Tag Archives: Finance

Bank of Uganda should seize the day

By Rafiq Raji, PhD

Recent political developments in Uganda are sobering, but not surprising. Yoweri Museveni, the Ugandan president, is pushing through parliament, legislation that would allow him stay in power another 5 years, and perhaps for life. He has already been in power for 31 years. There are indications some citizens may no longer be passive about such autocratic tendencies: contentions about the controversial law seeking to remove age limits on contestants for the presidency caused a brawl during at least two recent sittings of the Ugandan legislature. Security operatives, allegedly from President Museveni’s special forces, were immediately deployed to eject the erring lawmakers. Of course, a downside is that instead of the security agencies putting more time to closing the many unsolved murder cases in the country, they are busy going after perceived enemies of the president. Never mind the bizarre mandate they recently added to their primary remit: policing indecent dressing and pornography. There could not be greater evidence of misplaced priorities. More likely is it, though, that the authorities seek to distract the populace from more pressing problems. Be that as it may, there have been some positive happenings on the back of having a relatively secure political leadership.

Bright future
The authorities recently agreed terms with a consortium to build a much desired crude oil refinery; after a number of failed talks with previously interested investors. Their persistence has clearly paid off, though. Because not only have they agreed what seem like quite good terms, the investors are of great standing. The consortium, which includes American industrial giant, General Electric, would build and operate the country’s first refinery, hopefully processing a greater part of the country’s recoverable oil reserves of 1.4-1.7 billion barrels; a feat that has largely eluded other African oil producers. So even as Mr Museveni’s longrunning rule deserves much criticism, it is highly unlikely the refinery feat would have been achieved if his position were not so secure. A fragile political leadership could have easily succumbed to pressure from global industry giants who harped about the weak economic case of the project. Earlier botched negotiations were with Russia’s RT Global Resources (which then put the project at about US$2.5 billion) and a subsequent one with South Korea’s SK Engineering. It is not all done yet, though. A project framework agreement is yet to be signed, but is expected to be endorsed soon. Better still, this new agreement involves regional neighbours, Kenya and Tanzania, which have committed to 2.5 percent and 8 percent stakes respectively. Additionally, construction has started on the US$3.5 billion joint crude oil pipeline with Tanzania, expected to be completed by 2020, about the same time first oil is expected. An ambitious Uganda now envisages membership of the oil producing countries’ cartel, OPEC, then. If all goes according to plan, growth could be in the high single-digits in just half a decade from now, when as the International Monetary Fund (IMF) estimates, the crude oil economy could account for at least 4 percent of output; albeit it is not likely to match pre-global financial crisis growth of above 10 percent. Growth would likely still be decent in the short to medium term, though, about 5.7 percent in 2018, the IMF reckons, from an estimated 5 percent in 2017.

Last chance
I made a call to my clients for an additional interest rate cut by the central bank in August, after one by a 100 basis points to 10 percent in June. The Bank of Uganda (BoU) thought otherwise and kept its benchmark rate unchanged. I am reiterating my call for at least a 100 basis point rate cut to 9 percent. With inflation slowing, and likely to slow further, I think the monetary policy committee (MPC) has a chance to ease policy at its October meeting; lest it misses the chance to do so for the remainder of the year. At 5.3 percent, annual consumer inflation was largely unchanged in September; only a basis point higher than the earlier month’s headline of 5.2 percent. But this was still great progress from a year-to-date high of 7.3 percent in May. That said, prices accelerated quite significantly on a monthly basis in September, by 1 percent, after barely 0.2 percent in August. The increased price pressure is likely fleeting, though. Monthly core inflation last month was just 0.1 percent, from zero percent earlier; pushing annual core inflation by about the same pace to 4.2 percent from 4.1 percent in August, well within the authorities’ 5 percent target. My forecasts put annual consumer inflation at about 4 percent by year-end. The committee should seize the day.

Also published in my BusinessDay Nigeria column (Tuesdays). See link viz. http://www.businessdayonline.com/bank-uganda-seize-day/

Nigeria: Still delicate

By Rafiq Raji, PhD

The Nigerian economy exited recession in the second quarter of 2017 to much applause. Readers of my column would recall my earlier expectations of a positive recovery in the first quarter of 2017. When that did not happen, I took a more cautious view that a recession exit was likely in Q3 but almost certainly in Q4. Needless to say, I was pleasantly surprised that it finally happened in Q2. A particular client, I thought, would at least be already ahead of its competitors if they acted on my recommendation that the recession was going to be shortlived. But now that the economy is recovering, how sustainable is it likely to be? That would depend on a few things. Government policy for one. Agriculture proved to be resilient during the slump and yet despite stimulus efforts by the authorities in the sector, growth has been slowing. This must be a little frustrating for the Central Bank of Nigeria (CBN), which has been at the forefront of encouraging banks to lend to the agriculture sector. It may very well be that one is being a little hasty: there are indications the CBN is beginning to succeed. Recently, Stanbic IBTC Bank signed a 50 billion naira agreement with the Nigeria Incentive-Based Risk-Sharing System for Agricultural Lending (NIRSAL), an agricultural credit guarantee scheme that used to be a unit within the CBN. Should the partnership succeed, more than 90 thousand jobs are expected to be created. And that is just one bank. Also, power generation has begun to improve, rising to about 7,000 mega watts (MW) lately; albeit only about 96 percent can be transmitted and just two-thirds reach consumers. In any case, it would likely remain a while before there is ample electricity to spur the type of industrialization needed to employ the country’s teeming jobless youths.

High food prices weighing on inflation 
Annual consumer inflation has been slowing; 16 percent in August from almost 19 percent in January, although the price index accelerated by the same monthly pace in both months. So, price pressures remain persistent. High food prices are majorly why, with food inflation – about 51 percent of the consumer price index (CPI) – at 20.3 percent in August from 17.8 percent in January. There are myriad reasons for this. Floods in the agricultural belt states of Kogi, Benue and environs mean this year’s harvest has likely been jeopardized. Incidentally, these are areas that have also been barraged by Fulani herdsmen attacks, leaving damaged crops in their wake. Continued insecurity in the northeastern parts of the country also means a significant portion of the farming community remains idle. Never mind that at least 5 million people in these parts are reportedly in need of food aid. Additionally, exporting food is now very lucrative. So what should ordinarily be sold in local markets are increasingly ferried to neighbouring countries and further abroad, where they can be sold at a premium. Some of the food inflation is imported, however, about 13 percent of the CPI. So, a still dear foreign exchange rate is also a factor. There is much to cheer about in this regard, though. Above US$50 crude oil and relative security in the oil-producing Niger Delta area means rising production volumes have been improving the authorities’ finances. These would likely be constrained still, as the authorities’ 2.2 million barrels per day (mbpd) target for 2017 now seems highly unlikely. Because even if that much could be produced, there are indications the oil exporting countries’ cartel the country belongs to would not allow output above 1.8 mbpd.

Burgeoning debt
There is growing concern about the government’s debt burden, rising to US$64.2 billion (16 percent of GDP) in June from US$63.8 billion two years earlier. Ordinarily, there should not be much worry at this relatively benign accumulation rate. But in the period, foreign debt has increased by almost half. And debt servicing is beginning to weigh overmuch on tax revenue, which the International Monetary Fund (IMF) put at more than two-thirds. Also, the authorities have not been as successful as they would have liked in securing foreign concesssionary debt. There are a couple of reasons for this. It held on to a costly fixed exchange rate regime for too long, haemorrhaging much valuable hard currency. Had the government been more prudent, floating the naira early on that is, it would not have needed to borrow as much. A populist political leadership also meant the CBN lost a great deal of its independence, to the dismay of investors and development partners. Consequently, multilateral financial institutions were relunctant to lend money while such a sub-optimal policy regime subsisted. There is reason to be optimistic now, though. A new FX market platform now allows foreign portfolio investors to trade at market-determined exchange rates. Hard currency inflows have surged consequently, with at least US$9 billion in volumes recorded in the first 6 months of the platform’s operations.

Do not rock the boat
The best the CBN can do at this time – its monetary policy committee would be deciding on interest rates on 26 September – is thus to maintain its current policy stance; one that has engendered naira stability and brought a new lease of life to the equity and fixed income markets. For those who desire that interest rates be lower (the monetary policy rate is currently 14 percent), the fundamental question remains whether they would buy government securities if yields were not high enough. When the authorities recently sought to test if they would, subscriptions were unsatisfctory. So, until market participants are willing to accept lower yields, it would not make sense for the CBN to start reducing interest rates. And that would not likely be the case until inflation is much lower, in the third quarter of 2018, say, when it is likely in the single-digits. Until then, the CBN would do well to do nothing.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. http://www.businessdayonline.com/nigeria-still-delicate/

Ghana: Ease faster

By Rafiq Raji, PhD

After earlier boasts about no plans to extend Ghana’s US$918 million aid programme with the International Monetary Fund (IMF), which the country agreed to in April 2015, the still new Nana Akufo-Addo administration was saved from a potential mis-step in late-August, when the Bretton Woods institution graciously decided to extend the package anyway, by another year from April 2018; much to the relief of market participants. Another good news came in one day after the Bank of Ghana (BoG) monetary policy committee (MPC) started its meeting in September (decision due on the 25th): the International Tribunal for the Law of the Sea (ITLOS) ruled Ghana was within its right to drill for oil in an area of the Atlantic Ocean it considered within its maritime boundary, after Ivory Coast contested its right to do so. Had the outcome been adverse, the US$6 billion Tweneboa, Enyenra, and Ntomme (TEN) oil fields located in the disputed area, which produced first oil in August 2016 and are expected to pump 80,000 barrels per day in 2017, would have been in jeopardy. Prices for Ghana’s still dominant export, cocoa, in the international markets remain poor, however; down about 30 percent from a year ago. And even though gold, its other major source of foreign exchange, has been doing well in the international markets lately (up 15 percent from December last year), local production is likely to suffer this year, as the authorities clampdown on illegal small-scale mining (locally termed “Galamsey”). So put together, the authorities’ finances may suffer a little this year.

Take control and diversify
The authorities are not standing idly by while this happens. Together with Ivory Coast, plans are afoot to ensure both governments have greater control over international cocoa prices. In this regard, they plan to build special warehouses to store cocoa beans, enabling them to mop up excess stock when there is risk of a supply glut like is the case currently, or add to supply when there is a scarcity. That capacity won’t be in place for at least another year, though, as a US$1.2 billion loan request to the African Development Bank (AfDB) is yet to be approved, making it more likely that the infrastructure may only become available in the 2018/19 season. The authorities are geared for the current 2017/18 season, though. In September, the Ghana Cocoa Board (Cocobod) secured a US$1.3 billion loan from international banks to fund purchases from farmers, which would start in October. The amount is almost 30 percent lower than the US$1.8 billion it raised for the 2016/17 season. Considering that even that much ran out months before the end of that season, with the Cocobod having to seek US$400 million in bridge financing, the ability of the board to offer attractive prices in the 2017/18 season may be similarly constrained. Thus, smugglers who go across the border to Ivory Coast for better prices are likely to continue having bumper paydays for a little while longer.

Still, there is more the authorities could do to diversify the country’s agricultural base. It does not make sense that a country with such fertile land imports almost three-quarters of its food supply. Efforts to boost local production have not been successful, however. True, there have been investments here and there. But as structural constraints remain, returns have underwhelmed. In some cases, factories built to process agricultural produce simply closed shop, after supply of inputs failed to keep pace. Authorities expect that its ambitious “one district, one factory” programme would change this poor state of things. It remains to be seen whether it would, but early indicators are not encouraging. Things are looking up in other areas, though. Power cuts are no longer the norm. And the authorities are acting proactively to ensure there is a low probability of running out of gas for generating power in the future, one of the reasons why electricity was short in the past. The government signed a 12-year gas supply deal with Russia’s Gazprom in September, after a 15-year one with Equatorial Guinea just a month before. That is, despite the likelihood that Ghana may become self-sufficient in gas by end-2018, when the 180 million cubic feet per day Sankofa gas field is expected to come onstream.

Capitalize on slowing inflation
Annual consumer inflation may very well be in the high single-digits from early 2018. My forecasts put the headline at about 8 percent then. But it would likely be in the 10 percent range before end-2017, from 12.3 percent in August. So at 21 percent going into the September meeting, the central bank’s policy rate is way too high relative to the inflation outlook. That is, despite having cut rates by 450 basis points already this year. Since there is no doubt the BoG would ease rates even further, the advocacy here is that it should do so faster. The economy needs the lift.

Also published in my Premium Times Nigeria column. See link viz. https://opinion.premiumtimesng.com/2017/09/25/ghana-the-need-to-ease-monetary-rates-faster-by-rafiq-raji/

Blue economy: Nigeria could learn from Seychelles

By Rafiq Raji, PhD

Some years ago, at an investor event in London, a prominent Africa-focused portfolio manager wondered if anyone knew where he could get research on Seychelles. The firm I used to work for at the time had perhaps the most comprehensive African macroeconomic research coverage, including such countries as Sierra Leone, The Gambia and so on; which I incidentally covered at the time, but no, we did not cover Seychelles. The reason was not farfetched. It is a small country, even by African standards. When you think of Seychelles, the thought that immediately comes to mind are its beaches and other tourist attractions. Turns out, its economy is also well-run. Of course, I had since moved on to other things. But just recently, a contact wondered if my budding research firm, Macroafricaintel, had any report on the country. I wondered what spurred the sudden interest. She graciously explained her curiosity was aroused by such innovative solutions coming from the country like the proposed US$15 million blue bond, the proceeds from which would be used to fund the development of sustainable fisheries. Just so you know how impressive it is, it earned the 2017 Ocean Innovation Challenge award at The Economist World Ocean Summit earlier in the year. In 2016, Seychelles also struck a “debt-for-adaptation” deal with the Paris Club in partnership with The Nature Conservancy (TNC), an American non-profit environmental organisationIn exchange for promising to protect at least 30 percent of the country’s waters by 2020, authorities got debt relief to the tune of US$21.6 million. Authorities would thus now be able to disburse about US$280 thousand per year from the interest savings to train fishermen, do research and so on. Unsurprisingly, other African countries with similar endowments like Mauritius, Madagascar, Mozambique, Tanzania, and the Comoro Islands are now looking to develop similar initiatives, according to The Economist, a British newspaper. But if they hope to succeed, they must first start with a blue economy roadmap like Seychelles did. What is a blue economy, though? Seychelles’ finance, trade and the blue economy minister, Jean-Paul Adam, defines it “as all those economic activities that directly or indirectly take place in the ocean, use outputs from the ocean, and put goods and services into ocean activities.” With tourism and fisheries accounting for 11 percent of its workforce and 33 percent of its GDP, the Seycehellois government clearly has good reason to take its blue economy seriously.

Collaborate to secure waters
For a very long time, fishing boats from Europe and elsewhere have prowled the continent’s waters with impunity, pillaging them for fish and everything else in between. Oceana, an American non-profit organisation dedicated to protecting and restoring the world’s oceans, released a report in September that put illegal fishing costs to West African countries at about US$2.3 billion per annum. It reports 19 vessels from Italy, Spain, Portugal and Greece illegally spent about 31,000 hours on Gambian waters between April 2012 and August 2015. Perhaps in response, The Gambia has decided to do something about it, announcing ongoing negotiations with at least three private firms to police its waters and stem the pillaging of their marine life. Greater collaboration between African countries, especially West African ones, would help a great deal, though. And surely for an industry with an estimated output of US$1 trillion per year, it should not be too difficult for African governments to be enthused about doing so. There are already some initiatives in this regard. The African Charter on Maritime Security, Safety and Development in Africa (“Lome Charter”), adopted at the African Union (AU) extraordinary summit on maritime security and safety and development in Africa in October 2016, builds on earlier collaboration mechanisms like the 2009 Djibouti Code of Conduct2013 Yaounde Code of Conduct and 2050 Africa’s Integrated Maritime Strategy adopted in 2014. The Lome Charter is a huge step as it formalizes what is referred to as a “blue economy”, defining it as “sustainable economic development of oceans using such technics as regional development to integrate the use of seas and oceans, coasts, lakes, rivers, and underground water for economic purposes, including, but without being limited to fisheries, mining, energy, aquaculture and maritime transport, while protecting the sea to improve social wellbeing”. 

Make blue economy part of diversification agenda 
One is not aware of a robust government policy on fishing in Nigeria. The Economic Recovery and Growth Plan, the most recent 4-year strategic plan of the government, espouses the need to diversify the economy but does not elaborately consider how the blue economy would be tapped in this regard. It mentions fisheries as part of its agricultural policy, though, but does not spell out specific initiatives. Maritime policy in Nigeria is more focused on shipping and security via two principal agencies: the Nigerian Ports Authority (NPA) and Nigerian Maritime Administration and Safety Agency (NIMASA). Their utility is seen primarily through the lens of the revenue they generate for the government through these activiities. Deep-seated corruption at the agencies means the government has been perennially short-changed, though. Even so, they could be doing so much more. And like the Seychellois example shows, an ambitious blue economy agenda need not weigh significantly on the government’s finances: it could be self-funding if creativity is applied. In the Nigerian case, however, any potential gains would require some initial investment by the government to resuscitate the country’s polluted coasts and waters, especially in the Niger Delta region. Nigeria’s blue economy could offer so much more than oil.

Also published in my Premium Times Nigeria column. See link viz. http://opinion.premiumtimesng.com/2017/09/15/a-blue-economy-what-nigeria-could-learn-from-seychelles-by-rafiq-raji/

What about the 2017 BRICS summit?

By Rafiq Raji, PhD

The BRICS group of five emerging economies (Brazil, Russia, India, China and South Africa) held its 9th summit in the Chinese city of Xiamen this year (3-5 September). Originally just an idea by former Goldman Sachs (an investment bank) executive Jim O’Neill in a 2001 publication dubbed “Building Better Global Economic BRICs”, BRICS countries today constitute almost a quarter of global output. They have not proved to be as inspiring since those heady days, though. Since its first substantive summit in June 2009, only China (GDP: US$11.2 trillion) and India (GDP: US$2.3 trillion) have proved to be consistent good performers, albeit China has since 2015 adjusted to a new normal of below 7 percent growth. India is forecast by the IMF to continue powering on above 7 percent, though; over the next two years, at least, after a 7.1 percent headline in 2016. But that is where the good story ends. Brazil (GDP: $1.8 trillion) only emerged from a 2-year recession (the longest in its history) in the first quarter of 2017. And South Africa (GDP: $0.3 trillion) exited a relatively short-lived one in the quarter afterwards.

Mostly about China
The 2017 meeting was somewhat overshadowed by coincidental negative global geopolitical happenings; top among them being the firing in late August 2017 of an intercontinental ballistic missile (ICBM) over Japan by the communist North Korean regime of Kim Jong-un. China, which consititutes more than 60 percent of BRICS output, was called on by world powers to reign in the North Korean regime, which depends a great deal on it for sustenance. Naturally, the key headline from the final communique was related to the crisis. In any case, BRICS has become a veritable platform for China to project power and influence, as it seeks to have more say in international affairs. (As the second largest economy in the world, China would like the IMF to be more representative of the new global economic order, for instance.) And judging from the paltry US$80 million funding commitment ($76 million for an economic and technological cooperation plan and $4 million for projects by the group’s development bank) China made at this most recent BRICS summit, the group probably serves no greater purpose than that; especially when you consider its US$124 billion funding commitment in May 2017 to its ambitious Belt and Road initiative or so-called new Silk Road plan. (It did pledge $500 million for a South-South cooperation fund, though.) As a counterweight to recent American insularity, China used the occasion to once again make the case for globalisation and climate change; two major global issues the Americans have been reluctant to show leadership on under its current president, Donald Trump. Specifically, Chinese president Xi Jinping posited the group “should push for an open world economy, promote trade liberalization and facilitation, jointly create a new global value chain, and realize a global economic rebalancing”. 

BRICS plus
The 2017 summit had one major distinction though. It was its largest gathering yet, with non-BRICS countries like Guinea, Mexico, Egypt, Thailand, and Tajikistan in attendance as observers. Their presence was informed by a so-called “BRICS-plus” initiative proposed by China, which could see the current 5-member group include more countries, although this was not formalized at the summit. Of course, it is not too difficult to see why Mexico might be interested in more global outreach, as it faces an imminent dissolution of the North American Free Trade Agreement (NAFTA), which if successful would see it lose lucrative market access to America. Considering it is a major campaign promise of President Trump, it is probably only a matter of time before this happens. Mr Trump desires that America get more from NAFTA, which he believes is currently lopsided in favour of neighbours like Mexico. In any case, China indicated it was interested in entering into a free trade agreement with Mexico; in line with a trend where it now increasingly fills the gap left behind by a less-ambitious America. One of the observer African countries, Guinea, got something as well: it secured a US$20 billion loan over about a 20-year period from China in exchange for mining concessions on its bauxite deposits. Structurally, it did not seem like a bad deal, as revenues from projects the loan would fund would be used to service it. They include a planned alumina refinery and two bauxite mine projects. Roads, a power transmission line and a university are other projects earmarked. Still, considering how shrewd the Chinese are, it is not likely the Guineans got the better side of the deal; especially as the Chinese would get to keep any potential gains down the line, often beyond that which could be reasonably valued at the early stages. Like its other international trade and foreign policy initiatives, the ulimate beneficiary of BRICS is China itself.

Also published in my Premium Times Nigeria column. See link viz. http://opinion.premiumtimesng.com/2017/09/08/what-about-the-2017-brics-summit-by-rafiq-raji/

Nigerian banks should embrace Islamic finance

By Rafiq Raji, PhD

Say you are approached by a banker, who then makes you a home acquisition proposal that converts your rent payments into equity, and thus enable you own your home after a predetermined period. Naturally, you would be excited. How likely is it then that as a non-Muslim, you would balk at the proposal when it comes to light that what you were just now giddy about is actually Islamic finance? Very little; not if you were rational, at least. Of course, it could be more palatable to your sensibilities if it is called “non-interest banking”; which is just as well. Try imagining, though, how many homeowners there could have been by now if Nigerian banks adopted such an approach to financing home ownership. If Islamic finance is to thrive and become attractive to all and sundry in Nigeria, however, conventional commercial banks would have to embrace it. At the moment, only one – Stanbic IBTC Bank (2016 total assets of 1.1 trillion naira) – has an Islamic banking window or subsidiary. There is one fully-fledged Islamic bank, though; that is Jaiz Bank (2016 total assets of 68 billion naira). Clearly, the former would have unmatched scale and network advantages that could be easily transferred to its non-interest banking arm; efficiency, for instance. Hence why Islamic finance stands a better chance in Nigeria (and elsewhere, for that matter) if other conventional banks open their own Islamic windows.

CBN steps up
In late August 2017, the Central Bank of Nigeria (CBN) introduced two liquidity management instruments for non-interest financial institutions (NIFIs); a “Funding for Liquidity Facility (FfLF)” and “Intra-day Facility (IDF)”. Hitherto, there were three discretionary liquidity management instruments for NIFIs; namely a “CBN Safe-Custody Account (CSCA)”, “CBN Non-Interest Note (CNIN)”, and “CBN Non-Interest Asset Backed Securities (CNI-ABS)”. So how are the recently introduced ones any different or useful? Well, conventional banks are typically able to place their surplus with each other during the course of a business day or overnight and vice versa when short. This enables them manage their clearing operations, for instance. Depending on the circumstances, like when the interbank market is tight, banks could go to the CBN for such transactions. In both cases, Islamic banks and windows are excluded because they are barred from earning or paying interest. So hitherto, all an Islamic bank or window could do was to place its surplus funds with the CBN either as a CSCA or CNIN. But these are discretionary. These new instruments would thus provide tremendous relief for NIFIs. To access them, the CBN requires they either are in clearing with a temporary debit balance and/or have a liquidity problem. This is the primary distinguishing criteria; aside placing collateral with the CBN that is at least 1.1 times the transaction value. In a February 2017 report, the IMF mentioned the lack of such sharp liquidity instruments as a key risk to the financial systems of countries where there are Islamic banks. Needless to say, the CBN’s recent move is a welcome development.

Keep your customer
More Nigerian banks would be wise to have Islamic banking windows. That way, they are able to keep all the business of their sometimes affluent Muslim customers, while still availing them of conventional banking services. Global banks already do this for their Middle Eastern customers. Of course, there is the oft-cited refrain about technical capacity. This does not necessarily apply to traditional Islamic finance products. Problems have mostly arisen with so-called hybrid and exotic products for which compliance with the strict Islamic law criteria can sometimes be fuzzy or inconclusive because of their sheer complexity. Such is the complication that it is sometimes difficult to distinguish them from conventional banking products. It does not help of course that the evolutionary nature of Islamic finance also means legal clarity and certainty have been somewhat elusive. There is some level of standardization with traditional or so-called plain-vanilla products, however. Take the standard savings account from an Islamic bank. Instead of the quite meagre fixed interest rate a customer currently gets from a conventional bank, there is an opportunity to partake in a potentially higher return. How so? An Islamic bank pools its customers’ deposits and invests them in Shariah-compliant investments (like shares of companies that are involved in ethical businesses; so a brewer or tobacco producer would not qualify, for instance). There is a downside, though. The customer also shares in potential losses. This is in accordance with the Islamic finance principles of risk sharing and that investments be in real economic activities. In both instances, the CBN-approved sharing formula is a 70:30 ratio, with the bank getting the larger share. Statutorily, returns are shared monthly.

Potential challenges
A conventional bank looking to open an Islamic window must be mindful of some potential pitfalls, though. Customers might be sceptical about whether it is truly able to separate its Islamic banking arm from its interest-earning entities. A commingling of funds would be antithetical to the whole scheme. There is also the possibility of regulatory arbitrage, where the bank potentially transfers risk between the two arms, depending on which is favourable. The CBN seems well-geared to handle such potential abuses.

Also published in my Premium Times Nigeria column. See link viz. http://opinion.premiumtimesng.com/2017/08/31/nigerian-banks-should-embrace-islamic-finance-by-rafiq-raji/

On the African prospects of Islamic finance

By Rafiq Raji, PhD

I attended an Islamic finance roundtable event in Lagos recently. It was organised by S&P Global Ratings, one of the three leading global credit rating agencies. There is increasing interest in Islamic finance in African countries, whether in the form of a sukuk (Islamic bond which makes returns from an underlying revenue-generating asset as opposed to scheduled and fixed interest payments in conventional bonds) or commercial banking products that avoid the payment of interest, which Muslims are barred from earning. African sukuk issuances have yet to impress, though; about US$2 billion (since 2014 mostly), according to S&P Global Ratings. (17 African sovereigns issued US$46 billion in conventional debt in 2015.) Over the past two years, annual global sukuk issuance was about US$65 billion on average and end-2016 Islamic finance industry assets are estimated at about US$2.1 trillion. There has been a decline in the volume of global issuances lately, though; low crude oil prices are one reason why. Even so, there are significant prospects for more sukuk issuances by African sovereigns and sub-sovereigns. A sign that Islamic finance may eventually become mainstream is that corporate entities are beginning to seriously consider it as a source of financing. The Lagos-based Africa Finance Corporation (AFC) issued a 3-year US$150 million sukuk in early 2017, for instance.

Entrenched ways
Curiously, Muslims have not warmed up to Islamic banking as was probably envisaged, though. Most have gotten used to conventional banking, especially as they have over time devised personalized mechanisms for abiding by their religious principles while still availing themselves of conventional commercial banking services: For example, when paid interest on their savings account deposits, they would either ask that the interest portion be removed or alternatively, they maintain it as a permanent balance in their accounts. The motivation is rational. To forgo conventional banks for the few Islamic ones that have only recently begun to spring up in a few African countries could be costly. Conventional commercial banks have more heft to provide a more diversified bouquet of banking services than the still budding Islamic ones. To become more commonplace, Islamic banking professionals have to find ways to make their services appealing to non-Muslims. Patronage of an Islamic bank does not require that you believe in Islam. It is simply a type of banking that insists that if you must earn a return, it should be from actual assets and not just financial transactions. Call it ethical banking, if that is more palatable to your religious sensibilities. Such sentiments seem to have been overcome in the Islamic capital market sector, however. Non-Islamic entities and countries have issued sukuk, for instance. Still, Islamic law does underpin the industry.

Standardize now
A lack of standardization is becoming a problem, though. To be clear, Islam is clear on what the rules are or should be. Varied and unusually dynamic interpretations of sharia (Islamic law) on what is compliant or not have been problematic, however. The controversial case of Dana Gas, an Abu Dhabi-listed gas company, may be the crisis the industry needs to finally put things in order. To avoid parting with more cash than it agreed to, Dana Gas is seeking to restructure two sukuk issues worth US$700 million into more supposedly Islamic-compliant ones. The reason is obviously not religious but financial. It is the classic case of trying to use religion to escape fulfilling an obligation. Still, Dana Gas is simply latching on to what seems like a “dynamic” Sharia interpretation culture in Islamic finance. To be fair, prominent Islamic finance sharia advisors have been forceful about what a dangerous precedent the Dana Gas case would set if it wins the case it filed with an English court, which may not be heard before December 2017 (according to The Economist, a British newspaper), two months after the sukuk issues would have matured. Put simply, the problem is human, not religious. It is a classic case of an attempt to breach a contract after agreeing to its terms. Bear in mind the sukuk issues in question were issued some 10 years ago. That is a long time for anyone or entity to suddenly develop a phony sense of religiosity. There could not be a greater need for standardization. A global authority on Islamic finance needs to be instituted without delay, a point made at the S&P Global Ratings Lagos event (and in recent features by The Economist and African Banker magazine). The Malaysian model, which is more liberal and advanced than the Middle Eastern variants, is touted as befitting. The current artificial ambiguity is a needless constraint.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. http://www.businessdayonline.com/african-prospects-islamic-finance/

Why are most African airlines floundering?

By Rafiq Raji, PhD

The state-owned airline of Africa’s most advanced economy, South African Airways, is about to be bailed out by the state with about US$1 billion. Again. In July, not only did the state provide cash support to the almost bankrupt airline after an international bank insisted that its loan be serviced, it had to provide about 20 billion rand in guarantees. It would probably not be the last time. Even more saddening is the proposal that the pension fund of public workers may be used to pay almost half of the proposed US$1 billion bailout. Almost everytime credit rating agencies issue a review on the sovereign now, the deplorable state of the airline’s finances is mentioned. Only breath of fresh air is perhaps, finally, it has new management that probably knows its onions. Time will tell. Up north to the east, Kenyan Airways, another state-owned airline (partially though, as the Kenyan government only has a 29.8 percent stake), which incidentally has an international airline of repute, Air France KLM, as a shareholder (26.73 percent stake), would restructure its finances imminently, after failing to recover from a souring of the Kenyan tourism sector by terrorist attacks some five years ago. The restructuring plan seeks primarily to convert the debt it owes 11 local banks into equity via a special purpose vehicle, which would make them the largest shareholder afterwards (according to Reuters).

Bright spot
Some African countries have simply given up on the idea of a national airline, after earlier initiatives either went bankrupt or simply collapsed out of sheer incompetence. But there is a bright spot. Ethiopian Airlines made more money (US$273m net profit) than all African airlines combined (US$800m net loss) in 2016; a point happily made by African Business, a prestigious African publication, and BBC, the premier British broadcaster, in recent features. It begs the question, though: what makes it possible for Ethiopian Airlines to do so well at the same time that its supposed contemporaries are floundering? Tewolde Gebremariam, chief executive of the Ethiopian national carrier puts it rather well in a recent BBC interview: lack of government interference, private sector expertise and cost management. They seem simple, not so? Not really. Even when private sector experts are allowed to run a state-owned enterprise, African governments loathe being ignored.

The discipline of the Ethiopian government provides many lessons. It does not fund its airline in anyway. Ethiopian Airlines is completely run from its own finances. It does get support from where it matters though: America. The US Exim Bank guarantees most of its aircraft purchases, Mr Gebremariam tells the BBC. With that kind of backing, top global banks like JP Morgan Chase, Citi, Barclays and HSBC are all too eager to offer it accommodative financing. Today, a lot of Africans increasingly do not mind a stop at Bole International Airport in Addis Ababa en route their final international destinations and indeed on the return journey back home. Mr Gebremariam made sure to point out to the BBC that at least 2,000 Chinese pass through Bole en route various African countries in the morning and vice versa in the evenings, every blessed day. And anyone who has travelled on the airline would attest to their efficiency. The quality is mid-range, though.

Hands off
Amidst the many floundering African airlines, Nigerian authorities desire to establish a national carrier. The motivation is nostalgic, in part. National pride is also a factor. Many agree that unless the motive is profit, it would suffer the unflattering fate of its predecessors. Thankfully, the authorities plan for it to be private-sector driven. The government has also appointed Lufthansa, a highly-regarded German airline, to advise it. But would the authorities be able to hands off like the Ethiopians seem to be able to do rather well? History suggests this is doubtful. It certainly does not help that Nigeria has a bad reputation when it comes to contracts. The experience of Richard Branson’s Virgin Group in the mid- to late-2000s with its Nigerian airline venture, Virgin Nigeria, in which it had a 49 percent stake, is instructive. Mr Branson was left dumbfounded when a new administration began to question the validity of Virgin’s contracts with the preceding one. What was the gripe? The authorities did not think it was appropriate for Virgin Nigeria to operate from the international terminal of the country’s main airport. To Mr Branson’s dismay, “heavies” were sent to “smash up” his airline’s lounge “with sledgehammers” to ensure compliance. The African aviation sector is not for the faint-hearted.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. http://www.businessdayonline.com/african-airlines-floundering/

Nigeria: Economy is slowly but surely recovering

By Rafiq Raji, PhD

My forecasts suppose the economy could record positive growth in Q3-2017 but almost certainly in Q4. There are those who are more optimistic, however, supposing that this could be as early as Q2. After my earlier optimism about a recession exit as early as Q1, I am taking a much more cautious view this time around. My revised forecasts take into consideration the historical trendline growth of the economy during its good and bad times. The midline scenario puts the economy on a positive growth trajectory only as early as Q3. If this happens earlier, I would be pleasantly surprised. But of course, even as the economy would likely exit recession this year, technically, that is, the positive effects on peoples’ wallets would probably take longer to manifest. When businessess start investing again, they typically make new hires which then translate into greater consumption and so on. They already are: recent business expectations (-1.5 in Q2 from -27.7 in Q1) and purchasing managers’ index (52.9 in June from 52.5 in May) data published by the CBN point to a recovery.

FX liberalization is only immunization against crude oil price volatility
Central bank governor Godwin Emefiele has been receiving plaudits lately. With the exchange rate stabilizing, some of his fervent critics have been on the record wondering if he were not right with his unorthodox policies after all. I do not share this view. Had crude oil prices remained tepid – and they largely still are, the Central Bank of Nigeria (CBN) would not have had the confidence to allow for a separate so-called investors’ and exporters’ (I&E) FX window. Besides, the increased FX trades, about $4.2 billion thus far, recorded via the window is a vindication of earlier views that a fully liberalized market would not only give foreign portfolio investors confidence in the market but also relieve the CBN’s foreign exchange reserves. Bear in mind that a sustained bullish trend in the crude oil markets remains doubtful. In addition to Nigeria and Libya, which are exempt from OPEC production cuts, increasing their output more than envisaged, other members of the cartel, Saudi Arabia for instance, have also recorded above-target production. So the increased FX trades in the I&E window are not so much about portfolio managers counting on oil prices to rise as they are hoping the CBN would keep its word this time about ensuring investors would be able to bring and exit their funds at will. At a market-determined rate.

Rate cut would not be data-dependent
In light of the recent rate cut surprise by the South African central bank, some economists are already hedging their bets about the CBN’s July monetary policy meeting. They now wonder if the CBN might not similarly succumb to political pressure to cut rates. Unlike in the South African case, however, a CBN rate cut would not be data-dependent. Yes, annual consumer inflation has been slowing, lately to 16.1 percent in June from 16.3 percent in May. Were base effects not a significant factor, the downward trend may not have been so smooth. This is because month-on-month inflation has not been similarly sober, averaging at 1.5 percent since the beginning of the year. That said, there are some economists who have long held the view that monetary policy easing would be required to lift the economy out of the doldrums.

But why is inflation still so high? Food inflation is a dominant reason why. And it is not entirely a hard currency story, albeit that continues to be a significant factor. The 2016 cereal harvest, which was completed in January 2017, was above-average, up 5 percent to 22.6 million tonnes. So, supply is not short. Farmers are increasingly finding it more lucrative to export their produce, however, even for crops which are yet not in ample supply. Take the recently launched yam exports initiative of the government, for instance, even though there is currently a 20 million metric tonne supply-demand gap. Prices would almost certainly rise consequently. Never mind that the same mistake being made with crude oil and the other primary goods is being made here. What the authorities should desire to export should not be raw yam tubers but processed yam products. We should earn more of the value here instead of subsidizing it for another market only to import the more expensive processed good afterwards. Food prices have also remained high because of our exploitative business culture: a price increase is usually sustained artificially longer than necessary. That is, when market conditions change, traders are not similarly swift in reducing prices.

Truth is, if the CBN desires that inflation remain sustainably on a downward trend, it must resist the temptation to cut rates just yet. Easier policy by the CBN would not only accelerate inflation, it may just like before not translate into lower commercial bank loan rates. The CBN is probably mindful of the recent outreach by the Nigerian Senate over high interest rates. In a rebuttal, the argument was made about how perhaps the first point of call should be government securities, which but for that with a 3-month tenor, currently yield on average at least the inflation rate. The authorities are not being generous for the sake of it. They have no choice. It is the barest minimum they must pay to compensate for price risk. And the fiscal authorities need the money. Commercial bank loans which must compensate additionally for default and tenor risk must be priced higher. Banks also have to add some of the unique costs they bear due to the difficult operating conditions in the country, where they pay for myriad things that ordinarily should be provided by the government. Power supply, for instance. A rate cut would be ineffective at this time.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. http://www.businessdayonline.com/nigeria-economy-slowly-surely-recovering/

South Africa: Economic outlook still calls for caution

By Rafiq Raji, PhD

Even though the South African economy probably exited recession in the second quarter of the year, the outlook remains mixed. My current forecasts suppose growth was 1.2 percent in Q2-2017, after contractions of 0.7 percent and 0.3 percent in the preceding two quarters respectively. Business confidence recovered in June, with the index up to 94.9 from 93.2 a month earlier, a seven-month low then. And yes, annual consumer inflation continues to decelerate, coming out at 5.4 percent in May from 6.6 percent five months earlier, and would probably slow further in June to 5.2 percent, say. It could be about 5 percent or less by year-end, within the central bank’s 3-6 percent target inflation band.

But the most recent consumer confidence reading was poor. It deteriorated further in the second quarter of 2017 to -9 from -5 in the preceding three months, as consumers remain weighed down by a sluggish and dysfunctional labour market, high taxes and still dear but decreasing food prices. The most recent Purchasing Managers’ Index (PMI) data, a bellwether of the economy, was not encouraging either. That compiled by Markit fell to 49.0 in June, a 14-month low, from 50.2 the month earlier. Unsurprisingly, the IMF continues to warn about the economy’s vulnerabilities to external shocks and funding shortfalls, as recently as early July, even as it remains steadfast on its 1 percent growth projection for the economy this year. (Mine is 0.5 percent.) A subsisting toxic political environment would continue to be detrimental to business and consumer confidence, it adds.

It is heartening, of course, that finance minister Malusi Gigaba has a plan to supposedly steer the economy out of its current recession, unveiled in the week just past. More store would be put in how much will there is to implement it and how transparently so than its content, though. The tone of the plan certainly echoes the radical economic transformation drift of the ruling African National Congress (ANC) party. Some state enterprises would be partially privatised, non-core state assets would be sold, and so on. A sustainable wage agreement by February 2018, two months after the ANC elective conference, is probably going to be a tall order, though. The proposed financial sector, tax and procurement reforms are within Mr Gigaba’s powers at least. So these should be relatively easy. State-owned enterprises’ reforms may not be quite so.

Not yet
Arguably, the economy could use some reprieve from the monetary authorities. Thankfully, there is some room for the South African Reserve Bank (SARB) to begin to cut rates before year-end, which could be as early as this quarter, by 25 basis points to 6.75 percent, say. Another 25 basis point cut to 6.5 percent in Q4-2017 would also not be farfetched. A rate cut would probably be unwise at the July monetary policy committee (MPC) meeting, however, especially as the SARB fervently tries to fend off imminent political interference from stakeholders who see policy easing as the only way out of the doldrums for the South African economy. Not only must the SARB seem to remain stubbornly on its inflation-targeting path, the toxic politics that has forced it into war-mode also inevitably imperil any potential dovish policy action: it has to avoid even the slightest perception that it is susceptible to pressure. Still, the assault on the SARB is real. It is much heartening that Governor Lesetja Kganyago has shown an almost fanatical zeal to protect the mandate and independence of the bank.

We the people or we the few
Of course, there would be worries about whether Mr Gigaba’s plan is not just another opportunity for corruption and other unseemly acts that have come to be associated with the Jacob Zuma government. All these are amid still ongoing controversy over the increasingly rampant use of state institutions to achieve what are clearly selfish political objectives. Some argue the major problem is not the ANC per se, but President Zuma. One analyst estimated cheekily recently that his poor stewardship might have cost the South African economy about 1 trillion rand, a quarter of 2016 output. In frustration, or perhaps sensing an opportunity, the South African Communist Party (SACP), one of the three-member ANC-led governing tripartite alliance, recently declared it would contest the 2019 elections independently, whilst still maintaining a foothold in the ruling government. Of course, hedging as such is as much due to the SACP’s disillusionment with Mr Zuma as well as its feeble conviction in its electoral prospects. Had the older SACP taken on the mantle now ably assumed by the young ultra-nationalist Economic Freedom Fighters (EFF) opposition party much earlier, the story could have been a little different. The economy’s prospects could be so much brighter without Mr Zuma.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. https://www.businessdayonline.com/south-africa-economic-outlook-still-calls-caution/