Tag Archives: Research

Davos insights for Africa

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Africa’s representation at the 2018 World Economic Forum (WEF), themed “Creating a Shared Future in a Fractured World”, was small. The forum has always been primarily focused on America and Europe anyway. Last year, China stole the spotlight. And a few years ago, Africa got its chance. With regional forums now, the Davos meeting is increasingly focused on global themes and issues. And the major attraction this year was none other than Donald Trump, the American president. Once he arrived (thank goodness, it was on the last day), everything became about him. India’s prime minister Narendra Modi was probably delighted he gave the forum’s keynote speech on the first day (23 January); long before “The Donald” arrived. Mr Modi made some deep points. But the part that resonated with me was that about data. He posited that in today’s world and in fact the future one, data is the biggest asset. And he who controls data controls the world. He is ahead of the curve. It was also a veiled boast, I think. India is firing ahead on the technological front. Like China, it is racing ahead to ensure that it would be an active participant in what would entirely soon become a digital world economy. China has a date for when that time might be upon us: 2025. That is the target year for its ambitious technological plan, which if realised, would put it at the forefront of technological leadership globally. There is the pertinent question, of course, about whether that digital future would not be exclusionary. Ever-evolving tech skillsets would be required by anyone who desires to be an active participant in the digital economy. So steps need to be urgently taken by African countries to ensure their citizens are able to compete in that future world. The mastery of basic technologies has to be the least qualification for anyone who passes through the education system. Technology has to be seen in the same way as English (or French and Arabic in other countries) is regarded as a foundation subject for basic education.

Technology as language
Technology is a language. If you do not know how to speak a language, you cannot participate in a conversation in that language. If the language of the future world is technology, what then would be your fate if you cannot speak it? You hear talk about up-skilling and re-skilling. What I think the focus should be on is what I call “dynamic skilling.” It is not entirely novel; you may have heard of “continous learning.” It is similar. But my concept of dynamic skilling is premised on how if the world of work would likely continue to change as technology evolves, then the individual that desires not to be changed (i.e., replaced) must also ensure that his skills are similarly dynamic. The foundation for any such eventuality is basic knowledge about technology. Thus, vocational skills of the future are not likely to be how to be a good plumber, carpenter, or electrician. Instead, it would be “simple” things like being able to code an app, use a digital currency, and so on. Any country which is not thinking in this manner, right now, would again be left behind. Fortunately (for African countries, at least), the extraordinary thing about emerging technologies like artificial intelligence, big data, and so on, is that they are equalizers; up to a point. Vintage is an advantage. One who starts early may remain ahead because of the advantages of experience and ownership of data acquired in the process. Even so, African governments could, for instance, momentarily start to insist on the ownership and control of the data of their citizens and all digital activities in their domain. That way, they would be able to ensure that their citizens benefit from whatever technological progress happens on the back of their data assets.

New paradigm
Benedikt Sobotka of the Eurasian Resources Group, in an interview with CNBC Africa during the WEF, made a point that all African governments need to muse on. Electric vehicles (EVs) rely on cobalt-based batteries. Where is cobalt found in abundance? The Democratic Republic of Congo (DRC) and Zambia. In the next decade or so, EVs would probably replace all fossil-fuel vehicles. That future can be Africa-led if the relevant governments put in place policies that ensure the cobalt mined in their jurisdictions would be used to build an African EV industry; as opposed to a mining one just for the taxes. By insisting on the batteries being built on the continent, or adding some meaningful value to the cobalt at least, before it is shipped to China and elsewhere, the DRC and Zambia would be able to participate in what is likely going to be a very lucrative global value chain (GVC). What is happening now? China is buying up the precious mineral. Cobalt is being mined and shipped abroad to build batteries that would power EVs the future world would use to wean itself of oil and gas that some key African countries rely on and failed to build industries around. African countries can be part of the new world right now. By the way, did I travel to Davos to arrive at these insights? Go figure.

Also published in my Premium Times Nigeria column. See link viz. https://opinion.premiumtimesng.com/2018/01/26/davos-insights-for-africa-by-rafiq-raji/

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/

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/

Doing Business: Can Nigeria replicate the Singapore model like Mauritius did?

By Rafiq Raji, PhD

It is undeniable that there is a correlation between a country’s business environment, foreign direct investment inflows and international trade performance. Countries that make setting up businesses easy, allow clearance of goods at ports with little hassle, grant entry and exit visas to investors and visitors alike in quick time, enable the registration of property with little trouble, provide reliable electricity, and make documentation like construction permits easy to acquire, attract more foreign direct investment (FDI). [1] The easier it is to do these things, the more likely cross-border and broader international trade would flourish.[2] These benefits are what motivate countries to try to improve their business environments, more so now that capital is increasingly choosy and circumspect.

Country GDP per capita(US$) (2016) (PPP) Overall DB rank (over 190) Trading across borders (over 190)
Singapore 87,855 2 41
Mauritius 20,422 49 4
Rwanda 1,977 56 6
Botswana 17,042 71 3
South Africa 13,225 74 25
Kenya 3,361 92 9
Seychelles 27,602 93 5
Zambia 3,880 98 31
Lesotho 3,601 100 2
Namibia 11,290 108 17
Ghana 4,412 108 29
Nigeria 5,942 169 181

Source: IMF, Doing Business 2017: Equal Opportunity for All (World Bank, Oct 2016) [3]

Singapore as role model
Singapore is the quintessential example. In the World Bank Ease of Doing Business (DB) 2017 rankings, Singapore is second out of 190 countries ranked globally, having topped the rankings at least nine times since they began in 2004.[4] With a GDP per capita on purchasing power parity (PPP) basis of US$87,855 (2016), it is one of the wealthiest countries in the world. More than three decades earlier, its GDP per capita of about US$8,852, was just one-tenth of its current level. Between 1980-2016, the Singaporean economy grew twenty-five times over from US$12 billion to US$297 billion. Its remarkable success is testimony to the heights any country can reach on the back of sustained reforms and reinvention. In Singapore, contracts matter and are readily enforced, the resolution of insolvencies are not tedious, there is little or no red tape in conducting tax affairs and cross-border trade thrives consequently. In spite of the second place ranking referred to above, Singapore is still widely acclaimed as the easiest place in the World to do business in.[5]

One aspect of doing business in foreign countries that investors dread, is that of dispute resolution. Court processes can be unnecessarily long and slow in most jurisdictions. Singapore overcame this constraint by automating the process, with almost all litigation activities (e.g., submission of claims, payment of court fees, serving of initial summons, etc.), outside of those requiring the physical presence of the litigants or their lawyers, doable online.

Even as some aspects of the Singaporean model are clearly replicable, attempts at copying it often falter when some of the necessary conditions that enabled the Southeast Asian nation to succeed, are missing. “Remaking is essential”: A country must be willing to reinvent itself when the variables change. [6] So just because a model proves successful over a certain period, does not mean it would be a good fit when the times change, as they always do. “Collective response” and “social consensus” also matter a great deal. [7] A determined leadership in the absence of an equally enthused followership may still flounder. Singapore has the unique distinction of having both. Still, there are probably just two essential ingredients for success. First, there must be the political will for reforms.[8] Second, and probably most important of all, the political leadership must be in a secure position and endure long enough for what are sometimes painful reforms, to translate into concrete progress.[9] The two identified prerequisites go together. Otherwise, longstanding African regimes could easily have been similarly transforming. Unsurprisingly, with political will lacking, most are not. There are a few exceptions, however. That is, cases where there have been both the political will for reforms and stable government to see them through. Successes recorded by Mauritius, Botswana and Rwanda, as the DB rankings show, offer a ray of hope for the continent. In line with the Singaporean evolution, their experience also adds to evidence about the identified necessary ingredients for success. In other words, they offer a template on how to assess the likelihood of success of many other countries, African ones especially, who now seek to be similarly attractive to foreign investors.

The case of Mauritius
The one African country that has consistently topped the rankings on the continent, and sometimes dubbed the “Singapore of Africa” – Rwanda also shares the epithet these days – is Mauritius (ranked 49 in the latest DB rankings).[10] [11] [12] Although the Mauritian economy (GDP of US$12 billion) is relatively small when compared with continental giants like South Africa (US$294 billion) and Nigeria (US$406 billion), it is one of the wealthiest. Its remarkable evolution especially suggests the Singapore model can be successfully replicated by African countries. Like Singapore, Mauritius ranks high for good governance and its politics is quite stable.[13] Mauritius’ strong institutions have also been widely acknowledged to be a key success factor.[14] Its cosmopolitanism, similar to that also evidenced in city and coastal states like Singapore, together with similarly close ties to China and India, were also crucial to the development of its manufacturing sector.[15] There is also a consensus in the literature about the huge role its trade policies played in its rapid development.[16] Preferential trade access agreements with key export markets and investment incentives via export processing zones (EPZs), enabled it to develop an apparel and textile manufacturing base, for instance. There is also now a vibrant light manufacturing sector. In addition, tax incentives have enabled Mauritius to become a preferred destination for offshore financial services, and was hitherto a major channel for Indian capital flows, a feat it competes with Singapore to achieve. Unsurprisingly, Singapore and Mauritius already explore palpable synergies between them, signing an air corridor agreement in October 2015, for instance.[17]

Mauritius especially highlights its DB ranking when pitching to foreign investors, and is acknowledged to be for Africa what Singapore is to Southeast Asia. However, unlike Singapore, it has not been similarly successful in getting foreign businesses that register within its jurisdiction, to actually situate the bulk of their operations within the country. That is why it is widely considered to be mostly a tax haven, a characterisation Mauritian authorities dislike and would like to disabuse. Unsurprisingly, its goods exports trend is not impressive, unlike the Singaporean example. It is noteworthy though that a bulk of its goods exports emanate from its EPZs. Lately, Mauritius has been forced to address these deficiencies, as developed economies crack down on tax havens and avoidance schemes and hitherto lucrative tax arrangements are renegotiated. Mauritius, which does not charge a capital gains tax, used to be the preferred destination for channelling capital to India, where capital gains tax can be as high as 40 percent and accounted for a quarter of its foreign capital inflows.[18] This may change from April 2017, when India started charging taxes on investments from Mauritius, after the more than 3-decade tax treaty between the two countries was amended in May 2016.[19] Consequently, Mauritius has ramped up its African focus, with more than half of foreign companies registered by it in the past few years, aiming to do business on the continent.

Corruption and poor governance may weigh on Nigerian reforms
Other African countries have been trying to improve their business environments.[20] Even so, most African countries remain in the lower rungs of the DB rankings, with South Africa and Kenya respectively at 74 and 92 out of 190 in the most recent one. Still, more than a quarter of ease of doing business reforms in 2015-16 were by Sub-Saharan African (SSA) countries, with Kenya one of the top 10 improvers globally. [21] Others seek to join the list of top improvers. Most recently, Nigeria (DB rank: 169) has made a splash about its DB reforms, announcing a 60-day action plan in late February 2017.[22] Nigeria’s abysmally poor non-oil goods exports is another motivation for the authorities’ forced reformist stance, after low crude oil prices over the past two years starved the government of revenue. Crude oil exports constituted more than 90 percent of total goods exports between 2009-15. That is, even as total goods exports were less than 20 percent of GDP on average. Unfortunately, attempts at using EPZs to spur export of manufactures have been slow-moving, with the most promising one (Lekki Free Trade Zone) still largely at development stage.

Fundamentally, the recently proposed DB reforms are aimed at increasing international trade and FDI. This is what motivates the three broad areas that Nigerian authorities have identified for reform: entry and exit of goods, entry and exit of people and government transparency and procurement. Agencies at the ports are to be reduced to six, from almost a dozen. Visitors to the country would be able to get visas on arrival, and those that apply at the country’s embassies, would hopefully get theirs within 2 days.

Incidentally, attempts were made in the past to sanitize the maritime ports.[23] That the bottlenecks remain point to the intense pushback reformers tend to face. Corruption is a principal motivation and is why Nigerian ports are some of the most expensive to clear goods at.[24] A report commissioned by the ports authority in October 2016, found that Nigerian authorities lose about N1 trillion annually to corruption at the ports. [25] Under new leadership, the ports authority has embarked on an anti-corruption war. Expectedly, it has come under attack, with death threats and mudslinging in tow.[26]

To demonstrate progress, Nigerian authorities announced in April 2017 that the number of days for registering a business had been reduced to two days from at least ten days, as part of reforms to ease doing business in the country.[27] Ordinarily, the activity takes longer than the statutory 2 working weeks hitherto. With that now reduced to two days, it could be reasonably expected that new business registration would be accomplished in a week, say. How was this achieved? Automation. Similar to how Singapore (and many other countries that copied its model since) was able to get rid of human-related bottlenecks to the ease of doing business, some of the tortuous tasks would now be done electronically. For instance, a lawyer would no longer be required to prepare registration documents, as some of the tasks they charge for could easily be done online by the prospective business owner. Also, such arduous tasks, in the Nigerian context at least, like registering with tax authorities, have been integrated into the government’s company registration portal. Additionally, lawyers at the business registry can now certify incorporation forms and other statutory compliance declarations for a token fee, tasks previously done by lawyers hired by the prospective business owner.

Considering how extraordinarily frustrating the Nigerian legal system is, the knotty issue of dispute resolution may be a hard nut to crack. Setting up specialist courts like Singapore did has not been similarly effective because the judiciary is as yet not equipped for the automation element. Judges still write their judgements by long-hand, there are no audio recording facilities in courts and virtually all documentation is in hard copy form. These deficiencies are why even with specialist courts like the National Industrial Court, Investments and Securities Tribunal and so on, cases can sometimes take years before resolution. And even when successful after years of litigation, red tape can be craftily deployed by a well-connected local partner or disputant to make the whole exercise seem like a total waste of time. A much broader reform of the Nigerian judiciary would have to presage any potential measure directed specifically at the ease of doing business. Understandably, the proposed DB reforms focus on those issues that can be easily fixed. But considering how important dispute resolution is to increasing investor confidence – as the Singaporean and Mauritian examples show – lack of progress in this regard only buttress the poor governance characteristic of the Nigerian business environment. And as earlier highlighted, entrenched interests, corruption and inter-agency rivalry at the ports, mean multiple inspections and continued unwholesome practices, which increase the lead time of goods clearance, would probably endure and continue to stymie the country’s trade performance. Patronage networks around doing business in Nigeria, beneficiaries of which include politicians and their lackeys in every facet of government, would be difficult to dismantle as well.

Conclusion
Nonetheless, even the slightest attempt at improving the Nigerian business environment should be applauded. Still, it would take at least a year of monitoring to determine how much difference the announced reform moves would make and if that would eventually be reflected in the Doing Businessrankings. Besides, there are other more entrenched problems that would require time and determination to fix. With Nigerian politics still relatively fragile, and even simple activities like passing the budget enmeshed in much wrangling, the risk remains that these new reforms may suffer the fate of earlier botched ones. That said, the legislature has expressed support for the efforts of the executive and aims to pass relevant legislation to ensure the DB reforms become codified in law and hopefully survive future administrations. As at late April 2017, two of the identified fifteen DB legislative bills had already been passed.

Despite recent crackdowns on treasury looters and other corrupt persons, corruption would be harder to tackle, however. There is the impression that should there be a change of government after the 2019 elections, the current anti-corruption momentum is likely to slow. Besides, a judiciary not in trend with the times would likely continue to slow the wheel of justice. And defense lawyers have proved to be quite deft at beating the system: successful prosecutions of high-profile corruption cases are rare. Thus, if one were to use the Singaporean and Mauritian success stories as templates, scepticism about the potential success of current reform proposals would be somewhat justified. Still, even the slightest reduction in red tape would bring tremendous relief to those foreign investors who are already decided on doing business in the country. Besides, foreign companies who have anyway managed to make hay despite the many constraints, could do with the efficiencies that some of the reforms would potentially bring about; that is, despite the risk of holdups down the line. But with a still fragile political fabric – evidenced by much infighting within even the ruling political party, which is an agglomeration of strange bedfellows of sorts – endemic corruption and poor governance, the reforms may yet flounder. There needs to be a “collective response” and “social consensus” around the reforms for them to succeed.

Dr. Rafiq Raji wrote this article for the NTU-SBF Centre for African Studies at the Nanyang Business School, Singapore, where he is an adjunct researcher. See link viz. https://www.ntusbfcas.com/african-business-insights/content/doing-business-can-nigeria-replicate-the-singapore-model-like-mauritius-did

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. http://www.businessdayonline.com/business-can-nigeria-replicate-singapore-model-like-mauritius/

Steady as it goes

By Rafiq Raji, PhD

It would be recalled in my column of 3 January 2017 (“Will Nigeria get out of recession in Q1-2017?”), I suggested Nigeria would likely get out of recession in the first quarter of this year. After the vindication of my 2016 1.5 percent growth contraction forecast, one feels more confident that this would likely be the case: at least my clients should be, after worries back then that such a view seemed somewhat optimistic. Authorities have also joined their voices to this possibility. My reckoning is that economic growth would be between 1-3 percent year-on-year in Q1; albeit my actual forecast is closer to 3 percent than to 1 percent. Yes, I am an optimist. Subsequently, I reckon the conversation, amongst ever so many pundits these days, would shift to whether technically getting out of a recession is the same as being out of recession in reality. No matter. What is more important is that once out of recession, stakeholders in the Nigerian economy would have their ‘mojo’ back: confidence is contagious.

Commentary since the release of the authorities’ economic recovery and growth plan (ERGP) has been mixed though. Some say it reads like a self-motivational book. If it does and in fact motivates the relevant stakeholders, that might not be such a bad thing. Others suggest the forecasts and goals are a little ambitious, considering the short timeframe and all. Well, better a plan than none at all. And yes, those who say the document was poorly drafted have a point. But that is the extent of our agreement. There is nothing in the ERGP that is farfetched. The problem has never been one of plans – and there have been better ones than this current one – but that of political will.

So as the Nigerian economy turns a corner, especially as much of its woes hitherto were policy induced, it behoves Nigeria’s monetary authorities to at least ensure nothing is done to upset the recovery. And the recent dip in headline inflation – which fell to 17.8 percent in February from 18.7 percent the month before – heartwarming as it is, should not spur even the slightest consideration of lowering interest rates; benchmarked currently at 14 percent. To do so would be premature, at this time. Firstly, prices continue to accelerate intensely: monthly inflation was 1.5 percent, the highest in eight months; not even the opportunistic price increases during the festive December and January months were enough to push the month-on-month inflation rate that high. But is year-on-year inflation going to continue on a downward trend? Almost certainly, yes.

Uhuru, uhuru
Crude oil prices, have remained by and large above US$50, boosting the central bank’s foreign exchange reserves: the level beat the $30 billion mark in March. In turn, the Central Bank of Nigeria (CBN) has ramped up FX supply. The naira has appreciated in the black market consequently, narrowing the premium to the official rate by a bit. But is it sustainable? Quite frankly, it all depends on the crude oil price outlook. If oil prices continue to rise, the CBN would be able to continue defending the currency. Are oil prices expected to continue on an upward trend? Most of the indicators suggest this is likely. Compliance by OPEC members to production cuts announced at their last meeting has been encouraging, with Saudi Arabia going the extra mile, cutting its output by more than it promised. And non-OPEC members have been reasonably compliant as well, fulfilling about half of their production cut commitments. Besides, there is a surfeit of dollars in domicilliary accounts: banks are reportedly now pushing dollar sales to avoid losses.

Needless to say, the CBN’s recent aggressive FX interventions have begun to unnerve speculators – from the average bank customer to the big corporate – who hitherto were expectant of a devaluation. And despite suggestions in the ERGP of an eventual free-floating exchange rate, this is not likely. Not only would support for the naira likely continue, FX bans on about 41 imported items would likely remain. This much, CBN governor Godwin Emefiele, asserts. Besides, having held on to its unpopular FX policies during the period of sub-$50 oil, it would be almost irrational for it to now change course at just the point it could claim victory.

Hunger games
Indications are that the ailing Nigerian leader, Muhammadu Buhari – recently returned from a 7-week medical vaction in England and soon to return for another round of medical checks and probably routinely thereafter – would not be able (or allowed) to run for a second term in office. Violent incidents, leaks of private correspondence to the press, and all sorts of mischief are already about to ensure that this is the case. President Buhari’s health condition is enough reason for him to take a bow after he concludes his first term. Those gunning to replace him are not taking any chances, however. The problem is that there are many potential candidates – most in middle age – from the north, the region expected to keep the presidency for eight years to 2022 at least. May the odds be ever in our favour.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz. https://www.businessdayonline.com/steady-as-it-goes/

CBN & SARB to keep rates steady

By Rafiq Raji, PhD

Interest rate decisions by the Nigerian and South African central banks coincide this week. They are both likely to keep their benchmark rates unchanged when they announce them on 24 January. In Nigeria, opportunistic price increases for staple foods, transportation and fuels during the festive period together with a continued weak exchange rate contributed to pushing the annual inflation rate a little bit higher to 18.55 percent in December, from 18.48 percent in the preceding month. There are reports some of these price increases are yet to be reversed, especially those for kerosene and cooking gas, which rose even further this month. In South Africa, inflation accelerated further in December, coming out at 6.8 percent, 0.2 percentage point higher than November’s. The outlook suggests the headline would fall back within the 3-6 percent inflation target band of the South African Reserve Bank (SARB) from February at the latest, and likely for the remainder of 2017. Considering both economies are in dire need of growth, the central banks would cut rates if they could. The inflation trend and outlook constrain them, however. I suppose the Central Bank of Nigeria (CBN) would get the opportunity by mid-year, when the headline should be about 9 percent. Having set a very high bar for any potential relaxation of its current tight policy, the SARB would probably like to see a sustained easing of price pressures before taking the plunge.

Troubling Trump
Even so, emerging market central banks like the CBN and SARB may find external factors would matter more than domestic ones, in the first half of 2017 at least, as global market participants try to make sense of what are probably unprecedented uncertainties, in modern times at least, spurred by disturbing trends of nationalism and protectionism in key developed economies. America is expected to be increasingly insular under its new and volatile leadership. Political disruptions in Europe are likely, as Germany’s liberal chancellor, Angela Merkel, faces backlash for her pro-immigrant stance ahead of elections in September – albeit she is likely to keep her job – and the probability of one not so liberally inclined winning the French presidential election in April edges up. And then there is China’s incipient opportunism, already asserting itself ahead of an expected void in global leadership that a potential American absence under Trump would spur. The immediate consequence for key African economies would be the likely slowing of foreign portfolio inflows. Still, I imagine some of these fears would abate later in the year. Until then, key African central banks would best serve their economies by being prudent. Thus, I don’t reckon the SARB would even consider cutting rates until the third quarter at the earliest, by 25 basis points, say, to 6.75 percent. In the Nigerian case, the CBN would be loath to tarnish its already battered image any further, especially as the fiscal authorities seek funds from international financiers, who have been grossly disappointed by the poor management of the economy thus far. So even as one expect inflation to slow to single digits in the second half of the year, there might be little wisdom in cutting rates even then. My reckoning is that the CBN would keep its policy rate unchanged at 14 percent until June at least.

Free naira
I have been a little astonished by recent commentary emanating here and there from the Nigerian intelligentsia that bizzarely seeks to rationalise the CBN’s foreign exchange restrictions. To allow the naira trade freely would be a recipe for chaos, goes one argument. Parallel market operators would necessarily impose a premium on their rates, it is also opined. I disagree. The instability argument about a market-determined exchange rate has been largely refuted by the recent success in Egypt, which devalued its currency, raised interest rates and cut subsidies to enable it secure a $12 billion 3-year loan from the IMF. The Egyptian pound has since returned to a path of stability, after the free-fall that initially greeted the authorities’ devaluation move. Better still, the second tranche of the IMF loan is set to be released in February. In contrast, Nigerian stakeholders have been bickering over the past two years on how to go about solving similar troubles. Little wonder, international financial institutions have been reluctant to play ball. The World Bank has refused to budge on the authorities’ loan request, pending clarity on planned reforms. Even the African Development Bank, which is favourably disposed to Nigeria, has applied the brakes on the second tranche of its $1 billion loan for the same reason. Thus, much needed funding to fill the gap in the budget and finance infrastructure projects are not likely to materialize until the authorities’ much touted Economic Recovery and Growth Plan is finalised, now scheduled for release in February, a 2-month delay. This potentially great but perennially foundering nation can ill afford such tardiness.

Also published in my BusinessDay Nigeria column (Tuesdays). See link viz. https://www.businessdayonline.com/cbn-sarb-keep-rates-steady/

Make a fuss. It’s your economy too

By Rafiq Raji, PhD

This week, I share edited views I presented on the state of the Nigerian economy and outlook for 2017, at the Bonds, Loans and Sukuk Nigeria Briefing Day held in Lagos on 21 November 2016. You can download my presentation via this link: http://www.gfcmediagroup.com/africa/bonds-loans-nigeria

Macroeconomic vs geopolitical woes: What is hurting the economy the most?
In the Nigerian case, they are interconnected. Attacks by Boko Haram, a terrorist group, in the northeast hitherto weighed significantly on agricultural output, as logistics and other parts of the agriculture value chain were significantly disrupted. In any case, farmers couldn’t plant for fear of being killed. Some of those fears have abated, in light of successes recorded by the Nigerian military. But a significant number of able men in the region are still not farming, because they are displaced, fighting with Boko Haram or in hiding to avoid arrest by the military on suspicion of being Boko Haram sympathizers. Attacks by Fulani cattle herdsmen on farming communities also affected agricultural production. As some of these troubles remain, insecurity in these areas remains concerning.

In the Niger Delta, attacks by militants on oil and gas infrastructure have disrupted crude oil production and gas supply to power stations. And even though these attacks are motivated in part by a desire for more control over resources, there is a corruption dimension as well; as erstwhile treasury looters feel squeezed by the administration of Muhammadu Buhari, Nigeria’s president. There is also likely a political motivation. A supposedly competent President Buhari, in the security sphere at least, would be hard-pressed to explain why he failed to curtail militancy in the Niger Delta come 2019, when elections are due. The casualties? Economic growth, inflation, and the fiscus. To a great extent, these negative geopolitical events contributed to the recession, double-digit inflation, and budget deficit.

Still, poor economic management made these troubles worse. The actions of the monetary authorities in light of dwindling foreign reserves were quite frankly irresponsible. To have kept the exchange rate artificially strong for so long, meant that even the little that had been saved was pilfered away to speculators and the like. And fiscal policy? You are all privy to how problematic the 2016 budget process was. Bizarrely, it seems history is about to repeat itself: the 2017 budget process is eerily following the same timeline.

More fundamentally, the main issue with the Nigerian economy is one of confidence. Authorities need to be clear on policy direction and be consistent. The government’s fundraising efforts have faced some pushback from multilateral institutions in part because of a lack of these. Though, it is surprising the authorities have not considered potentially much more effective ways of stimulating the economy. A 2-3 year tax holiday for households and businesses, whose expenditure constitutes at least 90 percent of economic activity, is one example.

Short-term suffering vs long-term gains: What does the end of the commodities super-cycle reveal about Nigerias economic fundamentals?
It is not the economy that is not diversified. It is government finances – 70 percent of which are crude oil-based – that are not. Unlike the popular commentary, Nigeria is not a mono-economy. 90 percent of the economy is non-oil related, based on 2015 data. At 23 percent of GDP, agriculture has a greater share of output than oil’s 10 percent. Then there is the dominant and varied services sector (53 percent of GDP), with telecoms, banking and other financial services accounting for not only significant tax revenue but are also major sources of employment. Only recently, Nigerian authorities raised an alarm about a potential famine next year, as farmers now find they could get more value for their produce abroad. One wouldn’t want to belabour the point about how unwise it was on their part for raising that alarm in the first place; after all authorities could better monitor the borders or quietly buy up grains needed for the strategic reserve. Even so, it highlights the likely underestimation of the agriculture sector and its potential as a source of foreign exchange; if in addition to producing for domestic consumption, farmers are able to export as well. Other sectors are probably underestimated as well.

What is pushing the currency down and how much further is it going to fall?
The main source of foreign exchange inflows to the Nigerian economy is not crude oil. Autonomous sources or so-called invisibles (ordinary domiciliary accounts, over-the-counter purchases, and so on) account for 60-70 percent of FX inflows. Crude oil? 20-30 percent. To encourage these suppliers, it is important for the Central Bank of Nigeria (CBN) to indeed let the naira float. It does not make sense for a central bank to keep supporting a currency when the extent of its firepower is in the full glare of the public. Then there is still pent-up demand. And just recently, the unthinkable happened. The country’s spy agency went after bureau-de-change (BDC) operators, ordering them to sell their foreign exchange stock at a certain price. Such actions discourage market participants.

There are other ways the government could increase FX supply. It is likely a significant sum of the money stolen during past administrations, foreign exchange especially, may still be domiciled within the country: It is not likely there was just one case of an ex-government official hiding dollars in a specially-built soakaway at his house. There are probably numerous others who have similar repositories of cash in safes and elsewhere. A way to formalise that money might be to issue a domestic dollar bond, like Ghana did. The Buhari administration may need to look the other way in the event. It is better to have stolen funds put to use in the domestic economy, than have them rot in some hideaway. So would the naira depreciate some more? It probably would. Unless the CBN allows the naira to trade freely long enough to re-gain the confidence of market participants, who have been disappointed by what has been a CBN-manipulated market thus far.

Is there more volatility ahead or will 2017 see a return to stability?
The recession would probably be over in Q1-2017. After likely negative growth of 1.5 percent for 2016, the Nigerian economy would probably record positive growth in the first quarter of 2017; 2.9 percent year-on-year is my reckoning. Inflation would also likely be in the single-digits by end Q2-2017, about 9 percent in June, say. Crude oil prices would also likely recover. Authorities’ economic stimulation efforts – to be proposed in a National Economic Recovery and Growth Plan (NERGP) – add to one’s optimism. In any case, base effects alone may buoy growth towards good numbers. But would that change the feeling of a go-slow economy among Nigerians? To the extent that likely positive growth figures in Q1-2017 changes the currently depressing commentary of government officials, the mood may turn around.

Hopefully, the Buhari administration would also adopt a pragmatic approach to current regional agitations. In the event, stability is likely. The Niger Delta issue has to be resolved by peaceful means certainly. And quickly. The Boko Haram issue should also be resolved once and for all. And to fend off other brewing regional agitations, authorities have to adopt a more inclusive style. It does not at the moment. And the CBN needs to make data-dependent decisions, consistently. Yes, it is under political pressure to cut rates. Still, a reduction should not be contemplated at this time. Thankfully, the CBN governor, Godwin Emefiele, has signalled as much. And the fiscal authorities need to get their acts together: pass the budget on time, borrow prudently, and explore untapped revenue sources. Ironically, it is the external environment that might make for a turbulent 2017. A Trump-led America, Brexit uncertainties, US Fed policy tightening and so on. But on balance, there is good reason to be cautiously optimistic.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/make-a-fuss-its-your-economy-too/

Tight policy by CBN & SARB to continue

By Rafiq Raji, PhD

Central banks at Africa’s two largest economies, Nigeria and South Africa, are meeting this week to decide on interest rates. Foreign exchange scarcity and the consequent weakening of the naira is principally what is stoking Nigerian inflation, which has been on an upward trend since the beginning of the year. From a 2016-low of 9.6 percent in January, annual consumer inflation accelerated to an 11-year high of 18.3 percent in October. Still, the Central Bank of Nigeria (CBN) is widely expected to hold its benchmark lending rate at 14 percent, when it announces its decision on 22 November. Its South African counterpart, the South African Reserve Bank (SARB) may raise rates, however, by 25 basis points to 7.25 percent is my reckoning. At 6.1 percent in September, headline inflation remains outside the central bank’s target inflation band (3-6 percent). My forecasts (6.1 percent for October) put the headline outside of the band for the remainder of 2016 and first month of 2017. Even so, external factors like the imminent policy tightening by the American central bank and uncertainties about what a Trump-led America means for the world at large may be what tilt the SARB’s decision towards a hike. Not that there are not ample domestic worries that weigh on the inflation outlook: the continued negative political dynamic that sends the rand on a tailspin every other two weeks or so for instance. There is some relief though: surplus maize (the staple food) output is predicted for 2017, after drought-induced shortfalls in the last season. The SARB announces its decision on 24 November.

FX scarcity and politics limit CBN’s choices
The CBN’s monetary policy committee (MPC) would be making its decision this week amid an ongoing economic recession and tricky political environment: there is limited political space for it to raise rates; that is, if it desired to make the policy rate positive in real terms. In any case, there is probably no need for it to do so, as inflation likely reached its zenith in October, and could begin to slow from December onward; albeit all too slightly at first, at about 18 percent then. Even so, the CBN governor, Godwin Emefiele, in recent comments, has ruled out a rate cut anytime soon. At least, not at current inflation levels. More importantly for the CBN would be how to tackle the continued foreign exchange scarcity. It was confirmed last week that the CBN may seek extraordinary powers from the legislature to prosecute those who keep foreign currencies for more than a predetermined legal holding period, 30 days, say. Although the CBN says in news reports, by Bloomberg at least, that the proposed legislation did not emanate from it, it did not seem to object. The proposal comes against the backdrop of recent raids by security operatives on black market foreign exchange operators, mandating them to sell FX at a price directed by the central bank. In a nutshell, what has turned out to be a disappointing turn of events, after initial excitement that the naira would trade freely since its supposed float in June 2016, has worsened further. Much needed foreign portfolio flows would probably slow even more consequently, as fund managers hold back their funds for fear of getting burnt a second time. Prior to the float, the CBN frustrated the repatriation of capital abroad, with investors and businesses having their funds stuck in the country for much longer than even their most extreme risk model scenarios ever envisaged. Most lost money.

It is tempting to think that the reason there is FX scarcity is because crude oil prices have more than halved, with similar consequences for the revenue of government. An examination of the typical structure of FX flows into the country, in 2014 say, reveals that the dominant source of foreign exchange inflows is not the CBN or crude oil. Instead, it is the so-called autonomous sources that supply about 70 percent of needed foreign exchange, at least in 2014. These are those kept in domiciliary accounts, sold over the counter, and non-oil receipts by banks. In the current anti-corruption environment, the OTC sources have diminished significantly. And those in domiciliary accounts, which have risen as speculation is rife, remain just there. The CBN now wants to tap into that source. With the CBN’s foreign exchange reserves fast depleting on its stubborn but futile support for the naira, the central bank is clearly desperate. A suggestion to the CBN on how to tap domestic dollar deposits without resorting to coercion might be to issue a domestic dollar bond, like Ghana did. But even after that, it cannot run away for too long from the inevitable measure it must take: allowing the naira to find its level. Any solution that avoids that is never going to be sustainable.

Toxic politics and imminent Fed tightening may force SARB’s hand
The SARB’s MPC meeting this week comes against the backdrop of an almost certain rate hike by the US Fed in December and consequent strengthening of the US dollar in anticipation of it. President-elect Donald Trump’s expected fiscal expansionism adds to market sentiments buoying the dollar. Never mind that South Africa has upheavals of its own. The political environment remains toxic, spewing at every other occasion, some irritation or the other to rile market participants. Incidentally, at least one rating agency, Moody’s no less, is expected to reveal its rating assessment this week (25 November). Although it has South Africa two notches above sub-investment grade, its decision may lead the mood ahead of the much more anticipated decision by SPGlobalRatings in early December. Besides that, the inflation outlook suggests annual consumer inflation would remain outside the upper bound of the SARB’s 3-6 percent target range for the remainder of 2016 to January next year. Rand volatility weighs certainly. After showing some resilience to the now expected negative political event every other week, it almost lost its bearing, so to speak, once it became clear the US Fed was going to hike rates almost for sure in December – bets of a hike are about 100 percent in some cases. The dollar exchange rate of the rand has weakened by almost 10 percent over the past two weeks to 14.4 (18 November), a 2-month low. The SARB, although it would be loth to acknowledge this, might also want to pre-empt potential market volatility should SPGlobalRatings go ahead to downgrade the rating of South Africa to junk status in December. Short of a pre-emptory strike by the SARB, all these may be a little too much to bear for South African assets. These considerations underpin my reckoning that the SARB may raise its repo rate by at least 25 basis points to 7.25 percent this week.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/tight-policy-by-cbn-sarb-to-continue/