By Chukwuma Charles Soludo, CFR
In the first part of this discourse which was published yesterday, Prof. Soludo argued that 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? Today we conclude the discourse.
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. The 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, the 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.
Private sector operators
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.
Depleting national assets
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 of the African Heritage Institution and former Central Bank Governor