The week ahead – Game of sanctions

1st March 2024

Two senior executives at Binance were reported to be detained in Nigeria as the country cracks down on cryptocurrency exchanges, the Financial Times reported. The executives who flew to Nigeria last week were detained by the office of the country’s national security adviser with their passports seized. The crackdown followed a period after several cryptocurrency websites emerged as platforms of choice for trading the Nigerian currency, which suffered chronic dollar shortages. The naira’s official exchange rate has been trading at levels close to the parallel market level after the currency was devalued last month, its second adjustment in less than a year.

Within the past decade, the Naira’s exchange rate has experienced a significant shift, rising from ₦190 to a dollar in 2014 to ₦1500 in 2024, an increase of about 700%. This surge has led to wealth erosion, prompting Nigerians to trade cryptocurrency on platforms like Binance P2P to protect their finances from the Naira devaluation. By purchasing USD-denominated stablecoins, individuals can safeguard their wealth from the depreciation of the Naira. Despite the government’s tendency to blame external factors, such as cryptocurrency trading, the root causes of Nigeria’s forex rate challenges lie in irresponsible government spending, oil theft and low export income levels for which the government bears significant responsibility. If the problem of crude oil theft, allegedly masterminded by some elites, is not solved, the CBN will only keep running in circles. This is in addition to Nigeria’s exposure to absurdly unsuitable subsidy payments and prices for petroleum products that limit government investment and local production capacity. Instead of facing these factors, they have chosen to attack the crypto community. If foreign exchange was easily accessible within the economy, there would be no motivation for speculation, and the CBN would not need to get into hot pursuit of BDCs or speculators, some of whom are unemployed and trying to take advantage of a bad situation. It would appear that the Nigerian government and elite keep setting their appointees up for failure. With the banning of crypto activity in Nigeria, people are likely to explore various options to preserve the value of their cash, such as investing in dollarized assets, which are typically less volatile than the local currency and can offer some protection against purchasing power erosion. They can also invest in commodities like gold, silver, or real estate, which have historically been viewed as stores of value during periods of economic uncertainty. Despite the ban, some individuals might still resort to informal currency exchange markets to convert their Naira to USD and look for alternative peer-to-peer (P2P) platforms to facilitate transactions. However, the effectiveness and legality of such platforms remain uncertain. Certainly, Nigeria’s decision to detain Binance executives and demand sensitive information is likely to negatively affect the country’s reputation and prospects in financial sector circles. The forceful detention and interrogation of foreign executives will raise concerns about Nigeria’s rule of law and regulatory environment. It will discourage potential investors, both domestic and international, from entering the Nigerian financial sector, hindering its growth and development.

The Central Bank of Nigeria (CBN) has pegged cash dollar purchases to a customer at $500, saying amounts exceeding this will be transferred to the customer’s Naira bank account. If the customer purchasing the foreign currency is a non-resident, Nigerian or not, such will be issued a prepaid Nigerian Naira card. Telecommunications firms have been directed to block access to cryptocurrency websites to curb speculation, with Binance stating that its platform is not for currency pricing. Also, the CBN raised the benchmark interest rate to 22.75% from 18.75%, increased the Cash Reserve Ratio to 45%, and retained the Liquidity Ratio at 30%.

Under Mr Cardoso’s leadership, the CBN has reverted to conventional methods employed by past governors, such as simplistic demand management strategies and singling out certain entities as the primary cause of foreign exchange rate fluctuations. His predecessor, Godwin Emefiele’s poor handling of the foreign exchange market caused several people to profit from roundtripping, amongst other things. The CBN under Emefiele restricted cash withdrawals from domiciliary accounts, limits for international transactions reached as low as $20 and AbokiFX, a website that publishes black market rates, was hounded and blamed for the FX crisis. The website was eventually restricted. The outcome of these actions may be akin to chasing the wind. We opine that Mr Cardoso has waited too long before holding an MPR, but it is better late than never. The announced measures align with expectations in the current high inflation environment. We anticipate that these actions will help to gradually lower inflation towards the governor’s modest 21% target. Nevertheless, for a meaningful effect, inflation must decrease substantially below this goal. While high-interest rates will lead to increased borrowing costs, there is a risk of decreased productivity and a subsequent reduction in the overall supply of goods in the economy, potentially resulting in a resurgence of inflation. The CBN’s recent announcement regarding USD purchases is part of a long-standing effort to address what it perceives as excessive demand for foreign exchange. The Naira’s value has plummeted by over 120% in the early weeks of 2024, leading to a significant undervaluation according to economists. This move reflects the necessity for drastic action in response to dwindling investor confidence in the Naira. Various sources recently revealed that many Nigerians, including institutions, are purchasing cryptocurrency to exchange their Naira for FX, and this is putting pressure on the exchange rate. Therefore, the increasing supply needs to be addressed by closing off leakages. Meanwhile, the CBN is implementing more interest rate and Cash Reserve Ratio (CRR) hikes to control bank deposits and make fixed-income securities more appealing to investors, thereby decreasing the demand for foreign exchange.

Following a fatal stampede at the Nigeria Customs Service (NCS) Old Zonal Headquarters in Lagos State, where seven people died, the NCS suspended the sale of seized foodstuffs. Nigeria Customs had said it was selling seized food items at ₦10,000 per 25kg to alleviate the people’s suffering. Chief Superintendent Abdullahi Maiwada announced the suspension after hoodlums attempted to force their way into the Yaba Customs office compound, causing the stampede that caused the death of a pregnant woman and six others. Intending buyer, Toyin Oke-Owo appealed to President Bola Tinubu for a lasting solution to the country’s economic hardship.

The tragic incident at the Nigeria Customs Service Old Zonal Headquarters in Yaba, Lagos State, resulting in the loss of lives, is deeply saddening. It is concerning that such a situation occurred while people were trying to access food items sold by the Customs Service. Only so much can be said about Nigeria’s value system. Government agencies will tow the path of their principals. If the administrators have shown that they value the lives of citizens, agencies will fall in line. In a society like Nigeria, where there are approximately 215 million mobile phone subscriptions, the absence of streamlined processes and resistance to automation in the 21st century reveal a clear image of the country’s approach to modernisation. The fact that no one will be held accountable for those seven lives lost makes the picture grimmer. The incident at the Nigerian Customs office is a tragic reflection of how the organisation has deviated from its intended purpose of facilitating trade to improve the lives of Nigerians. The Nigerian Customs’ imposition of a 70% tariff on wheat is exacerbating the affordability of staple foods, contributing to the citizens’ hardship. The organisation’s reluctance to adjust this policy reflects a prioritisation of revenue over the people’s welfare. Rather than addressing the root cause of economic strain, the Customs’ attempt to improve its image by selling seized food items at a fixed price has led to fatal stampedes. This strategy is a misguided attempt at public relations, emphasising the urgency for the Customs to reconsider its policies instead of resorting to measures that endanger lives. The optimal approach would be for Nigerian Customs to work with the executive and legislative bodies to review and adjust tariffs on essential goods like wheat, etc., considering their contribution to food inflation. A shift in focus towards policies that promote affordability and accessibility of staple foods is crucial for the well-being of Nigerians. There has to be a genuine commitment to facilitating trade rather than simply throttling it and acting extortionary. Also, this unfortunate event underscores the importance of ensuring safety and order in all public activities, especially those that provide relief to citizens. It also emphasises the need for effective communication and crowd control measures to prevent such tragedies in the future. The Customs should focus on fostering positive import and export practices that benefit most Nigerians to ensure fair trade practices and actively contribute to socio-economic development.

In Ghana, the average unemployment rate for the first three quarters of 2023 was 14.7%, with females consistently experiencing higher rates, according to the 2023 Q3 Labour Statistics Report. Only four regions had lower unemployment rates than the national average. Greater Accra and Ashanti regions recorded rates above the national average. Producer Price Inflation (PPI) in January 2024 rose to 17.4%, up from 16.6% in December 2023, with a month-on-month change of 1.7%. About 1.96 million Ghanaians, representing 6.1% of the population, face acute food and nutrition insecurity. The Cadre Harmonisé reports 34.7 million people in West and Central Africa are facing similar insecurity, which is expected to worsen in June–August 2024.

Ghana is currently battling with a significant economic challenge, facing high unemployment rates, double-digit inflation, and a depreciating currency against major trading currencies like the US dollar. In December 2023, the inflation rate surpassed 23%, while the unemployment figures released by the Ghana Statistical Service for the third quarter of 2023 revealed a worrisome rate of more than 14%. This represents a threefold increase in Accra’s unemployment rate compared to a decade ago, positioning it as one of the worst in the ECOWAS region, surpassing counterparts like Nigeria, Ivory Coast and Senegal, which all maintain single-digit unemployment rates. According to the Ghana Statistical Service, the average unemployment rate for the first three quarters of 2023 stood at 14.7%, with females experiencing consistently higher rates than males. The gender gap in unemployment widened in 2023 compared to 2022, driven by a sharp increase in female unemployment between the fourth quarter of 2022 and the first quarter of 2023. As more individuals migrate to urban centres like Accra and Kumasi in search of employment opportunities, the regions of Greater Accra and Ashanti consistently record unemployment rates higher than the national average. The youth unemployment rate in Ghana is nearing 20%, with a concerning statistic indicating that 22.3% of individuals experiencing unemployment between the first quarter of 2022 and the third quarter of 2023 had completed tertiary education. In fact, of the 540,000 individuals who transitioned from being outside the labour force to unemployment status between the fourth quarter of 2022 and the first quarter of 2023, over 75% remained unemployed. The latest Food Security Update by the World Bank revealed that approximately 1.96 million Ghanaians are facing acute food and nutrition insecurity, primarily due to high prices and post-harvest losses. While food may be available, the pressing question arises regarding whether the ordinary Ghanaian, grappling with unemployment and double-digit inflation, can afford it. As the 2024 presidential and parliamentary elections approach, the escalating number of unemployed individuals in Ghana raises the critical question of whether they will be promised unemployment benefits similar to those in Nigeria or opportunities for job creation.