Food security has always been an issue for Governments and Policy Makers the World over from the dawn of time.
Food is a basic need of all people and food security is considered a component of National Security especially in the 21st Century. Hence, what to do with surplus food during the season of bountiful harvests and how to manage food in the time of famine is a never ending challenge.
In the Bible; the Book of Genesis 41 verses 22-31 and 47 verses 13-27, tell the story of Joseph a young Hebrew Man and how his interpretation of Pharaoh’s dream led to the creation of the first Strategic Grain Reserves in the World.
Joseph’s ideas in ancient Egypt, helped that Civilization survive the onslaught of famine that affected all other Kingdoms and groups of that time and have been replicated in varying formats since then. The basic idea has remained the same though, and this has become an integral part of food security for Nations.
A Strategic Grain Reserve (SGR) is a government stockpile of grain for the purpose of meeting future domestic (and sometimes International) needs. Government sets aside a part of the public funds to enable it buy these grains and invests heavily in building giant Silos that are used for proper storage of the grains.
In addition to their primary function of ensuring the year-round availability of food in the event of emergencies, the SGR can also be used to help in price modulation. If the price of a particular grain becomes too low as to make it economically unviable for Farmers to produce it, the Government comes and mops up the grains so as to drive up the price, and when it becomes too expensive, the government releases from its stockpile to help stabilise the price.
In Nigeria, the SGRs are located in all the States of the Federation (Silos are at different stages of completion and operation) and the grains are released based on the assessment and advice of relevant departments of government.
The National Agricultural Seed Council (NASC) also conserves seeds for onward distribution to Farmers during the planting seasons. Some of these seeds are kept in Silos, but are not edible and therefore separate from the SGR.
Recent incidences of looting of warehouses all around the Nation, have brought to the fore the importance, dangers and complete lack of knowledge of most Nigerians of the SGR and the Stockpile of grains and seedlings kept as a buffer for the Nation.
The Government of Ekiti State raised an alarm on Saturday that huge quantities of poisonous items, mistaken for food yet to be distributed as COVID-19 palliatives, were looted in warehouses in Ado-Ekiti on Friday according to Premium Times an Online news medium.
According to the Paper, the Federal Government’s silos, the ADP warehouse and the State Emergency Management Agency (SEMA) stores, all in Ado- Ekiti, were attacked by hoodlums under the guise of seeking Covid-19 palliatives. Unfortunately, the items carted away were Single Super Phosphate and NPK fertilisers, which they erroneously thought was “Garri’’ (Cassava grains).
Also on Sunday, October 25, 2020, hoodlums broke into the NACS Warehouse in Bukuru, Jos, Plateau State and looted wheat seeds worth millions of Naira. In both instances, Government has appealed to people not to consume these items because they are not fit for human consumption as they have been treated with Agrochemicals and are only suitable for planting.
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Lootings such as these are presently going on in different parts of the nation and the grains so looted would find their way into the Markets and would be sold alongside normal foodstuffs. There is also the prospect of depletion of seeds for the next planting season which was already projected to be hit by floods in some Northern States.
Concerted efforts must now be made to ensure that no further looting of the SGR is experienced, even as Government intensifies efforts to ensure all the ongoing construction/rehabilitation of Silos is completed, so that the idea behind the establishment of the SGR can be realised.
Recession; proactive measures not cyclical factors can resuscitate economy
The National Bureau of Statistics (NBS) released the GDP report for Q3 2020 which officially confirmed the economy has slipped into a recession.
Earlier this week, the Minister of Finance, Budget & National Planning, Zainab Ahmed attended the 26th Nigerian Economic Summit and in her presentation highlighted some of the steps and investments the government is making to bring the economy out of a recession. Some of the points she highlighted were; stimulating the economy by preventing business collapse through ensuring liquidity, retaining and create jobs through support to labour intensive sectors such as agriculture, undertake growth-enhancing and job-creating infrastructural investments in roads, rails, solar power and communications technologies, promoting manufacturing and local production across all levels as well as advocating the use of made in Nigeria goods & services. She also highlighted focus on pro-poor spending as a strategy to mitigate the impact of covid-19 on poor households.
We recall that during the weekend, the National Bureau of Statistics (NBS) released the GDP report for Q3 2020 which officially confirmed the economy has slipped into a recession. Following the 6.10% contraction recorded in Q2 2020, the economy further contracted though at a decelerating rate of 3.62% in Q3 2020. We reckon that prior to the covid-19 crisis, economic growth had began to slow with Q1 2020 GDP growth of 1.87% trailing prior 5-quarter average of 2.29% (excluding Q1 2020). The economy has largely survived on an oil-led recovery which we consider cyclical with other core sectors lagging and reeling from the fallout of the impacts of the 2016/17 recession.
In our view, the government needs to be proactive and strategic about policies it intends to adopt to resuscitate the economy. The focus on social welfare, fiat-led interventions in agriculture, emphasis on infrastructure development and advocacy for local manufacturing is reminiscent of prior strategies that can’t be really be considered successful. In our opinion, the economy is in dire need of influx of investments and adequate skill pool to spearhead resource allocation, which we believe can be provided by the private sector. Thus, the public sector should in our view invest in tackling structural issues around ease of business operations (borrowing costs, regulatory & licensing bureacracies/inconsistencies, public agency corruption & FX policies etc.) as well as strengthening regulatory & legal frameworks while the private sector drives the investments for accelerated growth in manufacturing, infrastructural development, agriculture and other core sectors.
In our view, supporting a free market-led economy (given the more organised nature of the private sector than the public sector) would see a return of foreign direct investments into the Nigerian economy while local entrepreneurs would be motivated to take more risks to develop businesses. The outlook for oil prices remain weak and production levels may remain below historical levels as OPEC attempts to keep price stable. Thus, the possibility of a cyclical recovery is limited, only proactive measures to correct long term structural issues would restore the economy on the path of accelerated inclusive growth.
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Understanding T.I.N.A. in the Nigerian financial system
As investors face an environment where uncertainty persists, the alternative left will be to park their excess funds in a safe place until Covid-19 passes.
This week, I want to talk about T.I.N.A….(no not the girl)
T.I.N.A. is an acronym for There Is No Alternative. It is used to describe a situation where the markets have excess liquidity and have no outlet to invest, so they invest in low yielding government securities because there is simply no alternative out there.
The financial markets today are awash with liquidity.
In the US for example, the CARES Act 1 cost an estimated $2.3t (11% of US GDP) including $510b to prevent bankruptcies and $349b in Small Business Administration Loan.
All this cash simply increases the liquidity of the financial system. The US Federal Reserve further lowered rates to a band of 0-0.25% in March 2020, the effect? Rates offered by banks on deposits have crashed.
Thus investors face an environment where the economy is shut because of Covid-19, and uncertainty persists. The only alternative left to the market is to park their excess funds in a safe place until Covid-19 passes, that safe place being US Treasuries and Bonds.
Thus the Fed and US Treasury can offer the low yielding paper to the market because the market is chasing safety, the investors buy because there is no other safe alternative out there, safety first.
It’s the same in Nigeria, the economy has contracted due to the COVID-19 mandated shut down and also exchange rate and land border closures.
These issues have strained the economy and have been amplified by falling economic output. As a result, investors are very risk-averse and are not willing to expose their capital to risk, thus they are seeking the safety of the sovereign paper.
The Central Bank of Nigeria (CBN) faced with a glut of liquidity has done what any prudent banker will do, it has dropped the fees it pays to lenders when it borrows money from them.
Thus the Nigeria Treasury bill rate which is the cost of the CBN borrowing at the short end of the market, (less than 365 days) has fallen.
Take the latest auction of Treasury Bills dates 11/11/2020, the rate now being offered by the CBN for 91day and 364-day paper is 0.0350% and .300% respectfully.
The low rates to my mind is not a surprise, but consider that the CBN offered to borrow N19b from the market, but received subscriptions from the markets to place N99b, this at 0.0350%.
Why are investors flooding the Sovereign Debt market with money? Because there is no alternative viz a viz risk and reward.
The Nigerian Stock Exchange All Share Index for instance has fallen from a recent high of 42, 624 in January 2018 to 32, 990 as of the Week ending Friday 20th, 2020.
In essence, the Nigerian investors prefer to book negative real return by holding risk free government paper than take any investment risk by exposing their capital to commercial lending.
Again this is a normal consequence when there is uncertainty in the markets but the lack for a better word “greed” in the markets has offered the CBN a rare chance to drop rates even in an inflationary environment.
The consequences of T.I.N.A. in the Nigerian financial system is clear.
Low rates will discourage savings, already the Pension Fund Administrators have a decision to make if they will continue to hold a full 8% of their portfolio in a negative-yielding but safe investments. T.I.N.A. also supports the Central Bank of Nigeria’s strategy to force banks to lend to the real sectors.
By dropping the risk-free rates in the economy, the CBN is making a point that there is no more free lunch, rather yield will have to be generated from creating risk assets and earning a return.
This sounds good on paper but the investing environment in Nigeria is yet unchanged positively, new taxes are being proposed, land borders are still shut, wages are still low and falling due to inflation.
In general, the Nigerian consumer is in a weak state with very low buying power, as evidenced by the sachetization of the consumer space. It will take a brave investor to commit funds, but then again, fortune, they say, favors the brave.
Traders’ Voice… A recession, for how long?
With the oil sector likely to remain depressed in Q4 2020, expectations of recovery will rest mainly on the future performance of the non-oil sector.
Recession! I think we all saw this coming. The Nigerian economy declined for the second consecutive quarter by 3.6% YoY in the third quarter of 2020, following a 6.1% drop in the preceding quarter. It marks the 2nd recession in the country in four years amid a significant decline in the oil sector, coupled with the rippling effects of the restrictions implemented across the country in early Q2 in response to the COVID-19 pandemic.
During the Sunday sermon, my pastor made a spirit-filled statement. He said, “it is hard to create sustainable wealth with a shaky foundation.” This statement did not only resonate with me spiritually, but it also did economically. In the case of Nigeria, ever since we shifted all attention to crude oil, it has been one economic struggle or the other. If I start talking about the macro-economic and sociocultural headwinds that watered down the effect of the fiscal and monetary stimulus packages, I would be forced to ‘off my mic’. At the end of the sermon, we were all asked to say this short prayer “Oh Lord, heal my foundation.” I also made the same prayer for Nigeria. However, deep down, I know we will need just more than prayers to address the fundamental issues hindering growth in the economy. The question remains, how long will it take to diversify the economy?
Over the years, huge amounts of investment have gone into the Agricultural sector in a bid to diversify the economy from crude oil. However, the agricultural sector remains underdeveloped and unable to sustain the economy (maybe we need to decide on what sector can really take us to the promised land). Although Nigeria is not the only country that has been gravely affected by the Covid-19 pandemic, I think it is safe to say that the Nigerian economy was already showing signs of weakness following a steady decline in crude oil prices and external reserves.
Just thinking out loud, for a country that is so rich in natural recourses, has a youthful population, favorable weather and fertile land, why do we struggle to generate multiple revenue streams? I guess it is true what they say, “one man’s trash is another man’s treasure.”
The oil sector recorded a real growth rate of -13.89 percent YoY, driven by the depressed price of crude oil this year. We also witnessed a significant drop in oil production, which declined by 18.13% YoY to 1.67 Mbps, representing its lowest level since the third quarter of 2016, due to compliance with OPEC+ cut agreements.
ICT remains the outperformer in the non-oil sector
The non-oil sector recorded a real growth rate of -2.51 percent YoY in Q3 2020, which is down by 4.36 percent relative to the rate recorded in Q3 2019, but represents an improvement of 3.54 percent when compared to the 6.05 percent contraction recorded in the preceding quarter. The gradual economic reopening pursued during the third quarter aided the improvement. The underlying subsectors that supported the non-oil sector include Information and Communication (14.56%), Agriculture (1.39%), Construction (2.84%), Financial and Insurance (3.21%), and Public Administration (3.58%).
For how long?
With the oil sector likely to remain depressed in Q4 2020, expectations of recovery will rest mainly on the future performance of the non-oil sector. We expect that the N2.3 trillion stimulus package contained in the economic sustainability plan will play a major role in supporting the recovery of the non-oil sector.
Nevertheless, the economic impact of the #EndSARS protest remains a concern as well.
All eyes are on the MPC meeting…
The MPC will be holding its last meeting for the year and with the recent macro-economic data (GDP and inflation), market participants will be anticipating the outcome of the meeting more than ever. The MPC will have to decide between further supporting economic recovery or taming inflation. The Central Bank of Nigeria unexpectedly slashed its monetary policy rate by 100 bps to 11.5% during its September 2020 meeting, bringing anchor to the lowest since 2016.
Inflation vs Interest rate (2015-2020)
*White line… inflation
*Blue line…. MPR benchmark rate
Where is the money?…….
The decision of the MPC will be a major determinant of market direction for the rest of the year. We face three
1. Bull case (rate cut): A further rate cut at the MPC will most likely renew interest on the long end of the
curve in the bond market as the short to mid end have received most of the traction in weeks. We will
also witness renewed interest in the equities market after last week’s pullback created possible entry
2. Base case (maintain status quo): The relatively quiet trend will persist in the bond and equities market.
Participants will be looking forward to the PMA on Wednesday where stop rates could print negative.
3. Bear case (rate hike): Although least likely, this would lead to a sharp knee jerk negative reaction
across all financial assets especially in the fixed income market.