How is the wider worlds sovereign debt crisis going to affect Nigeria?
We all know there are dark clouds on the horizon internationally. The US and Western Europe constitute a major part of world GDP and demand for commodities.
Oil plays a disproportionate role in economic matters in Nigeria. Its only 30% of GDP. But its by far the greatest contributor to government revenues and almost the sole source of foreign exchange earnings, because of the very slow pace of structural adjustment and diversification of both the economic and revenue base.
There will always be concerns over what would happen to the price of oil in a double-dip recession, slackening demand, and how that is going to impact on the Nigerian economy.
Weve seen from 2007 and 2008 the impact of an oil price drop, from over $140 a barrel to under $40. The Excess Crude Account disappeared. The capital market had a bust.
Bank balance sheets were adversely affected. So we have a history of what kind of things might happen, even though the impact might not be so severe now as it was in 2008, given that right now theres no bubble in the capital market.
So the biggest threat is what would happen to the oil price, and by extension what would happen to the governments fiscal position and revenues, given where we are already with a domestic debt profile at 16% of GDP.
That looks like a small number but it is pretty high, given that across many parts of GDP the government does not earn tax revenues. The areas that are really contributing to government revenues in Nigeria are oil and gas, telecoms, maybe some forms of wholesale retail trade and services.
So youre looking at no more than 30% of GDP paying taxes. At 16% [debt-to-GDP] you are already at 50% of [taxable GDP]. That is something that one needs to keep an eye on.
Is Nigeria better or worse positioned than in 2008?
The last time, the biggest impact was on financial markets, leading to a banking crisis. We dont have the same kind of exposure as we did in the capital market that would lead to a crisis in the banking system.
In 2007, we had banks with huge exposures to the capital markets: proprietary positions, margin loans. The capital market was on an unsustainable high. You also had huge exposure to the oil markets [via refined petroleum imports], with prices at $130/$140 a barrel.
The stock market lost 70% of its value and the oil price crashed. Many of those positions were unhedged. As a result, banks had their capital wiped out and they were going under.
Those kinds of things are not likely to repeat themselves generally, to the extent that the banks are better prepared now. They are more adequately capitalized and their exposures are more controlled. However, there will be an impact on government revenues.
You have expressed in the past a commitment to currency stability. How far do you think the oil price would fall before there was devaluation to the currency?
If the oil price were to crash as a result of recession, we would expect there to be [an impact on the currency].
But these issues are dependent on how far oil prices crashed and how sustainable that is. If you have a blip and it comes back up, its not likely to lead to a major policy shift. If that translates to a continuous decline in reserves, its time to think of a shift in policy stance.
The Monetary Policy Committee will have to look at all the facts on current reserve positions, oil price and output, analysis of reserve cash flows, to see the composition of inflows and outflows, and then take a position.
A lot of things have to be looked at on the reserves side. There is the whole issue of disconnect between the higher oil price and output, and revenue growth. Revenue growth doesnt reflect to quite the same extent the oil price increase and output.
One of the explanations we have had informally is that an increasing proportion of oil production is in production-sharing agreements and the governments share of that is lower. So you have to look at what is the benefit that we get from the higher oil price and higher output.
Then there are the structural problems in the Nigerian economy, which place us in the unfortunate position of being a highly import-dependent economy, including importation of petroleum products. When the oil price goes up, unfortunately the amount we spend on importing petroleum products goes up, as refineries arent in any way operating at enough capacity to meet our domestic needs.
So we suffer from an oil price shock, even though were an oil-exporting country. A significant part of the imports of the last six to seven months has been petroleum producers and that has been a major part of the demand on the foreign exchange market and a drain on reserves. Plus, of course, other things like the amount we spend on importing food especially rice and wheat and so on.
What can you do as a central bank to mitigate these pressures on the currency?
The import elasticities are such that as a central bank there is little that we can do. The real solution has to be in the short-term with fiscal retrenchment, so that the amount of money that is coming into the system from fiscal operations and driving import demand gets this under control, and then in the medium to long term there is structural adjustment that reduces the dependence of the economy on imports.
If oil prices would go down, the fuel imports bill would go down, and you would expect a reduction in the fuel imports bill but thats only around 20% of imports. You still have rice, food, manufacturing raw materials. You still have other fast-moving consumer goods that keep getting imported. Those would be affected largely by weaker fiscal expenditure.
Theres too much recurrent expenditure, too much cash in peoples hands.
We were totally in agreement with fiscal authorities in 2008 and 2009, that where the world was in crisis there was a need for countercyclical fiscal and monetary policies. When oil prices reverted and when we had peace in the Niger Delta, we started tightening [the monetary policy rate] and we started calling on fiscal authorities to also exit the fiscal stimulus. Unfortunately, that hasnt happened. The tension between fiscal and monetary policies started after the recovery of commodity prices.
How confident are you that, after the elections, fiscal retrenchment will happen before there is a big decline in the oil price?
Im not sure there will be a big decline in the oil price. We do have a finance minister [Ngozi Okonjo-Iweala] who understands that theres a sense of urgency to the fiscal situation and that theres a need to move very quickly towards fiscal consolidation. I think she also understands that if we dont build up reserves and reduce debt, very quickly, we will place ourselves in a position where we are less well prepared to cope with a shock.
The real question is whether, in spite of all our best efforts, its possible to have a massive reduction in fiscal spending in the very short term, because the nature of these expenditures is that reductions always come with political costs.
For example, everyone thinks that subsidies of petroleum products should go. But you have resistance from trade unions and the general public, who feel the increase of prices on the street.
Everyone thinks that the price of electricity should be increased as part of the reforms and to attract investment into the sector. But how many Nigerians understand that even higher tariffs have to be much lower than privately generated electricity? Its a communication issue and theres political resistance to that.
We have a huge expenditure on personnel costs and salaries. To reduce that you have to reduce the size of the labour force, maybe, in the formal sector, and that has political costs.
So there is nothing you can do to maintain currency stability, in the short-term, other than hiking the monetary policy rate?
We have limited options in the central bank and the exchange rate will not make any difference to the demand for petroleum products because you do need transportation. It doesnt make any difference to the imports of food, for example.
One of the quick wins, obviously, would be proper policies in agriculture, and appropriate policies under the Petroleum Industry Bill to encourage investments into downstream and into refineries and so on.
Would we see the results of that in six to 12 months? Perhaps not. So in the short-term, the only tool available to us is monetary tightening, but even if we did that, we have to look at the context of the world economy.
Lets presume we moved rates rapidly into positive territory in real terms and, therefore, make them attractive for the investor. You still have to look at the fact that this is an investor operating in a very difficult environment, where you have concerns about the sovereign debt crisis in Europe.
You recently removed tenure limits to foreign participation in the government bond market was that partly to ease the pressure on the currency?
Partly, yes, but principally it was being realistic. How many investors in the world in which we live are willing to lock themselves up in an African country for 12 months, or in any country for 12 months?
Certainly if you are looking to attract foreign investments, you have to remove some of those disincentives to that investment.
We dont have a fixed exchange rate policy. We try to manage the volatility within the band, and part of the reason we do that is because we feel that exchange rate stability is a critical component of our price stability objective.
We are flexible as far as the mid-point is concerned, and we take a medium to long-term view. If, for instance, we felt that this decline in reserves looks like the most likely scenario, then we would have to shift the mid-point down. On the other hand, if we find we are able to control fiscal spending, if we are able to put in the fiscal control that increases the revenue, and take advantage of the higher oil price and higher outputs, then there would be no need to do that.
What is the central bank doing to help Nigeria reduce its structural reliance on imports?
For the last six months, we have been working with the Alliance for a Green Revolution in Africa (AGRA) in developing a document called the Nigerian Incentive-based Risk Sharing System for Agricultural Lending (NIRSAL). That document is basically about the need to fix the agricultural value chain, what needs to be done and how we can then fix the finance-funding chain and make sure that we get funding into the different areas of agriculture, profitably.
Agriculture is 42% of our GDP. It receives less than 2% of bank lending. A significant part of the problem is made up of: the lack of adequate infrastructure; the question of the commodity-value chain from production to market; the risk-sharing mechanisms for the banks; and technical assistance and capacity, both on the part of the farmer and on the part of the banks.
This document seeks to address those [issues]. For example, if you go 40km from Kano in the north, you have a tomato breadbasket. About half of the output of that area gets lost between the farm and the market because there is simply no investment in storage, no investment in processing, and the tomato just perishes.
Just putting in place appropriate structures to reduce those harvest losses and providing those tomato farmers with the right seeds, with the right fertilizers, with the right chemical training, the infrastructure, and giving them access to the processing plants, would significantly increase output and incomes in that area, and then make tomato production commercially viable.
At this moment, no bank would lend to a tomato farmer knowing that potentially 30% to 40% of what he produces would be lost. So we have been engaging with the government. We are fortunate, again, with a new agricultural minister [Akinwunmi Ayo Adesina] who came in from AGRA, who worked with us on this blueprint and who, therefore, knows exactly what we think needs to be done and who is taking ownership of it.
Would you agree that there is a general challenge in Nigeria to get banks to lend to the real economy even to areas like mortgages and vehicle finance?
We need to understand that a great deal of the constraints to credit extension to these areas are structural and they are demand side, structural constraints, not supply side.
The banks have the capital, liquidity and the ability to lend. But how do you lend to a manufacturer who does not have regular power supply? How do you lend to a tomato farmer if half of his stock is going to be wasted between the farm and the market? How do you lend to a cassava farmer if his cassava doesnt end up as starch.
What it says about our role in development is that we have had to really look at our role as an adviser to the government; increase the quality of our interventions in policy as advisers.
Agriculture is one good example. We will make a great success of it. We have also been involved in the power reforms. We pushed strongly for those reforms and supported the reforms in many ways, and others are on course.
If you talk about mortgages, for example, you have issues around land title, repossession of assets, the courts process that is long and all of these are risk issues that discourage banks from lending to people.
If you cannot easily enforce and realize your collateral, which has been tied up in the courts for years, you end up losing your exposure. You tend to focus on the top end of the market, and that is a big problem.
What else are you doing to improve these infrastructural shortcomings?
We worked with the pension commission, for example, in the review of pension guidelines that would allow pension fund administrators to invest part of their pensions in infrastructure deals. We are working, through the Bankers Committee, with a number of state governments to see how we can encourage the issuance of infrastructure bonds.
One of the major concerns we had in the past was to show whether the banks were providing money for refineries, for roads, for bridges, and [banks] do have a short, highly volatile liability base.
Apart from their equity, the bulk of their funding comes from savings and current accounts. Therefore, they take huge maturity transformation risks if they try to over-extend themselves in the long-term, so the capital market reforms are critical. [The Securities and Exchange Commission] has been driving them, and we have been fully supportive of those reforms.
If the capital market were able to provide the long-term funding, that would be fantastic. If the government can assist that through using the governments balance sheet to provide some kind of credit enhancement or interest subsidies, that would be even more helpful.
Your approach to fixing the banking crisis has come under quite vitriolic criticism at times. Have you received any threat of physical attacks because of this death threats, for example?
I never received credible death threats. Certainly, we live in a very difficult environment, [especially given] the kind of class that we took on, which is basically a coalition of very rich bankers with strong political connections, and also very rich borrowers, who were not paying back their loans.
The state felt there was a risk of a backlash and took immediate steps to increase the security around me. I have never received any physical attack. Security takes many forms, but its really not as high anymore in terms of the number of people that I see around me.
With time, the threats should have come down. To see a CEO [Cecilia Ibru, former CEO of Oceanic Bank] sign a plea bargain, return assets and accept to go to jail, then they know that there was a basis for our actions. People who were initially irrational and unreasonable begin to understand that there was a reason for those interventions. As the reforms have continued and weve made progress, the threat has reduced.
So the battle with that class is over?
Those battles will never end. If youve removed a CEO and put him in jail, hes never going to forgive you, nor his family, nor his friends. But I dont think of it in terms of battles.
There is a sense in which battles have been won. We moved from a point where people thought they were untouchable and we removed them. People thought they could never go to jail and theyve gone to jail. Weve made the point that this is not a country in which everything goes. No matter how rich and powerful you are, there are certain lines you dont cross. Will there be a fight back? I dont know. Its not too important.
Weve always made it clear that our primary role as a regulator is to protect depositors and creditors. We would love to protect all stakeholders, including employees and shareholders. But if management or boards or shareholders run institutions in such a manner as to place creditors at risk, then they stand the risk of losing their investment.
We have tried over the past two years to carry all the shareholders of the banks weve intervened in along with us, to see if they can negotiate transactions where they can retain some value in the institutions.
When the NDIC [Nigeria Deposit Insurance Corporation] stepped in and recapitalized the three banks [Afribank, Bank PHB and Spring Bank], that has been called nationalization, which is really not whats going on. I suppose they think of it as nationalization, as they are now owned by Amcon, which is owned by the government.
The banks [understood] very clearly what will happen to them at the end of September if they decide they dont want to go into a transaction: either take a route where they remain minority shareholders or get a generous cash payment, or they lose everything.
Are you disappointed there hasnt been more international participation in the recapitalizations?
There was never really a desire as such [for foreign buyers]. What I inherited was [a situation in which] there were restrictions on how much foreign banks could own in Nigerian banks it couldnt be more than 10%. I removed the restriction. The idea was that there would be no impediment to any bank which was interested.
For me, whats important is that the institutions are saved, and the institutions that succeed are well run, with strong risk management and governance, and that [they] will not go back to the mistakes of the past. Some of the foreign and global players bring to the table best practices in risk management and corporate governance. That would have been a major boost to the system.
But we already have a number of [foreign banks]: Standard Chartered is here; Citibank is here.
A number of the institutions that looked at [the intervened banks] didnt move forward, partly because of what was happening in Europe itself. Many [international banks] decided it was not the right time, partly because they didnt quite understand the Nigerian market. They had no experience in it.
[International banks] didnt think it would make sense to go into a distressed institution ... also partly because the problems were so deep, much deeper than we had thought when we started. These institutions will come back and they will come back to stronger institutions.
Is the banking crisis over?
By the end of September, when we [had] the AGMs [of the intervened banks, to agree on recapitalization deals], all those problems are solved. We have looked very clearly at the banks over the past two years. Were on the cusp of fixing the crisis.
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