Dr. Jekwu Ozoemene (FCIB)
“When you start thinking that you can create something out of nothing, it’s very difficult to resist” – Lee Hsien Loong, Prime Minister of Singapore, speaking on Capital Markets shenanigans that led to the 2008 Global Financial crisis.
I understand this quote totally.
In the heady days of Nigeria’s capital market boom (in the run up to the 2008 global financial crisis), we used to hear quips from investment bankers like “there is nothing that cannot be structured”. This was a time when market players normalized and openly discussed “supporting shares”, which today (and as always) should be plain “pump and dump” market manipulations. You can guess that these often Rube Golberg machine like capital market structures, bolstering the value of stocks against underlying business fundamentals, led to the crash of the stock market and played a major role in the subsequent Nigerian banking industry crisis.
The above is very reminiscent of the interesting case of Nigeria’s ‘pretend’ encumbered and expensive to maintain foreign reserves, and the Central Bank of Nigeria’s (CBN) intervention (bad) loans debacle, something we have known for at least half a decade and that the publishing of the CBN audited accounts and JP Morgan’s recent report has since finally confirmed.
We never learn.
A common admonition in the capital markets is that you “don’t try to catch a falling knife”. The CBN’s attempts to use monetary policy instruments (OMO, CRR, DDCRR) to defend the exchange rate (without FGN addressing the causative fiscal policy challenges) was an attempt to catch a very sharp falling knife. No matter how dexterous you think that you are at catching falling sharp knives, at some point, the knife will slice through your hands, or clatter to the ground, or both slice through your hands and clatter to the ground. Addressing the underlying fiscal challenges amounts to removing the knife so that your hands can “breathe” and not bleed.
It goes without saying that Nigeria needs more fiscal policy reforms (and the political will and capacity to execute such reforms) and should not continue trying to solve our fiscal challenges with monetary policy as was done by the previous administration.
We need to understand that the only reason a Central Bank will step in to begin to engage in the role of a development bank (via availing intervention loans), an activity which it clearly lacks the capacity (evident by the quantum of bad loans it created) is because the FGN who should be driving and implementing fiscal policy was nowhere to be found.
We also need to understand that the benefits of fiscal policy reforms tend to take a while to kick in so we need quick wins that can generate FX earnings and liquidity and stop the need for our current Ways and Means Financing and external borrowing binge.
The kind of fiscal policy reforms that Nigeria needs are like treating a malignant tumour. Treatment regimen should follow a chronology which may include, chemotherapy and radiotherapy to kill the cancer cells and shrink the tumour (to make it more easily operable), a surgery to excise what is left of the cancerous tissue, and a period of convalescing, without which, the shock of yanking out the malignant tumour stands the risk of killing the patient.
For those of us still looking back and hoping for the reintroduction of subsidies, one thing that the JP Morgan report should have made clear is that we had run our economy to the ground such that we no longer have the fiscal space to accommodate any subsidies and we also don’t have the headroom to continue to defend a fixed exchange rate.
So, the exchange rate had to be floated, and the three major subsidies; fuel, FX and power had/have to go. As I have noted elsewhere, Free floating the exchange rate is good and was inevitable, but a managed free float doesn’t automatically translate to increased supply of FX.
Increased FX supply for Nigeria requires increased oil production volumes and earnings. We are in the middle of an oil boom (we have been for more than two years now) and oil typically accounts for over 90% of Nigeria’s FX liquidity. The second highest oil boom in history was in 2022. We even had a Ukraine war during which OPEC had to increase production quota but didn’t bother much with Nigeria because we couldn’t even meet our existing 1.8 million barrels per day quota.
Increasing our oil production volumes should be a quick win, no?
Increased FX supply also requires increased non-oil export revenues. Did we undertake port reforms to speed up the export process in other to enhance FX liquidity? Are there incentives granted exporters to ensure that volumes are increased, and export proceeds repatriated? Have we addressed the ease of doing business in the sectors that can generate FX for the country? Have we capacitated our local development finance institutions; Bank of Industry (BOI), Nigeria Export Import Bank (NEXIM), Development Bank of Nigeria etc to fund local businesses that export and generate FX? Other than funding and risk underwriting, there are key issues of security, affordability and competitiveness in the international markets that must be addressed by a reduction in production cost drivers (along the entirety of the production value chain), an increase in production yield and improved security across the country. To reduce the high cost of domestic production, we must resolve; The prohibitive cost of logistics within the economy; Traffic bottlenecks on the roads leading to our sea ports; Bureaucratic bottlenecks within the ports; Border policy capacity and consistency; We must fix structural constraints like power challenges and rehabilitation of road networks to evacuate produce; We must address storage and wastage (and when I say fix or address, I don’t mean to say so in government press releases).
Increased FX supply requires increased foreign direct investment (as against increased foreign portfolio investment/ hot money). Again, back to ease of doing business, what exactly have we done to attract investors to come and deploy their resources in Nigeria?
It requires increased diaspora remittances. Our brothers and sisters in the diaspora will always bring their funds to support their families at home but what have we done to encourage them to leverage resources in the countries where they are domiciled to invest back home in Nigeria? Have we sold hope to them? Have we sold a future Nigeria that we all desire to them?
Increased Government revenues requires increase in tax earnings as well as royalties. At least, this is one area where we are at least speaking about the required reforms and seeking experts to help us propose solutions. We must first identify and then tax where the money is. Available data shows that property taxes, on the average, account for 50% of tax revenue in federal (as against unitary) countries. Not surprising because the most stable and predictable form of taxation is wealth-based taxes like those on land and property, given that these are on an immobile tax base, and of a fixed supply thus difficult to evade. We also need to relook at sin and consumption taxes, de-corrupt tax collection and make it more efficient via e-payments.
We need the mental recalibration that Nigeria as a country may be “rich in oil” but is not “rich”. It is this false “oil rich” narrative that our politicians deploy to justify profligate government expenditure, the irrational cost of our bureaucracy, irrational salaries for political office holders and the various subsidies on consumption.
For the avoidance of doubt, Nigeria is in fact the poorest member of OPEC in terms of oil per capita yet the “Nigeria is oil rich” fallacy largely accounts for why we run a very strange economic model that I can only describe as a “procurenomy”, defined as “an economy based on the distribution of gross national income via inflated contracts to a chosen few, inflated contracts which are paid for using public debt or income from natural resources”.
So we need to reduce our cost of governance on both a federal and state level.
Without all this our exchange rate will go into a death spiral to reflect our Real Effective Exchange Rate and Government would still be unable to service it’s Debt and Non Debt Recurrent expenditure and CAPEX obligations…..Nunc dimittis!
The temptation to borrow against future oil revenues (such as the NNPC did recently) is real but very dangerous. Between our “Carry Arrangement” requirement with NNPC’s IOC JV Partners and “PMS Swap” requirement (unless this has stopped), we have barely been unable to produce sufficient crude to generate FX liquidity (note that I am not talking about FX earnings), and now we are encumbering more future crude oil earnings. At this point, speculators attacking our currency have detonated Nigeria’s Foreign Reserves claims, reviewed our outstanding and maturing FX and Liabilities obligations and maturity profile, mapped against the general hope anaemia in the land and are licking their lips in anticipation of a feast.
Finally, we need a leadership that understands that these are the issues, has the will and capacity to address them and knows that you do not catch a falling knife, you address what led the knife to fall in the first place.