This is one of Nigeria’s biggest economic perturbations: “Nigeria’s letter of credit payments has plummeted by 63% in the first quarter of 2024 compared to the same period in the previous year, according to international payments data from the Central Bank of Nigeria (CBN).”

A letter of credit (LOC) is a document issued mainly by a bank that guarantees a buyer will pay a seller on time and in full for goods or services. Largely, with the fall of LOC, it does mean that banks are not offering a lot of those guarantees.

Good People, that is a big problem. But it is expected. Indeed, the problem with our forex paralysis is not that the Naira has lost value, but that it is not stable. And with that volatility, LOCs take a hint, freezing economic activities along the way. Nigeria needs a stable currency urgently.

The deal is clear: FX traders and speculators look at the exchange rate; investors, besides everything, look at the stability of Naira. Naira needs to stay within a variance percentage of -/+ 5% over six months to bring investors back at scale.

One way of doing that is to fix an official rate, and stop the current illusion that Naira can be floated to swim in the waters of international market when it is clear we do not have enough life jackets (factories, services, warehouses, etc) to save it, if it begins to drift, as it is now doing!

Nigeria’s Letter of Credit Payments Drops by 63% in Q1 2024

Great feedback on the post on how we financialized Nigeria without the making things components and put the nation on an economic descent. Even a senator sent a note to a village boy with “…my staff forwarded your post to me. We will look into this”. Good People, I told the senator that Nigeria has made Naira a “commodity” which can be bought and sold like any product since people pay fees with POS (post of sale) agents during withdrawals and deposits. Simply, because of our institutional deficiencies, we’ve created a business sector to “tax” the Naira by non-government agents.

Let us continue the financialization of Nigeria conversation. I have noted that between 1989 and 1993, Nigerian financialized its economy.  Nigeria has not recovered from what happened in those four years. Let me add another vector to what we have already discussed. It was in 1989 that Nigeria introduced Bureaux de Change (BDC), creating a meaningless financial institutional category that was mainly designed to “tax” the citizens.

Simply, like the POS business which has turned Naira into a “commodity”, enabling the buying and selling of Naira, BDC and POS share the same genes.

Yes, I want N10,000 and you can take N100 if you can give me this money as a POS agent.  I want to deposit N20,000, please this N500 is my fee. Magically, Naira is now a commodity where to withdraw or deposit, someone has to pay a fee. When you model that the central bank noted that more than 90% of cash in circulation is outside the banking sector, and a big chunk goes through this POS system, you will agree that it is indeed a great sector. Under that system, how do you convince a young man to start a poultry business when he can insert himself with a POS merchant in the village market to tax the citizens? 

That is financialization which is possible because Nigeria has not given banks an ultimatum to reach all local governments and wards to be called national banks, 15 years upon licensing. Because we have allowed banks to operate where they can make profits and avoid where they cannot, we then shifted the “losses” to the citizens.

If this village boy is to be a decision maker, I will give all national banks in Nigeria to be present in all local government areas. We do not want to see those huge profits when Ovim people do not have a decent banking product there!

BDC like the POS offer marginal production value and are products of a financialized Nigeria. But while POS is focusing on Naira, BDC is an international vector. Yes, BDC plays with the national currency, and with that vector, Nigeria created a business sector which can only thrive on the volatility of the Naira! So, more volatility, better gain.  (People who invented POS did it to help in payment of goods and services, not for selling and buying currencies.)

Just like that, we created Naira billionaires for doing largely nothing but get USD from the central bank and sell to the citizens! Tufiakwa! And in a system where that happens, why do you need to create a soap business or start a farming business? In other words, if volatility brings economic gains, why do you think people will not work towards creating it?

Our banks cannot be allowed to choose where they operate to declare huge profits; they should be pushed to go rural, spend the profits, but over time, they will deliver value to themselves and the economy. That will ensure we reduce the POS agent “tax” in our economy.

Also, we need to pay attention if it is time to make everything aspect of BDC operations 100% digitized. In other words, any operator receiving funds from the central bank will get it in a digital form, and the ones in airports or ports must be better regulated with higher accountability. Yet, over time, what BDCs do must be folded into what banks do.

And let me add that POS and BDC have united in Nigeria as you can also engage POS agents when doing your thing with BDCs. In those cases, Nigeria introduced two layers which offer marginal value (and remain necessary because we have not fixed foundational things).

In a landmark legal and political development, the Federal Government has filed a lawsuit against the 36 state governors of Nigeria at the Supreme Court, seeking to enforce full autonomy for local government councils as the third tier of government.

The Attorney General of the Federation (AGF) and Minister of Justice, Prince Lateef Fagbemi, SAN, initiated the suit, marked SC/CV/343/2024, in a bid to curtail what he describes as the unconstitutional interference by state governors in local government affairs.

The AGF is requesting the Supreme Court to issue an order prohibiting state governors from the “unilateral, arbitrary and unlawful dissolution of democratically elected local government councils.” He argues that such actions contravene constitutional provisions that guarantee local government autonomy.

The suit also calls for an order mandating that funds allocated to local governments from the Federation Account be directly channeled to them, bypassing the controversial joint accounts managed by state governors. This direct funding is seen as crucial to ensuring the financial independence and effective functioning of local governments as envisaged by the 1999 Constitution.

Additionally, the AGF seeks an order stopping governors from constituting caretaker committees to run the affairs of local governments, arguing that this practice violates the constitutionally recognized democratic councils. He also requests an injunction restraining the governors, their agents, and privies from receiving, spending, or tampering with funds released from the Federation Account for the benefit of local governments when no democratically elected local government councils are in place.

The suit is predicated on 27 grounds, emphasizing that the Nigerian Federation, created by the 1999 Constitution, recognizes federal, state, and local governments as three tiers, each drawing funds for their operations from the Federation Account. The Constitution mandates a democratically elected local government system and does not provide for any other form of governance at this level.

The AGF contends that state governors have failed to establish democratically elected local government systems, even where no state of emergency has been declared to justify the suspension of democratic institutions.

“All efforts to make the governors comply with the dictates of the 1999 Constitution in terms of putting in place a democratically elected local government system have not yielded any result,” the AGF stated. “To continue to disburse funds from the Federation Account to governors for non-existing democratically elected local governments is to undermine the sanctity of the 1999 Constitution.”

The AGF has asked the Supreme Court to invoke Sections 1, 4, 5, 7, and 14 of the Constitution to declare that state governors and state houses of assembly are obligated to ensure a democratic system at the local government level. He also seeks a declaration that governors cannot lawfully dissolve democratically elected local government councils.

While the push for local government autonomy is viewed by some as a potential catalyst for good governance, it has also sparked concerns about the risk of increased corruption. Economist Kalu Ajah provided critical insight into the historical and practical challenges of local government administration in Nigeria.

“LGAs were primarily created by the military as a way to get oil money, not to develop rural areas,” Ajah explained. “Oil cash in Nigeria is shared via LGAs, so if I want a state to get more oil money, I (as a General) arbitrarily increase the number of LGAs that state has.”

He highlighted the disparity between Kano, which has 44 LGAs, and Lagos, with a larger population but only 20 LGAs.

Ajah suggested that for local government autonomy to be effective, funding should be based on performance metrics rather than direct allocations.

“LGAs should not receive direct FAAC funds but rather grants based on the actualization of HDI goals,” he proposed. “For example, the LGA gets a direct cash payment for every child who graduates from primary education. Same for immunization or reduction in waterborne illnesses.”

He added: “Simply paying cash to LGAs because they are LGAs is the most significant waste of wealth that has occurred in Nigeria.

“You can’t reform LGAs without reforming the premise of their creation.”

The Supreme Court has scheduled the hearing of the suit for May 30, setting the stage for a landmark decision that could reshape the governance structure at the local level in Nigeria. The outcome of this legal battle will have far-reaching implications for the balance of power between the federal and state governments and the future of local governance.

This legal confrontation, which highlights the ongoing faceoff between different tiers of government in Nigeria, raises critical questions about the best ways to achieve effective and accountable local governance in the country.