Nigeria: How to win

Henry Boyo

The above is the title of the lead paper presented at the 2nd Vanguard Economic Discourse, held in Lagos, on Friday, April 13, 2018.

This year’s theme was titled, “Economy in rebound: Pitfalls, Trajectories, and Resetting”. The keynote speaker, Mr Bode Agusto, CEO of Bode Augusto & Co, is an ICAN Fellow, and a “finance professional by vocation”. The Guest Speaker admittedly, also, taught himself economics and industry analysis, in order to “understand how macro-economic issues and economic dynamics impact his client’s finances”. Agusto was Vice President of City Bank Nigeria and also served as the Director-General and Adviser (Budget Matters) during President Olusegun Obansajo’s tenure.

Hereafter, some of the keynote speaker’s salient observations will be highlighted, while related comments will be made, wherever necessary, by this writer.

Bode Agusto began his presentation by debunking the following “myths” in our country.

First Myth: “Nigeria is an oil rich country”. False. “In 2013, oil revenue per person was US$520 when crude oil prices averaged US$100/barrel, whereas in Qatar and Kuwait, it was US$31,000 and US$27,000/ person respectively”.

Second Myth: “Nigeria’s population is a strength”. False. “Population is only a strength if it is well-educated and healthy” and if the economy has the capacity “to provide them with employment that sustains households’ income to buy the goods and services produced by several businesses”.

Third Myth: “Nigeria’s debt to GDP ratio is below 20 per cent, so we have one of the lowest ratios and therefore have additional leverage to continue borrowing to finance fiscal deficits”. Incidentally, a large population does not necessarily generate greater tax revenues. For example, in Nigeria, we don’t (readily) pay taxes, consequently, national debt as a percentage of revenue would be a more meaningful assessment. Such a ratio would immediately spike government’s local currency debts well above 325 per cent of all revenues, when compared with the median of 200 per cent for countries in Africa and the Middle East”.

Furthermore, the current annual interest charges on government’s loans are estimated at 50 per cent of the Federal Government of Nigeria’s revenues, “whereas Portugal, for example, with a debt/national income ratio of 130 per cent applies only 11 per cent of reserves to pay interest on her loans!”

The speaker disagrees with the notion that “our problems cannot be solved”, and argues instead that, “with sincerity of purpose and presence of mind, our problems, can in fact be solved”. Consequently, he expects that “we can still return our country to the path of growth and prosperity”.

Nonetheless, the financial guru identifies five key sectors as drivers in every economy. The first three sectors i.e. the central government, the external, and the financial sectors are usually identified as drivers of the other two, i.e. business and consumer sectors. Furthermore, inflation, interest and exchange rates are also identified as three key prices in every economy; the rate of inflation is the most important amongst the three key prices, because it drives both interest and exchange rates. Savvy investors will normally factor inflation rate when making investments because an unexpected inflationary rise could erode earlier projected profits.

Agusto recognises that stable exchange rates will not be possible, “if a country cannot effectively keep inflation at best practice levels below three per cent.” Furthermore, uncontrolled population growth may also remain Nigeria’s biggest problem, if population continues to increase by five million annually.

Agusto’s paper suggests that credible projections indicate that from 1960-2070 i.e. after 110 years, Nigeria will add over 500 million to her population, whilst the United Kingdom would add only 30 million even when the latter’s base population of 52 million was initially higher than Nigeria’s in 1960. Consequently, the fear is that we may never produce enough goods and services to keep pace with population growth. The least we can do therefore, according to Agusto, is “to encourage families’ with sanctions and benefits to just replace themselves by having a maximum of two children”.

Sadly, non-oil taxes presently represent only about four per cent of Nigeria’s national income, while the same non-oil taxes subhead in Ghana, Kenya and South Africa are 16, 17 and 24 per cent respectively of national income. Furthermore, available records suggest that government’s obligatory annual expenditure is already more than 100 per cent of actual revenue and therefore, clearly constrains government’s ability to spend on social services and infrastructure without resort to more borrowings. Agusto however admonished that whenever government has to borrow it must do so at very low interest rate.

The financial guru is obviously concerned that we may have replaced Paris Club with Abuja Club debts, as current external debt is $36bn i.e. well in excess of the $32bn paid to exit the controversial London/Paris Debt trap in 2006. The principal holders of these new debts are, notably, the banking system, pension funds and foreign private investors. Consequently, according to Agusto “the finances of the government are presently broken and we need to fix them” otherwise “government will not be able to fulfill its purpose”.

However, in order to fix it, “government must do unpopular things, such as population control, cutting of costs, enforcement of tax compliances and relinquishment of government control over infrastructure spending, while we sell down some of our oil and gas assets and use the proceeds to improve critical infrastructure such as the ports, railways and a robust national grid.

However, as for the external sector of the economy, Agusto recommends that government should sustain naira/dollar exchange rates that reflect purchasing power parity and formulate investor-friendly policies that will improve the competitiveness of Made-in-Nigeria goods. However, the former presidential adviser seems bemused that although government is keen to ensure stable naira to dollar exchange rates,  government still seems unconcerned with the well-over 10 per cent difference in the long term rate of inflation, between the two currencies. Consequently, “whenever our central bank is short of dollars, they become compelled “to allow large devaluations”. This according to Agusto was how “NGN/USD exchange rate moved from 1:1 to 360:1 in our lifetime”.

In place of the present regulated exchange rate, Agusto’s paper recognises that pegging the naira to the dollar is not a viable option because “we don’t have sufficient reserves to back up the 10 per cent difference between naira and dollar inflation rates.” Consequently, the crawling peg option is favoured, because it allows the naira to appreciate or depreciate against the dollar, by a rate which is close to the difference in inflation between the two currencies.

Ultimately, in order to protect the naira exchange rate, the Guest Speaker recommends that inflation should be kept below three per cent per annum, while measures that will support inclusive growth and enhance the “capacity of banks to remain healthy to lend to businesses will be adopted, but government must keep the level of loans within statutory limits”.

Sadly, according to Agusto, the present rate of unemployment and underemployment is already close to 30 per cent. Consequently, a turnaround or increase in the rate of employment will invariably, positively instigate increasing growth of domestic output.

Curiously, despite his earlier admonition or preference for best practice inflation rates below three per cent/annum, Agusto unexpectedly makes a somersault and recommends that Nigeria needs ‘to prioritise growth and employment above inflation in the short to medium term”. Consequently, the guru moans that the “CBN has prioritised price stability over growth and employment” “they have chosen to bring down inflation by stabilising exchange rate!” Conversely, Agusto advised that, “if we control our population and grow domestic production significantly, shortages will thin out and inflation will begin to drop”.

Unfortunately, Agusto’s otherwise sensible paper will regrettably fall flat if the CBN abandons its prime mandate for price stability, at best practice inflation rates below three per cent as suggested. However, that will be an unwise option.  Instructively, inflation will be easily tamed when the CBN ceases to fuel the ‘eternal’ systemic naira liquidity surplus, which drives rising prices when it substitutes naira allocations for dollar-derived revenue every month. Quite simple, really!