Thursday, August 31, 2017

Nigeria's 2015-2017 Economic Performance- A Report Card

In March, I was guest of AIT Moneyline Show discussing the Economy Report Card of the Buhari Administration

Saturday, August 13, 2016

Nigeria's Faltering Economy & Strategies to Reflate it

Economics is a very funny thing.. and I get the feeling that the team of President Buhari, especially the Osinbajo camp are getting frustrated with the way the situation in Nigeria is going from bad to worse, and their supporters are increasingly jumping ship.

It is true that they've done some common sense clean up, but the seeming addiction of the President's team to law and order, decree or ban approach to economic management have only worsened the situation not made it better. There is a place for law and order, but the economy especially that based on free market principles responds very badly to command and control. Freedom is the hallmark of a free market economy, and the Buhari team have done exactly the opposite of that which has led to the worsening situation.

Let us be clear here...Buhari did not cause the recession, but he could have at least tried to prevent it or at least soften the impact. I dare say the recession was already with us since last year if not for the residual spending of the free dollar rain at the exit stages of the elections. Nigeria has no budget for 2015 and PMB did not implement one. It was as such the highest level of economic and perhaps political malpractice not to come in with an economic plan on day one- and to wait 5 clear months to even have ministers in place. Which takes us to three facts that must underline this long post...

1. Psychology and language matters more than reality. The tone and body language of doom breeds doom. That is why people will be more optimistic and willing to spend when the leader presents a rosy outlook . Our President is always talking about oil price. Of course that is what investors and ordinary citizens will now focus on and will impact their behavior. What the president says matters. Oil was $55 on the day the President was elected, it is $46 today or thereabout. Big deal . It was falling, you knew it- we needed a plan around it to ensure the country was stable not excuses or bad policies like banning everything and "demand management" as the mugu in CBN calls it driving FDI down by 84% and inflation up by 300% even before the grudging acceptance of reality one year late. We have more than oil price going for us. A solid entrepreneurial base, large banking system (if TSA is tweaked), a consumption based economy (which even China will die for) and booming ports/transportation sector. We should promote what is going good in Nigeria. Oil is a poor commodity for the President to tie his emotions and speeches to. Enough already.
2. Velocity of money matters more than availability of money itself. When people trade and money change hands the economy grows. Idling money under TSA banked only at CBN (without a circulation capacity) or crushing trade by truly dumb foreign exchange policies and banning tactics crush the velocity of money and destroys the economy. To limit your intervention to bail outs and the budget funded eight months late is economic malpractice. We needed a stimulus package and an economic team to deliver it outside the inefficient civil service structure since May 30, 2015.
3. There are two sides to a balance sheet. OBJ inherited a poor revenue profile but also had a much smaller civil service with only half of the 700 plus parastatals we have today, which he quickly added to (so in some ways OBJoke created today's problems). Go and look at legislation between 1999 and 2003, and you will see a multiplication of federal agencies. Some needed, some not. This also led to increase in not just payroll but also overhead and cost of keeping up even as his successors perpetuated the reverse Midas touch by ballooning overhead and recurrent expenditure and spurious "capital projects" often directed to service the servicer (civil servants). PMB should have recognized this from day one and focused on taking the public service back to $30/bbl level. Instead we still operate a public service of $125/bbl minus some ghost workers. This ensures less money to drive velocity of funds changing hands vis capital projects, and more Doom.
So the doom cycle feeds itself...there is still room for correction, but we need those in the saddle to first admit we have a problem. We elected a Law and Order Ticket no doubt over the lawless ticket of criminals presented by PDP, but we expect more professional management that hews to the needs of the people - Jobs, Jobs, Jobs.

So here are some free ADVICE for Mr. President, VP and the new team...

1. You can reflate the economy by targeted infrastructure/stimulus  program that employs a bunch of people to rebuild our universities, roads , parks/stadiums and schools for example. But it is useless using the procurement process or the civil service. You need that money in the economy hard and fast- into local sub-contractors. Launch an office called Nigeria Works- out of Aso Rock under a special bill. Deliver the much needed jolt the economy needs. Unfortunately if it were May last year you probably will get a bunch of wads from the debt market but that market is probably closed now due to monetary missteps of the last one year led by the CBN governor you guys have somehow retained . Recommended size of rebuild is 5 trillion naira over 24 months. Use bonds to pay contractors- see what FDR did and copy-paste

2. You can reflate the economy by stop focusing on oil and gas and the impact of reduced price or production. Nigeria is more than oil and be more upbeat promoting the promise of the country. Promote technology investments and manufacturing especially (in designated FTZs/Industrial Parks with constant power guaranteed). Please fire the ComTech minister for good measure , and let's stop mismanaging the sector . There is an idea to use school uniforms alone to revive the textile industries long abandoned and employ tailors. Just do it...stop talking about it.

3. You can reflate the economy by doing the hard job of restructuring the public service and also some divesting from NNPC to bring some private sector sanity to that place. NNPC especially can be used to reflate the stock market which has a lot of impact on private sector mentality. It can be listed/spurn as 4-5 companies organized by business units or 3 integrated companies organized by area around the refineries .

4. Send trapped TSA back to designated top tier banks, who should be allowed to lend a portion of TSA gross deposit with them (30%) through a special small business administration (SBA) type mechanism at concessionary rats of 5%. Track the 5-7 banks so used and enforce the pushing of these funds to people that need them for business. Promote active lending and good practice that partners the banks as well. So may be give 75% of the loan from TSA backing, while the bank uses 25% of its own money. For good measure, have banks tender for the opportunity to participate and thus gain TSA business.

5. Keep pushing on power, it will take time but it is worth it. But be aware of structural defects of the privatization reforms under the prior administration. It may be time for NERC to force consolidation of GENCOs and DISCOs (eliminating the NEBT bottleneck) even as it should look at allowing GenCOs to supply their DisCOs directly instead of going through the grid i.e. break the grid up.

In any case, keep pushing- keep trying. You asked for the job, you got it.

Wednesday, July 06, 2016

Who shall tell the President? Demons Marauding around the Economy

Another commentator had alerted the world to the danger ahead of Nigeria in her quest for market based economic policies. The demons vary, but one that keeps rearing is head is that which muddles up the policy waters, creating a narrative for a dangerous policy reversal that will leave all on its path destroyed. We can see the seeds in the undulating attitude of Mr. President, a forced convert to the gospel of appropriate pricing of Nigeria's forex regime, in the last 3 months. Mr. President is sending mixed signals and it is dangerous.

First we start with Quotable Quotes on all sides of the FOREX matter from Mr. President.... 
While speaking at an interactive session with Nigerians living in Kenya, President Buhari reiterated his stand on the devaluation of the Naira and strong currency restrictions saying he requires more convincing before agreeing to devalue the Naira. He said a devaluation of the Naira would “kill the Naira, cause higher inflation and hardship for the poor and middle class in Nigeria.” - January 2016 in Kenya
“The central bank has moved to introduce a greater flexibility in our exchange rate policy. These actions are a down payment on our people’s ability to succeed,”  June 16, 2016 (Wall Street Journal Essay) 
"President Muhammadu Buhari says he does not see any benefit  the country could derive from the devaluation of the naira." June 28, 2016 (Ramadan Fast Breaking with Business Community)
Since the experts surrounding Mr. President are yet to convince him, let us help him out with four points that perhaps the "experts" meeting with him can drop behind on a cheat sheet the next time they visit. It is simple:

1. By selling official reserve short, states are short changed on a monthly basis as dollar or forex income from oil is always converted at officially exchange rate to determine what is shared monthly. They cant pay salaries or pensions. People die. People suffer. We are poorer. Osun state for example that received 6 million naira in February could easily have received 4 billion naira, and would still have 1.5 billion naira in hand to pay March salaries. May be the President should listen to the governors and not the financial experts. They know the people are suffering and would keep him convinced.

2. By selling official exchange lower than market price, corruption is encouraged. As people who get it at officially low value will roundtrip- despite the President's threat otherwise. They gain, while state workers suffer because that money should have gone into official pockets not individuals. The profit of the crime is too great not to act on the arbitrage opportunity. Patriotism cannot trump economic common sense for private market actors.

3. By selling official exchange lower than market price, government is encouraging imports of certain items not discouraging it. By also creating certain items as favorite, you can create obverse incentive for those items to be imported even when not needed. Let us have a consistent import policy, of encouraging local production not importation. Higher exchange rate officially almost at par with private market puts all items on near equal footing and will make imports expensive

4. Higher official exchange rate will boost IGR in the short term especially after the slump. Duties is set to go up by 42% even as importation fell 40%. Essentially we can achieve net zero impact on national revenue. Under previous scenario, you will have importation fall due to economic crisis any way, but the IGR will stay low because exchange rate have been kept artificially low by under selling the forex in the official vault relative to those held in private hands.

5. Ultimately the end result is that effective exchange rate is higher for all not lower as the existence of an official selling window underselling forex will put supply pressure on true market which will continue to over price the few forex left or sourced by round tripping. Few will buy at official rate, as we've seen for the past year and the psychology of low rate will be useless to the economic ruin of this reality because forex will be scarce for production, and an implicit cost for market interference will be paid for in distraction, and additional inefficiency of the dual sale window. Good news that BDC may get CBN dollars after all, it may help continue to narrow the gap between the new interbank window and the parallel window which has since collapsed.

Hope it is clearer to PMB now who is an unconvinced convert. Higher exchange rate is not the problem. Lack of infrastructure for production, corruption and obsession with mere figures is the problem. Japan is at 110 or so to USD, still didn't prevent it from being 3rd largest economy in the world.

You're what you produce, not your exchange rate. To help Mr. President further, and the naysayers...especially those that take the patriotic or "we are stuck" strategy of arguing against reality, we remember this talk..

 “those who can afford foreign education for their children can go ahead but Nigeria cannot afford to allocate foreign exchange for those who decide to train their children outside the country. We can’t just afford it. That is the true situation we are in.” - March 5, 2016 on Al Jazeera Interview

This is lose talk. Forex reserve of your country is not just what is held by CBN but what is held by private citizens in their homes and vaults.Hence, while the official reserve is held by the CBN with some foreign banks, or in its vaults- the national reserve is more relevant and that which is outside the control of the Central Bank will continue to determine the market price - which (exchange rate) can be exaggerated as it is now, if the full supply of the CBN is not brought to bear on this real market.

So if they source it from somewhere else, it is still part of the reserve available for import. And all you do is create room for black market by pushing demand into the shadows which creates corruption. The demand for forex - real or imagined- will be met at a certain price point, why then should Nigeria sells its official reserve held in CBN short priced compared to that held by private individuals, and then turn around to complain of lack of revenue:

To explain what the official reserve is:

The reserve is always shared. It is oil money converted monthly to naira. We print naira to back the reserve up. So it is not savings. It is just useful build up for purpose of imports. The only way to stop depletion as such is to reduce imports, which will happen when forex becomes more expensive as it is now under the new policy. If you sell to lowest bidder, then forex is cheap and everyone will import - causing the reserve to deplete. Get is now?


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