7th November, 2011
 Mr. Eghes Eyieyien, Chief Executive Officer of Pharez Consulting explains to CLEMENT ORILOYE and FUNSHO BALOGUN how the current Euro Zone debt crisis is having a domino effect on the Nigerian economy
Europe is engulfed in a debt crisis. Can that crisis be affecting the Nigerian economy in any way?
In the globalised world that we have today, events and happenings in one side of the world will affect the other. It would be naïve to think that events, especially economic matters, in Japan, America, Greece or Spain cannot affect Nigeria because we are far from them. For example, we saw the spill-over of the crash of the sub-prime markets in the USA on the Nigerian economy, although the impact was not as severe as it was for a country like Iceland, for instance. Investors there and elsewhere are moving into the Nigerian stock market as portfolio investors; they abound here, though all our shares are actually trading at far less their real value. The crash in the Nigerian stock market was partly due to the fact that some of those investors pulled out their resources as a consequence of the crisis in their own market. Their investment in the market contributed to a bubble. When they withdrew their money, the bubble burst.
While there may not be direct evidence that Nigeria is being affected so far by what is happening in Greece, Portugal, Spain or Italy, we cannot be completely immune from the shocks. One way we could be affected is that now, the ratings of many European banks, including UBS and the Royal Bank of Scotland, have been downgraded by Moody’s and Fitch. Some of these banks act as correspondent banks for Nigerian banks. If they are having challenges and liquidity problems, it means their customers could also be affected. That is not yet happening, but the possibilities are there. A domino effect is possible. If the crisis in Europe is not handled very well and the recession deepens or in trying to resolve the problem in Europe, the IMF, World Bank and many banks give Europe priority, Africa can become a secondary place to look at. European countries could also cut back on aid to Africa. We are already seeing that the United Kingdom is thinking of ‘exporting’ our Nigerian brothers and sisters in their prisons back to Nigeria. They are cutting down on their own budget and cannot afford anymore to keep those prisoners and feed them. They are actually ‘exporting’ their problem to us, because the prisoners did not commit the crimes here.
All these show that while the impact may not be manifesting yet, we should be mindful of the fact that economic crises in Europe and in other countries can affect us eventually. We cannot be unmindful about what goes on there. The world has become one organism, through globalisation. What affects one part of the world can affect others.
Some analysts argue that the European crisis could bring about high consumer prices and adjustments in fiscal policies here. How feasible is this?
One of the things happening in Europe is that because of the crisis in their economy, there is fiscal restraint. They are cutting down on their budget and expenditure. In the world today, government is the major spender in most economies, even in the capitalist nations. So, when government cuts down budget, cash supply is reduced. When cash supply reduces, it has a spill-over effect on even the private sector. Government contracts for businesses are cut down. It is a cycle that also influences unemployment. When people are unemployed, families and individuals are compelled to cut down on their own budgets. So, it is possible that if you have two cars, you will sell one and manage one. If you have only a car instead of two, you will not need as much fuel as before. If there is reduction in demand for petroleum products, it means there will also be a need for reduction in crude. Then we will be affected because we are an oil producing nation.
Apart from that, ours is an import-dependent economy. What do we manufacture? Virtually everything is imported. If demand has reduced in Europe for those goods, it does not necessarily mean that demand has reduced in Africa and in Nigeria. So, if demand is affected over there where they are producing and employing people to do so, they would be compelled to increase prices for importers from places like Nigeria in order to cover their production costs. So Nigeria is not insulated from the negative effects.
What can the Nigerian government do to avert a full effect of the euro crisis on the Nigerian economy?
The answer is straightforward – diversify the economy. As long as we are a monocultural economy, with only crude oil as our earning power, we will remain susceptible to the vagaries of international markets. For instance, if Nigeria were an agricultural economy, it was exporting food and had a potential to feed Africa and even the rest of the world on food crops, not even cash crops, we would be having a boom because whether you are poor or rich, you will still eat. If we invest in our agriculture and empower farmers so much that we are food sufficient, we can begin to export. Indonesia and Malaysia became exporters of palm oil, but they were not initially even producers.
But this is just a short-term solution. You need a bit of time for a revolution in the agricultural sector. That is one area that if you really invest accurately and purposefully, whether there is a world recession or not, you cannot fail. The market for crude oil is so volatile and not sustainable. Nigeria should also direct funding or capital into entrepreneurship and capacity-building instead of frittering away money on recurrent expenditure, which gulps over 70 per cent of Nigeria’s budget. The civil service is too big and government generally too large. It is spending too much of its revenue just to sustain and maintain the bureaucracy. Too few people are gulping too much of our resources just to be kept in office.
The oil and gas sector can only employ a few people? It’s a highly technical area. How many people do you need on a rig? It is mostly automated. Engineers go there just to look at the panels and make sure everything is flowing properly. Everything is hi-tech. Where a mass of our population can be employed is agriculture. We can also turn our jobless youths into entrepreneurs. But part of the challenge in achieving all these is our educational system. We produce graduates to look for jobs. It is a carry-over from the colonial period when the colonialists trained us to be civil servants and to be employed in the civil service. That is the educational system we came up with. The curriculum in our universities should be revisited. Even if you train somebody in any discipline, he should also learn some entrepreneurial skills such that when he comes out from the university, he will not be looking for who will employ him but what he can do for himself. But then there is the issue of funding, because if you have a brilliant idea and there is no capital, the idea won’t come up anywhere. When the Central Bank set up the Small and Medium Enterprises Equity Investment Scheme, SMEEIS, it was a very laudable objective. But what happened? Even the Small and Medium Enterprises, SMEs, were apprehensive. They did not like the idea. Many of them preferred to be given loans and were not keen about the idea of the banks becoming part-owners in their enterprise. There was the fear that the banks could take over those projects. Then secondly, even the banks themselves approached the whole thing with a mindset of credit. The dynamics of credit creation is different from the dynamics of equity investment. In equity, you are a risk taker. Your risk acceptance criteria must be higher than in credit. And you are investing to be part of the business. So, at the end of the day, the banks were not very enthusiastic about it, except for a few banks like First Bank, Union and Oceanic.
The government needs to put in place a SMEEIS fund. It could be administered by the Bank of Industry, entrepreneurs and SMEs that meet certain criteria in terms of business plan and projects and have gone through some requisite training. They can be helped by way of equity investment or loan from that fund. That will bring funds or credits down to those that really need it. Access to funding remains a major problem. For instance, most of the industries in China are not the big corporations. They are small-scale industries, cottage industries producing staplers, staple pins, cotton buds and so on. They are small companies that employ a reasonable number of people, so on the aggregate level, many people are employed in such industries. Nigerians need to build cottage industries. Not everybody can operate at the level of Dangote or other big industrialists. Even if you will get to be that big, you must start from somewhere. Nigeria must create a system of encouraging its SMEs financially. Some of these SMEs seek only about N200,000, N500,000, N1 million, N2 million, N10, million to operate smoothly, not even as start-up capital but for expansion. Up to 20 million people could be employed through that means.
The Central Bank of Nigeria, CBN occasionally increases the monetary policy rate and on one occasion, the MPR went up to 12 per cent. How can the policy galvanise the economy?
I was concerned about that increase because it was unprecedented. From 9.25 to 12 per cent, which was 275 basis points. And it happened overnight. What many Central banks do with such instrument is increase or reduce it gradually. Rarely do you see a situation where it is more than 25 basis points, or at most 50 basis points. The CBN explained that fiscal expansion, in terms of government spending, which triggered a surfeit of liquidity, warranted the increase.
There is also the pressure on the naira and on our foreign exchange reserve. CBN had a policy whereby it was going to keep exchange rate at N150 to the dollar, plus or minus 3. So, over the past two years, the CBN has been defending the naira. Last year, the International Monetary Fund called on the CBN to devalue the naira. But the CBN resisted it and did not agree to that policy. We are now compelled to look back and think about this issue of defending the naira. You cannot defend the naira if you have a limited external reserve capacity. Our external reserves was as high as $60 billion when Obasanjo left power in 2007. Today it is just a little over $30 billion. If it was when we had $60 billion, you can talk about keeping the exchange rate at N150 because you had enough foreign reserves to do that, but not in a situation where your foreign reserves is not what it used to be and the demand for foreign exchange has not reduced. We are still an import-driven economy, so we actually have an inelastic demand for foreign exchange.
There is also speculation. Some of that demand is not real. Some people just want to keep their money offshore. And, of course, there is the corruption aspect. The people stealing money in this country do not want to keep the money here where it would be threatened. That is another issue. The point is that if you must defend the naira and you don’t have an inexhaustible foreign exchange reserve base to do that, how do you achieve your aim? This is the CBN’s dilemma. It cannot continue to defend the naira unless it is ready to have about $10 left as reserves at the present rate of attrition and usage of our foreign exchange resources. Meanwhile, the price of oil in the market has been reducing and we are not earning as much as we were earning. How much has been put in the excess crude account lately? It is not much. The issue is that there is pressure on the Nigerian currency and I think that while it is noble for the CBN to want to defend the naira in a free market economy, especially when you don’t have the foreign exchange resources to do it, it is futile to want to defend the naira and keep it at a pegged rate. We are trying to have a free market system, but not allowing things to work the way they should work. We are virtually a liberalised foreign exchange market, yet we put in place a policy that automatically pegs the naira to the dollar. It is ironic. There is a disconnect. That is what led to where we are and has depleted our foreign reserves. If you are going to defend the N150 to a dollar, you must meet every demand for foreign exchange. And some of that demands is spurious and unreal. The CBN was wrong in its effort to defend the naira at all cost. It should have been more liberal such that we would have a situation whereby the price will fall, recover, fall and recover again. That is what we see in the free market economy.
Pegging the exchange rate also means unwittingly creating an avenue for arbitrage. Because if you keep the official rate at N150 to the dollar or thereabout, the black market rate would be the real rate. And because you cannot fix the demand at the black market just like that, the dollar would be, therefore, getting more expensive, giving room for arbitrage. There will be round tripping, buying at the official rate and moving it to sell at the parallel market. So, it was inevitable the CBN would have to relax on pegging. All these notwithstanding, I wish the CBN has been doing the interest rate increment gradually over the last six months. Applying the hammer to do it at once has negative implications. It has automatically driven the cost of funds up. Already, players in the real sector are crying about high interest rate. Of course, it will get higher. The cost of accessing funds will keep rising with its consequent negative impact on the economy. If manufacturers are unable to borrow at reasonable rates they can afford, they will have to pass that cost to their consumers. So you should expect to see rise in prices of goods as inflation is induced. Some manufacturers may have to even lay off staff to be able to cover their cost. These things have implications.
There is, of course, the need for us to expand in the area of infrastructural development and all that. If government’s spending were in the capital area, nobody would complain. But much of this spending is in consumption. For instance, the House of Representatives is buying 360 Toyota Camry cars at N2.5 billion or thereabout for the legislators. Government is too expensive and recurrent expenditure is what makes government expenditure high. We need a radical reform in the way governance is structured and the way government business is done. A minister has so many Special Assistants and Advisers and when going somewhere, you can see the retinue of cars that go with him; a convoy of about 20 cars. For what? Each has a driver and uses fuel. Most of the things causing bloated government expenditure are unnecessary.
Look at the British system. The Prime Minister does not even have an official jet. When he travels, even on a chartered flight, he does so by British Airways. Most of our problems are self-inflicted. We carry on as if we have money, but we don’t really have money. In actual terms, we are a poor nation when you consider that we have 150 million people and a low per capita income. What is our human development index? What is the infant mortality rate? What is the life expectancy? What access do we have to clean water and good health care? These are things we need to address.
So how does the CBN address this?
There are no easy answers and one must sympathise with the CBN. The amount of the demand in the foreign exchange market is not real. How much of it is for genuine products and service? How much of it is capital flight by those who have stolen money and are stashing it away? How much of it is by multinational companies inflating invoices to export capital? A lot of rot is going on in Nigeria. It is a consequence of the pervading corrupt system. It has been a systemic thing for years. Banks have to be honest too. Banks falsify demands, they submit fake papers just to bid for foreign exchange because they want to round trip and sell.
Some Nigerians are actually against building up reserves. Is their thinking right that since we lack infrastructure, we should channel all the funds into building infrastructure?
It is utmost naivety for anybody to suggest that building up of reserves is a bad thing merely because you have to build infrastructure. Has Nigeria under-spent on infrastructure? No. The problem is corruption. How much money has been spent on the Lagos-Ore-Benin expressway over the years? Is it that money has not been spent? Money was allocated, disbursed, but we didn’t get value for money. Our foreign exchange is our national savings. Constitutionally, the governors may be right that Nigeria is under obligation to spend every money we earn. Whether those governors spend the money honestly for their people is another matter; their people won’t think so. By the provision of the Constitution of the Federal Republic of Nigeria, all federally-generated revenue must compulsorily be shared. So, the Constitution does not even make room for savings. The Sovereign Wealth bill is okay, but the problem is that it should have been backed up with a constitutional amendment for it to have effect.
Is the federal government’s commitment to removing oil subsidy desirable now?
To be fair to the government, the truth is that oil subsidy is not sustainable. But the blame resides with the government in the first place. Why do we need subsidy in the first place? It is because our refineries are down. So, we are importing petroleum products and we are doing so at world market prices. They sell to us at the same amount they sell to other countries. And those products are priced in foreign exchange. The irony of it is that even when the price of crude oil was good in the market and it was putting big money in Nigeria’s treasury as a leading producer of oil, it was paying more in terms of subsidy. I am not in support of the removal of subsidy. Nigerians are already impoverished. There is no aspect of our lives that is subsidised. They just increased electricity tariff. There is no social welfare scheme. In Europe and America, the agricultural sector is wholly subsidised. Even till today, as it talks about recession and is tightening its budget, France is still subsidising its farmers. Yet, all these are capitalist countries and are the proponents of free market forces. So, if it is only on petroleum products that the average Nigerian can enjoy some subsidy, it is welcome. I am not contradicting myself because I earlier said the subsidy is not sustainable. What I mean is that if petroleum subsidy must be removed, then fix our refineries. If our refineries are fixed, you can produce petroleum products here, cheaper than it is produced on the international market, sell to our people and be in a position to export.
Next year, after removing the subsidy, we will still need to remove again in future and government wouldn’t have responded humanely and rewarded suffering Nigerians with provision of infrastructure. The government cannot say because there is corruption in the petroleum sector and there is a cabal, it would be removing subsidy and pass the suffering on to the masses. The backlash from the citizenry is unpredictable.
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