Former CBN Governor, Professor Charles Soludo has thrown his hat into the ring of raging controversy surrounding the proposed sales of government assets recommended by the Federal Executive Council. The foremost Economist who is not shy to wade into national issues, particularly around the economy, reeled out several reasons why he is against the sale of assets.
In an article Published by most media outlets on Tuesday, Professor Soludo laid out his reasons for rejecting the sale of National assets at a time when the economy was neck-deep in a recession and facing the biggest foreign currency crisis ever. An argument for a rejection of an asset sale is quite easy to make especially against a government that has proven to be sloppy, full of bad policies and perhaps not even coherent in their argument for a sale. However, we believe the former CBN Governor may have bungled this up considering his pedigree.
Let’s analyse some of his submissions;
Nigeria is not in “Extreme, Exceptional Circumstances”
Our thesis is that in extreme, exceptional circumstances, sale of certain assets could be a last resort option but that Nigeria is currently not near that threshold and the institutional framework for its effective use is also not in place.
Nigeria is currently facing its biggest economic crisis since the civil war and to think we are not “near that threshold” is quite surprising to us. A simple look at some of our macro economic data clearly points to this fact. Within two years, the exchange rate has depreciated from N165 to over N440 in the black market. Inflation rate has risen from under 9% to about 17.6% in a little under two years. Foreign direct investment into the country currently stands at about $170 million per quarter to about $400 million per quarter. Foreign Portfolio Investment on the other hand has dropped from an average of $5 billion per quarter in 2014 to under $500 million in 2016. Quarterly budget estimate was also under N700 billion compared to about N1 trillion in boom years and is now 33% lower than budgetary estimates. Crude oil production has declined from about 2.2 million barrels per day to under 1.6 million barrels per day. This is in addition to an oil price of under $50 for much of the year. No one needs to explain to you that the economy is currently in “exceptional circumstances”.
Furthermore, we argue that any sale of assets now amounts to chasing pennies when by acts of omission or commission, we are losing pounds. Such a hasty auction of national assets can only benefit a privileged few with cash and access while jeopardizing Nigeria’s long term economic interests. It will be a historic mistake for the reasons stated below.
This is some good word play, however remarking that the sale of assets can only benefit a privileged few, is rather uncanny. The Nigerian Government has been selling assets since the government began its privatization programme in the Babangida era, so it’s hard to understand how this is a hasty decision. Calling it a “hasty auction” and “benefitting a privileged few” is also prejudiced. Surely, there are suspicions out there that some people in the corridors of power have already positioned themselves to buy the assets but alluding to that in this article suggest a political undertone rather than an economic opinion.
Calling Recession Short-Term
Let me start by noting that the objective of policy is mistakenly identified in terms of getting the economy out of recession. Recession is short-term.
There is actually no timeline to when a country can get out of a recession. In fact, there is even every likelihood of jumping into recession after experiencing a quarterly growth a situation economists call a double dip recession.
Reserves is not enough to attract investors
What they seem to suggest is that there is a sense of “optimal level of reserves for confidence” such that once investors see $35 billion or $40 billion as reserves, they will stop speculation. This is a strange argument. Private economic actors are much smarter. There is more to investor confidence than temporary boost in stock of reserves when everyone knows that the underlying political environment as well as the policy regime and its credibility make the flow of reserves unsustainable.
This is with due respect also a weak argument. Like it or not foreign investors look to our reserves in deciding whether to invest in the emerging economy or not. The reasons are quite simple. For example, when a foreign investor invests in your country either via bond purchase or purchase of equities, they have one eye at your external reserves because that is more likely than ever the only way they can get their money out whenever they want to. The markets are wired that way and it’s pretty clear that is one of the major reasons why we are where we are today. For example, it’s no news that some airlines have closed shop in Nigeria because they cannot repatriate their dollars.
We have enough to pay for imports
The IMF calculates reserve adequacy in terms of the amount to finance at least three months of imports especially for countries with flexible exchange rate (which we claim to have), and of course also enough to cover short-term forex liabilities for countries with open capital account. Nigeria currently has much more reserves to cover even six months of imports (size of imports also depends on exchange rate). So, what is the problem?
This is also quite strange. Nigeria’s import bill between 2013 and 2015 averaged about N7 trillion based on official accounts. Add unofficial figures and we could be looking at double figures. Based on 2014 exchange rates of about N165, our import bill in dollar terms is amount $42 billion or $10 billion per quarter. At $25 million and fast depleting, Nigeria can hardly meet up to 3 month’s import bill without the exchange rate plummeting to multiple record low. This perhaps is why the CBN is adamant and lifting the ban on 41 items (even though we are in support of a lifting of the ban).
Other West African Countries
No amount of reserves can stop currency speculation in a poor policy environment. There is much more to confidence than absolute or relative size of reserves. Look around our West African neighbours that are doing far better in economic terms and check out the size of their reserves (even as percentage of GDP). Until 2004, Nigeria never had more than $10 billion in reserves, and we have survived oil prices below $10 without selling Nigeria.
Neighboring francophone countries such as Benin Republic and Niger Republic use the CFA and have their currency tied to the Euro. These economies are way different from Nigeria and can’t be surely used as an example. Ghana, by the way had one of the world’s worst currency last year and has been experiencing high double-digit inflation for years now. They also just recently floated Euro Bonds in a bid to shore up their dollar reserves and fund government expenditure. This is also 2016 and not 2004 especially if you consider inflation, population growth and the magnitude of infrastructural deficit currently in the country. Nigeria is also in a recession in 2016! Besides exchange rate was about N141 in 2004 at the BDC. It took, about 10 years to get to N197 and just six months to cross N300.
We respect the Professor a lot and love to read his opinions on National issues. In fact, we still consider him the best CBN Governor to data. However, this article appeared rushed and too emotional making it the worst we have read from him ever.