Column
By Prof. Chukwuma Soludo
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 legislations that impede the economy and enact new ones is commendable. The National Assembly and the Presidency should declare an emergency on these legislations 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 $575 billion (as at the time this government took over) to about $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 $1,300 from over $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 $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 $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. 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 $10 billion in reserves, and we have survived oil prices below $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.
**Chukwuma Soludo is former governor of the Central Bank of Nigeria (CBN)
– Sept. 26, 2020 @ 10:53 GMT /
Tags: Chukwuma Soludo Nigeria: Sale of assets as dangerous policy myopia?
