For the Israelites wandered in the wilderness 40 years… because they did not obey….
In several columns on Nairametrics over the last one year, I argued that President Muhammadu Buhari’s no retreat no surrender mantra on the naira at N199/$ was digging us into a big hole. After holding out for 12months, the rapidly deteriorating economic environment (surging inflation, mounting job losses, onset of a recession) and persistent declines in foreign reserves finally forced the president’s hand on the currency.
Not that Nigeria is different from other countries but since the 1990s, transitions from a pegged exchange rate regime to a flexible one have been disorderly and required painful devaluation depreciation as market participants sought to establish an anchor point for FX trading. Unsurprisingly the NGN dropped over 40% on the first day of trading to N281/$ but the largely static movement, despite the occurrence of certain events like Brexit, suggested some darker arts were at work.
After foreign investors ‘outed’ the CBN during its ‘RM road trip’, the apex bank course-corrected allowing the NGN float more freely. But more importantly, CBN is now aggressively curbing naira liquidity at much higher interest rates (including one OMO auction at a record 17% for 357days) which hints at a rate hike at this week’s MPC. I’m hazarding a guess that MPR will rise by 250-300bps. Using the trilemma framework I spoke about in my last post, you can infer that the CBN is trying to entice FPI inflows to the fledgling interbank market to shore up the value of the NGN. Implicit in this action is that CBN cares less about domestic macro-economic conditions where a recession is on the cards.
Is this a wise move? As I argued in my last post, chasing FPI has its risks as it’s essentially a put option on your FX reserves. When things go south same FPI becomes a drain on your reserves and worse it becomes like a classic bank run. Importantly, while you can seduce FPI into a country, events outside a country’s control can trigger FPI outflows – someone sneezes funnily at the MMA airport, FPI out, bomb goes off in Timbuktu FPI out, attempted coup in planet Jupiter, FPI out. Put simply, a whole load of random events can occur and the entire FPI lot streams out.
Thus, while they can help ease a dollar liquidity problem, FPI cannot address the dollar shortage problem in a sustainable manner. Our ongoing dollar shortfall stems from an oil hole in our current account which reflects fundamental and deeper lying issues with our production/export structure as a nation. In the chart below I’ve plotted FPI and FDI flows into Nigeria since 2007.
Source: CBN * Q1 16
Historically, FDI’s exceeded FPI as Nigeria did not have an interesting capital market – Our debt market only seriously started in 2006 and equity markets similarly became active in the same period. Most capital flows were into the oil and gas industry and the start of the PIB conundrum with implications for IOCs and the ongoing militancy problems moderated FDI appetite for Nigeria. But the big surge in FPI’s began in 2012, when the one-year holding period restrictions for FPI into Nigeria was removed and global central banks began a massive QE binge with the US Fed spraying $85billion dollars into financial markets. The termination of the program over 2014 and the start of the oil price plunge drove a cutback in these FPI flows, not just into Nigeria, but across emerging markets as well. So for those thinking floating will bring back flows – the question is are we going back to 2012-14 or pre-2012 era?
In a world where all the talk is about Brexit, Turkey coup, potential for a Trump presidency with isolationist tendencies – my hunch is that we are going back to the pre-2012 world. Importantly, dollar demand has ballooned to levels which reflect the era we were awash with FPI and $100/barrel oil money. As a smart economist once said, it’s easier for households to refrain from making expenditures in the first place than to stop after starting it. Thus, while dollar supply has dropped, dollar demand remains downward sticky. Safe to say FPI inflows are unlikely going to solve the dollar problem unless we adjust our taste for foreign goods and services.
Nigeria has a huge services sector (more than half of GDP) and a ‘permanent’ services deficit (going back to 1980s) i.e. we import more services than we export – on average $22billion dollars since 2008. Thus attempting to force the import demand genie back into the bottle like PMB tried over the last one year won’t really work as you’d literally have to kill a sizable share of the economy along with it.
So how do policymakers fix this mess?
As I’ve hinted in my last piece – go for FDI. FDI is like the equivalent of a guy looking for a wife while FPI is like someone looking for a one night stand. One is stickier, less volatile and cannot leave you in a jiffy while the other is only after your money after which it moves on to the next point. However, as with finding a spouse you need to trick FDI into coming. While Nigeria has the population to serve as a viable market for any product, a good advertising point, we are 169th in the world in ease of doing business, right up there with great business destinations like our neighbours Niger Republic, Guinea and Zimbabwe.
To start a business in Nigeria, it takes on average 28days (vs 8days in serious countries) and registration costs 31% of per capita income (only 3% in serious countries) among other hurdles. As a friend of mine likes to say – government agencies in Nigeria think they compete with businesses for revenues. Add the myriad of existing protectionists’ laws across several sectors, Marxian labour unions, extortionist indigene groups etc and Nigeria is only open to foolish FDI with money to burn. If in doubt ask Tiger Brands whose share price rallied 10% after announcing it was leaving Nigeria.
For FDI to step in to fill the dollar void, our government must go beyond sheer rhetoric such as making ‘exotic’ statements about debottlenecking the economy/improving business climate etc to ACTUAL ACTION.
- Firstly, governments at all tiers must commit to actually reducing levies from their bureaucracies and quasi-official groups on businesses. A big quick win is on taxes – using its strong negotiating position now, the FGN must force states to signing up to a harmonized tax schedule which addresses the multiple taxation issues businesses groan about. The FG must use this crisis as a window to drive change in state government finances by wielding the threat of allowing states go bust as stick to coerce recalcitrant states.
- Secondly, inadequate socio-economic capital in the form of power and transport infrastructure makes several businesses non-competitive such that the economic side of the force is with imports or smuggled goods. Government must either address these deficiencies if it can or create the enabling environment for private initiative to provide these services profitably. This includes not flip-flopping in the face of populist political opposition or dodgy god-fathers with shadowy interests.
- Thirdly, a key tenet of market systems is that everyone knows everything about everything before making a decision. This works fine but Nigeria is not exactly data Valhalla and more often than not government agencies and private businesses go the extra mile to hide and obfuscate data. In most advanced countries, at minimum this role is filled by government agencies – each MDA must provide on a periodic basis (monthly or quarterly) a report on its activities including a data portion. This enables more informed decision-making about developments in the economy.
- Fourth, an often missed point behind many liberalization fundamentalists is that in the thirst for allowing unbridled private control of the economy, they omit the need for effective rules. Markets work well but, as a Keynesian, I’m not blind that market failure can be an even worse problem in the absence of simple regulation. Our legal systems must be strong enough to detect and handle punitive penalties for anti-market behaviour.
- Lastly, an easier way to entice FDI is to ensure local financing is accessible and available at reasonable costs.
You can call this a five point political manifesto of some sort, but if we are serious why wait for forty years for a forty day policy. J
This article was submitted by Walle Smith. Follow Walle on twitter @Walesmit