How Borrowing Can Salvage Nigeria’s Economic Woes

Mr. Johnson Chukwu is the Managing Director and Chief Executive Officer of Cowry Asset Management Limited based in Lagos, Nigeria. In this interview with Segun Oladipupo, he bares his mind on the dwindling oil prices, devaluation of Naira and many more. Excerpts;

Going by the persistent fall in the oil prices and the measures being put in place by the Federal Government to cushion the effect on the nation’s economy, could it be said that the Nigerian economy is distressed?

One cannot say that the Nigerian economy is distressed. What is happening is that the Nigerian economy is going through a difficult time and that is different from the nation’s economy being in distress. In distress means, that economy cannot meet its obligations but Nigerian economy can meet its obligations.
What we have had is that our foreign exchange earnings has declined and for that reason our reserve is being depleted as a result of our consumption of our foreign exchange and then we have seen the exchange rate depreciate or the value because inflows are no longer higher. So, that has had impact on the exchange rate, the impact on inflation is still the least but it does not amount to the economy being distressed.

And I give a classical example, the Federal Government has come up with a budget, in that budget, there is still a provision for capital goods or capital expenditure of more than 600 hundred billion and it has about 2.2 trillion in recurrent expenditure.

You will only become distressed if the economy gets to a point where the government can no longer meet the recurrent expenditure but we still have a provision for capital expenditure which means we are meeting all the capital expenditure based on the budget and we will still incur the capital expenditure.

Talking about the budget, we are aware that the benchmark for the 2015 budget had been adjusted twice and finally at 65 Dollars per barrel and as at the 7th January, 2015 the oil price had fallen to 50 Dollars per barrel far below the 2015 budget benchmark. What is the implication of this development to the economy?

The implication is that the country may need to borrow if the government has to go ahead and implement the capital expenditure budget. But remember that oil prices are not fixed, it fluctuates and it is expected that the oil will soon bottom out and we still need and we have seen what happened in 2008 when oil prices dropped to 37 Dollars per barrel before it climb back and before we saw this current bear on the oil prices, we have seen oil prices go back to as higher as 120 to 128 Dollars per barrel.

So nobody is so sure that oil will average only 50 Dollars per barrel this year, oil may average far above 50 Dollars. But again, we also have the latitude to borrow, today, our foreign currency loan is in the neighbourhood of 9 billion for an economy of 510 billion Dollars. So the country can support additional borrowing and the beauty of additional borrowing is that if we borrow and invest in capital projects that will catalyze economic growth, it will expand the economic base of the country and government will earn revenues to pay back those loans. Ideally, this should have been done from savings when we had an oil price rally but the good thing is that our foreign loan stock is very low and we have the latitude, we have the credit worthiness to borrow internationally to support infrastructure.

So, I don’t think that the fact that the oil prices had dropped below the current benchmark of 65 Dollars should be a critical course to worry unless if one is hundred percent sure that the oil will average the current 50, 52 Dollars. But oil may still average, remember that the international oil market price may still average above the benchmark of 65 Dollars.

From your view, you seemed to align your views with that of the Honourable Minister of Finance, Dr. Ngozi Okonjo- Iweala where she suggested that the country may likely borrow to finance some capital projects captured in the 2015 budget. Am I correct?

Ideally, the purpose of borrowing is to fast track future projects or future consumption; in this case, we are talking of capital consumption. Every country that has strong fiscal management can catalyze or fast tracking economic growth by borrowing as long as all such borrowings go into assets that have economic value and that will support further economic growth.

So, I agree absolutely with the Minister that we may need to borrow to finance the capital expenditure budget but I think we should actually borrow more than what we have in the capital expenditure budget so as to fast track economic growth and diversification.

And we have living examples of countries that borrowed to support their economic development and then build their countries, the United Arab Emirates is one example, they borrowed heavily and they built infrastructure to which the world is going to spend and from the money the whole world is going to spend in Dubai, they will earn enough foreign exchange earnings to repay those loans.

Even if you bring it down to Nigeria, Lagos State is highly indebted but Lagos State has used the funding it got from the capital market to expand infrastructure and support economic growth and with heightened economic growth,

Lagos State tax revenue has grown from 600 million Naira monthly in 1999 to more than 20 billion Naira monthly, in fact it is expected that Lagos earns about 20 to 30 billion Naira from tax revenues on monthly basis.

Lagos by diversifying its economy, now has enabled residents to earn income which they now tax and we have seen Lagos as the only state in the country that the foreign exchange, earning from crude oil only accounts for about 25 percent of the budgetary expenditure of the state and I think that is the direction the nation should be going and other states should be going.

If you build the right infrastructure, you catalyze productive activities in the country. That will enable people get jobs, it will help companies make profit, the federal government will take corporate taxes from those companies, the states will earn income taxes from  most of these companies but you need to build the necessary infrastructure that will support the country to be a productive base.

In the last World economic meltdown that we had, all the economies of the countries in Europe apart from Germany were distressed but somehow, the Nigerian economy which is considered a third world country managed to stay afloat. Would you say that the development could be attributed to the efforts of the nation’s economic managers or to providence?

Well, I think a lot of factors helped Nigeria weather the economic meltdown. It wasn’t as if Nigeria was not affected, we saw asset value crashed, we saw a lot of people losing their jobs in the financial industry, we saw banks almost going bailing up, I mean banks getting distressed. It wasn’t as if we were not affected but may be the magnitude and the length of time the problem persisted was lower compared to some of these Western countries.

We have to look at the level of integration between an economy and the global economy itself as at the time that happened. Remember that what caused the economic crisis of 2008/2009 was Mortgage crisis which dovetailed into a financial crisis. The financial crisis was transmitted through inter bank borrowing or interbank lending globally, that is global interbank lending and as at that time, few Nigerians were investing money outside the country or were buying foreign assets.

So, when those assets failed, that would not have a direct impact. The impact we had was as a result of commodity price crash particularly as it relates to crude prices and refined products which Nigerian businesses were holding in stocks at that time and of course, the crash in the capital market.

And again, Nigeria had a reasonably high level of foreign reserve as at the time that happened. I know we had more than 20 billion in the excess crude account and I think globally, we had about 51 billion Dollars as at December 31st 2007. Remember the market crash was in March 2008.

So, we had sufficient buffer that helped us weather that crisis. Whether you call it providence, I don’t believe that providence determines the fortunes of nations, I think planning and diligent execution of well planned policies determine the fortunes of countries.

Having said that, one can conclude that we had reasonably good economic management and then our level of integration and exposure to global market was also highly limited as the time that crisis happened.

Bringing it down to the Maritime sector, you know shipping is an international business as it is transacted in Dollars. Now that the Naira has been devalued, how do you think this will affect the country’s maritime sector?

Two things will happen. The maritime sector is gradually being domesticated, the cabotage law encouraged a lot of Nigerian Merchants vessels but that has not domesticated the means of payment    of trade in the maritime industry since international trade is dollar denominated. But what will happen is that a lot of Nigerian merchants who hold asset in the maritime sector, what that means is that even in crisis situation, the impact on the domestic economy will to some extent be insulated.

The second factor is that the maritime sector is a service provider, so its cost serves as an input to consumer goods and sometimes to stock of working capital or raw materials. So, when the cost of maritime increases as a result of conversion rates because the Naira has depreciated, it is passed on as input cost to the goods that are consumed in the warehouses or shops or that are used for productive activities.

As long as the maritime sector is a transit service, it will be affected to the extent that consumption is sustained. If consumption within the local economy declines, the demand for maritime services will decline. What that means is that the number of containers and ships coming to the country will decline because the demand for goods will decline.

But until that happens, until we get to a point where the economic crisis weakens the local demand for goods and services, we may not see an immediate effect on the maritime sector other than the exchange rate which is passed on to the consumers.

Many Nigerians have warned that further devaluation of Naira will endanger the economy of this nation. Do you agree with this?

What endangers an economy is not the rate of exchange. The rate of exchange will change the price level in the economy, but it has a secondary effect. That secondary effect is that when the price level in the economy goes too high, those with fixed income will realize that the purchasing power of their income has declined and therefore, the cost of living has gone up and their standard of living will go down.

At that point, they are no longer able to consume as much as they are used to. So, the implication when consumers failed to consume as much as they used to is that producers will no longer have demands for their goods and that is when it is transmitted into the economy. Producers will reduce their production and when they reduce their production, they will have no choice than to downsize their labour force.

So, you have high level of unemployment, the GDP will decline or the growth rate will decline. So that is what will happen. But until you get to the point where the change in exchange rate translates into the inflation rate which like I said has not happen but may eventually happen, then the purchasing power of fixed income earners will decline and their consumption capacity will decline. When that happens, the demand for goods and services will also decline in that economy.

But the good thing about it is, if we build the infrastructure which is why I always emphasize on infrastructure, such that as a result of the devaluation of the currency, imported goods becomes more expensive and the citizens begin to look for substitutes by patronizing locally made substitutes of those products then you find out that sometimes, when you tweak with your exchange rate, you end up stimulating your economy.

In fact, what countries do is that they use their exchange rate to stimulate their local production by weakening their currencies. If you see what has happened in America, America has a lot of contending issues, weakened the US  currency and therefore encouraged a return of production activities from other countries like  China and the rest of them that were not highly remunerated to come back to the US and the US economy has began to grow again.

Today, the European Central Bank is on the process of triggering a quantitative easing so as to weaken the Euro currency and make production more attractive in Europe or make the export of the European goods cheaper to the international buyers to stimulate production. So, the exchange rate can also be used to stimulate the local economy but that local economy must have the productive capacity to produce those goods that are substitutes to goods that are currently imported.

Do you see the austerity measure being put in place by the Federal Government as good enough to keep the nation’s economy afloat within this period?

Well, I think the austerity measures are just slap on the lips. The issues that have come up are the issues of ban or restriction of foreign travel and overseas courses. I don’t think those two cost elements are significant in the cost profile of the Federal Government.

Unfortunately, there are also limited measures that the government can take in a pre-election period, so it is understandable why they will not take any measure that will be very drastic.

But I actually have a different perspective to austerity measures. Austerity measures were introduced in the 1980s and they were recommended by the IMF and virtually all the countries that adopted the austerity measures had their economies destroyed.

In 1929, the US had an economic recession and when the recession resided, the US government of Roosevelt spent out of the economic crisis. And overtime, economists have come to understand that it is easier to stimulate the economy by spending out of the economy than to institute austerity measures. Austerity measure tends to shrink the economy, quantitative easing or government expenditure will trigger inflation but it end up stimulating the economy.

My approach would have been, the government should borrow heavily and engage in massive infrastructural development. That borrowing will end up creating employment in the economy; those employees will earn income which they will spend, this time I am talking about the fixed income employees which they will spend on basic necessities. The producers of local substitutes will begin to produce more within the economy. Then you find out that the economy will grow and expand and ultimately, the country will have a more diversified economy that will pay back the foreign borrowing and given the fact that the oil prices are not going to remain at the current prices, they will get to a point where the price will rally back and earnings will bounce back as in the days of glory.

But the key thing at this stage is that the country needs to invest in infrastructure to support and diversify the economy. If we have a diversified economy, if only we are not importing refined products, we would have cut off about 15 percent of foreign exchange demands, I mean if we can domesticate the refining of petroleum products locally.

We have seen a shift in food production; we have seen a lot of savings in that area. So the more you diversify your economy, the lesser you have need for foreign exchange and at that point, we will have a balance economy that does not depend on what happens on the international oil market.