Solving the Unemployment Crisis

One of the most critical challenges facing Nigeria today is unemployment especially among 15 to 34 year-olds. According to the National Bureau of Statistics, at the end of 2015, about 30.4% of young people in this age group were unemployed. Meanwhile, based on the 2016 census, this age group makes up 35.6% of the population. Something drastic needs to be done.

Many reasons have been advocated for the unemployment crisis in Nigeria. One reason put forward is the failure to transform the economy from one in which the majority are employed in subsistence agriculture to one in which manufacturing is a significant employer. Rather, the economy is transiting from agriculture to services and has failed to deliver a large number of quality jobs to absorb the millions that enter the labor force every year.

Another popular reason is the quality of recent Nigerian graduates and the paucity of certain skills. For example, quality electricians and plumbers are in short supply. The educational system has thus been unable to meet the demands of Nigerian employers. The consequences include low productivity of the labor force and offshoring of jobs that the country badly needs.

To change the dynamics will require solutions both orthodox and radical. My radical proposal that could be quickly implemented is to reduce the retirement age of civil servants from 60 to 55 and the number of years of service from 35 to 30. The bar should also be lowered for polytechnic and university lecturers whose retirement age is now 65 and 70 respectively to age 60.

Some of the benefits of this proposal are:

First, millions of jobs will be created immediately. This will enable younger, eager, motivated and cheaper Nigerians to be employed.

Secondly, with a younger workforce, the reform of the civil service to a more efficient and fit for purpose service will be accelerated.

Thirdly, the retired civil servants will leave the labor force at 55 when they are still young enough to start a business and create jobs should they wish.

Finally, it will reduce the intergenerational unfairness that has created a situation whereby younger people are shut out of the labor force and are forced to waste their formative years and for the best to leave the country. For example, the retirement age for university and polytechnic lecturers was changed by former president GEJ due to pressure from ASUU. Brilliant minds are now forced to flee the country and the educational sector continues to suffer. The retirement age for lecturers in polytechnics and universities should be dropped to 60. Meanwhile, the retired professors can be engaged on short-term consultancies as required. The professors can also devote their energies to writing first class study materials, something that is sorely lacking in the country.

Developed countries have the luxury of high life expectancy. Unfortunately for us in Nigeria, our life expectancy is still in the 50s range. Therefore, it makes sense to lower the retirement age to enable retirees to enjoy the fruits of their labor and for those that can, to start a business. Importantly, this change will improve intergenerational fairness and could stave off a potential crisis and buy time for the government to implement other job creation policies.

Retirement at 55 has the potential to solve the unemployment crisis. What do you think? Let’s have your thoughts below.

The Return of Wonder Banks

Wonder banks, the local moniker for Pyramid or Ponzi schemes, are back in public consciousness. The schemes tend to proliferate at the extremes of the business cycle – booms and recessions. Mainly driven by greed in the former case and by desperation to escape financial difficulties in the latter case. The last time they were popular was in the boom period between 2005 and 2008. The Securities and Exchange Commission (SEC), the Central Bank of Nigeria (CBN) and other regulators of the finance industry have recently issued warnings to the public against patronizing unlicensed financial and investment firms.

There are many variations of the schemes but they all typically promise high returns on investment significantly beyond what is available from a range of products offered by licensed institutions. Some schemes offer as much as 10% to 20% interest per month – that is a staggering 120 to 240% per annum. The first investors normally get their returns as promised and then spread the great news to people in their network. The good story spreads quickly and more people rush in to enjoy the spoils. The party then gathers momentum as money from new investors allows payments to be made to old investors. This continues until the new money coming in cannot sustain interest payments to investors. This is a signal to the promoters that the bubble is about to burst and it is time to disappear. Participants wake up one morning to find the offices of the promoters closed and their money was gone.

The latest variations consistent with the current economic mood, present the schemes as economic empowerment tools to help one another survive the recession. Naturally, many of these schemes are now moving online to lure a younger demographic and to escape regulators. Generally, you are invited to contribute a certain sum of money. You are then required to introduce others to contribute and in return receive a certain percentage, say 30%, as your share. And on it goes until it bursts. A few months ago, I tried to dissuade a friend from joining such a scheme. Interestingly, I received an email two days ago inviting me to join a similar scheme by paying N3,500 as admission fee. In return, I will receive 30% of the admission fees of all those I introduce plus a chance to win a plot of land, car etc. The mail included a full address in a shopping complex in Lekki, Lagos. Suffice to say I deleted it.

The reality is such schemes are scams solely designed to enrich the promoters, as they are not based on any underlying legitimate and productive business. And even if there is an underlying business, it is merely a smokescreen as annual returns of 120% and above are impossible. For example, a review of the accounts of Nigerian publicly quoted firms reveal that return on equity is on average below 20% per annum while average dividend yield is a single digit. Savings accounts tend to pay 5% or less, while Treasury Bills and government bonds yield below 20% – even in this period of high inflation.

Therefore, save and invest only through licensed institutions else you risk losing your money, damaging your relationships and reputation. You can find the list of approved companies and products on the websites of SEC www.sec.gov.ng, CBN www.cenbank.org, the pension regulator  www.pencom.gov.ng and the insurance regulator www.naicom.gov.ng.  If you have a business and need funds to start or grow it, prepare a business plan and approach licensed financial institutions or friends, family and others in your network to fund it. If you have financial difficulties and need help, you are far better off asking assistance directly from family and friends rather than luring them to participate in a scam.

Thriving in a Recession

The 2008 financial crisis was indeed a difficult time for the Nigerian economy as it was for most economies. However, then, unlike now, the economy did not fall into a recession as prior savings and swifter oil price recovery ensured the economy continued on a growth path. In August, the National Bureau of Statistics confirmed what most of us already felt, that the economy was in a recession as GDP contracted by 2.06% in Q2 2016, the second consecutive quarterly drop. As we await the 3rd quarter GDP numbers with trepidation, this is perhaps a good time to reflect on what we can do as individuals to survive and thrive in the downturn.

Reduce Discretionary Spending

With high inflation and reduced purchasing power, it is important to make your income even go further. Now is thus a good time to reduce discretionary spending and focus on the essentials. A simple budget will be a good way to identify what is essential, what can be deferred and what can be done without. Spend on only the essentials,  cut off the rest and make budgeting a habit.

Pay down Debt

With interest rates on loans so high, debt is a huge burden. Any savings from eliminating non-essentials should be partially used to reduce debt with loans having the highest rates paid off first. If you are in real difficulties, then approach your bank to restructure the tenure of the loan and the interest rate. Do not be put off thinking it is not possible to get a better deal. It is. If you are lucky not to have any debt, go to the next point.

Save

Yes, I know we are in a recession and you are barely managing to make ends meet. Still, you need to save. If you spend all your income, you are guaranteed to be in financial crisis anytime your income falls or disappears due to a job loss etc. Therefore, always set aside a percentage of your monthly income and use it to build up an emergency fund. An emergency fund to cover about 6 months of your expenses should be your minimum target.

Embrace Financial Planning

Having done the above three things that can get you quickly back on track, it is essential you take it further by embracing financial planning. It should actually be the starting point as it is vital for a better future; alas most of us ignore it. This is now your chance to plan so that you will not only survive this crisis but also thrive. A financial plan is your roadmap to financial security as it enables you to identify and prioritize your goals, appraise your resources and identify products and solutions to help you meet the goals. It also allows you to regularly review your progress and keeps you on track towards achieving those goals.

We are in difficult times but you can thrive if you can reduce discretionary spending, pay down debt, save and embrace financial planning.

Financial Inclusion beyond Lagos

Financial inclusion is now globally at the forefront of policy makers, central banks, and development banks attention. Most of the attention has deservedly been focused on the underserved low-income households, especially in rural areas. Nigeria has not been left out as the Central Bank of Nigeria rolled out its financial inclusion strategy in October 2012 aimed at reducing the exclusion rate to 20% by 2020.

Another area of concern in Nigeria is the regional disparity in credit availability. Data released by the National Bureau of Statistics showed that 76.2% of loans were issued to businesses and individuals domiciled in Lagos at the end of 2015. The rest of the South received 14.2%, the North 6.6% and Abuja 3%.  Lagos generated 49.9% of the deposits meaning it sucked in an extra 26.4% from the rest of the country. My personal experience confirms this as an attempt to access credit using collateral in Kano met with little enthusiasm from commercial banks.

While commercial banks could argue that the action is in Lagos, the reality is concentrating their portfolios in Lagos exposes them to concentration risk. This risk is now playing out in the current economic challenges as a number of banks have a large percentage of their credit portfolios exposed to the oil and gas sector and are now facing write-offs amounting to hundreds of billions of Naira. The exposure to real estate in Lagos is also playing out as a number of expensive hotels, office and residential buildings are vacant indicating possible over supply at the high end of the market. Ultimately, a significant number of such loans would be written down, crystallizing losses to the banks. Commercial banks, therefore, need to diversify their loan portfolios across sectors and the various parts of the country as part of their risk management strategy and ultimately for better returns.

Development banks such as the Bank of Industry (BOI) and Bank of Agriculture (BOA) have a role to play considering their development focus which is not confined to one State. There are industries in the rest of the country outside Lagos that are viable and need low-cost financing from BOI. Obviously, Agriculture is not a Lagos affair and the recent recapitalization and restructuring of BOA positions it to significantly increase its loan portfolio across all States. Both institutions, therefore, need to put in place processes that ensure their portfolios are diversified across the country.

To sum it, banks in Nigeria need to diversify their loan portfolios across the country to better manage their risk and ultimately for better returns.

Memorable Johan Cruyff Quotes

The dutch football genius and legend died on 24th March 2016. Here are some memorable quotes to remember him:

“It’s like everything in football – and life. You need to look, you need to think, you need to move, you need to find space, you need to help others. It’s very simple in the end”.

“Playing football is very simple, but playing simple football is the hardest thing there is”.

“Quality without results is pointless. Results without quality is boring”.

“Why couldn’t you beat a richer club? I’ve never seen a bag of money score a goal”.

“If you can’t win, make sure you don’t lose”.

“People who are not of my level can’t affect my integrity”.

“When my career ends, I cannot go to the baker and say: ‘I’m Johan Cruyff, give me some bread”.

“I told players not to be afraid: If you have an idea, good: try it. And if it goes wrong, don’t worry”.

“It is better to fall with your ideas than someone else’s”.

“Barcelona were always thinking about inferiority, they had Madriditis. We were always thinking we were the victim but in my way of thinking there was no victim. Let’s look at ourselves, let the rest do whatever they want; we know what we want”.

Cicero on Friendship

Cicero’s classic “Treatise on Friendship” is a joy to read even though written over two thousand years ago. Hear him.

“In a word, other objects of ambition serve for particular ends – riches for use, power for securing homage, office for reputation, pleasure for enjoyment, health for freedom from pain and the full use of the functions of the body. But friendship embraces innumerable advantages. Turn which way you please, you will find it at hand. It is everywhere; and yet never out of place, never unwelcome”.

“What can be more delightful than to have someone to whom you can say everything with the same absolute confidence as yourself?”

“Nay, if you eliminate from nature the tie of affection, there will be an end of house and city, nor will so much as the cultivation of the soil be left. If you don’t see the virtue of friendship and harmony, you may learn it by observing the effects of quarrels and feuds. Was any family ever so well established, any state so firmly settled as to be beyond utter destruction from animosities and factions? This may teach you the immense advantage of friendship.”

If you enjoyed the above sample, you can find the full free ebook here: http://www.gutenberg.org/ebooks/2808

Investing in Turbulent Times

The Central bank of Nigeria (CBN) Monetary Policy Committee (MPC) met on 25th and 26th January 2016 and kept everything unchanged. The decision to keep the Naira exchange rate against the dollar at the same level for over a year despite the collapse of crude oil price the main foreign exchange earner for Nigeria is difficult to understand from an economic standpoint. Nevertheless, it made perfect sense politically and further demonstrates the unwillingness of the current leadership of the CBN to exercise its independence in steering the economy.

The economic thinking of the current government seems a bit muddled up. Somehow it thinks since Nigeria generally imports a significant part of the manufactured goods it consumes, devaluation is not an option. The same government also wants to encourage domestic manufacturing and also to discourage imports. At the same time the government ends up subsidizing imports by maintaining an uncompetitive exchange rate. The government claims devaluation will cause inflation but then proceeds with an expansionary budget in 2106 that will require significant borrowing which might also end up stoking inflation. Furthermore, by refusing to devalue by say 20% the government denies itself more Naira for its oil dollars, meaning it could actually reduce its borrowing needs by devaluing.

What can an ordinary investor ought to do in this uncertain, volatile and low growth environment? The most important thing is to tighten defenses and minimize unnecessary risk. This can be achieved by doing some of the following where applicable:

  1. Keep at least 6 to 12 months living expenses in a deposit account to protect against unexpected unemployment or other shocks.
  2. Pay off consumer debts.
  3. Prune equity portfolio and weed out weak companies that should have been sold long ago but are now even more risky in view of deteriorating economic environment.
  4. Identify a few, no more than 10, companies that are sound with low debt. Determine an entry price and buy when the price is achieved despite market volatility. Keep the number of banks to no more than 3 as they are high risk and only a few are really good value. When all is said and done, these companies will weather the storm and you would have bought quality at a reasonable price. This is key, as the return on investment depends on the price paid, the lower the better.
  5. In constructing your portfolio, have a log term view and only sell when fundamentals of the company have deteriorated such that the company is no longer good quality.
  6. You will feel very uncomfortable doing 3 to 5 above, as it is never easy being a contrarian. But your chances of making money are higher if you stick to quality companies and buying more when no one wants them and holding them for as long they remain good businesses.
  7. If you are fortunate enough to have a large enough stash of cash, then keep your eyes open for value in the real estate market as there will be distressed sales that you can grab at a bargain.

Stay calm amidst the chaos, have cash and be ready to pick up value left behind by the departing crowd.

On your Terms

As we start another year, you will do well to remember the words of Steve Jobs. Happy new year.

“No one wants to die. Even people who want to go to heaven don’t want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be because death is very likely the single best invention of life. It is life’s change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.

Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma — which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.” Steve Jobs

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