I saw this awesome article by Ayo Teriba given reasons why Nigeria as a country still have a meal of hope to feed on..I thought you would like it too, so here it goes.
This is not the
first time that Nigeria is facing export income decline following a
steep fall in oil price. The first time was in the early eighties and it
spelt doom for the Nigerian economy for almost two decades. This time
is rapidly degenerating into early eighties-like doomsday situation in
which oil price collapse is translating into a currency crisis,
inflationary spiral, fiscal collapse, and recession. This should not be
so at all as this time is fundamentally different from the early
eighties. Nigeria should easily find a way around the loss of export
income by taking advantage of glaring opportunities to attract foreign
investment to move the economy forward. Such opportunities were not
available in the 1980s. The essential difference is that the global
economy that had been burdened by a debt crisis then is now awash with
liquidity, and it should be easy for Nigeria to attract enough foreign
investment inflows into infrastructure sectors to compensate for the
export income lost to the fall in oil price. Nigeria can rapidly build
the capital account buffers required to cope better with the decline in
income from oil exports.
Crisis of the early eighties
Nigeria’s first export income collapse
came in 1982, about 20 years after independence, and after almost a
decade of oil boom that started in 1973. The economic and financial
realities facing Nigeria in the early 1980s were so bleak as the country
was already burdened with heavy external debt before the fall in
commodity prices triggered the collapse in export earnings, and the
emergence of the global debt crisis in 1982 triggered a severe global
liquidity shortage for the rest of the decade. The export income
collapse thus coincided with intense external debt service pressures at a
time when global illiquidity foreclosed any hope of relief from foreign
capital inflows.
Consequently, Nigeria had to go through a
painful economic stagnation and structural adjustment. The economy
deteriorated, federal and state governments retrenched workers
massively, multinationals exited the country in droves, and
infrastructure deteriorated. The situation was used to justify a series
of military coups – December 1983, August 1985, and November 1993, in
which successive regimes blamed the ousted ones for the nation’s
economic woes, only to find that the grim economic situation was no
fault of the ousted regimes. This situation persisted until 1999 when
the return of Nigeria to democratic rule coincided with a strong
recovery in global commodity prices, accompanied by a surge in global
liquidity.
The current crisis
The oil price collapse that started in
July 2014 has inflicted sharp declines in export earnings, putting
downward pressure on Nigeria’s external reserves to the point that the
naira exchange rate has now moved from about N150/US$ to about N300/US$
by mid-2016: specifically, the inter-bank rate is now at N280/US$; while
the BDC rate is now at N330/US$, both were more or less at par at
around N150/US$ mid-2014.
Consumer price inflation has reached a
six-year peak of 16.5 percent in June 2016 as a result of devaluation of
the parallel market rate and increases in the electricity tariff and
pump prices of petroleum products. Government revenue has dwindled to
the point that more than half of the states are unable to meet their
workers’ salary commitments, and the Federal Government is funding its
entire capital spending, and indeed 36.7 percent of its 2016 budget,
with debt.
Economic activity had contracted as a
combined result of the global commodity price weaknesses and reduced
access of domestic businesses to foreign exchange supply. Quarterly real
GDP growth has slowed from 6.77 percent in the first quarter of 2014 to
-0.4 percent in the first quarter of 2016 and stock market
capitalization has fallen from a historic peak of N14 trillion in June
2014 to N8.2 trillion in January 2016, before recovering to N10.1
trillion in June 2016.
Why this time is different
These economic hardships are reminiscent
of the early and mid-eighties, especially the foreign exchange
rationing, dramatic movements in the dual exchange rates, government
having difficulties meeting workers’ salary commitments, and a
recession. But this time is quite different from the early eighties as
Nigeria has a clear way out of the present crisis, unlike in the
eighties when there was no way out.
The oil price-induced current account
crisis is happening at a time the global economy is awash with liquidity
and many of Nigeria’s emerging market peers are successfully attracting
record levels of foreign direct investment and diaspora investment
inflows. Nigeria should adopt immediate measures to join the ranks of
these countries and attract investment inflows on its capital account to
offset the export income lost on the current account because of the
collapse in oil price. Saudi Arabia is currently pursuing this strategy
by attracting the world’s attention to its non-oil investment
opportunities. Nigeria is much better placed to do so than Saudi Arabia
because Nigeria has a much bigger non-oil economy than Saudi Arabia,
thereby offering much bigger non-oil investment prospects. A long and
growing list of emerging markets is capitalizing on the global liquidity
glut to attract and retain record levels of foreign investment inflows.
The way forward
The most worrying fact about Nigeria’s
external financial inflows is that two current account items, export
revenue and diaspora remittances, are the only two significant sources
of foreign exchange supply. Capital account inflows into Nigeria, in the
form of direct investment and portfolio investment, are very weak. And
this must be immediately redressed. In 2015, Nigeria’s exports were
US$45.89 billion, while diaspora remittances were US$20.41 billion,
compared to foreign direct investment of US$3.06 billion, and foreign
portfolio investment of US$2.54 billion. Such weakness in the capital
account makes the oil price-induced current account crisis more hurtful
than it should have been in the presence of buffers from stronger
capital inflows.
The way forward for Nigeria is to fix
this weakness in the capital account by taking the following three
measures: (i.) Break government monopoly that shuts foreign investment
out; (ii.) Attract foreign investment to fix foreign exchange scarcity
and infrastructure decay, through immediate IPOs on existing state-owned
enterprises, and new licences for greenfield projects; (iii.) Engage
the world about the future of the Nigerian economy.
(i.) Break government monopoly that shuts foreign investment out
Nigeria has the potential to attract and
retain significant inflows of foreign direct investment into its large
network infrastructure sectors, including rail transportation, gas
pipelines, and electricity transmission, as it has successfully done in
telecommunications, but failure to abolish government monopoly in these
sectors keeps shutting the investment out. Nigeria’s stock of foreign
direct investment is currently concentrated in two sectors,
telecommunications and oil & gas. These are the only two sectors in
which the government has liberalized entry of foreign direct investment.
Government monopoly in key infrastructure sectors, like rail
transportation, gas pipelines, and power transmission, obstructs
beneficial FDI inflows. The new government in Nigeria needs to take
immediate measures to break government monopoly in the critical
infrastructure sectors to allow the inflow of needful foreign
investment.
(ii.) Attract foreign investment to fix foreign exchange scarcity and infrastructure decay
Nigeria should attract foreign investment
inflows to solve the two main problems that have inflicted recession on
the Nigerian economy: inadequate supply of foreign exchange and
infrastructure decay. Attracting investment into infrastructure sectors
will solve the two problems and will also make the Nigerian economy more
competitive as infrastructure gaps are filled. The global economy
currently presents a bleak outlook for commodity prices, exports and
real economic growth, while offering bright prospects of continued
liquidity glut. Developing countries with clear visions of how they want
their economies to progress have leveraged on the global liquidity glut
to attract record levels of foreign direct investment stocks. Box 1
provides a discussion of the alternative investment opportunities
available for Nigeria at this time: FDI, FPI, and remittances. Box 2
discusses the reasons why FDI is key to Nigeria’s quest for progress at
this time. Box 3 discusses why investment promotion is more realistic
for Nigeria now than export promotion. Box 4 explains why borrowing to
fund capital projects is not a sustainable strategy for Nigeria at this
time. Box 5 explains why slogans like Diversification and Buy Nigeria
are wishful thinking, given infrastructure gaps, and suggests more
realistic slogans.
Box 1: Alternative investment opportunities for Nigeria: FDI, FPI, and remittances
While it is appropriate to highlight
investment opportunities in infrastructure as obvious potential
destinations for large-scale FDI inflows, Nigeria needs to boost all
types of investment inflows into all areas of the economy, although it
is a fact that functioning infrastructure would also boost investment
inflows to all other sectors.
• Greenfield foreign direct investment
involves the creation of tangible and irreversible investment, while
brownfield foreign direct investment involves acquisition of existing
projects. Both involve active managerial roles and technology transfers.
China leads the pack with US$1trillion in FDI stock in 2015, from only
US$20 billion in 19904. A fifty-fold increase in FDI stock in 25 years.
Rather striking is the fact that Nigeria had hosted US$8.538 billion in
FDI stock in 1990, well ahead of South Korea’s US$5.185 billion, or
India’s paltry US$1.656 billion at the time, or even UAE’s miniscule
US$751 million. All three have since overtaken Nigeria as India’s stock
of FDI reached US$282 billion in 2015, South Korea, US$171 billion, UAE,
US$111 billion, compared to Nigeria’s US$89 billion. On the African
continent, Nigeria was the top investment destination in the early
nineties, but has been displaced by South Africa since the turn of the
century. To attract foreign direct investment, the Nigerian government
will have to do two things: (1.) break its own monopoly in all network
infrastructure sectors to allow inflow of foreign direct investment,
through immediate IPOs on existing state-owned enterprises, and new
licences for greenfield projects; and, (2.) engage the world about the
investment opportunities in the Nigerian economy. The new regime could
have taken these two measures from its inception in May 2015 to avoid
the deterioration in domestic economic realities that has occurred since
then. The steps have to be taken now to stem further deterioration, and
induce a turnaround.
• Foreign portfolio investment on the
contrary only provides needful short- and medium-term liquidity, and is
fully reversible. Many refer to FPI as ‘hot money’, as they can be very
volatile. To illustrate, FPI inflows into Nigeria was US$6 billion in
the first quarter of 2013, and that must have really been helpful, but
it was -US$387 million in the third quarter of 2015, and that must have
been equally hurtful.
• Diaspora remittances are mostly
irreversible current account private sector inflows that end up in
consumption. But some countries have succeeded in encouraging inflows of
remittances on the capital account, through the issuance of medium-term
foreign currency government bonds, with possibility of redemption in
local currency on maturity. India did this by issuing multi-year bonds
for its citizens in diaspora, thereby inducing capital inflow from
remittances as well. Nigeria was the fourth largest destination for
remittances in 1990, behind India, China, and Mexico. By 2015, Nigeria
had dropped to sixth position, but more significantly, the gap in the
quantum of funds remitted had widened from a margin of about US$7
billion in 1990 to US$50 billion in 2015, as India received US$70
billion and China received US$68 billion, compared with Nigeria’s US$20
billion. They had each received about US$22 billion in 1990, compared
with Nigeria’s US$15 billion. We are talking about relative ability of
countries to convince their nationals who are resident abroad to remit
funds into government coffers back home.
Box 2: Why FDI is key
Of the three types of foreign
investment, FDI is the easiest and most beneficial for Nigeria to
attract at this time. They hold the prospect of bringing investment that
is large enough to stabilize Nigeria’s foreign exchange situation, and
are likely to look beyond short-term macroeconomic risks, fixing their
gaze instead on the medium- to long-term returns; these are clearly high
enough for network infrastructure projects in Nigeria to more than
compensate for short-term macroeconomic risks. Such opportunities for
high returns abound in rail and associated property development
opportunities across the country, pipelines (and fibre-optic cables)
that should ideally be laid beneath the new rail lines, and power
transmission that should also ideally be above the new rail tracks. Each
of the sectors clearly offers huge first mover advantages similar to
the ones enjoyed by the early entrants to Nigeria’s GSM telephony. The
two sectors in which the Nigerian government has liberalised entry of
investors are oil & gas and telecoms. Foreign direct investment had
flowed in to the point of saturation. If Nigeria should liberalize
investment in rail, pipelines, and power transmission, it is reasonable
to expect a similar response from foreign investors who recognize
Nigeria’s attraction as the last of the world’s untapped large markets.
Thus the major obstacle to the influx of FDI into large infrastructure
projects in Nigeria is Federal Government monopoly. Unlike FDI, FPI and
diaspora investment will understandably be deterred by short-term risks,
especially exchange risks or uncertainty, having no medium- to
long-term profit expectations to offset such risks against like foreign
direct investors. As such, it would be best to engage portfolio and
diaspora investors once FDI inflows are underway to stabilise the
foreign exchange situation.
Box 3: It is easier to promote foreign investment inflows than exports
Successive Nigerian governments have
acted as though they were oblivious of the opportunities on the capital
account. It is far easier and quicker for the Nigerian government to
promote foreign investment inflow than it is to promote exports, given
the current dull prospects for global economic growth, and Nigeria’s low
export competitiveness arising from weak infrastructure. There is a
large pool of money on the global scene that Nigeria can attract into
its large network infrastructure sectors that include nationwide rail
transport network, gas pipelines, and electricity transmission. Nigeria
probably requires US$1 trillion investment in infrastructure over the
next decade to close yawning gaps. The current global liquidity climate
will deliver every cent of that sum if the new government can
immediately break government monopoly in the sectors and engage the
world to come and invest in these sectors. Had Nigeria done this when it
opened up the GSM space in telecoms in 2001, much of those
infrastructure gaps would have been filled by now, and external reserves
would have been buoyed by massive FDI inflows, and perhaps diversified
export base that adequate infrastructure would sustain, but missed the
opportunity. She also could have done it in the wake of the oil price
collapse two years ago to avoid some of the more painful consequences
for real GDP growth, external reserves and exchange rate, but had
delayed until now. The time to act is now.
Box 4: Why borrowing is not a sustainable option
Nigeria cannot borrow her way out of
the current crisis, as the projected debt service of N1.35 trillion in
the 2015 federal budget is already 35.5 percent of the projected
revenue, and 22.6 percent of the total budget. The reality is that
revenue inflows in the first half of 2016 were considerably less than
the budget projected, implying that borrowing and associated debt
service may be higher than projected. China, the country that often gets
mentioned as a willing bilateral creditor to Nigeria, hosts US$1
trillion in foreign direct investment. Nigeria should pursue the more
sustainable strategy of attracting foreign investment into
infrastructure. India illustrates the success and sustainability of this
approach. Nigeria should rely on foreign investment to fix
infrastructure, and also provide the foreign exchange required to
stabilize external reserves and the exchange rate, by creating capital
account buffers.
Box 5: Why ‘Diversification’ and ‘Buy Nigeria’ slogans are wishful thinking
Unless infrastructure gaps are filled,
the much-talked-about diversification of the Nigerian economy away from
oil, towards manufacturing, agriculture and solid minerals, will not
happen because it is the high costs of key infrastructure, particularly
the prohibitively high road haulage costs in the absence of rail
transport and high costs of fuel (electricity, gas, or petrol) because
of inadequate supply, that have killed these sectors that once thrived
in Nigeria. Talks about diversification when these vital infrastructures
have not been fixed amount to wishful thinking. Similarly, the rhetoric
about ‘Buy Nigeria’ sidesteps the fact that we need to ‘Fix Nigeria’
before Nigeria can produce the things we need to buy. Once other key
infrastructures are fixed, the way telephone lines in Nigeria jumped
from only 300,000 in 2001 to 160 million in 2015, system-wide
transaction costs will become much lower, making all sectors more
competitive. Only then will slogans like diversification and ‘Buy
Nigeria’ will become realistic. At the moment, the new government may
want to consider ‘Invest in Nigeria’ or ‘Rebuild Nigeria’ or ‘Fix
Nigeria’ as much more realistic slogans, given the circumstances that
the previous regimes had left the economy.
(iii.) Engage the world about the future of the Nigerian economy
Nigeria needs to take immediate steps to
open up to foreign investment. The first and perhaps most important step
is to ensure the ease of entry of potential investors into
infrastructure sectors that are currently under government monopoly. The
second step is that Nigeria must engage the world about the future of
her economy, like India and Saudi Arabia are currently doing.
India is fast becoming one of the world’s
top investment destinations. India received an FDI inflow of US$44
billion in 2015. This is the result of a determined investment-friendly
strategy that shows that countries that court
investors in the face of the current easy global liquidity conditions
will receive investment. India also received the biggest inflow of
remittances in the world, getting a record US$70 billion in 2015. India
has learnt how to get the message across to both non-resident Indians
(NRIs) and foreigners, and both groups respond very resoundingly!
India’s current slogan is ‘Make in India’, which attempts to attract
more FDI into manufacturing in India, after more than a decade of
attracting FDI to infrastructure that used to be under government
monopoly.
Saudi Arabia is also currently trying to
attract foreign investment to make up for export income lost to oil
price fall. A planned 5 percent IPO in the state-owned oil giant,
ARAMCO, is expected to earn about US$120 billion, among other
initiatives to attract FDI. Saudi Arabia is speaking loudly and clearly
to the world about her non-oil investment prospects.
Nigeria has much bigger non-oil
investment prospects than Saudi Arabia, but is quiet. Nigeria now has to
put a sellable story together on the economy, and engage the world. In
his first year in office, President Muhammadu Buhari openly engaged the
world in his fight against corruption and insecurity in Nigeria, as
these two have been the theme of the discussions with both foreigners
and Nigerians in diaspora during his trips around the world. He has been
extremely well received. He now needs to engage the world about the
economy as well, about the huge opportunities
for profitable investment in Nigeria, especially now that his regime is
well known to have taken giant strides in making the country much more
secure and much less corrupt. Nigerians in diaspora and foreigners alike
are waiting to buy in. Nigeria needs to mobilize all the foreign direct
investment, foreign portfolio investment and diaspora investment that
it can, but needs to learn how to engage investors and gain their
confidence as a country with clear enough vision and strong enough sense
of purpose that others can make large-scale investment commitments in.
Ayo Teriba
Being the text of a presentation made
at the Lagos Members’ Forum of the Harvard Business School Association
of Nigeria (HBSAN) on Friday, 28 June at the Radisson Blu Hotel,
Victoria Island, Lagos
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