The week ahead – Keeping score

2nd February 2024

Foreign exchange expenses eroded the operating profit of Guinness Nigeria for the year ended December 2023, resulting in a ₦5.233 billion ($3.6 million) loss, the firm’s unaudited interim financial statements showed. The former Managing Director, John Musunga, blamed the Federal Government’s forex harmonisation policy for the development. Also, the Poultry Association of Nigeria (PAN) attributed the closure of more than 50% of its farms in 2023 to sectoral challenges. Mr Mojeed Iyiola, Chairman of the PAN Lagos State chapter, highlighted that poultry farmers faced difficulties meeting the increasing demand for poultry products due to the closure of a significant portion of their farms.

Foreign exchange dominated much of Nigeria’s economic discussions in the second half of 2023, and this theme appears set to continue for the first half of 2024. Manufacturing companies were hit hard during the last financial year due to the rise in value of their foreign exchange liabilities, and this is set to continue as the Naira has hit record lows. Some companies have been engaging in backward integration to reduce their dependence on raw material importation, while many have decided to shut down factories in the country and change their business models to importation and trading of finished goods. Either way, 2024 is shaping up to be a difficult year for businesses in Nigeria because costs are going through the roof while consumers’ spending capacity has crashed considerably. This is what is at play at Guinness Nigeria. The company has already announced that from April 2024, it would “no longer import or distribute certain Diageo international premium spirits products, including Johnnie Walker, Singleton, and Baileys.” This, it said, was to limit its FX exposure. As of June 2023, these spirits accounted for 6% of the company’s total revenue. A common trend noticed among producers in Nigeria is that although the retail prices of products are increasing, they are not rising as fast as the cost of inputs. In 2023, the company said its distribution expenses increased by 21% due to logistical challenges and “a massive ₦49.1 billion unrealised forex loss in the income statement.” One of the company’s strategies was to reduce overall administrative expenses by 6%, which was insufficient in combating the effects of naira devaluation and subsidy removal. The economic impact of the ill-implemented policy continues to reverberate throughout the economy. While we maintain that the policy was right, its implementation was premature and ill-thought-out. The authorities did not consider the gaps and potential impact of the ban. Thus, they failed to provide measures to mitigate any negative effects. This has led to confusion and disruption in the financial sector. In effect, the Naira continues to depreciate unpredictably, destroying value and eroding profits. The CBN has a lot of work to do to stem the continual regression and eventual close-down of businesses.

Costs of feed, animal products and other inputs continue to spiral in Nigeria, trapping the population and the farming community in a vicious economic cycle. Coming from the Poultry Association of Nigeria (PAN), there has been an urgent call on the FG to intervene to control escalating feed costs. According to a senior official in one PAN chapter, feed that cost ₦8,000 (US$9.11) for a 25-kg bag in November is now selling for ₦10,950. To remain in business, poultry farmers require financial support from the government in the form of grants, he said. Even at low rates of interest, most poultry businesses are in too fragile a state to repay any further loans. Already, many poultry farmers have cut down their bird numbers, while others have closed their businesses altogether.

There are several dimensions to the ongoing crisis in Nigeria’s poultry industry. First, is the inability of crop farmers to meet the maize demand for domestic production. This problem is then worsened by insecurity which has hindered farmers from carrying out farming operations. Between October 2019 and October 2020, Nigeria’s maize imports doubled, rising from 500,000 metric tonnes to one million metric tonnes, and leading to a ban. The unintended consequences of the ill-advised ban on maize imports continue to show itself. When that policy was announced, SBM published a chart showing how this would further drive the costs of poultry products and medicines up because maize is a key component in the value chain of both industries. The Cardoso-led CBN has lifted that ban, but the effects still linger for maize, a crop that Nigeria ranked as Africa’s highest producer in 2019. Second, is the demand for a subsidy. A major downside to Nigeria’s subsidy strategy since the 1970s was that wages remained low, as funds were diverted to subsidising consumption. Over time, this led to a growing imbalance between the cost of living and wages, which has now reached a crisis point. The subsidies have now been removed, but wages remain largely unaddressed; hence the vast majority of Nigerians cannot meet their basic financial requirements. Unfortunately, PAN’s call to the government to intervene to control escalating feed costs is not the right way to go. Nigeria must continue the push for free markets, but wages must rise quickly. From a health perspective, the inability of farms to remain open would translate to a drop in egg production, which would lead to a hike in prices. This means that eggs would gradually be out of reach for the poor, and children may not get adequate proteins for growth. Thus, the problem in Nigeria’s poultry industry is not just about businesses or maize farmers. The health of the young population is at stake.

The chairman of the Lagos State chapter of the Peoples Democratic Party, Philip Aivoji, who some yet-to-be-identified gunmen abducted along the Lagos-Ibadan Expressway, has regained his freedom. Mr Aivoji and some other party chieftains were abducted at the Ogere area of the Lagos-Ibadan Expressway while returning from the party’s Stakeholders’ Zonal Caucus meeting held in Ibadan. Meanwhile, gunmen killed two traditional rulers in Ekiti State between Oke-Ako and Ipao-Ekiti in Ajoni Local Government Area (LGA). The victims are Onimojo of Imojo Ekiti in Oye LGA and Elesun of Esun Ekiti in Ajoni, Ikole LGA, while another chief, the Alara of Ara, reportedly escaped.

As Nigeria’s kidnap epidemic boils over, it is important to note that the insecurity in the Southwest is not a recent phenomenon. It reached a boiling point between 2019 and 2020. The killing of the Ekiti chiefs is not also the first time such a high-profile, headline-stealing death would happen in recent times. Suspected Fulani herders in June 2019 killed Funke Olakunrin, daughter of Afenifere leader Pa Reuben Fasoranti, in Ore, Ondo State, on her way to Lagos. That incident hastened the process that set up Operation Amotekun by the Western Nigeria Security Network. A year later, the Olufon of Ifon was killed by kidnappers in Ose LGA of Ondo State. What these deaths, the killing of the Ekiti chiefs and the abduction of the Lagos PDP boss have in common is that they all happened on an intercity road. While home invasions are becoming a common tactic for kidnappers in Abuja and many parts of the Northcentral and Northwest, most abductions in the Southwest still occur on the roads. These highway abductions are precisely part of what Amotekun was created to prevent. Since its creation, the success of the Amotekun security outfit in the Southwest has been debated, and the recent surge in insecurity has questioned its effectiveness. But beyond the immediate outrage, a deeper analysis reveals a chilling factor: The proliferation of small arms. A 2020 SBM Intelligence report, “Small arms, mass atrocities and migration in Nigeria,” painted a stark picture of readily available firearms across all regions and predicted a rise in violent crime. This easy access, the report argues, is fueling kidnapping’s rise by empowering criminals: guns make kidnapping a more lucrative and less risky option compared to other forms of crime. Criminals feel emboldened, victims intimidated, and resistance minimised. The abundance of firearms has weakened state authority and strengthened criminal groups. The Lagos-Ibadan Expressway kidnappings, where gunmen were reportedly armed, exemplify how firearms embolden criminals. The vast, poorly secured expressway allows them to operate with impunity. It is crucial to remember that kidnapping impacts everyone, not just high-profile figures. Ordinary citizens, particularly in vulnerable regions, live under the constant threat of abduction. This not only shatters lives but also cripples economic activity and stifles development as our report on the effect of kidnapping in Abuja, published yesterday, shows. As abductions and killings continue, calls for state and community policing will grow louder. The federal government will be forced to choose between decentralising security and maintaining central control. Given its history, it is likely that the government will try to have it both ways, attempting to decentralise while maintaining control. Nigeria’s leaders should prioritise curbing the proliferation of small arms, having stricter gun control measures, and cracking down on the smuggling of weapons across borders. However, no matter how many measures are put in place, there will be limited progress if the root causes of insecurity―poverty and unemployment―are not addressed. Solving the problem of insecurity requires a holistic approach that tackles both its symptoms and root causes.

The Bank of Ghana has reduced its main interest rate by 100 basis points to 29%, its first rate cut since 2021, as inflation declined for the fifth consecutive month in December 2023. Inflation dropped to 23.2% year-on-year in December from 26.4% in November and 35.2% in October. Governor Ernest Addison anticipates further declines, with inflation projected to reach 13%-17% by year-end and 6%-10% by 2025. The Central Bank aims for 8% inflation with a 2% margin of error. Factors contributing to disinflation include a tight monetary policy, stable crude oil prices, and a steady exchange rate, Addison said.

Ghana’s fiscal policy implementation has closely adhered to the requirements outlined in the IMF ECF-supported programme. The latest provisional data indicates positive progress towards meeting performance criteria targets, including the primary fiscal balance on a commitment basis, non-accumulation of external debt payment arrears, and avoidance of new collateralised debt by the central government and public entities. Despite these achievements, there are notable challenges in the financial sector. A combination of a tight monetary policy stance and increased risk aversion among banks due to rising credit risks has resulted in sluggish private sector credit expansion. In December 2023, the growth in private sector credit slowed to 10.7%, a significant drop from the 31.8% annual growth observed in December 2022. Real terms indicate a contraction of 10.2% in credit to the private sector, compared to a 14.5% contraction in the same period the previous year. The Central Bank reports an improvement in the banking sector’s performance, attributing it to the receding adverse effects of domestic debt restructuring and macroeconomic challenges. As of the end of 2023, the banking sector is described as stable, liquid and profitable. Profitability has rebounded from the 2022 loss position, with increased net interest income, fees and commissions. The sector’s balance sheet is robust, supported by asset growth fueled by deposits. However, a critical analysis of the government’s recapitalisation strategy raises concerns. Despite efforts to assist commercial banks, their participation in the Domestic Debt Exchange Programme has left many on the brink of insolvency. The collapse of Ghana’s bond market amplifies the potential risks, casting doubt on the effectiveness of the central bank’s decision to provide junk bonds to commercial banks to bolster their balance sheets. This could lead to solvency crises for locally-owned banks in the long run. Commercial banks prioritise short-term securities, particularly treasury bills, with rates as high as 30%. This has resulted in crowding within the private sector. The recent reduction in the policy rate of the Bank of Ghana from 30% to 29% may not yield the anticipated positive impact, as commercial banks may be hesitant to lower the cost of borrowing for individuals and firms. Overall, challenges persist despite positive indicators, requiring careful consideration and potentially revised strategies to address the underlying issues in the financial sector.