit-chat with the friendly women vendors. These pleasantries are no longer the norm. With all of us wearing masks, I can hardly recognize my vendors and they cannot make out their customers. I don’t taste the fruits until they are washed in soapy water.

The COVID-19 pandemic has revealed that while open markets are a key component of a sustainable food system, they aren’t built for a crisis like this one. Urban food markets in Africa often lack adequate infrastructure, resulting in over-crowded spaces and massive amounts of food waste. Vendors have little or no control over the hygiene practices of their suppliers and customers, making food safety protocols difficult to follow.

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Various governments in Africa, have provided guidelines to help secure the food supply during this challenging time. While this is a good short-term measure, we need to be thinking about the long-term changes that will make our markets more resilient for the future. African countries can develop prototypes for “smart” markets fit to our context, designed to ensure health and safety, and equipped to meet our food needs now and into the future.  The big question however is, what could an African Smart Market look like?

Firstly, the vast roofs of markets are a perfect place to install solar panels, enabling markets to run on sustainable energy. The power generated could also serve surrounding consumers and businesses.

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(READ MORE: FG exempts tuition fees, basic food items, others from 7.5% VAT )

Secondly, modern African markets provide the perfect opportunity for water harvesting infrastructure. The roofs of the markets could collect water during rains and would help keep the market well-sanitized and supply customers and vendors with clean drinking water.

Covid-19 & Smart Food Markets for the Future

Good water supply goes well with sanitation facilities. Water, sanitation and hygiene facilities are critical to limiting infection spread and protecting health. Clean facilities, maintained by private sector partners, could offer services such as sorting bays and improve hygiene by sanitizing surfaces for vendors.

Nigeria is the second largest tomato producing country in Africa with production of 1.5 million metric tons per annum with an estimated demand of 2.5 million metric tons.  Unfortunately, 50% of the harvested tomatoes go bad after harvest. This mainly because of the use of raffia baskets that are piled on top of each other and the lack of cooling trucks during long distance transportation. Improving storage infrastructure and sharing storage best practices can increase the availability of food on local and regional markets, leading to improved food security and increased resilience for smallholder farmers.

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Through the YieldWise Initiative, and in partnership with TechnoServe, The Rockefeller Foundation has trained farmers on post-harvest loss  reduction technologies as well as linked the farmers to processors and buyers of fresh tomatoes.

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(READ MORE: Africa day 2020: Buhari urges economic groups, CSOs and private sectors to drive peace for economic development)

Safeguarding human health, food safety and traceability must be a priority throughout the food system. While subsistence production, informal distribution channels, and traditional community markets make it difficult to implement large-scale food safety interventions, smart markets could promote a shift in consumer attitudes by designating a section where traders only sell certified and traceable produce. This could be a big step toward creating consumer demand for food safety and traceability and lay the groundwork for future reform.

Covid-19 & Smart Food Markets for the Future

Therefore, a carefully considered market design is the final piece of the puzzle. For example, traders in the sunniest and windiest spots often cover their stalls in dirty sacks, introducing the unnecessary risk of contamination. Markets could be optimized to have clear entries and exits and take into account the direction of the sun and wind, minimizing the need for extra work and unsanitary makeshift solutions.

READ ALSO: Former Andela boss, Aboyeji, has new venture aimed at funding early-stage businesses 

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As we think about designing the markets of the future, we should also explore business models to help markets become self-sustaining.

We must take COVID-19 as an opportunity to think creatively and help our markets evolve to be more hygienic, more sustainable, and more resilient to future shocks and disruptions. By doing this, we can help protect our local vendors’ livelihoods and ensure that millions of Africans have secure access healthy, nutritious food.


Writen by Bola Adekoya

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Columnists

Economy: Domestic investors hold sway in January

The NSE data on domestic and foreign investor participation for January revealed that activity level in the stock market was high.

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The Nigerian Stock Exchange (NSE) data on domestic and foreign investor participation for January revealed that activity level in the stock market was high, as total value of transactions grew 84% m/m to N235.5 billion.

The sturdy growth in the level of transactions was driven largely by domestic investors, as the value of transactions executed rose by 155% m/m to N165.1 billion from N64.8 billion in December 2019.

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We believe the strong participation of domestic investors was spurred by buoyant system liquidity following the restriction placed by the CBN on individuals and Pension Fund Administrators from investing in OMO bills. As a result, this segment of the market could no longer invest funds from maturing OMO bills, leading to a surge in the amount of the funds chasing existing asset classes.

We recall that there was a lot of buying interest in high dividend yield stocks particularly in the banking sector with tickers such as UBA, ZENITH, GUARANTY & FMN recording significant gains.

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Despite the improvement in the value of transactions executed by foreign investors (up 11% m/m to N70.3 billion), we highlight that foreign investors’ outflows from the local bourse outpaced inflows for the fourth consecutive month. Specifically, foreign investors’ net outflows rose to N22.7 billion in January compared to N19.8 billion in December 2019. In our view, this reflects the fact that foreign investors interest in the local bourse remains weak despite attractive valuations.

[READ MORE: CBN announces initial policy response to COVID-19)

We think the absence of structural reforms in strengthening the resilience of the domestic economy, rising vulnerabilities to external shocks, heightened uncertainty in the banking sector given the flurry of regulatory guidelines from the CBN are fundamental issues inhibiting foreign investors appetite for Nigerian equities.

Considering the outbreak of coronavirus (COVID-19) which has disrupted global supply chain and the downturn in oil prices (crude oil prices are down c.50% from US$68.91/b at the start of the year), we expect foreign investors to remain averse towards Nigerian equities.

With respect to domestic investors, we expect subdued interest in the local bourse given heightened concerns around a currency devaluation and the tendency to want to hold foreign currency. Accordingly, we envisage that domestic investors will trade cautiously with many remaining on the sidelines.

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devland

CSL STOCKBROKERS LIMITED CSL Stockbrokers,

Member of the Nigerian Stock Exchange,

First City Plaza, 44 Marina,

PO Box 9117,

Lagos State,

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NIGERIA.

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CBN announces initial policy response to COVID-19

In light of the rampaging impact of the COVID-19 pandemic on global supply chains, CBN announced its initial policy response to the pandemic.

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In light of the rampaging impact of the COVID-19 pandemic on global supply chains, demand shocks and consequently impact on liquidity and growth prospects, the Central Bank of Nigeria (CBN) announced its initial policy response to the pandemic.

This comes ahead of its Monetary Policy meeting on March 23 and 24. Below are highlights of the bank’s communique:

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  • All CBN intervention facilities are hereby granted a further moratorium of one year on all principal repayments effective March 1, 2020.
  • Interest rates on all applicable CBN intervention facilities are hereby reduced from 9.0% to 5.0% for 1 year effective March 1, 2020.
  • The CBN establishes a N50 billion targeted credit facility through the NIRSAL microfinance bank for households and SMEs vulnerable to the COVID-19 pandemic.
  • The CBN hereby opens intervention facilities and loans to pharmaceutical companies intending to expand operations and set up drug manufacturing plants.
  • The CBN hereby grants Deposit Money Banks leave to consider temporary and time-limited restructuring of the tenor and loan terms for businesses and households most affected by the outbreak of COVID-19.
  • Strengthening of the CBN’s LDR policy to support credit growth. The CBN would further support industry funding levels to maintain DMB’s capacity to direct credit to individuals, households and businesses.

READ MORE: Oil price crash, Coronavirus: The trouble that lies ahead for Nigeria

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We recognize that the COVID-19 pandemic has impacted global supply chains and created demand shocks. Consequently, this has impacted revenue and created cashflow constraints for companies vulnerable to the spillovers of the outbreak.

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Granted some Nigerian companies, which rely on supplies from China, may have met with tough times, we believe the most serious negative impact of the outbreak on the Nigerian economy stems from weaker oil prices and pressured external conditions which have led to rising FPI outflows and consequently exchange rate panic. These pressures have significantly raised the risk of an economic slowdown and a possible recession in the medium term.

In light of this, we don’t think the CBN’s policy response addresses the key risks faced by the Nigerian economy from the COVID-19 outbreak. The policies highlighted above are geared towards freeing up more liquidity into the financial system and relaxing debt covenants for companies rather than tackling exchange rate concerns.

We note the CBN has earlier stated it believed market fundamentals do not support a devaluation. Thus, we do not expect any major reaction from the apex bank on that front.

READ ALSO: REMINDER: Nationwide implementation of cashless policy starts April 1st

Nevertheless, we think the policies will be beneficial for companies who currently enjoy CBN intervention loans. With an extra 1-year moratorium and lower interest rate (from 9.0% to 5.0%), these companies would enjoy improved liquidity. In addition, the CBN’s regulatory forbearance on loan restructuring would further support credit quality and prevent a credit crunch in the event of a protracted low oil price environment.

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devland

CSL STOCKBROKERS LIMITED CSL Stockbrokers,

Member of the Nigerian Stock Exchange,

First City Plaza, 44 Marina,

PO Box 9117,

Lagos State,

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NIGERIA.

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