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Analysts Review CBN's Currency Redesign, Nigeria's Gas Expansion Blockade, and Cost of Flooding

Oct 27, 2022   •   by TheAnalyst, Proshare Research   •   Source: Proshare   •   eye-icon 598 views

Being an Analyst Note issued by Proshare Research on October 27th, 2022 


CBN's Decision to redesign Banknotes May Create Unintended Consequences-The Cobra Effect

The Central Bank of Nigeria (CBN) announced that new designs of N100, N200, N500, and N1,000 banknotes would be produced and circulated. The new currency would be in circulation from December 15, 2022, while the existing currency would remain a legal tender till it is phased out on January 31, 2023. According to the CBN, the endgame is to rid the system of counterfeited currencies and to mop up a large amount of money currently held outside the banking system. CBN data suggest that N2.73tn of the N3.23tn currency in circulation (about 80% of money in circulation) lies outside commercial banks' vaults. 

 

Analysts believe that the move would make monetary policy action more effective in the long term. The move was also motivated by the government's efforts at disrupting the activities of bandits, kidnappers, drug peddlers and other such unscrupulous individuals who operate on the fringe of society since they would usually demand cash as payment. Perhaps most importantly, the Decision of the CBN would help prevent vote buying during the 2023 general elections since politicians who have stash large volumes of  cash would be forced to convert the same to new notes. If banks play their role of reporting transactions of certain volumes to the Economic and Financial Crimes Commission (EFCC), the withdrawal and transfer limits would act as an effective control valve on the amount of money available for vote buying. 

 

On the flip side, however, analysts argue that the policy would create multiple cobra effects. First, the ultra-rich, who hold large amounts of existing currency, may consider the dollar and other liquid securities as alternatives to lodging their monies in the bank, thus sending asset prices higher in the short term.  The large amounts of money that would be released into the economy may spur a short-term inflationary rush. It has also been argued that many Nigerians who operate in the large informal sector may get stuck with the existing notes as the six-week window provided for the conversion of notes may prove inadequate given also the fact that many communities lack the presence of commercial banks. The last time Nigeria redesigned its currency was in 1984.

 

Nigeria Gas Expansion Hits Road Blocks

Despite the increase in Nigeria's gas reserve from 206.53trn cubic feet (tcf) in 2021 to 208.62tcf in 2022, gas development and utilisation have remained a problem in the country. Industry operators and analysts have attributed the low domestic gas utilisation to the subsidies on petrol and cheap electrical energy. The regulation on petrol made it preferable to CNG, and the relatively inexpensive energy from electricity and traditional cooking methods is also preferred to LPG. Whereas industry experts have called for the relaxation of the stringent conditions for accessing the CBN N250bn gas intervention fund, analysts argue that the legacy issues and the industry's inefficient pricing model are deterrents to attracting gas investment into the sector.   

 

Economists Review Oil Major Earnings and the Call for A Windfall Tax

Earning releases by oil majors have started rolling out. Based on a few already released earnings, the likes of Shell, TotalEnergies, and Seplat, profits are higher than the corresponding period of last year but some lower than the previous quarter's earnings. Analysts expect the strong earnings buoyed by the high oil and gas prices to reignite the call for a windfall tax on the excess profits of the oil majors. Howbeit, such taxes distort the risk-reward model of business. In principle, business owners should be the sole administrators of increased earnings during the boom and risk-bearers during the recession. 

 

FAAC Allocation rises 4% in 2022 on Account of Higher Oil and Gas Royalties

The Federation Account Allocation Committee (FAAC) shared N700.24bn among the three tiers of government for September 2022. According to the communiqué issued by FAAC at the end of the meeting, the Federal Government received N262.636bn; States received N217.191bn, the Local Government Councils got N160.416 bn while oil-producing States received N59.992bn as derivation from 13% mineral revenue. Examining the revenue sources, Analysts noted that Oil and Gas Royalties increased considerably in September, possibly indicating the payments for newly issued Oil Mining Licenses (OMLs) and/or the settlement of related arrears. Petroleum Profit Tax (PPT) and Excise Duty recorded marginal increases. However, Value Added Tax (VAT), Import Duty, and Companies Income Tax (CIT) decreased considerably (see chart 1 below).

 

Chart 1: FAAC Allocations January-September 2022 (N'bn)

 

Counting Floodings Cost on Agriculture, Nigerians Groan

Nigerian farmers and processors have begun counting losses after flooding ravaged different parts of the country. The Rice Millers Association of Nigeria (RIMAN) disclosed that some mills had been hit severely by the flood as they lost many paddy bags and expensive equipment. At the same time, some workers are feared dead or displaced because of the flood. It has been claimed that the flooding experienced this year has destroyed over 70,000 hectares of farmland across the country while damaging over 40,000 houses and affecting over 1.4m Nigerians. The situation has caused the price of paddy to increase due to the flood from N200,000 to N300,000 per tonne in three weeks which has piled more pressure on millers who have been struggling with rising diesel prices.

 

Traders have claimed that food prices would continue to rise and could reach above the N50,000 price. Last month, rice per 50kg bag sold between N32,000 and N35,000 but has since moved up to N42,000 naira as distributors cite the higher cost of transporting the commodity and the effect of the flooding as the major drivers of the price increase.

 

Analysts noted that during the holiday season, food prices generally increase, and with the country struggling with high energy costs and the effects of flooding, food prices could skyrocket by December. With an election coming up in 4 months, the government may have to contend with higher food prices running up to the end of Q1 2023.

 

Relatively Low Yields on Treasuries Faze Investors as NTB Subscription Stalls 

Investor's subscription at the NTB primary auction declined by -54.6% yesterday, with N109.19bn notes sold against the N240.26bn offered. The treasury bill market has been experiencing an under-subscription in the past few weeks as the pressure for higher yields increases. The rates on the 91-day, 182-day, and 364-day notes increased by 3bps, 15bps, and 150bps to 6.50%, 8.05%, and 14.50%, respectively. The bid-to-cover ratio across the three papers was 0.70x, 0.18x, and 0.83x, respectively. With the raised yields, analysts anticipate some buying interest in the secondary market today.

 

Telcos, Fintechs Release Internet Bundles to Boost SME Productivity in Nigeria.

Telecommunication service provider, Airtel Nigeria, has announced a partnership with Microsoft and TD Africa to unveil Smartbox, designed to empower and improve the productivity of SMEs significantly. Airtel Office Internet Smartbox bundles give SMEs unrestricted access to reasonable data plans, free business domains, Microsoft 365 licenses, unmatched Internet speed, and complementary data. Airtel's partnership with TD Africa, a distributor of IT & lifestyle products, is mainly to guarantee a perfect rollout of the internet Smartbox bundle to its customers across the nooks and crannies of Nigeria. 

 

Analysts believe that empowering SMEs through access to product bundles, tools and resources will positively impact employment and generate more revenue, adding to economic growth on the continent and generally transforming the SME landscape in Nigeria.

 

Equity Market Continues Bullish Offensive 

The NGX All-Share Index (ASI) inched up +0.16% to close at 44,788.14 Index points against a +0.73% gain recorded at the end of the previous trading session. The NGX Market CAP recorded a gain of N39.02 bn. Sectorial performance was broadly negative; six (6) Sector indices closed positive, ten (10) sectors closed negative, and two (2) sectors closed flat. The NGX INDUSTRIAL sector topped the gainer's chart with a growth of +1.14%. The AFRHDYI Index dipped by -1.35% to top the losers' chart. The month-on-month (M-o-M) loss stood at -8.49%, while the Year-to-Date (YTD) gain stood at +5.02%. Analysts note that although there has been an improved Week-on-Week market performance, sectorial performance has been broadly negative due to sell-offs across different sectors, indicating potential hidden-value interest (see chart 2 below). 

 

Chart 2:  NGX ASI MOVEMENT FROM 4TH OCT 2022 – 26TH Oct 2022

 

 

 

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