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Professor
Charles Soludo, former CBN governor
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I
have just read the wide media coverage regarding the recommendations of the
National Economic Council (NEC) as well as the Senate on the ways to reboot the
economy out of the current recession.
Times
such as this require all brains at work and all hands on deck. Consequently, I
commend both institutions for their patriotic duty in advising the President.
Surely, the proposals are still mere advice or recommendations, and not
approval as wrongly reported by some media. Only the President can approve any
of those recommendations to become policy (both NEC and Senate are advisory
bodies on matters of national economic policy).
Without
a doubt, several of the proposals deserve serious consideration. In particular,
the Senate suggestion for active coordination between monetary and fiscal
authorities is urgent. Furthermore, the suggestion to urgently review legislation that impede the economy and enact new ones is commendable. The
National Assembly and the Presidency should declare an emergency on these legislation and ensure that they deliver on them over the next 100 days for
the sake of Nigeria. I expected this to have been done within the
first 100 days of this administration.
I
am not in the habit of joining issues except when I consider the matter
critical. Specifically, I am troubled by the proposal to sell some valuable
national assets in order to “build reserves and provide funds for immediate
spending” and thus ensure that this recession will be the “shortest”
ever. Some people had bandied the same suggestion in the past but I
largely dismissed it as a joke. But when the Senate and NEC joined the
convenient but flawed call for asset sale, I have a citizen duty to join others
in letting our voice be heard. Part of the legacy of the oil resource curse on
matters of public finance is a mindset that resorts to easy, albeit lazy
approach to ‘quick fixes’ — with a gaze on the short term even when the issues
are structurally long-term. So, I understand the mental framework that drives
such a proposal especially given the pressures to show immediate results.
But
for the record, it is our considered view that the proposal is based on a false
foundation. 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. 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.
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. With
good rains and bumper agricultural harvest, GDP growth can easily recover with
tepid positive growth and bingo, we are out of recession! A GDP growth rate of
even 0.01% next quarter will mean that we are out of the recession. What
does this actually mean for the average Nigerian? Really very little! The
fundamental issue to focus the attention of policymakers is that the economy
has dramatically compressed by more than 50% in US dollar terms. The GDP
compressed in dollar terms from about US$575 billion (as at the time this
government took over) to about US$252 billion currently—depending on the
exchange rate used (currently estimated to be about third largest economy in
Africa after South Africa and Egypt; with per capita income closer to US$1,300
from over US$3,000 in 2014).With the current policy regime, it will be a
miracle if the current government can, after eight years in office by 2023,
succeed in returning Nigerian economy just to the size of GDP (in US dollars)
it met it in 2015.
To be fair, the wheels of the economy were
already falling off by the time this government took over plus other
complications of the oil sector and I sympathize with them. But it is also fair
to note that some of its policy choices have made matters worse. Now
that the government is showing seriousness in tackling the crisis, focusing on
short-term next quarter GDP growth misses the key point and has the danger of
understating the serious work required.
Second,
there is little basis for the figures being bandied (only God knows how they
did the valuation and by whom to get US$10- 15billion expected from the asset
sales), and there is no basis for the expectation that shoring up reserves by this
amount will magically restore investor confidence and stop speculation on the
naira. What they seem to suggest is that there is a sense of
“optimal level of reserves for confidence” such that once investors see US$35
billion or US$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. 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?
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 US$10 billion in reserves, and we have
survived oil prices below US$10 without selling Nigeria. The British pounds has
been down for months against major currencies since the Brexit vote in June,
while China (with trillions of dollars in reserves) experienced major stock
market and currency attacks recently and the Yuan had to be devalued. Before
the 2008/2009 crisis, Russia had robust reserves but it lost tens of billions
struggling to defend the local currency and eventually yielded to the market.
We
spent one year trying to reinvent the wheel of macro management and exchange
rate regime at a time of adverse terms of trade shocks with twin deficits.
Finally, we have admitted that we had used the Nigerian economy and Nigerians
as guinea pigs in the futile experimentation with tried but failed policy—and
the dead bodies are littered everywhere with a recession, escalating
unemployment and factory closures, rising inflation and poverty. Now we have
started to make some progress with so-called ‘flexible exchange rate’ but still
combined with a black list of 41 items ineligible for forex as well as other
crude controls, and the consequent huge parallel market premia that is one of
the highest in the world. Parallel market exchange rate has now become a very
important leading indicator in the economy. There is a saying that “confidence
grows at the speed that a coconut tree grows but falls at the speed a coconut
falls”. Investor confidence is not like a tap you can turn on and off.
Restoring policy credibility by swiftly correcting the persisting errors and
demonstrating commitment to sound macro management rather than the “trial and
error” mode will be the first important step forward. If we sell assets and
lodge into the reserves under the current policy framework, I am willing to
take a bet that in a few months’ time, it will be frittered away and we will be
in even a bigger mess as economic agents know that we have nothing else to
resort to.
Furthermore,
if building reserves or budget revenue is the objective, it seems to me that we
are chasing pennies through asset sale while losing pounds. How much are we
losing each day in oil production/sales through the disruptions in the Niger
Delta? We need to broker a deal urgently on this matter. Can someone
explain why the cost per barrel of oil production in Nigeria is several times
the cost in Ghana, Equatorial Guinea, Saudi Arabia, Iran, etc and how many
billions of dollars are being “lost”? What does it cost to fund the security
vessels to protect oil companies vis-à-vis equipping the Navy to do its job,
and how many billions of dollars can be saved from that over time? How many
hundreds of millions or billions of dollars are being lost through
inappropriate pricing and auctioning of the telecommunications spectrum assets?
How much is being lost by way of portfolio/ FDI inflows and export revenue due
to the incoherent, inconsistent and distorting export and exchange rate policies?
Indeed, the amount of capital flight out of Nigeria is estimated to be far in
excess of the expected revenue from asset sales.
We
know that government non-oil revenue has averaged 3% of GDP over the years
(because we relied upon the easy oil rents for revenue and abandoned tax
collection) while many African countries without oil average 18-25% of GDP in
tax revenue. Such countries also have a larger informal sector than
Nigeria. Several of them are doing close to double digit GDP
growth. How did Dr. M.I. Okpara, Ahmadu Bello and Obafemi Awolowo as
well as Dennis Osadebey and Samuel Akintola in the regional governments or even
the federal government of Nigeria then fund their budgets without oil? It is
good news that the Federal Inland Revenue Service (FIRS) has announced its
intention to make 700,000 companies pay tax for the first time. That is a good
effort, but the bulk of the money is in the informal sector (and we must learn
how other African countries do it). The list is long, but our point is a simple
one: sale of assets is the easy short-term option to earn peanuts while
ignoring the hard work to earn the sustainable revenue required to move the
economy forward.
In
addition, government is yet to demonstrate seriousness in tackling the
conundrum in our public finance. Over the past few years especially 2009- 2014
(part of the years of high oil prices), total recurrent expenditure exceeded
total government revenue, meaning that not a penny of the oil boom was used for
infrastructure/ capital expenditure and we even borrowed to fund consumption
(literally every penny of capital/infrastructure spending was borrowed). The
trend has not changed under the current government. Funds are fungible, and
reasonable people are right to fear that indirectly the proceeds from asset
sale will end up funding current consumption.
The
argument that sale of assets is the only way to reflate the economy out of
recession is troubling, and suffers what economists might call policy myopia or
time inconsistency problem. First, imagine if previous governments used asset
sales as a strategy to ‘reflate the economy’ during previous periods of
economic recession or crisis. Alternatively, if we auction away some valued
national assets for the short term goal of reflating the economy out of
recession, what will happen during future cycles of recessions and economic
crisis? The global economic system is inherently and cyclically
crisis-prone. Prudently managed economies are preparing for the next
cycles of global crisis, and the IMF has already warned of persisting
vulnerabilities. What shall we sell then?
Besides,
a hasty auction of the assets will short change Nigeria. Privatization of
national assets is not an ideological matter for me. It is plain pragmatism.
Reasonable people can have a good debate about the composition of public assets
for sale at any time. Although government is yet to be definitive
about the assets being proposed for sale, it is reasonable to object to any
scheme that will hurriedly sell performing public assets that guarantee future
flows of revenue and forex to future generations such as the NLNG, AFC shares,
JVs in oil and gas sector, etc. Even for non-performing assets, when
privatization is forced and assets auctioned on an emergency basis to meet
short-term needs, the danger signs are there for all to see. Nigeria will never
get value for money under the circumstance. We all know what happens when
someone urgently needs to sell his or her property to meet an emergency. What
happens to the valuation/pricing? If we price them properly and wish to go
through proper due process, the deal might take several years to conclude
thereby defeating the advertised purpose of immediate spending. On the other
hand, if we insist on forced sale because we need cash urgently, we can as well
imagine how the valuation will be done and how buyers will bid for them.
In
all, the proposal is largely self-serving and convenient. For some privileged
private sector operators with cash and access, the temporary rump up of
reserves as well as temporary strengthening of the Naira will enable them to
take whatever forex they can get (at the official rate) knowing that it is just
a temporary elixir. They can then roundtrip same a few weeks after and rake in
billions. Furthermore, the attempt to sell valuable national assets under
duress guarantees these same interests to cherry-pick the assets on the cheap.
For our Senators and government, it is very convenient in the sense that it
provides easy money to continue with the expenditure trends. So, for both
government and its private sector collaborators in this scheme, it is a
win-win. The only losers are Nigerians and the economy. In this
apparent short-termism or myopia, no one seems to care about tomorrow.
This
brings me to the issue of inter-generational equity. I read an argument that a
private company would normally sell its assets when it is in distress. Well,
there is a world of difference between managing a firm/company (a micro
operation with profit maximization as objective and which can easily go through
bankruptcy/liquidation) and managing a national economy with multiple and often
conflicting objectives, including social and inter-generational equity. Oil and
gas, solid minerals and other depleting national assets belong to present and
future generations of Nigerians in perpetuity. In less than 40 years, oil may
be history in Nigeria. But the current generation has basically been consuming
what belongs to them and their great grand-children. In various policy
proposals (which obviously did not see light of the day because again, they
were not convenient) I have argued that Nigeria should adopt the Norwegian
model whereby we invest 100% of the proceeds from oil, privatization, and other
sale of assets into a sovereign wealth fund. Each generation can only spend the
returns from the fund as revenue. This way, we can guarantee that generations
unborn will also enjoy the gift of nature to the country and truly force us,
out of necessity, to diversify the economy. For the Senate to glibly suggest
sale of national assets without first providing a robust legislation on how to
invest the proceeds to protect future generations is very disappointing. We
have sold many national assets in the past (under privatization programme) and
does anyone remember what we did with the proceeds? At some point, this country
must start learning and not repeat the same mistake year in year out.
Soludo is former governor of the Central Bank of Nigeria
(CBN)
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