At the last Standard Bank West Africa conference in September 2015, within a context of adjusting to a new government after the general election earlier in the year and lower oil prices, I had highlighted the fact that many long-term investors in Nigeria had previously navigated through various booms and busts and so they were familiar with the early warning signs which signify a recession and/or a recovery cycle for our capital markets. Investors do not like heightened uncertainty because it confronts them with questions that they cannot answer and/or successfully explain.
In early September, 2015, the big unknown was the country’s economic policy direction and the likely composition of the President’s economic team. The team is now in place but the greatest policy uncertainty of all remains and that is an exchange rate policy regime that threatens the foundations of macroeconomic stability and appears to be unsustainable. The argument at stake is not whether to devalue or not because there has already been an effective devaluation.
The naira prices of various capital goods are now being “correctly” priced purely on the basis of realistic expected replacement costs and so the economy is sliding towards an unpalatable scenario where the consumer suffers the “pains” of devaluation (rising prices) without witnessing any of the expected “gains” such as enhanced fiscal viability (in local currency terms at least) of the three tiers of Government and increased competitiveness of Nigerian businesses.
The much craved economic diversification can only take place meaningfully if new capital investment activity takes place to take maximum advantage of increased domestic competitiveness. Sadly, most investors here (local and foreign) are currently caught up in a frenzied pursuit of the cheapest available dollars and the difference between losing this game and winning it can be as high as a mind-boggling 50 per cent on new transactions.
The pursuit of scarce forex for today’s needs has understandably become the main game in town and this has exacerbated the pressures on Nigeria’s foreign exchange reserves and the Naira via the one-way bet that is currently on against the naira i.e. everybody wants to take foreign exchange out and nobody really wants to bring it in.
The excitement caused by the important development in Nigeria’s political landscape last year, where a change in government occurred at the federal level after a keenly contested election, has given way to some apprehension surrounding whether a populist government can take the necessary tough economic policy actions that are necessary to restore confidence and stimulate badly needed new investment activity. Without investments there will be no new jobs.
The uncertainty surrounding the exchange rate regime and its sustenance has cowered both local and foreign investment activity. It is also worrying that the federal government is considering further borrowing to “bridge” a fiscal viability crisis that is caused in part by its decision to sell its forex to the private sector at rates that guarantee the latter huge windfall incomes, while the cash strapped government goes a borrowing.
Clearly leaning on government’s agenda for broadening revenue sources within a context of lower commodity prices, this year’s conference has been themed: Unlocking Nigeria’s Potential…growing through diversification. The theme is timely as there is need for collective and concerted action to embark on a drive for sustainable economic growth.
Nigeria’s overdependence on oil revenues could result in serious downside risks for the economy as the reality of current economic trends and indices speak for themselves. Arguably, the process of diversification will be more challenging given downbeat global economic sentiment and the need to generate enough foreign
exchange in order to pay for capital intensive factors of production which can then be leveraged upon to further industrialize the economy.
Efforts at economic diversification are still at a relatively early stage of execution and are hampered by exchange rate uncertainties. This has created a very challenging backdrop for policy makers to operate against as the private sector is naturally pre-occupied at present with the short-term pursuit of scarce forex at official rates which guarantee huge windfall incomes for the lucky recipient.
By rising above the distractions and uncertainties surrounding the short-term foreign exchange situation and evaluating Nigeria’s long-term potential in key sectors of the economy, such as infrastructure, power and gas, consumer goods, agriculture, etc., investors will be better guided and positioned to take informed decisions on where the best long-term returns on investment will eventually emerge from.
The need for decisive diversification of the economy becomes even more apparent when we consider the yearning needs of the populace for new jobs and/or welfare packages that will help drag significant numbers of them up from below the poverty line.
Given the government’s plan to boost economic activity through extensive spending on infrastructure as well as on social projects, it potentially provides a platform through which the private sector can partner with government. It is clear to most stakeholders that government cannot attempt to close the infrastructural gap alone without recklessly expanding Nigeria’s debt burden. This makes it imperative that the government clearly articulates a policy regime which enables both the private sector and the public sector to allocate scarce resources more efficiently.
An in-depth look at the 2016 budget proposal which is still being deliberated upon in the National Assembly clearly brings up a number of opportunities for the private sector which if properly executed will slowly enable the Nigerian economy tap its potential growth opportunities and boost aggregate demand. Certainly, the increased focus and planned harnessing of all of the government’s possible revenue streams into a central pot should give rise to a better oversight of all government spending and enable a more efficient allocation of resources.
On the expenditure side, government plans to spend, in 2016, at least 30% above the 2015 budget. This translates into a capital expenditure budget of close to NGN1.8tr (versus NGN557bn in 2015). Even if the government is not successful in implementing 100% of the programmed capital expenditure, it is still plausible that a significantly higher expenditure on infrastructure should take place in 2016 than anything that has been spent on infrastructure in recent years. There is clearly an opportunity for private capital to leverage upon this.
• Peterside, Chairman of Stanbic IBTC Holdings Plc, delivered this lecture yesterday at the seventh Standard Bank West Africa Investors’ Conference in Lagos