End of Oil

A year ago, no one thought that within six months the world will be thrown into chaos with businesses severely disrupted, freedoms curtailed and economies wrecked in a manner not seen since the second World War. The havoc caused by the coronavirus is unprecedented in its speed and spread. No country, rich or poor, was spared. Over 900,000 lives have been lost to the virus and there is no end in sight.

In the beginning, like with most novel viruses, the speed of transmission, deadliness and staying power were little understood. The speed of the transmission of the virus is ferocious and only draconian measures, as implemented by China, appear to curtail it. Globally, as at today, the death rate is around 3.2% of those infected, though likely lower since not all cases are reported. Regarding staying power, the virus appears to be going nowhere. There was a lull in the speed of transmission in the summer following lockdown by many countries. However, infections have since end of August resumed an upward trajectory, for example, in France, Spain and the UK. The quartet of United States, Brazil, India and Iran never had any serious respite since the first infection was detected. India is now setting new records for the highest daily infections. The United States, India and South America are currently the epicentre of the disease. As Susan Glasser aptly put it, coronavirus is the world’s only superpower. 

Many thought Africa, the world’s poorest continent, will be overrun by the virus. Thankfully, it has not happened, except in South Africa were the virus has killed over 15,000 (47% of Africa’s death toll) and has devastated the economy, which was already in a recession before the virus. Perhaps, it is because South Africa being in the Southern hemisphere, experienced its winter when the virus was on a rampant run across the globe. 

In Nigeria, the death toll has been mercifully low and at no point were hospitals overwhelmed. This is despite the unprofessional and inhumane conduct of some medical professionals who embarked on strikes in the middle of the pandemic. Thanks to the seriousness with which the Federal Government handled the pandemic, the virus appears to be in a retreat in Nigeria.

The impact of the pandemic on the Nigerian economy though will be far more consequential and will likely last longer. This is because the pandemic has significantly affected globally the hospitality and travel industry, with negative consequences on demand for oil. Consequently, the pandemic has accelerated the end of high oil price. 

The Nigerian economy was already struggling before the coronavirus appeared on the horizon. The economy had grown at only 1.24% per annum in the last five years, well below current annual population growth of about 2.5%. Predictably, according to the National Bureau of Statistics, the Nigerian economy shrank by 6.1% in the second quarter of 2020 and a recession is almost a certainty by the end of the third quarter. 

Federal Government revenue continues to be embarrassingly low and with low oil price and OPEC output cuts, there is no respite in sight. In 2019, actual revenue available to the Federal Government to spend was N4.12 trillion, which is a mere 2.83% of nominal Gross Domestic Product (GDP). Actual Federal government expenditure, supplemented by record borrowings, was also very low at only 5.7% of GDP. Consequently, while Nigerians have high expectations for Federal Government spending, the fact of the matter is that when it comes to spending power, the Federal Government is not as impactful as thought. To put it in context, in 2019, wealthy Nigerians, according to official records, spent $8.57 billion, that is N3.09 trillion on foreign schools and foreign medical care. This implies wealthy Nigerians, a tiny percentage of the population, could afford to spend the equivalent of 75% of Federal Government revenue sending their children to school abroad and on foreign medical care. 

Therefore, the end of high oil price, thanks to coronavirus, has arrived too soon as Nigeria is not ready for the pain it will inflict. The immediate impact is that the Federal Government is forced to borrow record sums just to stay afloat. The Federal Government also had to approach the International Monetary Fund (IMF) for financing in order to shore up foreign currency reserves that were fast depleting even before the virus. While there were no strings attached to this particular type of loan, the IMF released the funds and also encouraged Nigeria to carry out reforms such as removal of petrol and electricity subsidy, merger of multiple foreign exchange rates and implementation of market driven exchange rates. The World Bank on its part has refused to release the loan, quietly insisting on reforms. Consequently, the Federal Government was finally forced to do what the IMF, World Bank and others have been pleading with the government to do for decades. Petrol subsidy is no more and electricity tariff was increased by almost 100% in September 2020. 

The removal of petrol subsidy is not without its critics. But it has been long in the making. President Obasanjo removed it and sold the refineries. Only for his successor, late President Yar’Adua, to reverse the subsidy removal and sale of refineries. President Goodluck attempted to remove the subsidy but the backlash was vicious and the subsidy had to stay at great cost. Under President Buhari, removal of subsidy caused Emmanuel Kachikwu his position as GMD NNPC in 2016. Nigerians though owe Kachikwu a debt of gratitude for having the courage to do what needed to be done at that time. Furthermore, the refineries are still not working and according to NNPC, it spent N117.64 billion in one year to maintain the refineries despite them not producing refined products. This is equivalent to 92% of cost of running the much-maligned National Assembly or funding two years of Federal Health capital budget. Hopefully, Nigerians have finally realised the futility and inefficiency of petrol subsidy and will allow the deregulation to stand.

Apart from the above reforms, two of which are still outstanding (merger of multiple exchange rates and market driven rates), the Federal Government has to find a way to attract investments from the private sector, domestic and foreign, to get the economy going. This is not going to be easy considering the attitude of government officials, red tape and other inefficiencies investors have to put up with. It is only if the economy returns to robust growth that government can reasonably expect to receive additional revenue in the form Value Added Tax and Company Income Tax, which will enable government to plug the hole created by decline in oil royalties and Petroleum Profit Tax. State Governments will also benefit from Personal Income Tax that the new jobs created by new investments will generate. 

In the end, what needs to be done to get Nigeria moving developmentally upward, in the new normal of low oil price, is not a secret. The challenge has always been for the government to embrace the need for reforms, the capacity of the government to actually execute the needed reforms and the ability of the government to convince Nigerians to support the reforms. The coronavirus pandemic is already forcing the government to embark on reforms. Whether the reforms eventually executed will be enough to alter Nigeria’s development story for the better, is left to be seen. Time will tell.

Nigerian Stock Exchange as a Laggard

On the day the market capitalisation of Apple reached a record $2 trillion (19 August 2020), the market capitalization of all the shares listed on the Nigerian Stock Exchange was a mere $34.65 billion (at N379 to 1$). Technology companies listed on US stock exchanges have had an incredible run on the back of increased demand following coronavirus induced lockdowns. Meanwhile, the All Share Index of the Nigerian Stock Exchange is down 6% for the year, as at 31 August 2020.

The Nigerian Stock Exchange (NSE) All Share Index, which measures market performance by comparing current prices with past prices, closed at 25,327 on 31 August 2020, that is 61.8% lower than the record level of 66,371 reached on 5 March 2008. At the peak, on 5 March 2008, the market capitalisation was $108 billion, which is still 68% higher than the market capitalisation as at 31 August 2020. This is despite the listing of Dangote Cement (2010), MTN (2019) and Airtel (2019), which currently account for 46% of the market capitalisation. The lacklustre performance has consequently made the NSE not very attractive even to Nigerian Pension Fund Administrators (PFAs). For example, at the end of 2017, PFAs had 8.9% of their portfolios invested in firms listed on the NSE. By June 2020, investment in listed equities has dropped to 4.73%.

So, what are the reasons for the poor performance by listed firms in the last 13 years? The most important reason is the weak economic performance in the last five years. Real Gross Domestic Product (GDP) has grown by only an annual average of 1.24% between 2015 and 2019 compared to 6.73% between 1999 and 2014. Even though share prices could deviate from fundamentals and general economic performance in the short-term, in the long-term, there is a positive correlation between the performance of the larger economy and performance of firms listed on a stock exchange. Therefore, given the poor performance of the economy, it is not surprising that listed firms are struggling.

The second reason is that only a few firms are listed, leaving potential investors with limited choice, which serves as disincentive. Furthermore, there is a lack of variety as the market capitalization is heavily tilted towards banks, Dangote Cement, MTN and Airtel, as they make up 66.3% of market capitalisation at the end of August 2020. Consequently, after a short while, most investors find their interest waning as there are few firms left to discover, if any, that can make a difference to their fortunes.

The third reason is corporate governance. NSE, under a new leadership, has improved transparency, quality and timeliness of reporting, since the market collapse in 2009. Nevertheless, investors are still wary, as quality of financial statements and disclosures still vary considerably amongst listed firms. The trust damaged by the insider abuses prior to the market collapse is yet to be fully restored.

The fourth reason is lack of financial sophistication amongst individual investors. For example, despite some stocks offering dividend yields much higher than what Bonds and Treasury Bills offer, individual investors still ignore the market. This lack of interest then feeds back into low share prices creating a negative loop. The lack of interest is partly due to limited financial awareness and sophistication by individual investors, which hinders their ability to appreciate the value on offer.

Lastly and importantly, per capita income has declined by 31% in the last five years. Nigerians are thus poorer and have less to save or invest in the NSE.

Therefore, the key to revival of trading on NSE and improvement of performance of listed firms is robust economic growth. As long as economic growth continues to be sluggish and below population growth, Nigerians will have less disposable income to invest in firms listed on the NSE.

Why Nigeria Needs Chinese Loans

Nigerians want to be rich and occasionally, as a nation, we behave as if we are. How rich a country and her citizens are, can be measured by Gross Domestic Product (GDP) and GDP per capita. By these measures, Nigerians are, unfortunately, not rich, despite our collective desire to be so.

Gross Domestic Product (GDP) is a measure of the value of goods and services produced in a country in a given year. GDP can be calculated either as a value of output or equivalently as total income (salaries, profits, interests and rents) earned in a country in a year. GDP per capita, on the other hand, measures income per person and is calculated by dividing the GDP of a country by its population. According to the World Bank, Nigeria had a GDP per capita of $2230 in 2019 and was ranked 139th, just ahead of Ghana at 140th, out of 189 countries.  To put it in context, China was ranked 68thwith $10,262 and the United States 8thwith $65,281.

So how can Nigeria become rich like China or even the United States? It is by growing the economy and one of the most important drivers of economic growth is private and public investment. Public investment involves investment in roads, railway, ports, power (infrastructure) and institutions, while private investment involves investment in manufacturing, services and so on.

According to the World Bank, Nigeria’s GDP per capita in 1980 was $874, while that of China was $309. Therefore, in 1980, the typical Nigerian was more than two times richer than the typical Chinese. Forty years later, the typical Chinese is more than four times richer than the typical Nigerian. So, why this significant divergence in economic fortunes within only forty years and by a country with the largest population on earth?

The 1980s was the decade when China began its phenomenal economic growth and transformation that lifted hundreds of millions of its citizens out of abject poverty.  China’s growth was fuelled by increase in investments in both manufacturing capacity and infrastructure. According to the World Bank, China’s investment to GDP ratio averaged 39.2% from 1980 to 2018, significantly higher than the world average, which was 24.9% during the period. Today, China is such an economic powerhouse that the United States and Western Europe are scared of its transformation and ascendancy.

In Nigeria, on the other hand, investments, both public and private have declined in the last decade relative to the 2000s. Between 2000 and 2010, investment was an average of 25.8% of GDP but was a paltry average of 16% between 2011 and 2018 (China: 44.7%). At a time when Nigeria’s population is still growing, the country is investing even less. With this level of investment, it should come at no surprise that economic growth in the last few years has slowed considerably compared to the 2000s. And without economic growth, there can be no reduction in poverty and all the ills it portends.

It is also no secret that Federal Government revenue has declined considerably in the last five years on account of low oil price. This year will be especially challenging due to the coronavirus pandemic. So, for Nigeria to get out of this perpetually low investment cycle, it has to find an alternative source of investment, perhaps through attracting foreign direct investment, or through increasing taxes or borrowing or a combination of the three. According to economic theory, increasing rates of taxation leads to reduction in return to private investment, which negatively impacts growth. Which is obviously not what Nigeria needs at present. However, borrowing domestically, if excessive, could crowd out private investors and will also raise interest rates. This leaves us with the option of foreign loans or foreign direct investment (FDI). We have faltered in our ability to attract FDI in the last decade. So that leaves us with borrowing and this is where the loans from China come in.

Following the considerable negative comments about Chinese loans both in the local and international press, the Debt Management Office (DMO) released the details of outstanding loans Nigeria has with China Exim Bank. According to the DMO, as at end of March 2020, Nigeria has eleven active loan agreements with China Exim Bank, but has only drawn down on eight, with outstanding of $3.12 billion as at end of March 2020. This is only 11.3% of Nigeria’s total external debt of $27.67 billion as at end of March 2020. Furthermore, the loans are at 2.5% interest payable over 20 years, with 7 years moratorium. Frankly, outside of World Bank and IMF loans, the terms from China Exim are as good as it gets.

Let’s examine the eight loans that we have drawn on.  They are: Lagos to Ibadan railway ($1.27 billion); Zungeru Hydro ($984 million); Abuja to Kaduna rail ($500 million); Abuja light rail ($500 million); Four Airport Terminals ($500 million); Abuja Keffi Makurdi road ($461 million); National Public Security ($400 million); and ICT backbone ($100 million). Very few people can doubt the usefulness of the first six projects to Nigerians. The last two (security infrastructure and ICT) are the ones that should elicit further scrutiny to determine whether these loans actually served Nigeria’s needs and were a priority.

Another fact some Nigerians are missing is the very low interest rate of China Exim loans compared to commercial loans from the international capital market. For example, the current yield on Nigeria’s 2038 Eurobond is 8.5%. So, if Nigeria wants to issue a twenty-year Eurobond today, it will likely have to pay around 8.5% in annual interest. Assuming Nigeria borrows $1 billion for twenty years at 8.5%, with a bullet payment at the end of year 20, it will pay a total interest of $1.7 billion. However, if the loan is from China for the same twenty-year tenure, Nigeria will pay interest of 2.5%, for a total of $397 million. That is a huge saving of $1.303 billion compared to a loan from the international capital market. Given these two options, Nigeria should have no difficulty choosing the Chinese option.

Another option is borrowing from the World Bank. But the World Bank, for reasons only known to it, provides little funding for infrastructure projects such as railway, roads and ports. Most of the loans Nigeria secured from the World Bank in the last decade are on human capital (nutrition and education), governance and safety nets. As at end of March 2020, Nigeria has $10.1 billion outstanding loans from the World Bank, which is 36.5% of total external loans, more than three times our exposure to China.

Nigerians should, on the other hand, be concerned about foreign loans from the international capital market. Presently, Nigeria has $11.17 billion outstanding in commercial loans from the international capital market, which is 40.4% of Nigeria’s total outstanding external loans, more than three times our exposure to China. The most expensive is the $750 million 2049 Eurobond (30 years) at an interest rate of 9.248%, which will cost Nigeria $2.08 billion in interest. Lenders in the international capital market are happy to take the risk, in return for a high interest rate, and so have no need to request Nigeria to waive its sovereign immunity in the event of default. Unfortunately, there is no free lunch.

Notwithstanding the clarification and publication of pertinent details by the DMO and the advantages of loans from China Exim Bank compared to others, the controversies still continue. The latest is the issue of waiver of sovereign immunity. There is no reason to panic over this clause. China is merely ensuring that it should be able to recover its money should Nigeria default. Nigeria should not be able to claim sovereign immunity in the event of default to protect its assets, except defence and diplomatic assets. Without this clause, how else will China recover its money should Nigeria default and then claim sovereign immunity after China has won an award after arbitration? By going to war? Nigeria should not be able to borrow, at a very cheap rate from another sovereign, and then hide behind sovereign immunity in the event of default. China is right to insist on such a clause and if Nigeria one day finds itself fortunate to be lending to other countries, it should insist on such a clause.

If there is one thing most Nigerians agree on, it is that insufficient infrastructure in Nigeria is a major cost driver for businesses and also negatively impacts the quality of life of Nigerians. Whether it is noise and pollution from generators or traffic jams in Lagos or congestion at the ports, the problems can be linked to inadequate investment in key public infrastructure. These problems cannot be solved through annual budgetary allocations due to the enormous investment required and the current fiscal difficulties of all tiers of government. Loans from China to invest in key, priority and strategic public projects such as railway, power and ports could be just the catalyst Nigeria needs to address its chronic infrastructure deficit and return the economy to an annual real GDP growth rate of 5% or more. This is the minimum growth that is needed to keep per capita income rising and lift millions of Nigerians out of abject poverty.

The current negative press about Chinese loans is a distraction from our real problem of chronic under investment in infrastructure. Importantly, without investment, there will be no economic growth and without economic growth, Nigeria and Nigerians will continue to be poor. The choice is ours.

To buy or rent? The key issues

To buy or rent a home is one of those timeless debates. There are two main considerations in making a decision: the financial aspect and personal and emotional factors. In Nigeria though, there is a strong desire by most families to own their homes. This article will consider the financial factors only.

Assess your finances

The first step is to assess your finances to determine whether you can afford to buy the house of your choice. Buying requires a large upfront payment whether to purchase the house outright or as a down payment. Mortgages are not readily available in Nigeria and where they are the down payment and interest rate are high.

You should take the following into account when assessing your finances.

The amount of deposit you can afford. Where available most mortgages in Nigeria require you to contribute a down payment of 20%-40% of the cost of the property. In general, the higher the contribution you can make, the lower the interest rate. This is because the risk to the lender declines as the down payment increases.

Other costs associated with buying a house such as agency and legal fees and government charges.

Interest payment. Interest rates are high ranging from 15-20%. You might get a lower rate from mortgage banks but these are typically tied to buying a property they developed or are marketing. Another option is to borrow from the government backed National Housing Fund (NHF) if you are a contributor. The interest rate is capped at 6% and the maximum amount that can be borrowed is N15 million. However, due to a combination of low balance in the fund and low interest rate, there is a long waiting list.

Other periodic costs associated with home ownership such as insurance, estate management fees, maintenance and property taxes.

Add up all the costs above to determine if you can actually afford to buy the house or not. You also need to ensure your current income can accommodate interest payment and repayment of the principal without creating significant financial stress. Remember, a house is illiquid and costly to sell; therefore, it is important to manage your monthly cash outgoings to avoid defaulting on the mortgage payment. Having determined whether you can afford the house or not, the next step is to assess whether buying is more financially beneficial compared to renting.

Benefits of buying

The arguments in favor of buying and counter include:

Building equity. If you buy with a mortgage, the monthly repayment goes towards increasing your equity (capital) stake in the house. This serves as savings. However, if you are renting, the money is gone. Furthermore, in the future when you own it outright, the house can serve as collateral for another loan.

The counter argument is that it takes many years to build equity and if you have to sell the house early, you might end up losing money after deducting all costs associated with selling.

Serves as an investment. Your home could be the single biggest asset you own. In the long term, especially in a high inflation environment like ours, price appreciation could be significant. When you retire, with the children gone, you could sell the house and buy a smaller and cheaper one. The profit could then be used for other things or converted into a stream of income.

There is, of course, no guarantee the house will increase in value. This is especially true if you buy at what turned out to be historically high prices. For example, in 2008, property prices in Nigeria, especially in Lagos, Abuja and Port Harcourt were at a peak.

Tax efficient. Another advantage of buying a house with a mortgage rather than renting is that the interest cost is tax deductible. This means you deduct the interest from your income before you calculate the tax due to the government.

The result of the above evaluation, taking into account your own personal circumstances, can help you decide objectively whether buying with cash or mortgage is better financially rather than renting.

Update on Volunteer Teachers

Following our earlier advertisement, we were able to recruit the required volunteer teachers except for Mathematics. We have therefore reopened the application process for maths teachers only.

The requirements are:

1. Degree in Maths, Statistics, Physics or other quantitatively inclined subjects.

2. Interest in teaching in a public Secondary School in Kano Municipal as a volunteer teacher.

3. No age restriction.

Successful candidates will be posted to a public school within Kano Municipal where they will teach from 1st September 2017 to 31st August 2018. As this is a volunteer scheme, remuneration is N30,000 monthly for Maths teachers.

Please send your CV and copies of certificates to info@sanaadailmi.com Closing date is 11th August 2017. Test and interviews will follow shortly.

Volunteer Teachers Needed

As part of our contribution to improving quality of education in public schools in Kano, our Foundation Sana’a da Ilmi Foundation, decided to launch a pilot intervention to address poor quality of teaching in public schools in Kano. To this end, and as part of an overall strategy, we are recruiting a few volunteer female teachers to teach in public schools within Kano Municipal. We decided to concentrate on female teachers because according to the 2015/2016 Kano State Annual School Census (ASC) only 24% of teachers in public schools are women. Meanwhile, girls constitute 48% of the students in public schools.

Therefore, if you know any lady interested in joining this pilot one year program to teach in a secondary school within Kano Municipal, please ask her to send her CV and copies of certificates to sanaadailmi@gmail.com. The requirements are:

  1. A degree in any subject
  2. No age restriction
  3. Passion for teaching
  4. Resident in Kano and preferably within walking distance of Kofar Nassarawa, Kano Municipal. This is to reduce cost of transport to the volunteer.

The program starts 1st September 2017 and ends 31st August 2018. Successful candidates will be posted to a public school where they will teach during this period. As this is a volunteer scheme, remuneration is modest at N25,000 monthly, slightly lower than Federal Government NPower program.

Closing date for application is 30 June, 2017. Selection test and interviews will follow (late July/early August).

Living in Denial

We all want the good life. We all want to live in a country where things work and we can get on with our lives. Where we tend to differ is who pays for it, who gets to share in it and who is responsible for making sure we all enjoy the good life. Frustrations have been boiling over in several countries and have manifested in Brexit and the election of Trump. The looming French election will test how far populism will go.

Back here in Nigeria, the recession has frayed nerves. The blame game has been going on for almost 2 years after PDP lost the election largely due to its failure to address the security crisis in the North East. Thankfully, the security situation has significantly improved and the economy is showing signs of recovery on the back of higher oil price and increased oil production.

Nevertheless, our vulnerability to collapse in oil price was starkly exposed. Furthermore, the differences in the financial viability of the states was laid bare for all to see. Some states had to be bailed out by the Federal Government and many still owe months of salaries.

Let’s compare Kano and Lagos two states that have been diligent in paying workers salaries. Furthermore, these are the two states with the highest population according to the 2006 census and are the most prosperous in their regions. While Kano budgeted N218 billion in 2017 a decline from the ambitious 2016 budget of N274, Lagos state budgeted N813 billion for the 2017 fiscal year compared to N663 billion in 2016. In other words, and assuming broadly similar populations per the 2006 census, Lagos plans to spend 3.7 times more money per resident compared to Kano.

It is these glaring differences between the fortunes and development trajectories of the 2 regions as exemplified by the two states that the Emir of Kano brought to the fore recently. In the process, some people got upset.

Unfortunately, the harsh truth is that although Nigeria is a lower middle income country, the North has income more in line with low income countries. Not only does the North have the highest incidence of poverty, it also has the worst education and health statistics. For example, according to the data in the 2016 National Health Policy, 78% of doctors are in the South. Meaning, the North, despite higher population has only 22% of the doctors. The gap is not set to reduce anytime soon as according to the Policy, only 6 of the 27 accredited medical schools at the end of 2012 were in the North.

Not only are the economic and social indicators poor in the North, it also must contend with the aftermath of the Boko Haram devastation and the growing environmental threat to its main employer, agriculture, especially in parts of North East and North West. The outlook is indeed sobering.

However, rather than critically reflecting and thinking about these challenges and actively seeking out and implementing solutions, we would rather continue living in denial. Nigeria is poor and the North is poorer. No amount of sugar coating or denial can mask it. It is often said, the first task in dealing with a problem is acknowledging in the first place that there is a problem. Let us all do ourselves one big favour and acknowledge this truth.

Thankfully, the Emir of Kano has reminded us. Now that he has brought it to our consciousness, it is entirely up to us both the led and the leaders to step up to the challenge. We are all responsible for our prosperity, and we must all pay for it if we want to share in it. The other option is to continue living in denial and as a result continue to live with the indignities of poverty. The choice is ours.


2017: The Calm after the Storm

The year 2016 was a tough year for the Nigerian economy. Oil price and production collapsed dragging the economy into recession for the first time since 1991. The price began a long decline from $104 a barrel (OPEC basket price) in July 2014  and continued unabated until it bottomed out at $26.5 a barrel in January 2016.

The Naira was also dragged down by the oil price. It started 2016 at N197 to $1 in the official market and ended it at N305. The unofficial market, on the other hand, began the year at about N270 and ended it at N485. The Central Bank of Nigeria (CBN) dithered on devaluation despite clear signs that the pegged rate at N197 was no longer tenable as foreign exchange inflows dried up and the foreign reserves continued to fall. It was only in June when it could no longer sustain the pretext that it devalued from N197 to N280 and introduced new foreign exchange guidelines. Nevertheless, the implementation of the new policy is still suspect as we now have five different rates with significant opportunities for round tripping from subsidized official sources to unofficial channels.

Inflation also worsened, from single digit in 2014 and 2015 to 18.5% in November 2016. Nigeria thus found itself battling the dreaded stagflation – that is falling output combined with rising prices.

The All Share Index of the Nigerian Stock Exchange fared somewhat better despite declining by 6.2% during the year. This is because it had lost 17.4% in 2015 and 16.1% in 2014.

From the foregoing, 2016 was indeed a turbulent year for the economy but I am optimistic 2017 will be calmer. Here are 4 reasons why I think so:

Increase in crude oil price and production

The price of crude oil per barrel bottomed out at $26.50 in January 2016. Thereafter, it began to go up hovering around an average of $42.3 a barrel from March 2016 to October. At the end of November, OPEC members agreed to a cut in output and that helped to push the price above $50 a barrel. Furthermore, Nigerian production has been recovering after the disruptions in the second and third quarters of the year that saw daily production volumes plummet from an average of 2.1 million barrels a day achieved in 2015 to 1.6 million barrels a day.

We have already begun to see the impact of this in the $ reserves. Based on data available on CBN website, the reserves have been steadily going up since 20th October. The reserves increased by $2.76 billion from 20th October 2016 to 10th January 2017. This should help to dampen expectations of further fall in the Naira.

Deceleration in rate of increase in inflation

The rate of increase in inflation has decelerated. For example, inflation increased from 9.6% in January 2016 to 11.4% in February – a month on month increase of 18.3%. Since then, the rate of increase has gradually declined, though not in a straight fashion as should be expected. In November 2016, inflation increased by 0.82% compared to October 2016 – the lowest increase in ten months.

Renewed drive to buy made in Nigeria

The scarcity of foreign exchange meant manufacturers began to look inward to source some of their inputs. This is especially true for agricultural products that are produced in Nigeria. With the price of foreign goods almost doubling during the year, made in Nigeria goods are now more competitive and therefore more appealing to cash-strapped Nigerians. These combined with the renewed drive by government to encourage patronage of made in Nigeria should help to ease pressure on the Naira in 2017.

Commencement of social spending

The much-awaited Federal government youth employment programs (NPower) and cash transfers to the vulnerable began at the end of the year. These programs put cash in the hands of those who badly need it and will run throughout 2017. This should help increase demand for relatively cheaper local goods and consequently reduce the pains of local businesses that have seen their sales volumes plunge.

The above four reasons make me think the worse is over. We are not there yet, but we have been given a lifeline by the slightly better oil price. Hopefully, the government has learned the right lessons and will seize this welcome relief and steer the economy towards the path of growth in 2017 and beyond.

Here is to a happy and more prosperous 2017.

4 Reasons why you should make additional Voluntary Pension Contributions

One of the significant achievements of former President Obasanjo was the Pension Reform Act of 2004. It completely transformed the pension industry from one that was comatose with insignificant assets to a vibrant and growing one with N6 trillion in funds under management at the end of September 2016. Thanks to the reform, over 7.3 million Nigerians now have Retirement Savings Accounts (RSA).

The Act was reviewed and revised in 2014 and is referred to as the Pension Reform Act 2014. Under the revised Act, the contribution of employers increased from a minimum of 7.5% to 10% of the total of basic pay, housing, and transport allowances. The contribution of employees increased from a minimum of 7.5% to 8%.

An important feature of the 2004 Act that was maintained in the revised 2014 Act was the provision for additional voluntary contributions. Employees are allowed to make extra voluntary contributions above the stipulated 8%.

If you are among the fortunate Nigerians to have an RSA, here are 4 reasons why you should make additional voluntary contributions to increase your pension savings.

Voluntary contributions are tax-free 

All voluntary contributions are deductible for tax purposes. This means you pay no tax on the part of your salary that is deducted as the voluntary pension contribution. For example, if your effective tax rate is 15%, you pay nothing on the tax-free voluntary contribution. You will be hard pressed to find an investment that returns 15% with such ease. In addition, the incomes on your voluntary contributions are also tax-free. This is, therefore, a great opportunity to save in a tax-efficient manner.

You can withdraw your voluntary contributions anytime, however, you will be liable to pay taxes on the income earned if you withdraw the funds within five years of making the voluntary contributions.

Automatic and simple process to save

It is very simple to set up additional voluntary contributions to add to your regular pension contribution. All you have to do is to instruct your employer to automatically deduct the funds from your salary through the payroll system. Once done, no further action is required from you. And since the funds are not credited to your bank account, you are not likely to miss the cash. The combination of simplicity and automation means you are far more likely to stick to making the voluntary contributions compared to a manual monthly transfer to your savings account.

Long-term compound growth

Another advantage is that the voluntary contributions will enable you to enjoy the long-term compound growth of your savings. This is especially beneficial if you are young with lower pay but decades of employment ahead of you. The additional voluntary contributions no matter how small will grow into something significant thanks to the power of compounding. For example, an additional N10,000 monthly contribution over 20 years yielding 10% per annum will result in final savings of N7.66 million. Meanwhile, N20,000 monthly contribution over 10 years at the same 10% will result in final savings of N4.13 million. Although in both cases you contributed the same N2.4 million, the power of compounding means starting early with a smaller amount yielded an extra N3.5 million.

Low pension savings

Although the total pension assets have grown to N6 trillion, the average pension savings per person is a mere N820,000. The implication is that for most RSA holders, the 18% mandatory contribution will likely prove inadequate in providing a decent pension when they retire. The voluntary contributions, therefore, provide a good opportunity to increase pension savings and ensure higher income on retirement.

The year 2016 has been one of heightened economic anxiety for many of us as the Nigerian economy contracted for the first time in decades. Planning ahead and improving your pension savings through additional voluntary contributions will go some way in reducing the anxiety in 2017 and beyond.

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