Dawodu: Investment, Key for Economic Transformation

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Citibank’s Cluster Head for Sub-saharan Africa, Mr. Akin Dawodu, in this interview spoke about measures policymakers in Nigeria and other countries in continent can adopt to achieve sustainable economic growth in their respective countries. Nume Ekeghe presents the excerpts:

What has been the impact of COVID-19 on Sub- saharan Africa (SSA)?

SSA economies like the rest of the world has been in shock and it was one of those things no one saw coming. Six months ago, when we talked about 2020 forecast, it was very unlikely for anyone to have predicted there would be a pandemic that would shut down the global economy and completely change the calculus or expectations on the macroeconomic side. To that extend, it has been a real surprise especially when one thinks of global crisis like depression and recession occasioned by asset bubbles or fiscal excesses or balance of trade problems that have been seen before.

This pandemic has really been a challenge. When we look at SSA historically, it has been viewed as comparatively underdeveloped economically relative to many global economies. In terms of fiscal flexibility, SSA has its limitations especially when comparing the region to more developed economies that are able to finance palliatives or expand money supply and employing quantitative easing as a tool. The impact has been in two folds. For commodity exporters there has been impact especially when looking at oil prices. Also in general, the lockdown in countries have affected aggregate demand and market activity which has led to a slowdown in Gross Domestic Product (GDP). So, even if you are not a commodity exporter and you are a net importer in which case the drop in commodity price is good for you and there a few countries in this category in SSA, the slowdown in your economy occasioned by the global health crisis and more specific the lockdowns in their country means you get less tax receipts, less profit to tax, less activities, more unemployment which also brings your Gross Domestic Product (GDP) into negative territory or slowing down quite significantly. SSA’s access to the international market has also been constrained because most of the sovereigns in SSA are non-investment grade and non-investment grade countries have struggled more in terms of liquidity and the impact has been significant. There have been some positive trends in response to the crisis that has helped and there are signs that SSA is coming to terms with the situation and getting some relief in various forms to weather the storm. However in my opinion, it is going to be a storm that would be with us for a while.

For Citi, in Africa, how are you supporting your clients through this crisis?

At Citi, we continue to engage our clients because we exist for our clients. The important part of making it through the storm is making sure our clients make it through this period. Our clients range from public sector to corporate entities, financial institutions, multinationals and we have been constant and consistent in our engagement. For instance, with our sovereign clients, we have trusted advisory partners and we are working on solutions to support them particularly through this period. In some cases we work with multinationals and export agencies to find structures that would allow them access to liquidity that they need whether in foreign currencies or otherwise. We have continued to act as a bridge to the rest of the international capital market in Africa and we continue to play our role in keeping trade transactions flowing by providing the necessary finance and credit line to our clients to the extent we can. We also offer advisory services around risk mitigation. Citi is a global institution present in 98 countries globally and we have a particularly strong presence in Asia and that has allowed us to get an insight to what was going on regarding the crisis and we were able to respond as an organisation in terms of best practices whilst adopting relevant precautions. In a variety of ways, we have tried to put at the disposal of our client’s solutions that would help them navigate the crisis. We have also switched to digitisation which is a key aspect of our strategy and it has allowed us to showcase some of our capabilities and encourage our clients to move to online channels. The migration process has been ongoing and the crisis simply accelerated the process for many of our clients. So, overall it has been good to see the progress and the traction in that space. We have also focused on making sure we are adequately capitalised and our balance sheet remains strong and liquid. We have always been very strong on credit risk management side and we have continued to do this.

There are projections that oil might inch upwards to $60 per barrel, and with that in mind, what recommendations would you give to policymakers in commodity exporting countries in Africa?

I think the challenges for SSA and Nigeria are not entirely different from those of many countries in SSA. I think oil at $60 is good of course, but I think in the longer term, we have to figure out as a region and as a country, how to protect our country better from the impact the global commodity market. If on the revenue side we remain heavily dependent on oil, because it is difficult to control the price, you find yourself possibly changing your budget each time the market moves one way or the other. I think that in general there should be a reduction on oil especially from a fiscal and external balance prospective. So, investment is the real solution for growth.

SSA countries need investment in infrastructure – both physical and social and the Covid-19 crisis has seriously emphasised this point.

Social infrastructure such as education, health care, are more important than physical infrastructure. Roads or trains tracks are physical infrastructure you build, but the social infrastructure is the software on which that physical infrastructure would run, because it is people that are going to maintain your infrastructure for you and you need those people to be skillful, educated and healthy. So, Nigeria as a country and SSA as a region, require this investment.

Unfortunately for many regions, the revenue government generates, are not sufficient to make those investments as well as running the government itself. This varies from country to country – some have a higher cost of running their governments, higher salary or government maintenance bill, while others have less. So, you have to figure out how you’re going to get outsiders to help you and by outsiders, I don’t mean foreigners alone.

International investment is important, as well as domestic investors. You have to create an environment where private sector can thrive both at the country level and as a region. It is a critical success factor, otherwise SSA is likely to continue to lag behind the rest of the world. Therefore, the focus has to be on making the countries attractive for investors. For the commodity- dependent countries, it’s even double important – they have to do more in that regard. Due to historical commodity dependence they have been slower to opening themselves up. On the other hand, some other countries that are not commodity-dependent and probably not exporters have recognised it as part of life a while ago, and have had to survive by their ability to do it. The real opportunity in countries like Nigeria is dependent on how successfully you can open yourself up to both internal and external investors.

If you look at savings rates across Africa as a whole especially in Nigeria, there is relatively low savings rate, so the money is not going to come from local sources alone. You need to attract international liquidity and I think that has to be the future. Whether oil is $60, $40 or $10, I think the economy would not truly grow and reduce poverty if we do not find a way to attract investment needed to support the government in its effort to develop the economy. It goes various ways, there are some investment opportunities that are more investor-friendly and that are more commercial. Those are literally the first to go. For instance, mobile phones are a classic example, that one is easier to monetise, it is easier to make it commercial, so investors snapped that up and you have seen that. There are some that are potentially commercial, but require in some cases, some government support either via guarantees or partnership. Something that will help to reduce the risk and allow investors to participate by striking the right balance can be difficult to do but it is possible. Governments can focus a bit more on other investments that are less commercially attractive but are very important and need to be done and are typically, the burden of governments.

You can make education and healthcare commercially viable, but at the same time, the government still needs to bear a good chunk of the burden because of the strategic nature of these sectors and because the commercialisation of it may make it complicated for it to be universally available too. So, some sort of balance has to be struck there, but then the government still needs to outsource some of its resources towards those sectors.
I think, in summary, investment is the key and direct, long-term investment in creating an environment where business works.

You talked about attracting investment, but clearly one sector that seems unattractive or commercially viable ispower. What can be done to make investment in power sector attractive?

It’s a function really of creating the right environment. The power sector in Nigeria is not congenitally unattractive, neither is it commercially unattractive. Privatisation was done in 2012/2013 and some of the correct steps were taken originally, which was to unbundle the power utility and break it into three parts – Generation, Transmission and Distribution.

The tariff structure was put in place, and expectations of the future changes but when the time came to honor those tariff changes, from a political and regulatory perspective there was a reluctance to invest further. So, nobody is willing to invest. The people who had already invested would not invest more and potential investors would not invest at all. It can be made attractive, but there has to be the will on the regulatory and government side to allow it to be so. I also believe that the sector has to pay for itself and if it can’t we would have to continue to struggle.

Financial inclusion remains an issue in some countries in Africa. What do you think can be done to include more persons in the financial system in Nigeria?

There are two aspects to it, you can talk about channel and technology especially as things get more digital which I think is a good tool. A lot of the countries who have mobile money have improved statistics because everybody has a phone and if your phone is also your bank, then that’s easier. So, technology and channels are good ways to increase financial inclusion.

But the more relevant point really is financial inclusion via channels is one thing but economic inclusion is another. So, I can have access to my bank via my phone but, I have no money, I have no access to credit. That is always certainly more challenging and I think it is the more profound change that needs to happen.

Do not judge that because people have access to financial channels nominally but that they do so in actuality and that involves again the general growth and economic advancement. It involves investments in infrastructure, it involves things like credit scoring or credit rating, finding a way to do it on an individual detail scale, so that people can have some kind of credit score, credit history and can be appraised in terms of their ability to service debt and as a consequence in terms of their actions to credit. Also, being able to democratise that to make it universal will help to get people access to economic inclusion, in addition to nominal financial inclusion as well because that’s what really counts – that is what really lifts people from poverty.