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Banks re-capitalisation and its impacts on making Nigeria a $1trn economy

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The Central Bank of Nigeria (CBN) is focused on achieving the ambitious goal of Nigeria’s economy attaining Gross Domestic Product (GDP) of $1 trillion by 2030 as set by President Bola Ahmed Tinubu in his Policy Advisory Council report on the national economy. Seun Ibiyemi in this report, analyses the present state of the economy.

The Central Bank of Nigeria (CBN) Governor, Dr. Olayemi Cardoso has disclosed plans to shore up the country’s Gross Domestic Product (GDP) to $1 trillion in eight years.

Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country during a specific period. It is an internationally recognised measure of economy size and strength.

Nigeria’s GDP was recently rebased from about $270 billion to $510 billion for 2013. The increase of about 90 percent was attributed to new sectors of the economy such as telecommunications, movies, and retail which were previously not captured or underreported. As a result of the rebasing, Nigeria was adjudged the largest country in Africa and 26th largest in the world.

While asking banks to re-capitalise is quite desirable given the devaluation of the naira and high rate of inflation in recent years, it will be advisable that the CBN takes a different approach to the exercise this time around taking into cognisance the current circumstances of the Nigerian banking industry which has become a lot more democratised as a result of technological innovation, demographic demands and the weak state of the economy which will inhibit any capital raising exercise.

However, it is not enough to ask banks to recapitalise, the ultimate goal is for them to have increased capacity to positively impact the economy of the country for the benefit of the people. While the last bank capital raising exercise was deemed to be a success which attracted about $3 billion in additional equity into the Nigerian banking industry, the real benefit of a stronger financial services industry was not felt by majority of Nigerians because as of today only about 3 percent of Nigerians have access to bank loans which is roughly the same as what obtained before the bank consolidation exercise.

One of the biggest problems inhibiting the growth of the Nigerian economy is the fact that most entrepreneurs don’t have access to bank loans and this was one of the issues that the bank recapitalisation exercise of 2005 was meant to address. However, despite the success of the capital raising exercise, there was no increased flow of credit to Small and Medium Scale Enterprises (SMSEs). Rather the government’s appetite for bank credit through Treasury bills and government bonds escalated to take advantage of the increased capacity of our banks.

As a result of this, up to 70 percent of the loans given out by the banking industry are to the government at various levels and this has led to the private sector being crowded out of the money market. That said, most of the loans given to the private sector are to blue chip companies and multinational corporations thus leaving very little to support the growth of SMSEs in the country.

For the proposed bank recapitalisation exercise to have the desired effect of helping to grow the economy, there must be policies put in place to ensure that banks are incentivised to increase their lending to SMSEs (especially the productive sector) while government’s dependence on the money market should be reduced to ensure that more funds are available to the private sector to finance the growth of the economy.

Prior to the bank capital raising exercise of 2005, the categories of banks we had were limited to commercial and merchant banks which became unified by the universal banking license under which the 25 billion Naira minimum capital base was stipulated. Today, we have several categories of banks catering to various niches and it would be impractical to set the same minimum capital base for them as was done in 2005.

Unlike in 2005, we now have banks categorised into National and regional banks, interest paying and non-interest banks. We also have banks licensed as Mobile Money Operators, Payment Services Banks, Micro Finance Banks and even POS operators who provide banking services to the public. Given the democratisation of the banking industry since the last bank recapitalisation exercise, it is imperative that the CBN takes a different approach to the proposed exercise so as not to destabilise the industry.

Rather than take a rigid approach of insisting on a blanket minimum capital base for all banks which led to a lot of jobs losses in the industry then, I believe that this time around banks should be incentivised to increase their capital base while given the freedom to play at whatever level they are capable of within the industry. The CBN can for instance reduce the Cash Reserve Ratio and Capital Adequacy Ratio while increasing access to forex for higher capitalised banks to encourage banks to raise their capital to the desired levels.

In all this we must not forget that the ultimate goal of the bank recapitalisation exercise is to accumulate additional capital to finance the growth of the economy and this can only be achieved through significant increases in credit by the private sector. Thus, while we are incentivising the banks to increase their capital base, we must also be incentivising them to increase their lending to the public while also building a credit culture in our society to ensure that the system is not abused by the public who are supposed to be the ultimate beneficiaries of the bank recapitalisation exercise.

Comparison of BRICS and MINT economies

However, Mr. Cardoso seems unshaken and prepared to face the challenges ahead. According to him, the envisioned GDP target will put Nigeria in a position of much more favourable macroeconomic indices, comparable to other economies of $1.0 trillion and above, with similar population and development characteristics. As with these countries, there is an expectation that driving to this target requires improvements in productivity, employment, and key macroeconomic growth indices.

In drawing a comparison with some of these countries, Cardoso referred to selected BRICS and MINT economies, such as Brazil, Mexico, and Indonesia for their capacity to absorb economic shocks and rebound from cyclical downturns.

BRICS, established in 2006, comprises China, Brazil, Russia, India and South Africa. MINT countries refer to the economies of Mexico, Indonesia, Nigeria, and Turkey.

According to him, Brazil with a population of 215 million, Mexico 129 million, and Indonesia 275 million have 2023 unemployment rates of 7.8 percent, 3.1 percent, 5.4 percent respectively.

By comparison, KPMG, a multinational consulting firm, in a newly-released report tagged ‘KPMG Global Economy Outlook report, H1 2023, stated that the Nigerian unemployment rate had increased to 37.7 percent in 2022 and will further rise to 40.6 percent, due to the continuing inflow of job seekers into the job market.

For the CBN Governor, these are unemployment levels that “we in Nigeria should aspire to achieve, and with resolve can attain.”

Nigeria is in need of new investments, debt restructuring, and restoration of old credit lines. In a toxic political environment, Nigerian policymakers are looking for good economic news that the people can see and most importantly feel.

The President and his fiscal team have been globetrotting in the last 16 weeks in search of new investments, debt restructuring and restoration of old credit lines. There have been a lot of promises but very little cash on the table. The naira has oscillated wildly but seems to have stabilised at the current level of N1,150/$.

Nigeria’s economic challenges are consistent with its regional peers, the economic challenges are similar to some of its African peers, especially Angola, Ghana and Kenya.

The outlook is that Nigerian growth in Q4 will be stronger than Q3. The IMF and World Bank are estimating full-year 2023 growth of 2.9 percent, implying that the economy will have to expand by 4.24p ercent in Q4.

The policy-making environment is more likely to be predictable and stable, especially in exchange rate management and curtailment of the petrol and electricity subsidies in the near term. The real benefits of market reform policies are unlikely to be felt in Nigeria until Q2 2023.

Fiscal and monetary authorities

Both monetary and fiscal policies are macroeconomic tools used to manage or stimulate the economy. Monetary policy and fiscal policy together have great influence over a nation’s economy, its businesses, and its consumers.

The Minister of Finance and Coordinating Minister of the Economy, Mr. Wale Edun said that his Ministry and the Central Bank of Nigeria (CBN) are collaborating to undertake a comprehensive reform of the country’s foreign exchange market.

In terms of achieving macroeconomic stability, he said it is important to stabilise the exchange rate, to bring down inflation, and of course eventually bring down interest rates so that borrowing for investment is affordable. The collaboration would lead to the development of a new framework for the foreign exchange market.

“There is going to be a comprehensive reform of the foreign exchange market. Individual retailers (currently) are unprotected; they’re dealing in a market without rules. The intention is to have all players (operate) inside a formal market, where there is a rules-based price setting, where the smaller retailer is protected, and where speculators that deal illegally will face appropriate sanctions.

“The Central Bank of Nigeria is autonomous in terms of setting interest rates, and controlling money supply. But it is one economy, and so the foreign exchange question is something that is done with collaboration. So it will be a joint effort by the central bank, in collaboration with the Ministry of Finance, to really deliver a new framework for the foreign exchange market.”

Experts hail CBN’s planned recapitalisation of banks

Also, two financial experts have commended the Central Bank of Nigeria for its plan to further recapitalise Deposit Money Banks.

They gave the commendations in separate interviews.

Former President, Association of National Accountants of Nigeria, Dr Samuel Nzekwe described the decision of the apex bank to increase the capital base as a welcome development.

Nzekwe said that Nigerian banks needed to recapitalise because the country‘s currency had been devalued due to the rising inflation rate in the country.

According to him, the inflation is so high that what they have in the system might not be enough to back up any financial obligations that may come.

There is the need for banks to recapitalise so that they can continue to exist.

“In addition, they need to recapitalise a little bit so that they can be in strong fittings in case of any eventuality and problems,” he said.

The ex-ANAN president emphasised the need for banks to raise their capital base further to meet the challenges of the current time.

Also former Director, Research Department of CBN, Dr Titus Okunronmu said that the CBN’s planned recapitalisation of banks was a step in the right direction.

Okunronmu said it would put the banks in a better position to grant credit to the public.

He added that this would also help them to face future challenges.

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Private sector players urge FG to suspend new electricity tariff

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…Says it will affect production negatively

By Omolola Dede Adeyanju

Private Sector players in the Nigerian business space under the umbrella group of the Organised Private Sector (OPSN) have urged the Federal Government (FG) to suspend the new electricity tariff.

The Nigerian Electricity Regulatory Commission (NERC) had recently announced an upward review in the electricity tariff for Band A customers generating public outcry.

In a statement by OPSN comprising top Business Membership Organisations (BMOs) MAN, NACCIMA, NECA, NASSI and NASME representing more than 5 million businesses in Nigeria, the association said has taken due notice of the various reforms initiated by the President Bola Tinubu administration to stabilise the economy, enhance human capital development and increase the tax-to-GDP ratio to 15 percent while enhancing fiscal transparency.

“The OPSN has received numerous complaints from its member-companies on the implications of the recent astronomical increase in electricity tariff by the Nigerian Electricity Regulatory Commission (NERC) for Band A customers without the required and proper consultations with the private sector. This sudden exponential increase in the face of inadequate electricity supply, is inimical to the competitiveness of Nigerian products and businesses and will definitely exacerbate the impact of high cost of production,” the Group argued.

Meanwhile, OPSN explained that the astronomical increase is against the MYTO Order referenced NERC/2023/05, which valued the cost-reflective tariff at N114.8/Kwh (determined using exchange rate of N919.39/$1).

“It also does not reflect the current exchange rate reality that has seen the Naira appreciate by 62.95 percent over the dollar in the last one month.

“A closer look at the impact of increase in electricity tariff to N225/kwh (determined using exchange rate of N1463.31/$1) on the cost profile of a medium sized company using 700kw revealed that the firm will need to pay about N1.4b per annum (700 x 225 x 24 x 365)for electricity.

“In China, a similar medium sized company will pay a little over N24m (700 x 94.14 x 24 x 365). Obviously, the new electricity tariff is outrageously higher, when compared with the going rates in countries with significant manufacturing performance.”

The body further enumerated that In the United states of America (USA), United Kingdom, Germany, France, China, India, South Africa, Ghana and Benin Republic, prevailing electricity cost per kilowatt hour are $0.1545, $ 0.3063, $0.53,$0.0573,$0.076, $0.068, $0.0999, $0.123 and $0.195 respectively.

The group further argued that conversion values of the afore-mentioned electricity cost in Naira are N191.38, N379.41, N656.50, N70.98, N94.14, N84.23, N64.53, N152.36 and N125.95 respectively.

“Clearly, with the new tariff of N225/kwh, Nigeria now ranks third after Germany and the United Kingdom on the list of countries with high electricity cost. What is most worrisome with the Nigerian case is the fact that the electricity to be supplied is not adequate.

“Also, the increase is coming on the heels of macroeconomic instability, infrastructure deficits, as well as other supply side constraints limiting the performance of the productive sector. Truth be told, over 65 percent of private businesses, especially manufacturing concerns and SMIs, may be forced to close down due to the high electricity tariff.

“However, in consideration of the above and from compelling primary data and submissions from member-companies, the OPSN noted that it is constrained to state that the more than 200 percent increase in electricity tariff at this difficult time is inimical to the survival of our businesses and would lead to unprecedented downturn in the productive sector of the economy.

“It will have negative trickle-down effects and certainly impoverish Nigerians. The unwarranted increase will worsen the upward swing in inflation, aggravate the pressure on the disposable income of the average Nigerian and lead to closure of many private businesses. The cumulative effect will be an escalation of the current high level of unemployment and insecurity in the country,” it explained.

The group urged the government to have dialogue around the process and methodology of determining electricity tariff as well as jointly agreeing on the transparent mechanism required for tariff setting.

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NPA secures $700m facility from Citibank to rehabilitate Apapa, Tin-Can Ports

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By Seun Ibiyemi

The Nigerian Ports Authority (NPA) has negotiated a loan of $700million from Citibank to be funded by the UK Export Finance (UKEF), an export credit agency, to rehabilitate the Apapa and Tin-Can Island ports, Lagos.

The Ports Authority has also opened a discussion with another funding agency to secure financing for upgrading of the Eastern Ports including Calabar, Warri, Onne and Rivers Ports as well as the reconstruction of Escravos breakwater.

Speaking in Lagos on Wednesday during the signing of a mandate letter with Citibank Nigeria, Managing Director of the NPA, Mohammed Bello-Koko, said the mandate letter will be sent to the Debt Management Office for final review and approval.

He said the funds are ready and the reconstruction of the Lagos Ports will start soonest even as the NPA perfects plans to sign another mandate letter for the upgrading of the Eastern Ports in about a month.

“In the last two years, the Federal Government has realised the need for us to rehabilitate and reconstruct the ports all over the country. We have been having discussions with multilateral funding agencies who have sent various proposals that we have reviewed.

“What we did is to further discuss with interested parties and we realised it is better to separate the ports in Lagos from the ports in the East, and we are in discussion with other funding agencies to fund the construction of ports outside Lagos,” the NPA MD said.

According to him, the Citibank facility is the cheapest for the Ports Authority because it comes with affordable interest rates.

“Port efficiency is not about automation which we have already begun, it’s also about the physical infrastructure, which must be in place and that’s why we are automating. Automation will naturally bring efficiency, increase revenue and plug leakages,” he added.

Bello-Koko said that the NPA is putting the Port Community System in place, which is a platform that will improve trade facilitation.

“Currently in Nigeria, importers or exporters fill up to 30 to 40 forms for one transaction but the Port Community System will reduce the numbers of forms, human interference and ensure speedy clearance process in or out of the country,” he added.

Earlier, Managing Director of Citibank Nigeria Limited, Ireti Samuel-Ogbu, said the bank is committed to supporting NPA and the Federal Government in bridging infrastructure gaps.

“We are absolutely delighted to be partnering with NPA especially being the collection bank for foreign and local currency port levies. Now, supporting this strategic initiative through export credit financing to upgrade port infrastructure in Tin-Can and Lagos Ports is commendable. However, we are committed in supporting NPA and the Nigerian Government in all its endeavours especially in the infrastructure space,” Ireti Samuel-Ogbu stated.

According to her, Citibank was opportune to have met with Wale Edun, Minister of Finance, a few weeks ago where the port upgrading project was mentioned and he was very delighted about the project.

“Since NPA generates its own foreign revenue, we will be able to support foreign facilities from our resources because this project is very strategic and an important project for NPA and the country at large.

“We are looking forward to this project and we thank NPA for giving us this opportunity and hope to bring this into fruition as soon as possible,” Samuel-Ogbu added.

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Blue Economy Ministry to spend N1.35bn on foreign, local trips, vehicle

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The Federal Ministry of Marine and Blue Economy will spend a whopping N1 billion on the purchase of vehicles in 2024.

The ministry will also spend a total of N35 million on local and foreign travel in the same year under review.

According to the 2024 Appropriation Act signed into law by President Bola Tinubu, the ministry will spend N10 million on local travel and transport: training; N15 million on local travel and transport: others and N10 million on international travel and transport among others.

However, speaking on the appropriation, the President, National Association of Managing Director of Licensed Customs Agents (NCMDLCA), Lucky Amiwero, said the money for the purchase of vehicles for the ministry should be channelled towards port rehabilitation.

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