Appendix I. Letter of Intent
April 21, 2020
Ms. Kristalina Georgieva
International Monetary Fund (IMF)
Washington, D.C. 20431
Dear Ms. Georgieva,
1. The global humanitarian and economic crisis caused by the COVID-19 pandemic is having a severe impact on Nigeria. In addition to the high human toll from daily increases in COVID-19 cases, the economic cost is high. Containment policies to limit the propagation of the outbreak—including to restrict movement and encourage social distance—and a sharp fall in oil prices is causing a dramatic fall in economic activity. Our preliminary assessment suggests a contraction in real GDP of 3.4 per cent this year, a 6.5 percentage points drop relative to our previous estimate. Given the uncertainty as to the depth and duration of this crisis, this estimate comes with downside risks.
2. Our external position has already come under strong pressure. The current account deficit is projected to be about 3.3 per cent of GDP, despite some import compression, as oil exports drop. At the same time, remittances and capital inflows are expected to weaken substantially, leading to pressure on our international reserves, which have already declined. To mitigate the balance-of-payment pressures, we adjusted the official exchange rate from N305/$ to N360/$ and recently converged the Central Bank of Nigeria (CBN)’s various foreign exchange (FX) windows to the Investors and Exporters (I&E) windows rate, which will be allowed to move with market forces, as observed with the recent depreciation in response to capital outflows. This step also allowed us to close the gap between the CBN’s minimum and maximum exchange rates from 20 to 5 per cent—a major step toward exchange rate unification. We are committed to maintaining this more unified and flexible exchange rate regime, which will operate in a market-determined manner and be allowed to respond to shocks, with the CBN only intervening to smooth large FX fluctuations. While greater FX flexibility will help mitigate balance-of-payment pressures, an external financing gap of US$14 billion will remain.
3. Unsurprisingly, the COVID-19 crisis will also severely impact the budget. Lower growth and the sharp decline in oil prices are affecting tax revenues, which are projected to fall short of our target by about 3 per cent of GDP. The estimated cost of our pandemic emergency response plan, including additional health and social spending and fiscal stimulus targeted at the most affected sectors, is at least US$1.4 billion (0.3 per cent of GDP) in 2020. Together, these two factors will increase the overall deficit by about 2 per cent of GDP in 2020, despite expenditure reprioritization efforts. We estimate that the Government of Nigeria will require an additional US$11 billion (3 per cent of GDP) in 2020 to close the fiscal financing gap resulting from the shock.
4. To address the immediate external financing needs, the Government of Nigeria requests the maximum amount of IMF emergency financing available to Nigeria under the Rapid Financing Instrument (RFI), or SDR 2,454.5 million (about US$3,398 million), corresponding to 100 per cent of our quota. This loan will help remedy the immediate liquidity needs arising from the twin shocks facing us. We are confident that IMF involvement in the international effort to assist Nigeria in dealing with the global pandemic will play a catalytic role in securing additional budget support from our development partners. We are actively seeking this additional support, beyond the US$3.6 billion already committed this year by the World Bank, AfDB, IsDB, and Afreximbank.
5. The RFI purchases will be instrumental to help fill the projected fiscal financing and balance-of-payments gap in 2020. The RFI purchases will be on-lent by the central bank to the Treasury. To this end, we will sign a Memorandum of Understanding (MoU) between the central bank and the government, to specify the conditions of this operation, following the IMF’s policy and guidance.
6. In line with fiscal responses underway globally, we plan to partially accommodate the fiscal impact of the COVID-19 crisis in 2020. In lockstep, we will also grant banks the leeway to restructure loans for the most-affected but fundamentally sound borrowers in order to accommodate the cash squeeze facing the private sector. However, we will ensure that such actions are done in a timebound and transparent fashion and without compromising regulatory or accounting standards.
7. The government set up an Economic Sustainability Committee chaired by Vice President Professor Yemi Osinbajo to devise strategies to keep the economy working and ensure jobs are not only retained but that more are generated. The Presidential Economic Advisory Council (PEAC) is also working on policies to ensure macroeconomic stability and poverty reduction. Going beyond this year, the government of Nigeria is fully committed to pursuing policies consistent with macroeconomic stability and good governance:
• Fiscal policy: First and foremost, we will revert to our government’s planned medium-term fiscal consolidation path—which includes increasing revenue to 15 per cent of GDP through further VAT reforms, rise in excises, and removal of tax exemptions— once the crisis passes. The recent introduction and implementation of an automatic fuel price formula will ensure fuel subsidies, which we have eliminated, do not reemerge. In line with the Fiscal Responsibility Act, this will allow us to reduce the Federal Government deficit to under 3 per cent of GDP and eliminate recourse to central bank financing by 2025.
• Financing of the deficit: In addition to the external borrowing sought, we are also increasing our domestic borrowing limits in the supplementary budget so that we can make use of our favourable low domestic yields, particularly since the results of the last domestic bond auction show strong demand. The existing stock of overdrafts held at the CBN will also be securitized.
• Monetary and exchange rate Policy. As outlined in our home-grown Economic Recovery and Growth Plan, we are also strengthening monetary and exchange rate policies with a view to moving towards full exchange rate unification and greater exchange rate flexibility, which would help preserve foreign exchange reserves and avoid economic dislocation.
• Power sector reforms. We are also advancing in our power sector reforms—with technical assistance and financial support from the World Bank—including through capping electricity tariff shortfalls this year to N380 billion and moving to full cost-reflective tariffs in 2021.
8. Our anti-corruption efforts will continue unabated. We will strengthen the role of the Federal Audit Board in combating corruption and are committed to strengthening the asset declaration framework and fully implementing the risk-based approach to AML/CFT supervision while ensuring the transparency of beneficial ownership of legal persons. We fully recognize the importance of ensuring that financial assistance received is used for intended purposes. To that end, we will (i) create specific budget lines to facilitate the tracking and reporting of emergency response expenditures and report funds released and expenditures incurred monthly on the transparency portal (http://opentreasury.gov.ng/); (ii) publish procurement plans, procurement notices for all the emergency response activities—including the name of awarded companies and of beneficial owners—on the Bureau of Public procurement website; and (iii) publish no later than three to six months after the end of the fiscal year the report of an independent audit into the emergency response expenditures and related procurement process, which will be conducted by the Auditor General of the Federation—who will be provided with the resources necessary and will consult with external/third party auditors.
9. In line with IMF safeguards policy, we commit to undergoing a new safeguards assessment conducted by the Fund. To this end, we have authorized IMF staff to hold discussions with external auditors and provide IMF staff access to the CBN’s most recently completed external audit reports. We do not intend to introduce measures or policies that would exacerbate the current balance-of-payments difficulties. We do not intend to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, trade restrictions for balance-of-payments purposes, or multiple currency practices, or to enter into bilateral payments agreements which are inconsistent with Article VIII of the IMF’s Articles of Agreement.
10. We are determined to meet the immense challenge the Covid-19 pandemic is facing us with. Support from the international community will be critical, and we look forward to early approval of financial assistance by the IMF—which will help our effort to keep the Nigerian economy on a strong path and sustain our fight against poverty. Beyond this much needed immediate financial assistance, we reaffirm our willingness to remain engaged with the IMF, to benefit from its policy advice and its technical assistance. We authorize the IMF to publish this letter and the staff report for the request for purchases under the RFI.
/s/ Zainab Shamsuna Ahmed
Minister of Finance, Budget, and National Planning
Analysts forecast when Nigeria’s Bonny Light could hit $50
Economies are opening up, however, the recovery is gradual and will take some time for oil prices to hit pre-COVID-19 levels.
After months of dwindling demand and fluctuations in crude oil prices, which had crashed below $0 at a point, oil has now witnessed a resurgence in the last six days. Also, most countries are carefully reopening their economies after weeks of global lockdown.
As the world slowly moves towards resuming normal economic activities, oil industry players will be focused on how quickly things get back to shape. An uptick in economic activities signified by a return of public transportation, air travel, and reopening of factories will brighten the light at the end of the tunnel for oil prices. Some international oil experts have however argued that oil prices could only witness a surge later this year. According to them, an average of $35-40 per barrel might be possible by the end of the year.
For instance, a Norwegian consultancy firm Rystad Energy had stated that about $100 billion is expected to be cut in 2020 from E&P budgets, and that would, no doubt, be a negative development. The firm warned that if oil prices stayed below $30 per barrel in 2021, the total cut could reach $150 billion.
Rating agency Moody is a bit more optimistic, expecting a bounce in oil prices, but only in the medium term.
According to berry commodities group, oil prices in the long term will range from $50 to $70 per barrel. In the short term, Moody is less optimistic and sees the effects of CAPEX cuts trickling down from E&P companies to oilfield service companies (OFS).
How oil firms trim costs
Already, the ICCs are adjusting to the oil price crisis. For instance, last week, the Dutch-British oil and gas major Shell announced the reduction of its underlying operating costs by $3-4 billion per annum over the next 12 months compared to 2019 levels. It also announced a reduction of cash capital expenditure to $20 billion or below for 2020, from a planned level of around $25 billion.
In its own case, French oil major Total has also cut organic CAPEX by more than $3 billion, while planning savings of $800 million on operating costs in 2020 from $300 million announced earlier, along with a suspension of its buyback program.
Unlike the American supermajor ExxonMobil whose further cuts are in the pipeline, ConocoPhillips has started to cut its 2020 capital program by approximately 10% or $700 million, while Chevron targets $2 billion in cost savings. The IOCs aren’t the only ones suffering; with a financial crash in US shale, Canadian shutdowns, and of course, the OPEC deal.
Oil prices surge …
The oil futures in the New York exchange, which once traded below $0, was around $24 per barrel in Asian trading on Friday. This represents a 20% increase this week. Also, the Brent crude, which is around $30.15 per barrel, has had a 15% price increase in the last week. Nigeria’s Bonny Light also stands at N24.93, an increase of 10.16% as at Friday afternoon.
It was reported earlier that Saudi Arabia’s oil giant Aramco raised the price for all its crude oil grades to all regions for June, in a move that many analysts see as the start of demand recovery. This also hints that OPEC+ has started to cut production with the aim to stabilize the market.
But has the rebound come to stay?
Oil experts have described the surge as a welcome development driven by some factors. Director, Centre for Petroleum, Energy Economics and Law, Prof. Adeola Adenikinju, told Nairametrics in an exclusive interview that the development is hinged on a combination of demand and supply factors.
According to him, the reopening of global economies is bringing increased demand for energy services, thereby driving up oil demand. In addition, the cut in oil supply by OPEC+ members has also lowered excess demand in the market, as the global oil inventory figures have also shown some tentative positive signs.
On whether the surge has come to stay or not, he said, “If the rally would be sustained is still uncertain. This is because the fundamentals of the market have not changed significantly. Economies are opening up, however, the recovery is gradual and will take some time for economic activities to resume to pre-COVID-19 levels.
“There is uncertainty around the V-shaped recovery that has been predicted in some circles. In particular, the major source of global demand for oil, transportation, in particular, air transportation, is still largely under lockdown. International travels, tourism, etc., will not remain the same again, even when the vaccine is found.”
Adenikinju, who is also an associate of Delphi Ventura, US-based petroleum and energy-based consultancy firm, added that the daily commuting for work would also not remain the same, as employers accept the reality of working from home, and online meetings take centre stage.
If the surge continues, the oil experts expect the price of Nigeria crude oil, the Bonny light, to stay above $35 for Q3 and Q4, 2020. “It will pick up to mid-$40s or low $50s in 2021. However, Nigeria may not be able to fully take advantage of the increase because of production cuts that OPEC+ would need to maintain to sustain the market.
“Moreover, at higher prices, many of the shale oil producers would come back to the market and drive supply. Nigeria will also continue to face competition in its traditional market from other global suppliers, and reduce demand as some countries are using the Covid-19 pandemic to restructure their economies away from fossil fuels to renewable energy.
“The smart thing for Nigeria is to accept the reality that it will not be business as usual and find a way of increasing domestic value addition of its petroleum sector locally. We need to reduce costs of governance, and open up the economy for greater domestic and foreign investments,” he added.
Meanwhile, another oil expert, Chief Operating Officer, Oando Energy Resources, Ainojie Irune, urged stakeholders and Nigerians to stay optimistic, even as they see some casualties along the way to a rebound.
In an interview on CNN’s ‘First Move’ with Julia Chatterley, he explained that while most oil producers are currently battling with costs that they have very little control over, it is important for all to stay optimistic. He gave reasons why the surge could be sustained:
“We’re seeing an uptick in the price, we are seeing the decision by OPEC to cut 10 million barrels come in to realise the intention of OPEC; they’ve taken that huge step. But more importantly, the Government is stepping in to ensure that Independents like ourselves are engaged in conversations to ensure that process of survival, which is indeed a process for us, unknown as well, is managed jointly, to see that it takes the least amount of time to see a recovery.”
These banks gave AMCON N168 billion in 2019
Nigerian Banks increased their contributions towards the AMCON sinking Fund to about N167 billion in 2019 compared to about N154,9 billion a year earlier.
Nigerian Banks increased their contributions towards the AMCON sinking Fund to about N167 billion in 2019 compared to about N154,9 billion a year earlier. This is according to data compiled by Nairametics Research.
All banks operating in Nigeria contribute 0.5% of their total assets as at the dates of their audited financial statements as levies to the Banking Sector Resolution Cost Trust Fund (BSRCTF), also known as the AMCON Sinking Fund, to repay AMCON’s debt to the Central Bank of Nigeria (CBN).
According to the data banks in our universe of data that we track have contributed a combined N455.9 billion in the last 3 years alone. Financial services conglomerate, FBNH has contributed the most with about N107.4 billion in the last 3 years. Zenith Bank is next with about N82.7 billion.
What it means: The AMCON’s sinking fund was established following the realization that recoveries from AMCON-acquired bad loans might be insufficient to meet the cost of restoring financial stability. The fund is to further ensure that the burden on the national treasury is reduced, as any banking crisis will be resolved by banks, CBN and AMCON.
Meanwhile, the increase in levies is in tandem with the growth of the banks’ total assets. For instance, the total annual assets of banks in the last five years were N27.37 trillion in 2015, N32.02 trillion in 2016, N35.77 trillion in 2017, N41.04 trillion in 2018 and N47.27 trillion in 2019, based on data compiled by Nairametrics Research.
While some industry watchers believe that AMCON’s existence will be longer than expected, considering the crisis that rocked the industry from inception, some shareholders told Nairametrics that such tenure elongation is not a welcome development for them.
National President, Constance Shareholders’ Association of Nigeria, Shehu Mikail, explained that the contributions made by the banks are huge and if care is not taken, it could deplete banks profit and returns on investments (ROI).
He said, “The contributions being made by banks into the sinking fund is to the detriment of their shareholders. The act that established AMCON needs to be reviewed and the agency should give details of its services to the nation.
“We do believe that all other regulatory agencies are up to the task of enforcing the necessary rules to sustain the financial sector but this is not, as it causes more injury to shareholders in terms of dividend payment.”
Another shareholder, Taiwo Oderinde alleged that AMCON was designed to suppress investment in Nigeria, as all shareholders’ investments in the collapsed banks have gone down the drain. He said,
“Banks must have paid about N1trillion to AMCON in the last 10 years of its existence despite the fact that some financial institutions were nationalized without giving their shareholders anything. It was an emergency toxic vehicle established by the government through the CBN and stakeholders then to save the situation at hand, but it has overstayed its welcome.
“The only way forward is for AMCON to start winding down its operations because it has spent 10 years; it can use 2020 for rounding off. We call on the legislators to look into the tenure extension. The government needs to evaluate the performance of AMCON since inception, noting that the impact of the corporation is not felt.”
Q1’20: Okomu Oil’s result is more proof that essentials always win
With the pandemic on our tails, one of the lessons many businesses and individuals have learnt is that certain things are more important than others.
Even as the world scurries to find shelter from the storm, Okomu Oil stays unscathed as it records a 65.5% jump in revenue and 101.4% jump in Profit After Tax. Its performance is boosted by local sales, reduced cost of sales governed by optimized operations, as well as its decision not to pay dividends in the period just disclosed
If there is anyone business analysis tool to aid investors in choosing stocks that are head-above-water most of the time, it is “MoSCoW” – a prioritization system depicting the ranking of consumer spending particularly with the existence of constraints. Representing ‘Must,’ ‘Should,’ ‘Could,’ and ‘Would,’ the idea is that when the chips are down, consumers will spend on “Must-haves” as opposed to “Could haves” or “Should have.”
With the pandemic on our tails, one of the lessons many businesses and individuals have learnt is that certain things are more important than others; people will naturally channel their limited resources to their most essential needs. Even with the international market on a COVID-19-induced hiatus, OKOMUOIL’s Q1 2020 results performed exceptionally well, proving that its products are nothing short of essential.
With the growth in revenue of 65.2% in Q1 2020, the company recorded a turnover of ₦6.9 billion in comparison to the ₦4.2 billion it made in Q1 2019. It also recorded a profit after tax of over ₦2 billion in comparison to the ₦1 billion recorded in Q1 2019 – a jump of 101.4%.
What is most exciting is that the producers of the sought after Banga Palm Oil & Quality Noko 10 Rubber brands attained this feat from a YoY increase in local sales, almost doubling at a growth rate of 81.6%, thereby masking the weakness in export revenue – a decline of ₦89.8 million in Q1 2020 from its 2019 figures (-12.5% YoY).
Its export revenue is derived from rubber which is shipped out of the nation’s borders. The disclosed numbers suggest improvement in the company’s margins as well as heightened cash flow generation which could be as a result of the increased domestic demand from ongoing border closures. The growth in revenue also reflects the harvesting of matured portions from previous years’ planting.
The gain was further buttressed by the equally massive drop in the company’s cost of sales from the ₦838 million it incurred at the end of Q1 2019 to ₦252 million in 2020 – The decrease of 70% possibly attributable to optimized operations or the diminishing operational costs over time, typical of the agro-industry.
There could, however, have been some reclassification between the cost of sales and other operating expense that will be revealed in coming quarters.
With an increase in interest on long term loans of ₦113.5 million from ₦72.6 million in Q1 2019 to ₦186 million in Q1 2020, it is also clear that the additional capital obtained over the period contributed to its improved performance. The company also did not pay dividends in Q1 2020, clearly opting for a growth strategy of profit reinvestment.
Finally, cash generated from operations surged to ₦3.6 billion in Q1 2020 from ₦7.2 million in Q1’19 as a result of the surge in cash receipt from customers of 129.3% YoY.
The OECD-FAO Agricultural Outlook 2019-2028 foresees that the demand for agricultural products will grow by 15% over the coming decade. However, the Global Palm Oil industry has been witnessing unprecedented growth. The Global Palm Oil Market: Insights, Trends and Forecast (2020-2024) report by Research and Markets revealed that the global palm oil production volume is expected to reach 98.82 million metric tons in 2024, growing at a CAGR of 5.9%, for the period spanning from 2019 to 2024.
Agriculture companies such as OKOMUOIL are likely to be supported by devaluation impact and a larger market share due to border closures.
The company, thus, presents a buying opportunity based on its strong fundamentals and growth trajectory. Its share price as of today, May 5th 2020, before the markets opened was ₦55.05, which is about the midpoint of its 52-week range of ₦40.15 to ₦77. With a price-to-book ratio of 1.7643, the current price might be slightly overvalued.
The Price Earning ratio, which stood at 8.04, serves as a better measure of whether a stock is expensive or not.
However, with a dividend yield of 3.57% and earnings per share of 6.85 in the same period, Okomu Oil is set to grow at a good pace.