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
Am in total agreement, this has been my sermon since exception, we need a more favorable balance of trade by growing export, growing export is not by export programs, but by making your country attractive for an investment boom, then we can have the products and tech know how to export
Great points..especially on action items but could be greatly improved.
To summarize we need serious public sector reforms because you won’t get bureaucrats to cut taxes and fast track business registration with the current crappy civil service. While I do not agree with the “center knows best” ideals of your submission – as it is generally not the case in Nigeria (eg only the Feds does business registration through CAC and it is famously inefficient as you proved), a better posture is to send more powers to states to manage their economies instead of hugging the power at the center. Feds have no business collecting some category of taxes. The use of FTZ and Industrial Zones is better suited also for a federal system and this can be used to also concentrate infrastructure cum align taxes for the purpose of diversification- India has done this successfully despite its federal system. Arm twisting states to empower a federal government that is mostly wasteful and useless will probably end up badly once a new bad wolf takes over at the center. In a federal system, states that are open for business should simply prove it and get federal support. Those that want to remain behind can also do so.
The second point on infrastructure also requires the re-organization of the current civil service to reflect these priorities and professionalization of our foreign trade operations in both our foreign affairs and commerce/trade functionalities. We must ask ask ourselves the question why is there a different ministry for highway , airlines, ports and rails? Why not a single Ministry of Transportation? Why is the private sector not leading? Why is there a different ministry for petroleum and power? Why not a Ministry of Energy so gas can get to the variously built gas plants? Is our foreign consulates and missions focused on attracting foreign investments or just under funded outposts for displaying Nigerian shenanigans? Why do we need over 100 of them when we effectively have only 30 or so trade partners and we can make much smaller foreign footprints go further by shrinking the size of our foreign missions and increasing the capacity in a much smaller but equally more effective network of embassies focused on bringing business (FDI and infrastructure funding) to Nigeria? Of course the role of pension funds and ICRC concessioning mechanism to achieve point two can’t be overlooked
Thirdly, the idea of being open for information to citizen have to be two ways. That is, citizens must also have to give up more data starting with identity management. The best singular investment Nigeria can make today is to harmonize all our disparate identity databases into a single national ID and cover everyone. This should also be tied to obligations (voting), benefits (redistribution of oil income to individuals or basic health insurance for all) and responsibility (payment of taxes). First thing first though, let’s agree to identify ALL Nigerians within 12-18 months. It will do us a whole world of good.
The fourth point puts a big issue of anti-trust legislation and other forms of regulation alongside a deep and thorough judicial reforms that ensures cases are handles fast and judges act fairly are Instututes. The manner of prosecution also needs changes. We need district based single point of prosecution by professional prosecutors on federal cases confirmed by the senate and answerable for hitting conviction KPIs.
Lastly the point about cheap capital, is often easier done than achieved. Capital formation in an economy with shrinking export value is easier said than done. The Sovereign Wealth Fund can be more aggressive for large business and this is likely to attract PEs and VCs. The CBN can better manage its plethora funding mechanism and funds to ensure they partner with banks up to local banking level to open these funds currently managed on paddy paddy basis to ordinary businesspeople . The need to have a single Small Business Admin type organization to get these funds to ordinary people can’t be over emphasized. And the organization got to be staffed properly with bankers with KPIs to push money out and transform the small business side of things where jobs are created and capital most needed.
The biggest lacuna in the solutions offered by the author are the lack of the obvious ones. Jobs, Jobs, Jobs. Without Job focused recovery, the point of economic growth is lost on real people. The low hanging fruits will always be technology, manufacturing, agriculture, mining and construction. Nigeria needs a Job Czar that truly shows that the government cares about job creation and holds every single Minister responsible for creating private sector led jobs in their departments through creative policy making and creative partnership with the private sector.
I tell you,this boy is talking rubbish,the economy did grew more than 15 % immediately after independence,i.e without oil revenue, for about 2 or 3 yrs,and the economy did grew at least 10 % for about 2 years,after the civil war.
The governor of cbn cannot be what he is not,govt official should be more humble and sensitive to the needs of it’s citizen,you do not need to be genius.WHY NIGERIAN GOVT DID NOT FOLLOW UP PRODUCTION OR SUPPORT PRIVATE SECTOR THROUGH TECHNICAL,MANAGEMENT,CREDIT I.E ADVISE.we all wanted to be free and respect.when the crunch happen and,nigerian enterprenuers are exposed,he will have no thread to hang on.THERE IS A POPULAR SAYING IN NIGERIA FOR SOME NIGERIAN RICH MEN ” MONEY MISS ROAD RICH MEN.in Nigeria,you can have an illiterate person as a rich man,even those who passed or drop out of primary school.such rich men,do not have the mental and spiritual capacity to run their business effectively and efficiently,and this structural adjustment programme affected,middle class almost wipe-out,civil servant took cover,it became Darwin survival for the fittest,morality is thrown out of the window.THIS IS WHY THE CBN CANNOT — USES BANK INTEREST TO AFFECTS NIGERIAN MONETARY POLICIES.there is too much leakages in the Nigerian economy, excees freedom,excess liquidity,everything in Nigeria is in excess,if you look at stats,the economy did grew driven by the private sector and the 3 level of executive arm of the govt.yet the people are still not happy.
The sin qua non must be done” first thing first2,the governor may go to venus or mars for foreign investment.it will not work in Nigeria,even president buhari can travel oversea for conference or medical treatment,they are wasting their time.Michael Okpara the former premier of eastern Nigeria after coming from exile,said Nigeria should industrializes before 2000,the process,the knowledge,the personals,the people to do it in Nigeria already exists in Nigeria,.e.g computer,software development,car,planes,helicopter.
What they need to do bring the process together,govt subsidizing the economy,if it needs to do it.nigeria uses to uses british product,within 2 yrs Japanese products replaces everything,