May 28, 2018

FG must build buffers to protect Nigerians from fluctuations in oil price – Teriba

Finding a way out of Nigeria's high debt costs

Ayo Teriba…Nigeria must build the buffers now

Chief Executive Officer, Economic Associates, Ayo Teriba, in this interview, argues that Nigeria could have avoided the economic recession, devaluation and inflation that accompanied the loss in foreign exchange revenue due to decline in crude oil price between 2014 and 2016, if government had taken the right step namely to build external reserves buffer that will protect the nation from the vagaries of the crude oil market.

He noted that even till now we have not done so, and it is a must for us to do so, by following the examples of Saudi Arabia, which is opening up 16 sectors of its economy to attract $200 billion in foreign direct investment (FDI).

By Babajide Komolafe

WHAT is your assessment of the state of the economy in the light of latest economic indices released by the National Bureau of Statistics, NBS, and the MPC decision of last week?

It shows that the economy has continued to recover. Inflation has been coming down steadily for 15 consecutive months. Exchange rate has also been stable since February last year. It even appreciated in the parallel market and it has remained stable since June last year. The level of external reserves has continued to increase.

The real issue for CBN, in holding the Monetary Policy Rate; the Governor has assessed the case for tightening, loosening or holding; they observed that since all variables have been moving in the right direction on their own and they have not achieved single digit inflation yet, the time might not be appropriate to loosen the stance of monetary policy; and tightening maybe negative for the sustenance of growth. Loosening will be good for growth but to loosen when inflation is still above 10 percent, and when you have not achieved convergence of exchange rates, to loosen might affect the fragile equilibrium in the foreign exchange market; and to tighten may also derail the fragile recovery. It may be better to wait for the next meeting, or the one after the next, to be very clear where the economy is headed, and then they can have a fair judgement as to which of the policy levers can be moved, and in what direction. As such, the decision to hold is in line with my expectations.

In your view, what were the major challenges that confronting the economy since 2015

The swings in the oil price are the key problem. When the global oil price collapsed, our economy went  down with it; although, while oil price played most role, the reduction in Nigeria’s crude oil output also played a role at the time. Nigeria’s story largely revolved around the fluctuation in the oil price. Our economy is too dependent on the global oil price, and that is not good. We should take measures to insulate the economy from fluctuations in oil price, but we are yet to take the steps necessary to insulate our economy from the vagaries of the oil market.

Ayo Teriba…Nigeria must build the buffers now

Saudi Arabia is an oil dependent country too, but they did not see fluctuations in economic growth, exchange rate and inflation we have seen. They did not see a recession, at least until they started cutting their output by themselves, they did not suffer devaluation and they did not have higher inflation, because they had maintained adequate financial buffers in the form of foreign reserves ahead of the oil price burst. When oil price fell, they had more than enough reserves to absorb the shock. So, if Nigeria too had adequate foreign reserves, we would avoid all those upswings and downswings in key domestic economic variables. And the earlier Nigeria begins to build her foreign reserves, the sooner we would be able to free ourselves from that vulnerability to movements in the price of oil.

With a 200 million population, we are five times as large as Saudi Arabia, so if the Saudi government could think ahead and take steps to insulate 40 million people from those shocks, we in Nigeria should even do more. Seeing the exchange rate going to N520 per dollar in February 2017, before it came down to N360 could have been avoided if we had maintained adequate reserve buffers ahead of the crisis, or even made efforts to build up the buffers in the face of the crisis.

How would you assess the various policy measures introduced to address these challenges?

The truth is that we could have prevented the negative responses to the fall in oil price by maintaining buffers, but we did not. We failed to prevent. When the shock broke out, we could have responded by building buffers, but we also failed to respond, we just watched and hoped that oil price will go back up until it did. There is nothing you can do about whether oil price collapses or not, but there are steps you can take, to ensure that even if it collapses, you minimise the adverse effect on the economy.

For example, what Saudi Arabia did, which we did not do, was that they maintained high levels of reserves for self-insurance. The cost of holding the reserves idle was the insurance premium they paid before the shock. When the oil price collapsed, they were covered by the self-insurance. We failed on that score.

Upon the outbreak of the crisis, there were also emergency responses you could make to mitigate the steep fall in foreign exchange inflows that could have solved that problem, by trying to get foreign exchange from non-export sources. But we delayed, we just stared at the problem, and that inflicted a recession. The shortage in the foreign exchange inflicted a recession, it inflicted devaluation and devaluation inflicted inflation. We should have avoided those negative consequences if we privatised our foreign exchange denominated assets as a way of getting foreign exchange to compensate for loss of export income, but we didn’t.

In the face of the recession we started debating whether to sell the national assets, but how much have we now sold. In the recession, we also decided to seek foreign debt, and since February 2017, we have been issuing Eurobonds, that step came late, it was better late than never, and it was too little. We were issuing $1.5 billion, $2.5 billion to mitigate declines in exports of $40 billion to $50 billion. We were raising $5 billion when we needed to raise $20 billion. You needed a response; you needed to look for foreign exchange revenue enough to close the gap created by the fall in export revenue, that we have not managed to do till now.

Foreign equity inflows

If we compared our responses with Saudi Arabia’s responses, apart from the fact that they were better prepared to face the shock, and they had enough buffers to insure their domestic economy, with over $500 billion in reserves, they have been pushing more aggressively to attract foreign investment to compensate for the loss in export revenue. They have opened as many as 16 sectors of their economy to foreign investors for the first time in 2017.

These were sectors where government used to own 100 percent, they are opening them, they are privatising them, partial privatisation, with the stated aim of attracting $200 billion. So that is the kind of amount that makes sense in the kind of situation we are talking about. They are not looking for $1 billion or $2.5 billion in foreign debt inflows, they are looking for $200 billion in foreign equity inflows. We not only failed to prepare, our responses in the face of crisis were too little, and too late to insulate the country from painful recession, devaluation and inflation.

Going forward, the Nigerian economy remains at the mercy of the price of crude oil. Unless we take steps, we may be back to the experiences of 2016, if the price of oil should go the opposite direction of where it has been going in the last six months. We must wake up to the fact that we are in a post-boom economic environment. There are assets you must have acquired in the mentality of a boom, assets that you own 100 percent, but which you do not need to own. In the face of a burst, you should have no hesitation to divest to get the foreign exchange you need to insulate your economy from the adverse effects of the burst. That is the summary.

What are your recommendations to making Nigeria’s economy growing and booming, doing great again?

How to make Nigeria’s economy great again is to wake up to the fact that reliance on oil revenue as the primary means of sustenance is fraught with instabilities. You will be rich in five to six years and lose all your riches when the price of oil goes down. Depending solely or primarily on oil is an unstable strategy, where when the price of oil goes up, you will be rich, when the price of oil goes down you lose all your riches to recession, devaluation and inflation. This has been Nigeria’s story in the last five decades. You cannot even keep the gains you make when the price of oil was up, because when the price of oil goes up your exchange rate will be stable because you have enough foreign exchange revenue to build up reserves. But if you don’t build up reserves to the level where it will protect you beyond the boom, once the price of oil collapses, your reserves are depleted, and you have devaluation that wipes out the gains that you recorded under the boom. It is not the way Nigeria should continue.

So Nigerian government should recognise the fact that the only way to protect Nigeria from the vagaries of decline in oil price is to build buffers, and those buffers must be built now, having missed the opportunities to build the buffers during the boom and so far in the face of the bust. Nigeria can build buffers now.

The fall in price of oil is not a temporary development, it is a permanent development. What is temporary is when you have period of sharp increases in price of oil, as we have seen since the beginning of 2018. What is permanent is that the price of oil will trend downward, particularly given that the world is moving away from fossil fuel. And with the move away from fossil fuel,  demand will decline. You can have temporary geopolitical tensions, maybe Venezuela cannot maintain production or Iran is having difficulty with production, that will make prices go up, or agreement between OPEC and Non-OPEC members to cut production to make prices go up. These are all temporary, they cannot keep prices up forever. The forces that will make prices go down are the permanent ones. The Nigerian government must recognise that, and we should not wait for the next drop in price of crude oil to wipe the current gains we are making now. We should build buffers now.

But how do you build buffers when your export revenue is considerably lower than it was when the price of oil was high? It is not only through export revenue that buffers can be built. Export revenue happens on the current account. Life does not begin and end on the current account, there is a capital account that has nothing to do about export or trading, that has to do with capital flows. The response of Saudi Arabia is to turn to the capital account to attract the capital inflows that will compensate for the loss in export income on the current account.

Loss in export  income

Nigeria too can turn to the capital account and attract large volumes of foreign equity investment inflows. The approach that we are using to attract foreign investment is defective; we are looking for foreign portfolio investments which are essentially like borrowing or waiting for creditors to come and have stakes in your economy.

That does not give you much control, the creditors have more control. Whether a foreign portfolio investor buys a government bond or deposits in a Nigerian bank or invests in the Nigerian stock market is his decision, he will do it to the extent it satisfies his own purposes. He will not do it to satisfy your own purpose. So long as he can profit he would do it, once he cannot guarantee his profit, he will exit.

He would therefore come when things are good for you, when your currency is stable, when your economy is growing, and your interest rate offers adequate returns. The moment you have any problem with the economy, they exit. They tend to arrive when you least need them and exit when you most need them. That is not a sustainable strategy.

And it is the same with this going to raise Eurobond. They will buy your bond when your prospect looks good. If your prospect looks doubtful, they either penalise you with exorbitant interest rate or your bond issue will fail. You need a strategy that works for you even in the face of crisis. When you must deal with a permanent shortfall in revenue, you should not take temporary measures. Any type of debt or portfolio inflow will eventually be repaid. They are temporary measures. You cannot solve a permanent problem with temporary measures. Temporary measures merely postpone the evil day and it is costly because of debt service charges. The conditions you must meet to please the portfolio investors.

You hear our central bank talking about making sure they don’t cut policy rate so as not to discourage portfolio investors. Whereas you need to cut rate to encourage investment to support recovery, but they can’t be insensitive to the fact that portfolio investors are here for what they can get in terms of high enough interest rate, in terms of returns. The same with debt, we have borrowed, first $1.5 billion, another $3 billion, we are doing another $2.5 billion, that is $7 billion in Eurobonds, but the point is that it is costly. Whether you borrow domestically or abroad, it costs you money, you can argue that one interest rate is lower than the other, but the fact is that you must incur debt service and one day, sooner or later, you must also repay, you must look for the money to repay even the principal, after paying debt service for many years.

So why don’t you look for permanent foreign exchange inflows that is largely irreversible and you don’t have to pay service cost. You don’t need to pay service charge on foreign direct investment. Nigeria should look for foreign equity inflows like foreign direct investment (FDI).

Portfolio inflows

Unlike portfolio inflows that are not within your control, where it is up to the investor to decide how much to commit to your economy and when to commit it and when to exit, the FDI is different, it gives the host country more control. It gives you more control, as a matter of fact, your position is stronger than the position of the investor, whereas for portfolio inflows your position is weak, the portfolio investor has more control. And the way your position is stronger when it is FDI is that you can trigger the inflow when you want, and you can decide how much inflow you want.

I will give you examples. There are two types of FDI. There is Brownfield FDI. For example, Nigeria owns certain dollar denominated assets or dollar generating assets, like our investment in Nigeria Liquefied Natural Gas (NLNG) project, we own 49 percent of it. We own various fractions of the oil productions joint ventures, we own 100 percent of the national power transmission network in the country, we wholly own the rail network, we wholly own all the oil and gas pipeline. So Nigerian government have 100 percent ownership of some assets and 49 percent of some assets; if you consider yourself to be in need and you want to sell some of those assets to foreign investors, it is called Brownfield FDI because it merely involves changes in the ownership of existing assets and often does not lead to creation of any additional physical assets, but always leads to inflow of foreign exchange and such inflows could be immediate. This contrasts with Greenfield FDI, which we attracted into the telecoms sector, where the foreign investor had to build new physical assets.

If in July 2014, when the price of oil started declining, the Nigerian government had decided to sell part of the 49 percent in NLNG, you could consummate it in a matter of weeks, because some of the existing partners, the foreign partners could be happy to raise their stakes. So that is why I said when it comes to attracting FDI you have the control because it is a sale and purchase transactions, you are offering to sell something and therefore you have the right to the payment, and it is a seller’s market. What is the benefit of owning all those assets when the economy is in decline because there was no foreign exchange, when the naira has lost half of its value because there was no foreign exchange, causing inflation to double within one year. Unemployment soared, and the populace generally became poorer. If you had sold some of those assets and avoid those bigger loses, you would have acted in the interest of Nigeria. That is for Brownfield.

That is why I said it is easier and quicker, and you can decide how much you want to raise, you can say I want to raise $30 billion. If we got $30 billion and added it to our reserves at the time, it would have provided us with adequate protection against fall in oil price. That is how to run an economy. You should not hold on to what you own and watch the ship capsize, you must sell some of the assets you own to ensure the ship does not capsize. We got close to seeing the ship capsize, Naira went to N520 per dollar, we had a recession, we had inflation, many people were losing faith in the country. It took the fact that oil prices started rising again to arrest and reverse some of these losses. We didn’t have to wait for oil price to toss us up and toss us down, and then toss us up and toss us down again, that has been the story of Nigeria till today. Whatever we can do to regain the control from oil price, we should  do it. And to do that, you think first about Brownfield FDI.

The second type of foreign investment, Greenfield FDI, similarly gives you control. You can control the timing, when you want to raise the investment, you control the amount you want to raise because it is a question of when you want to sell the intangible assets that you have, even Greenfield involves sale. When we decided to sell GSM licenses and the spectrum to telecoms companies, in a matter of time they brought the money, they deployed more than enough resources to build the network that now supports more than 160 million GSM lines today, from a low base of less than half a million analogue lines in 2001. And they deployed more than enough resources to be able to compete. If you license only one, he might not deploy enough resources, but we licensed three or four and they have been competing among themselves to the benefit of the populace. Yes, they are making money, but they are creating value for you. NITEL was given a reserve GSM license but could not make money with it. Why don’t you repeat the same in other infrastructure sectors where government currently have monopoly like government used to have monopoly in telecoms.

We should not continue to tell foreign investors to come and do Public Private Partnership (PPP) with our government because that means we want to continue to have monopoly of government ownership. We should break government monopoly and allow investors to own equity in all other infrastructure sectors as we did in telecoms, and as Britain and India have done in all infrastructure sectors, and Saudi Arabia is trying to do in all infrastructure sectors. With PPP, investors are still more like contractors or creditors, and most investors, if it is about being a contractor or a creditor, they will choose how much of your burden they want to take upon themselves and for how long, but when it is about equity investment, they no longer see it as your burden, it becomes their burden too. And that is the motivation you see in the foreign investors in  GSM, that is the motivation you see in the foreign investors NLNG, the motivation you see in the oil producing foreign investors, and that is the motivation you see in those banks that came to buy equity. The same with DSTV, and you can go on and on. If they were just partners to banks owned by Nigerians, you won’t see the same level of motivation.

Same level of motivation

We are facing a situation where Nigeria does not have adequate foreign exchange, but Nigeria could easily get adequate foreign exchange by attracting Brownfield FDI, by selling part of what you currently own, and you can open the door for them to come and create new assets by attracting Greenfield FDI. When they create the new asset it is irreversible, all the investment in the Nigerian telecoms sector is irreversible, they are permanent, and we are not paying any service charges on them. And if any foreign investor wants to go, he cannot pack the investment and go. He would be obliged to look for someone to buy him out. So, the headache of who is going to buy him out is his own.

And you can decide as Saudi Arabia is doing and say I need $200 billion and therefore I will put as many as 16 sectors on the market. They are putting the King Faisal Hospital on the market, they are putting universities on the market, but it is limited to new building developments;  that is what they are asking foreign investors to come and do in their universities. Nigeria too can liberalize the health sector, like our hospitals that are in dire need of diagnostic capacity. We have a network of government owned hospitals, open equity investment opportunities for foreign investors to come and install and run diagnostic facilities within the network of government hospitals, you will reduce the number of people purchasing foreign exchange to go abroad. That will ensure that instead of our people travelling out investors will come and provide the services to us here. It saves our forex, and their investment in our health sector will boost our forex supply. Like some of the buildings you can’t maintain, you can get foreign investors to come in, you can unbundle them, you don’t have to sell everything, you can unbundle them and sell those assets that have commercial appeal.

If you look at many non-financial assets that government owns, some of them can even attract foreign investment on their own even without you privatising entities. Let me give you examples. This is a post boom environment. Some inefficient investment decisions must have been made during the boom, driven by the euphoria that comes with the boom. There are likely to be assets that we acquired but were not required, that we can easily let go off, that can earn us more if we divested from them and put the proceeds into better uses than we are currently putting them to, and we can raise revenue by reallocating or divesting from uneconomic investment  and investing in more economic purposes.

To sum up, Nigeria’s economy has been needlessly buffeted by the oil price shock, by recession, by devaluation, and by inflation. I say needlessly because oil price shock did not have to translate to recession if the correct steps are taken, it does not have to translate to devaluation if the correct steps are taken, and it did have to translate to inflation if the correct steps are taken.

Going forward, it is the responsibility of every Nigerian to support policies that will protect us in future so that we don’t repeat the adverse situations. And the steps to be taken are as follows: One, you could unlock resources by looking at the inefficient assets that government owns and put them into more efficient use, the prisons, the barracks for example. Number two, you could unlock resources by looking at corporate assets that you own with a view towards optimizing your ownership in them.

You don’t need to own power transmission line 100 percent, you can reduce your stake and let other investors come and play a part as a way of attracting FDI, as a way of partnering with people who could find investment to make those infrastructures work.