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Better Growth Expectations for 2022 Per the World Bank – Coronation Merchant Bank

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Lagos Nigeria - Investors King

Today we shed some light on the recently published Nigeria Development Update by the World Bank titled “The Continuing Urgency of Business Unusual”. The publication provides an overview of recent social and economic developments in Nigeria, as well as forward-thinking views and recommendations on select economic and policy challenges.

The report covers the weakening macroeconomic indicators despite higher oil prices and an analysis on economic and policy reforms that could support macroeconomic stability in the long-term.

For national output, the World Bank expects growth at 3.4% y/y and 3.2% y/y in 2022 and 2023 respectively. The improvement in growth prospects is on the back of higher oil prices as well as sustained growth in agriculture and a robust recovery in services (mainly telecommunications, and financial services). These sectors posted growth above prepandemic levels in recent quarters. The 3.4% y/y GDP growth forecast is in line with our projection for same indicator in 2022.

Although growth prospects have improved, domestic macroeconomic indicators have weakened. This can be attributed to high inflation, heightened global risks on the back of the Russia-Ukraine crisis, the impact of monetary tightening by central banks in advanced economies, national security and policy direction concerns due to the upcoming 2023 elections.

Based on the report, between 2020 – 2021, the “inflation shock” alone is estimated to have pushed c.8 million more Nigerians below the poverty line. The food inflation rate has been a major driver of Nigeria’s headline inflation. Given its importance in the production of staples such as bread and pasta, the shortage of wheat triggered by the Russia-Ukraine crisis has contributed to steady upticks in food inflation. As at April ‘22, the price of wheat flour had
increased by 36% y/y.

The World Bank provides some recommendations to combat rising inflation in the shortterm. They include – (i) fully reopen land borders to trade and remove fx and import restrictions on staple foods and medicines (ii) signal the CBN’s commitment to price stability as the primary goal and reduce subsidized lending to medium and large firms (iii) reduce CBN overdrafts for fiscal deficit financing to their legal limit (5% of previous year’s actual collected revenue). Our estimate for inflation for end-2022 is 20.6% y/y.

On fiscal, despite higher oil price, the World Bank expects oil revenue to be lower in 2022. This is mainly due to increased petrol subsidy payment and low oil production. The estimated total cost of petrol subsidy was revised from the initial N443bn to N4trn this year. Based on data from the NBS, average crude oil production (condensates inclusive) in Q1 ’22 was 1.5mbpd, below the revised FGN 2022 budget oil production benchmark of 1.6mbpd.
Nigeria’s oil production has been hampered by production shut-ins as a result of crude oil theft, vandalism, prolonged repairs, and community issues.

Regarding trade, the report highlights Nigeria’s path towards greater integration and policy reform through the active participation in African Continental Free Trade Area (AfCFTA) negotiations and its efforts to develop a domestic implementation plan. The World Bank notes that the AfCFTA implementation will require substantial preparation and engagement across sub nationals, the private sector, and other stakeholders.

From our vantage point, to maximise the benefits of the AfCFTA agreement, Nigeria’s manufacturing sector needs to be strengthened. The cost of transportation, power and logistics which is fundamental to production and competitiveness is significantly high and deepens cost of production for manufacturers.

Furthermore, local manufacturers need to significantly improve their service delivery and product standards if they are to be competitive in a burgeoning intra-continental marketplace. Nigeria’s manufacturing sector accounts for c.10% of total GDP. This compares with 11% in South Africa, 15% in Egypt and 13% in Ghana. Similar to the views expressed in this World Bank update report, we note that a handful of reforms are essential to boost domestic manufacturing competitiveness.

These include creating an enabling regulatory environment for technology to be incorporated in trade operations; developing a cohesive strategy to formalise the informal sector which should also focus on reducing government bureaucracies, improving fiscal policies and accountability, while providing training, technology, and access to financial services. Strengthening customs and border patrol to minimize smuggling and dumping of substandard products is also important.

The World Bank highlights the importance of further continental integration to enhance competitiveness of Nigeria’s manufacturing sector. Furthermore, given the growing trend of investors seeking green opportunities, the report suggests that Nigeria can remain competitive by reducing gas flaring, venting, and fugitive methane emissions.

Based on the report, Nigeria’s remittance flows has recovered to pre-pandemic levels. In 2021, remittances to Nigeria grew by 11.2% to USD19bn.

Since some transactions pass through informal channels, the actual amount of remittance flows into the country is arguably higher. We note that there was increased usage of official channels by Nigerians in diaspora in 2021, this contributed to the growth recorded in remittance inflow.

Furthermore, it is likely that the CBN’s Naira-4-Dollar policy assisted with boosting remittances in the period under review. There was a strong need among migrants to assist their respective families in Nigeria due to the economic downturn triggered by the coronavirus pandemic, this also contributed to remittance growth during this period. According to local media, 70% of remittances from Nigerians in the diaspora went into family support, while 30% was channelled towards investments in 2021.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Finance

Government Revenue Surges to N2.07trn in January 2024, FAAC Discloses

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FAAC

The Federal Accounts Allocation Committee (FAAC) has revealed a significant surge in government revenue to N2.07 trillion in January 2024.

This substantial increase reflects the buoyancy of Nigeria’s economic activities despite various challenges faced by the nation.

According to FAAC’s communiqué issued after its monthly meeting in Abuja, the N2.07 trillion revenue was distributed to meet the financial needs of the federal, state, and local governments.

N1.15 trillion out of the total revenue was disbursed to the various tiers of government, indicating a robust financial inflow.

The breakdown of the revenue distribution showcased that the Federal Government received N407.267 billion, state governments obtained N379.407 billion while N278.041 billion was disbursed to local governments.

Also, N85.101 billion, equivalent to 13% of mineral revenue, was allocated to the states as derivation revenue.

FAAC also highlighted that the revenue composition included N463.1 billion from distributable statutory revenue, N391.8 billion from distributable Value Added Tax (VAT) revenue, N15.9 billion from Electronic Money Transfer Levy revenue, and N279.03 billion from exchange difference revenue.

Despite the impressive revenue figures, FAAC noted a decrease in VAT collection by N71.7 billion compared to the previous month.

This decrease suggests fluctuations in consumer spending and economic activities, which could be influenced by various factors such as policy changes, economic conditions, and consumer sentiment.

Furthermore, FAAC reported increases in revenue from Companies Income Tax, Import Duty, Petroleum Profit Tax, and Oil and Gas Royalties.

However, revenue from Value Added Tax, Export Duty, Electronic Money Transfer Levy, and CET Levies experienced declines during the period.

FAAC’s disclosure of the January 2024 revenue underscores the importance of prudent financial management and effective allocation of resources to drive sustainable economic growth and development in Nigeria.

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Private Sector Credit Hits Record High of N76.94 Trillion in January 2024 – CBN Report

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Private employers

Private sector credit in Nigeria reached a record N76.94 trillion in January 2024, according to the latest report from the Central Bank of Nigeria (CBN).

This represents a 85.2% year-on-year increase from N41.54 trillion reported in January 2023.

The CBN’s Money and Credit Statistics report unveiled that credit to the private sector experienced a substantial month-on-month surge of 23.06%, or N14.42 trillion, from N62.52 trillion in December 2023.

This surge occurred amid the implementation of the CBN’s policy to unify the naira exchange rate.

Analysts attribute the reported N76.94 trillion credit to the private sector to the recent depreciation of the naira against foreign currencies.

The naira closed at N1,356.88 per dollar in January 2024, representing a 50.87% decline or N457.49 against the dollar compared to December 2023.

This depreciation compelled banks to extend credit to major corporations to meet the CBN’s mandated Loan-to-Deposit Ratio (LDR) threshold.

The CBN’s decision to resume the enforcement of the LDR policy, effective July 31, 2023, further propelled banks to increase lending to customers, stimulating the real sector of the economy.

With the CRR mechanism updated, banks with an LDR below the prescribed level faced a 50% lending shortfall penalty.

Experts suggest that the significant increase in private sector credit underscores the growing need for businesses to secure funds amidst economic uncertainties and exchange rate volatility.

It also signifies banks’ efforts to comply with regulatory requirements and support economic growth initiatives.

As Nigeria navigates its economic landscape, stakeholders anticipate further developments in credit dynamics and monetary policies to sustain financial stability and stimulate economic expansion.

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Senate Initiates Probe into N30tn Ways and Means Loans under Buhari Administration

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Muhammadu Buhari

The Nigerian Senate has embarked on a comprehensive investigation into the disbursement and utilization of the N30 trillion Ways and Means loans obtained by the Central Bank of Nigeria (CBN) during the administration of former President Muhammadu Buhari.

The Ways and Means facility allows the CBN to provide financial support to the government to cover budget shortfalls.

The decision to probe the massive loans comes amid concerns about the transparency and accountability surrounding the utilization of these funds, particularly as the country grapples with economic challenges, food crises, rising inflation, and worsening insecurity.

The Senate’s investigation aims to shed light on how the substantial overdrafts from the CBN were acquired and expended under the leadership of former President Buhari.

There is growing apprehension that the indiscriminate spending of the overdrafts, particularly during Godwin Emefiele’s tenure as CBN governor, may have contributed significantly to the current economic predicament facing the nation.

The probe will delve into the details of the N30 trillion overdrafts, with a specific focus on examining the purpose for which the funds were allocated and how they were utilized.

Also, the Senate will scrutinize the N10 trillion disbursed under the Anchor Borrowers Scheme, as well as the utilization of $2.4 billion out of the $7 billion earmarked for forex transactions.

The initiative underscores the Senate’s commitment to ensuring transparency, fiscal responsibility, and prudent financial management in the country’s economic affairs.

It is anticipated that the probe will unearth vital insights into the financial transactions of the past administration, enabling corrective measures to be taken to address any mismanagement or discrepancies discovered.

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