Economy Issue 01 - 2021 MAGAZINE

Will special bills foster Nigeria’s growth?

The central bank has issued a fresh licence categorisation and capital requirements for payment service providers

The Central Bank of Nigeria plays a pivotal role in shaping up the economy and it has been looking after the monetary policy on a serious note amid the outbreak of Covid-19. The apex bank has strived hard to maintain price stability, exchange rate and curb unemployment during the pandemic. The government has introduced the 2020 Appropriation Bill to maintain a yearly budget cycle for Nigeria as part of its fiscal policy. In addition, the government has also signed a new finance act earlier this year. The central bank has introduced special bills this month to manage liquidity control or money supply in the economy. Along with the introduction of these bills and, there are many more policies that have come into effect.
According to the National Bureau of Statistics, Nigeria’s economy has entered recession for the second time in five years due to a slump in GDP for the second consecutive quarter. The reports were produced in mid-November. The Central Bank of Nigeria has been compelled to introduce fresh monetary policies that could rebound Africa’s largest economy because of the negative third quarter growth of 3.62 percent.

Special bills: Why do they matter?
The Central Bank of Nigeria has rolled out special bills to foster economic recovery from the Covid-19 pandemic and bolster the financial market. The special bills will be valid for a period of 90 days. Furthermore, the special bills will be tradable amongst banks, institutional investors and retail. The bill will include features such as zero-coupon, 90 days tenor and Central Bank of Nigeria’s applicable yield at issuance. The instrument is not applicable for repurchase agreement transactions related to the central bank and shall not be discountable at the central bank’s window.

The Central Bank of Nigeria has sequestered more than N6 trillion since May this year. The banks are expected to maintain a loan to deposit ratio of 65 percent in accordance with the central bank. Furthermore, the accounts of the banks will be deposited if they fail to comply with the excess deposits target. The special bills pave the path for banks to provide an instrument to investors in exchange for a return. For instance, the special bills can be sold to investors who will need fixed income instruments.

The Central Bank has floated a fresh licence categorisation and capital requirements for payment service providers. The Central Bank of Nigeria’s move is in accordance with its commitment to encourage a robust and effective payment system. According to the new development, the minimum capital requirement is N250 million for payment solution services (PSS), and N50 million for super agents. Furthermore, the minimum capital requirement for payment solutions service providers (PSSP) and payment terminal service providers (PTSP) is N100 million.

The banking sector continues to grow
Nigeria’s banking sector continues to thrive amid the macroeconomic pressures even after the 2008 financial downturn and the 2014 oil crisis. The banking segment has been tough amid the pandemic including a surge in inflation, unemployment rates and slump in the real GDP growth rates. S&P Global reports indicate that Nigeria’s crude oil production recorded a 3.6 percent slump in Q3, after recording Q2 fall down of 6.1 percent. Furthermore, the GDP is expected to contract by 3.8 percent by the year end. The report produced by S&P Global indicates that 30 percent of the bank’s material is exposed to the oil segment, which weighs on asset quality and earnings. The reports indicate that restructured loans are expected to surpass the 10 percent mark of 2019 this year with 20 percent on the back of lower oil prices.

The loans under forbearance are expected to reach between 20 percent to 25 percent. While there will be an increase between 10 percent to 12 percent of non-performing loans compared to 6.1 percent a year ago. In addition, this year, the credit loss will surge about 2.5 percent and is expected to fall down to 2 percent next year, from an estimated 1.2 percent in 2019. The net banking segment will continue to remain stable at around 13 percent of worldwide loans in 2020-21 even after external continue to persist.

The bank’s foreign exchange shortages have re-emerged despite the rollout of the Nigerian Autonomous Foreign Exchange Fixing Rate Mechanism (Nafex). The reports indicate that the financial performance of the top tier banks will stay strong with return on equity averaging 14 percent this year amid weaker profitability. According to a report published by Banker Database, the biggest banks in Nigeria in terms of assets are: Guaranty Trust Bank, Access Bank, United Bank for Africa, First Bank of Nigeria and Zenith Bank. The report by S&P Global indicates that the private sector will witness a subdued bank credit even though the Central Bank of Nigeria has floated a minimum loan-to-deposit ratio of 65 percent to spur credit growth.

2022: The year for Nigeria to flourish
Nigeria’s central bank governor Godwin Emefiele expressed his concerns over recession and said that the country’s economy will surge 2 percent in 2021. The recession is a result of the Covid-19 pandemic and low oil prices. However, Mr Godwin Emefiele believes that the recession is temporary and will end when there is a rebound in the global economy. Mr Godwin Emefiele supports the central bank’s foreign exchange policies which were empowering the county’s local currency to be in line with the best practices in other economies. He also expects double-digit inflation to moderate by the first half of next year. According to analysts, Nigeria’s currency Naira has recorded a 28 percent slump this year.

The Q3 performance for Nigeria remains low due to weak oil demand. However, the results also reflect an offset due to a rebound in the non-oil economy. The reports by Capital Economics indicate that output in the non-oil segment recorded a 2.5 percent year-on-year slump compared to 6 percent in non-oil GDP in the second quarter. The manufacturing and construction segments showed signs of a rebound after strict restrictions on activities were gradually lifted by the government. There was double-digit growth for the telecommunication segment, while there was a 3.2 percent third quarter growth for the finance and insurance segment compared to the same period last year.

Capital Economics reports stated that Nigeria’s oil output is likely to be hampered in the coming months due to the 23-country Opec+ coalition which planned to cut production this year in order to offset a major slump in the oil global oil sector. However, growth and rebound will continue in other sectors amid some headwinds. Furthermore, the Central Bank of Nigeria held its lending rate at 11.5 percent this November to ramp up economic growth. The services sector represents 52 percent of the GDP and is responsible for employing 52 percent of the population in Nigeria. Sectors such as telecommunications, retail and finance are very dynamic. Moreover, the tourism industry is also a significant sector towards fostering the country’s growth. The government has established the Ministry of Culture, Tourism, and National Orientation to spur growth of the sector. However, the sector continues to struggle due to proper infrastructure, power supply and poor water quality.

FocusEconomics observed that Nigeria’s GDP will surge 1.9 percent next year, which is 0.2 percent lower than the actual estimate, before surging 2.9 percent in 2022. According to COFACE, the Nigerian economy will finance its deficit through foreign sources. The country has to face another challenge, which is the burden of debt service.

How is the Nigerian oil performing?
The current global oil market downturn has different implications on different oil producers. In the case of Nigeria, more than 50 percent of the country’s exports are linked to the oil and gas segment, and oil rents have been critical to maintaining ruling coalitions in power and also maintaining political stability in the country. The surge in investments in the upstream and downstream sectors of Nigerian the oil and gas industry has strengthened the market. However, the Nigerian oil and gas segment has been affected by the outbreak of insurgent problems in the past couple of years and not just because of the pandemic. Furthermore, oil theft has also contributed to the industry’s losses.

According to reports produced by indicate that Nigeria’s oil and gas segment is expected to grow at less than 5 percent CAGR between the 2020 and 2025 period. The offshore oil and gas industry are expected to make progress steadily and open more market opportunities. The driving force behind the strong growth in offshore exploration and production activities has been the government. The country is on the cusp of altering refined products’ supply dynamics in Africa with the assistance from the Dangote refinery from 2021, which is expected to be Africa’s biggest refinery. In addition, the refinery will pave the path for Nigeria to produce and export refined petroleum products without any challenges.

Nigeria’s gas sector is expected to flourish more than oil because the country has a huge gas reserve and has witnessed a massive LPG demand in the past few years. The oil market is one of the vulnerable markets because Nigeria is slowly shifting towards using more gas and is exploring new opportunities to replace oil consumption with gas in the power and transportation segment. The Nigerian government believes that oil reserves will dry up in the coming three to four decades. For that reason, it is pushing the adoption of natural gas. With that, natural gas has a brighter perspective over fossil fuels.The oil and gas companies are keeping an eye on gas production as a result of robust investment in gas-to-power projects across Nigeria.

Minister of State for Petroleum Resources, Chief Timipre Sylva, told the media at the 13th International Conference of the NAEE in Abuja, “The ongoing transformation of the Nigerian National Petroleum Corporation, NNPC into a diversified energy company and the increased focus on domestic gas utilization, were major strategies adopted that would strengthen the oil and gas industry and help cushion the effect of a future crash in crude oil price. The Covid-19 pandemic and progressive decline in crude oil prices in 2020, had made it imperative for Nigeria to aggressively pursue the diversification of its portfolio to non-oil businesses so as to cushion the effect of a future crash in crude oil prices and position the oil and gas industry for growth in a post-Covid world. The government had come to terms with the application of domestic gas as a platform to drive a truly sustainable in-country economic diversification. Our strategy to strengthen the Nigerian oil and gas industry in a post-Covid-19 world is to transform our national oil company into a diversified energy holding company to enable us respond swiftly to the twin challenges of a future crash in crude oil prices and decarbonization, by moving rapidly to becoming an energy holding company with more diverse interests. Consequently, we have strategically focused on our vast natural gas resources, as a critical transition fuel to help battle global warming and function as a bridge between the dominant fossil fuel of today and the renewable energy of tomorrow.”

Peek into the Nigerian healthcare in the pandemic world
Nigeria’s health workers and the existing health system has been critically challenged by the outbreak of the Covid-19 pandemic. The challenge is getting intense as the sector continues to face a shortage of proper hospitals, medical equipment and doctors in rural areas. The government of Nigeria had agreed to spend 15 percent of the overall healthcare segment in 2001. However, the current government has just spent 3.9 percent every year in the last three years.

The pandemic has changed the outlook of the sector as the government has bolstered its efforts to improve the current situation. Medical tourism in the country is currently shut out. The pandemic continues to take the toll of the current situation because every government which has ruled the country has not been able to fully develop the country’s healthcare properly. The country’s scientists have made several claims of getting an herbal cure for the Covid-19. However, this herbal cure has been validated by the presidential task force on Covid-19 and the National Agency for Food and Drug Administration (NAFDAC) is yet to examine it.

The current situation remains a threat to the Nigerian healthcare segment. The pandemic has turned out to be a game changer for many economies and the Nigerian government must look after the healthcare sector in a serious manner.

The real challenge for Nigeria is the risk of demographic explosion despite its dynamism and the outbreak of the pandemic. The United Nations’ reports indicate that Nigeria’s population could touch the 730 million mark by 2100, which is huge. However, the country’s concern remains over the militancy issues, poverty, outbreak of other serious illnesses such as tuberculosis and HIV, other than Covid-19 coupled with unemployment. The government expects a comeback in 2021 as local and foreign demand recovers from the shock. The global economy is scrambling to rebound from the pandemic. It will be interesting to see how Nigeria’s economy will fare in the coming years. The Nigerian energy sector will strive hard to make a comeback.

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