The week ahead – Chasing a pandemic

The FG has announced significant changes to its 2020 budget as measures to contain the effect of the outbreak of coronavirus on the country’s economy. Finance minister, Zainab Ahmed, said the government will implement a 50 percent cut in revenue from privatisation proceeds. She also announced a cut in crude oil benchmark price, from $57 down to $30, while crude oil production remains at 2.18 million barrels per day as earlier contained in the budget estimates. Ahmed said the Federal Executive Council approved reductions in capital budget by 20 percent, and 25 percent cut in recurrent expenditures. The state oil firm, the NNPC, has since announced a reduction in petrol price from ₦145 per litre to ₦120. Expected Customs revenue, which had been budgeted for at ₦1.5 trillion, will be adjusted downwards, but a new figure was not given. According to Ahmed, the government has resolved to stop recruitment, except for essential services such as security and health services. It has also resolved to restore and comply with the Civil Service Retirement Regulations. The FG would start to engage with the National Assembly immediately to pass these changes into law.

Annual inflation in Nigeria rose for the sixth straight month to a near two-year high, the statistics office said on Tuesday, as the impact of the country’s closed borders continued to be felt. Inflation stood at 12.20% in February, compared with 12.13% in the previous month. It is the highest inflation rate since April 2018, when it stood at 12.48%. A separate food price index showed inflation at 14.90% in February, compared with 14.85% in January. “This rise in the food index was caused by increases in prices of bread and cereals, fish, meat, vegetables, and oils and fats,” the National Bureau of Statistics said in its report. Nigeria closed parts of its borders in August to fight the smuggling of rice and other goods. Economists say the move has driven inflation as local food producers have struggled to meet the demand for food in the country of around 200 million people, Africa’s most populous. The central bank monetary policy committee will meet next week to set its benchmark interest rate. It had said it expected to keep monetary policy tight in 2020 to combat inflation and support the currency amidst slow growth of around 2%. But Nigeria, Africa’s biggest economy and top oil producer, has been hit hard by low oil prices and the impact of the coronavirus outbreak on China, with which it has close trade ties.

Despite an agreement by the governors of the country’s 36 states to reverse the Right of Way charges for telecoms facilities from the planned ₦6,000 to ₦145 per linear metre, their agencies superintending over telecommunication infrastructure have refused to comply. Local newspaper, ThisDay reported that in defence of the refusal to honour the agreement, the Lagos State Government said the ₦145 charge was suggested by the FG in 2013 for a five-year period, which expired in 2018; and could no longer be considered as tenable. Under intense pressure from the FG and telcos, governors had agreed to harmonise their charges with that of the FG after a meeting in January with Isa Pantami, the communications minister. The RoW charge on federal roads is ₦145 per linear metre, but state agencies in Lagos, Ondo, Cross River, Kogi, Kaduna, Osun, Anambra, Enugu, Imo, Adamawa, Kebbi and Gombe refused to collect the old rates for RoW and were no longer issuing RoW licences to telcos. The chairman of the Association of Licensed Telecoms Operators of Nigeria (ALTON), Gbenga Adebayo, confirmed that the states were still charging far above the recommended rate of ₦145, a situation he said had stifled telecoms growth across the states. Adebayo said while only Lagos State charged ₦500 per linear metre, all other states were charging more.

Zimbabwe’s government will offer land as compensation for nearly 800 farms it seized under its land acquisition policy since 2000, according to regulations published on Thursday. Under former President Robert Mugabe, Zimbabwe took over some 5,000 farms, mostly from white farmers, saying the policy was meant to address colonial imbalances. But the land seizures triggered an economic collapse. The southern African country’s new Constitution agreed with the opposition in 2013, provides for compensation of all farmers whose land was seized by the state. However, Zimbabwe’s economic woes mean it has struggled to pay the former farmers. It set aside US$17.5 million in its 2019 budget and a further 380 million Zimbabwe dollars (US$21 million) for the same purpose this year. The former farmers are demanding nearly US$7 billion in compensation, according to a committee representing them in negotiations with the government.

Commentary

• The culling of the budget was inevitable considering the fall in the price of crude oil. Looking at previous budget performance reports, not a lot was going to be spent on capital expenditure anyway so this is a fait accompli. However, whilst the proposed 20% reduction in capital expenditure appears feasible, the 25% reduction in recurrent expenditure will be hard to achieve. One way to have achieved this would have been savings from petrol subsidies, but the government also announced that the petrol pump price was being slashed, not floated and made subject to market rates, thus putting paid to any hope of deregulation. As this pump price directive comes into immediate effect, marketers of the products and their bankers stand to lose part of their capital if they are forced to sell products already purchased at previous prices at the new rates. Given that Nigerians spend a lot on petrol for mobility and power, on the face of it, the petrol price reduction will provide some relief to the man on the street. However, we have seen this move before, and it is a populist one. As oil prices dropped in late 2014 into early 2015, President Goodluck Jonathan reduced the petrol price from ₦97 to ₦87 per litre. He had tried to remove the petrol subsidies in 2011 but this had led to massive Occupy Nigeria protests. But clearly, these price controls do not work – months later, the price of petrol went up to ₦145 under President Buhari. The subsidy bill, now called ‘under-recovery,’ has become even more opaque and is still in the hundreds of billions yearly – last year, it hit a trillion naira. Nigeria is about to enter a crisis that is even more significant than the 2014 oil price collapse that eventually led to a recession. Unfortunately, from the early indicators, the policy choices being made are similar to those that led to the 2016 outcomes. The real solution, which the government is about to waste another crisis without following through, is to deregulate completely. But, due to the fear of political backlash, it will not happen.
• The key driver of this inflation is food prices. This is the component of inflation that hits the pockets of the most vulnerable Nigerians the fastest and hardest. By now it is abundantly clear that the border closure is fuelling this surge in food inflation. What is more, with the record low oil prices and the dwindling foreign reserves, it is inevitable that despite the Central Bank’s hubris, the Naira will be devalued, further eroding the short-term purchasing power of the Nigerian. In a previous report, we counselled that the federal government should make reducing the cost of food a strategic priority since Nigerians spend more than 60% of their income on food. Ordinarily, the forecast for inflation in the next few months should follow a similar pattern but with economic activity likely to be affected by restrictions imposed due to the COVID-19 pandemic, the inflation rate could, somewhat paradoxically, slow over the next few months.
• The arbitrary increase of Right Of Way charges by some state governments points to two of the major issues plaguing governance in Nigeria. First, is the disregard for agreements. A corner piece of a sound ‘ease of doing business’ regime is the adherence to agreements, especially by governments at every level. It is therefore extremely shortsighted for states that require massive telecoms infrastructure investments to treat agreements as if they are suggestions and not adhere to them after such agreements have been reached. Their objections should have been stated and dealt with at the negotiation table. This is extremely bad behaviour and is not good for the vitality of the investments that these states so desperately need. We urge the states to reconsider their positions and either adhere to agreements or renegotiate them bearing in mind the impact on the quality of the telecoms services available to their citizens and the productivity gains such investments will bring. The second issue is the right of states. The Land Use Act gives states the power over lands in their domain so it will be difficult for the federal government to enforce the previous agreement. This has not stopped the FG from attempting to dictate to the states what they should do, but the fiscal situation of the states is making a few rebels bolder. This reflects, more than anything, the broken state of Nigerian federalism.
• Zimbabwe has come full circle and is the poster boy of how populist government actions that are contemptuous of property rights and justice inevitably lead to disaster. The dispossessed farmers covered in the land compensation scheme are citizens of countries that have bilateral investment agreements with Zimbabwe, as well as some black Zimbabwean commercial farmers who lost their farms. These countries include former colonial ruler Britain, South Africa, Germany, Denmark, the Netherlands and Switzerland, all of which had significant numbers of farmers in Zimbabwe. In 2015, the International Centre for Settlement of Investment Disputes, which is part of the World Bank Group, ordered Zimbabwe to pay US$196 million compensation to a Swiss-German family whose farm had been seized by the government. But it has cost Zimbabwe more than these – it has created at least four lost generations and an economy crawling on its knees. It is a lesson worth learning well for other African countries who are inclined to trod the populist path. Equity and restitution of historical grievances can and must be carried out with a sense of justice, not one of vindictiveness.