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Higher prices loom as businesses rely more on loans to survive

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Nigerians will soon experience another wave of increases in the prices of goods by major manufacturers as most of them now depend more on loans to fund their operations, resulting in higher interest payments and increased cost of production.

Financial Vanguard investigations show that due to scarcity of foreign exchange, general cash flow challenges and other economic headwinds during the period, major manufacturing firms sustained their businesses with bank loans amounting N1.833 trillion in the nine months of the year 2023 , 9M’23.

The amount indicates increased borrowing of about 52.6% higher than the N1.2 trillion in the corresponding period of 9M’22.

Financial experts say the companies may have ended up in a debt trap following the rise in Monetary Policy Rate, MPR regime, sustained by the Central Bank of Nigeria, CBN throughout the review period in order to tame inflation that rose to 28.92 % as at December 2023, a development that triggered rising lending rates across the banking and finance sector.

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This development, according to financial experts, indicates that the companies that borrowed huge in the 9M’23 are now caught in a serious debt situation as cost of operating capital is now rising, a situation that will impact their profit negatively, and also restrict their ability to pay higher dividend.

Financial information from 17 leading manufacturing companies listed on the Nigerian Exchange Limited, NGX, showed that the finance cost (interest on borrowing) rose by a significant 332.3% percent to N589.623billion in 9M’23 from N136.379 billion in 9M’22.

The companies include: Nigerian Breweries, Dangote Cement, Lafarge Africa, Guinness Nigeria, Gsk, Beta Glass, Unilever Nigeria, Dangote Sugar, Okomu Oil.

Others are Nestle Nigeria, BUA Cement, Notore Chemicals, NASCON Allied Industries, Cadbury Nigeria, BUA Foods, Vitafoam Nigeria and International Breweries.

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Analysts and investment experts have decried the high cost of borrowing from the banks, saying that the capital market remains the best financing option for manufacturers to run on long term funds.

International Breweries led the borrowing chart in absolute term recording N323.25 billion in 9M’23 from N148.99 billion in 9M’22. It was followed by Nigeria Breweries whose borrowing rose to N307.99 billion from N113.69 billion in the corresponding year 2022.

Dangote Cement occupied the third position posting N267.13 billion from N269.19 billion in 9M’22. It was followed by BUA Cement occupying the fourth position as its borrowings rose to N258.26 billion from N97.46 billion while BUA Foods followed as its borrowings surged to N 237.79 billion as against N211.67 billion in 9M’22.

Analysts’ insight

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Victor Chiazor, Analyst and Head of Research & Investment at FSL Securities Limited said: “The manufacturing sector will continue to be negatively impacted by the high finance cost, especially given that the banks all responded to the high MPR. Until the Benchmark interest rate is reduced by the CBN, the banks won’t drop their interest rate and the high interest expense will continue to weaken the profitability of manufacturing companies and even throw some of them into loss positions.

“In the course of the year, if we see inflation taper down, the MPC team may begin to ease its hawkish stance and drop the MPR which should lead to a gradual drop in interest rates. However if rates remain high, the real sector of the economy will continue to struggle as the interest rates would be too expensive for businesses to thrive.

Also, though expensive, the option of raising equity capital remains viable especially for those who have impressive earning forecast, strong business model and a compelling story to tell. In the course of the year we may see one or two manufacturing companies raise equity capital from the capital market to support their businesses.”

Commenting on the cost of borrowing, he said: “The astronomical jump in finance cost relative to a midsize increase in actual borrowings by these public companies in a 9-month period of 2023 could have been due to multiplicity of factors around inflation: depreciation of the Naira; re-pricing of loans and other assets by lenders; high input cost; reduction or non availability of suppliers’ credit; etc.

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The result of this is more inflationary pressure, as the affected companies are pressured to re-price their earning assets to recover costs or reduce losses.”

On government rendering support to the manufacturing sector, he said: “The government may not be able to assist every sector, except for a few companies who have benefited from CBN intervention funds and single digit interest rate borrowing, most are exposed to more of bank borrowing which will be highly toxic to business operations if interest rates remain elevated.”

Reacting to the increase in borrowing, David Adonri, analyst and Executive Chairman at Highcap Securities Limited, said: ” The manufacturing industry was first battered by the rising inflation throughout year 2023 which escalated their costs. Due to decline in purchasing power of consumers their cost recovery efforts failed to preserve their working capital. Hence, their resort to higher bank credit to keep them alive. With higher credit, finance cost will escalate.

“The second reason behind the balloon of their finance cost is the collateral damage they suffered from floating of the Naira. Their hard currency liability exposures magnified in multiple folds when the Naira suffered heavy depreciation. As a result, they had to borrow more money locally, to meet outstanding obligations.

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This year, the factors that pressured them into excessive borrowing may not be replicated. The economy is expected to readjust to a new price level where prices will be more stable. However, to repair their damaged balance sheets, manufacturers may need to refinance their huge debt through the capital market.”

On how government intervention can aid manufacturers, Adonri, said: “The administrative intervention of government in the credit market through CBN has not been very effective. It continues to distort the market mechanism that ought to efficiently allocate credit in the economy. The interventions have also not been appropriately directed to the foundational sectors of the economy.

Fiscal intervention can be by way of subsidy to manufacturers to enhance production while monetary policy should target low interest rate environment. If manufacturing inputs can be internalized through appropriate fiscal measures, then manufacturing cost can reduce to the point where finance cost will become negligible.”

Commenting on the borrowings by manufacturing companies, an investment expert and CEO, Wyoming Capital and Partners, Tajudeen Olayinka, said: “Companies can borrow to improve production capacity and reduce average cost. Where this is the case, such borrowing is considered positive, and could improve fortunes of shareholders of the company. Where such borrowing does not improve production efficiency, it can become negative to the value of the company and make shareholders worse off. This is what most companies try to consider before borrowing from short-term money market or long-term capital market.”

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On the benefits of borrowing by manufacturing companies, he said: “Borrowing that improves operational efficiency would naturally benefit customers and other stakeholders. Borrowing must be done to improve shareholders wealth; and customers must have been given thoughtful consideration before embarking on such borrowing.”

However, he lamented that, “Short-term borrowing from banks could be more expensive at this time, especially if we consider the effect of rising inflation and interest rate hike by Monetary Policy Committee of CBN, which has compelled many banks to re-price loans and other financial instruments, leading to higher borrowing costs for firms and public companies. Borrowing from banks could be more problematic at this time.

Regardless of cost implications to public companies, short-term borrowings from banks might have been provided as bridging facilities for more flexible long-term capital already arranged by those companies, or as a way of obtaining working capital. It could also be a sign of weakness in annexing suppliers’ credit by some of those companies.”

On whether the government can aid manufacturers, Adeyinka said: “That could be another way of asking the government to provide financial subsidy, when they are already enmeshed in a fiscal crisis. I think the best way is to allow the market to function, so that assets are properly priced in the long-term interest of the economy.”

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Proposal for creation of 31 states demands critical examination, outright condemnation -DG, CCLCA, Dr Nwambu

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…says zoning arrangements clearly favoured a section of Nigeria

By Emmanuel Agaji

The Director General of Centre for Credible Leadership and Citizens Awareness, CCLCA Dr Gabriel Nwambu has called for critical examination and outright condemnation of the move to create 31 additional states in Nigeria.

Dr Nwambu disclosed on Friday in a position paper entitled: ‘Position Paper: Condemnation of the Proposal for New State Creation in Nigeria’ declaring that:

“The recent proposals for the creation of 31 new states by the House of Representatives Committee warrant critical examination and, ultimately, outright condemnation.

“As Nigeria navigates through significant economic challenges, it is essential we approach governance reforms with an understanding of current realities.

“It is clear that the creation of additional states is not a viable solution to our nation’s pressing issues and, in fact, could exacerbate the situations we are working hard to overcome.

Current Viability of Existing States

“As it stands, Nigeria is currently composed of 36 states, including the Federal Capital Territory. A disconcerting number of these states are not financially viable. Many states are unable to meet basic obligations, such as paying the minimum wage of ₦70,000.

He explained that: “The crux of the matter is that some states have reached a point of insolvency, making the idea of creating new states—a process that demands additional financial resources—even more untenable.

” Rather than resolving existing state-level inefficiencies, the introduction of new states would only compound financial burdens on an already strained federation.

Zoning and Geopolitical Implications

“The proposed new states raise critical concerns regarding zoning and geopolitical distribution, particularly highlighting an imbalance favoring northern regions.

“The potential increase in Local Government Areas in the North signifies not just a concentration of political resources but also increased financial allocations to that region. This further marginalizes regions like the South East, where the new proposals result in fewer states. Such an approach fails to foster national cohesion and equity among the disparate regions of Nigeria, risking further discord rather than unity.

Cost of Governance Concerns

“The timing of these proposals is troubling, especially as we engage in discussions aimed at reducing the cost of governance in Nigeria.

” The addition of 31 new states would inherently lead to an increase in legislative assemblies, senators, and representatives, thereby inflating the political structure rather than streamlining it. Rather than focusing on mechanisms to enhance governance efficiency, we would instead be entrenching a model that is financially unsustainable.

Imminent National Challenges

“Moreover, the pressing issues that Nigeria faces—ranging from rampant insecurity, widespread unemployment, inadequate healthcare, and dwindling infrastructure—demand our immediate attention and resources. At this pivotal moment, the creation of new states distracts from tackling these fundamental concerns.

” It is crucial to consider how we can strengthen existing governance structures, enhance service delivery, and ensure that government revenues transparently address the needs of our citizens, rather than atrophying under the weight of new state establishments.

Conclusion

“In conclusion, the Centre for Credible Leadership and Citizens Awareness strongly condemns any proposals for the creation of new states in Nigeria.

“Such actions would not only worsen our current economic quagmire but would also lead to heightened regional disparities, escalating governance costs, and distract from the critical reforms and policies necessary to improve the lives of Nigerians across the country.

“We urge policymakers, opinion leaders, and the general public to prioritize pressing developmental needs over cosmetic political restructuring.

“The focus should remain on enhancing the efficiency and viability of existing states, tackling economic challenges head-on, and fostering true national unity. The call for new states is neither a panacea for our problems nor a justifiable use of national resources at this time.

“Thank you for considering this position paper. We hope it contributes to the necessary dialogue surrounding the governance challenges we face in Nigeria.

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BREAKING ! IGP Egbetokun sacks 197 officers for bypassing regulations, forgery

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The Nigerian Inspector General of Police Kayode Egbetokun has ordered the immediate retirement of senior police officers who are either over 60 years old or have served for more than 35 years.

These include Simon Lough, SAN, the Head of the NPF Legal Section and Benneth Igweh, a former Federal Capital Territory Police Commissioner.

These police officers have been implicated in forgery, falsification, and bypassing service regulations.

The directive is disclosed in a letter dated February 1, 2025, signed by CP Bode Akinbamilowo, Deputy Force Secretary, on behalf of the Inspector General of Police, and addressed to the Deputy Inspectors-General of Police, Assistant Inspectors General of Police, Commandants of Police Staff Colleges at Jos and Kano, Commissioners of Police and Commandants of Police Colleges across the country.

The letter is titled ‘Re: Police Service Commission Decision At Its 1stt Extra Ordinary Meeting Of The 6thh Management Board On The Regularisation Of Date Of First Appointment Of Cadet ASPs/Inspectors Force Entrants.’

It reads, “Attached letter No. CH: 8400.IGP.SEC/ABJ/VOL.17/90 dates 31st January, 2025 with its attachments received from the Inspector General of Police, Force Headquarters Abuja in respect of the above underlined subject refers.

“I am to convey the directive of the Inspector General of Police that you ensure comprehensive implementation of the decision with emphasis on paragraphs 3 and 4 of the attachment letter under reference.”

The decision of the PSC refereed to in the letter was earlier communicated to the IGP in a letter dated January 31, 2025 and signed by Nnamani Onyemuche, Secretary to the PSC.

Paragraphs 3 and 4 to be given emphasis read: “Accordingly, the Commission at its 1st extraordinary meeting of the 6th Management Board held on Friday 31st January 2025 has approved the immediate retirement of those officers who have spent 35 years in service and those above 60 years of age.

“Any omission discovered subsequently on this issue also falls within this approval.”

Paragraph 5 reads: Please implement, inform the affected officers and make replacement for the vacancies thereafter immediately and forward to the commission for its consideration and approval.”

On the list of those who should have retired but still in service going by their dates of enlistment are: Simon Asamber Lough who should have retired on January 8, 2022 going by his date of enlistment.

Others listed include Benneth Chinedu Igweh (January 5, 2023), Akinbayo Olasukami Olasoji, Louis Chike Nwabuwa, Mukar Sule, Adamu Danjuma, Ajao Olusegun, and Iriemi Solomon.

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Just in: Trump launches first US sovereign wealth fund

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U.S. President Donald Trump signed an executive order ordering the creation of a sovereign wealth fund within the next year, saying it could potentially buy the short video app TikTok.

If created, the sovereign wealth fund could place the U.S. alongside numerous other countries, particularly in the Middle East and Asia, that have launched similar funds as a way to make direct investments with government dollars.

The text of the executive order was sparse on details, and simply directed the Treasury and Commerce Departments to submit a plan for such a fund within 90 days, including recommendations on “funding mechanisms, investment strategies, fund structure, and a governance model.”

Typically such funds rely on a country’s budget surplus to make investments, but the U.S. operates at a deficit. Its creation also would likely require approval from Congress.

“We’re going to create a lot of wealth for the fund,” Trump told reporters. “And I think it’s about time that this country had a sovereign wealth fund.”

Trump had previously floated such a government investment vehicle as a presidential candidate, saying it could fund “great national endeavors” like infrastructure projects such as highways and airports, manufacturing, and medical research.

Administration officials did not say how the fund would operate or be financed, but Trump has previously said it could be funded by “tariffs and other intelligent things.”

Treasury Secretary Scott Bessent told reporters the fund would be set up within the next 12 months.

“We’re going to monetize the asset side of the U.S. balance sheet for the American people,” Bessent said. “There’ll be a combination of liquid assets, assets that we have in this country as we work to bring them out for the American people.”

One approach would be to convert the U.S. International Development Finance Corp (DFC) to function similar to a sovereign wealth fund, which the Trump administration reportedly considered in recent months, Bloomberg News reported. The DFC is a government agency that currently partners with private parties to finance projects in the developing world.

Trump announced Friday he was nominating Benjamin Black to head that development agency. Black, a managing partner at investment firm Fortinbras Enterprises, is the son of Leon Black, the co-founder of asset management firm Apollo Global Management.

The Biden administration also was considering establishing such a fund prior to Trump’s election in November, according to The New York Times and Financial Times.

But precisely how such a fund would be structured, and funded, remained unclear. Several experts said Congress would likely need to authorize new funding given the lack of an existing surplus to tap. The order directed officials to review any need for legislation.

Clemence Landers, a former Treasury official who is now with the Center for Global Development, said there has been talk of repurposing the DFC but setting up such a fund would require Congress.

“Obviously you can’t establish an institution by executive order and more to the point is you can’t fund an institution by executive order,” she said.

Investors said the news came as a surprise.
“Creating a sovereign wealth fund suggests that a country has savings that will go up and can be allocated to this,” said Colin Graham, head of multi-asset strategies at Robeco in London. “The economic rules of thumb don’t add up.”

There are over 90 such funds across the world managing over $8 trillion in assets, according to the International Forum of Sovereign Wealth Funds.

Numerous U.S. states, including Alaska, Texas and New Mexico also have their own wealth funds, which help fund various priorities, including education and tax relief. They frequently rely on revenue raised by natural resources, like oil or land.

In another surprise twist, Trump suggested the wealth fund could buy TikTok, whose fate has been up in the air since a law requiring its Chinese owner ByteDance to either sell it on national security grounds or face a ban took effect on Jan. 19.

Trump, after taking office on Jan. 20, signed an executive order seeking to delay by 75 days the enforcement of the law.

Trump has said that he was in talks with multiple people over TikTok’s purchase and would likely have a decision on the app’s future in February. The popular app has about 170 million American users.

“We’re going to be doing something, perhaps with TikTok, and perhaps not,” Trump said. “If we make the right deal, we’ll do it. Otherwise, we won’t…we might put that in the sovereign wealth fund.”

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