Backpage Article Published in THISDAY Newspaper, 27 September 2016
In my previous capacity as the Chairman of the Technical Committee of the National Council on Privatisation up until May 2015, I canvassed for the privatisation of the power sector, sale of NITEL and pushed for the sale of the refineries and the passage of the transport reform bills before time ran out on the last administration. The Nigerian economy has since taken a turn for the worse. We are now confronted by the twin evils of economic stagnation (2.06% contraction of real GDP in the second quarter of 2016) and a high inflation rate (above 17%). Stagnation + Inflation = Stagflation. Those calling for a drop in interest rates, at a time of ravaging inflation and uncontained exchange rate pressures, are guilty of carrying out a partial/jaundiced analysis. Their prescription would further destabilise the macroeconomy.
These same people never seem to conclude their prescription. They should equally prescribe how to allocate scarce foreign exchange and attract forex inflows? If they would go all the way and recommend that we should allocate the available CBN dollars via a lottery, conducted on live television, where the winners pay N320/$1 and the losers head for the parallel market at N440/$1, then we can take them seriously. At least such a lottery would be “scientific”, transparent and corruption free. Ideally, the economy would benefit from a dose of stimulus, but only the type that simultaneously helps to ease Nigeria’s forex scarcity problem, rather than simply heating up the forex market further.
I am an economist, an investment banker and an entrepreneur too and so I know that, if you offer investors negative real interest rates and phenomenal forex arbitrage opportunities, then few will bother to invest in anything real. They would rather borrow Naira at low interest rates to chase Central Bank of Nigeria (CBN) dollars at N320/$1 with the aim of importing goods to sell to consumers at an effective rate of N440/$1. In effect, round-tripping will become the only worthwhile investment game in town. The time to bring down interest rates is when we have contained the inflationary pressures or are well on the road to doing so.
What we need is a combination of well thought out, calibrated and properly sequenced fiscal and monetary policies supported by the right mix of macro-prudential tools. Thankfully, the Monetary Policy Committee (MPC) of the CBN recently brushed aside some ill-advised public pleas for a drop in interest rates in the face of stagflation. Monetary and exchange rate policy, based on a sound theoretical underpinning such as the Mundell-Fleming Trilemma, is clearly not everyone’s forte.
The elections are over at the Federal level and I belong to the school of thought that believes that all hands must be on deck to fight Stagflation. The last administration did not save for the rainy day during an oil boom and the current administration was in denial for close to twelve months until the acute forex and petrol scarcities, occasioned by the continued pursuit of clearly unaffordable subsidies, forced a policy rethink.
The CBN has half-embraced market determined exchange rates, but then it retains so many impediments to the smooth functioning of the market that we are now stuck with confusing multiple exchange rates which have spooked investors. Business confidence is exceedingly low on account of unguarded utterances by severa: Government functionaries, regulators overreaching themselves and overzealous anticorruption agencies who take turns to harass private sector businesses. Investors see that the risk/return equation has altered dramatically – risks are up and returns are down.
Stagflation is one of the most difficult macroeconomic conditions to break out of and the Nigerian elite owe it to the teeming masses to jettison our differences, end the blame game and instead work together to initiate a credible path towards both lowering the inflation rate and restoring economic growth. If we do not act now, we may face 4 to 8 years of zero per capita income growth. Italy has just completed a decade of no growth and Japan has attained that same state for close to two decades. Brazil has been in recession for three years and the economies of Zimbabwe and Venezuela are in free fall. With our large youthful population, that is unprotected by adequate safety nets, Nigeria cannot afford to emulate any of these countries.
Some of the longer term structural changes that we need to institute to salvage our economy will require a bipartisan handshake because they call for constitutional changes. Those who are calling for some form of political restructuring are right to put that on the table because it is unclear how unviable State Governments, who cannot pay salaries, can become serious economic actors over the course of the next decade.
Our economy could do with some fiscal stimulus, but the Federal Government of Nigeria (FGN) has no net savings to draw upon and our external reserves have fallen dangerously low (below $25 billion). Instead, FGN faces a rising local debt burden which can only become progressively burdensome on account of high nominal Naira interest rates which are still necessary to contain inflation and help douse exchange rate pressures. The harsh reality is that the foreign exchange scarcity will continue to bite for a while because business confidence is exceedingly low and investors (local and foreign) have lost faith and now prefer to delay forex inflows.
There are two broad avenues for quickly increasing the availability of forex and these are; 1) external borrowing; or 2) asset sales. Let me quickly add that I am nervous about the former because we have weak institutions, a bloated and inefficient public service and a challenged economic team. The recent bad decision to sell subsidised forex to pilgrims after a sharp Naira devaluation for everyone else speaks volumes.
That brings me to asset sales. If these are done strategically, they can constitute a triple boost to a flagging economy. They can:- 1) bring in forex; 2) improve efficiency; and 3) reduce the drain on existing resources which some FGN assets/investments presently constitute. Call this my 3-way test. I would not advocate for the sale of a “cash cow” like the FGN stake in Nigeria LNG (NLNG) at this time because it does not pass the second and third pillars of my 3-way test. Conversely, I would advocate for the replication of the very successful NLNG model, where the FGN stake is capped below 50% across the oil producing Joint Ventures (JV). The biggest obstacle to incorporating the existing JVs between FGN and the oil majors is attributable to the fact that no right-thinking business house will want to be “trapped” in an Incorporated JV (IJV) in which the FGN has majority control. What happens when FGN dissolves the Board and fails to appoint new directors, thereby leaving the IJV short of a quorum? NLNG works because FGN is not in control there.
This is an excellent time to form separate IJVs with Shell, ExxonMobil, Chevron, Total etc. but for this arrangement to takeoff properly and quickly, FGN must sell down its stake from the 55-60% that it presently holds to no more than 40% in each of the IJVs. Anybody in his right mind will gladly pay a premium to attain 51% and move away from the present clumsy and unwieldy structure where they are junior partners in a Joint Venture with a historically meddlesome and value-destructive Nigerian National Petroleum Corporation (NNPC).
Adopting the NLNG model also frees the FGN from the debilitating cash calls that have become increasingly burdensome on the annual FGN budget because the IJVs will be able to borrow internationally to finance their investment programmes. Investment programmes I would also favour the listing of the IJVs on The Nigerian Stock Exchange by placing the balance of the 9% shareholding in each of the IJVs with the investing public. This will provide added public scrutiny (possibly better than what FGN alone can provide through board representation). The refineries should also be sold outright because NNPC has never been able to run them and their outright sale also passes my 3-way test above. If we have the discipline to transparently execute selective and strategic asset sales, that pass my 3-way test, then we can significantly reduce the extent of our recourse to worrisome external debt. Working together, we can tame this stagflation monster.