Teriba: How Nigeria Can Unlock Liquidity from Public Assets

Chief Executive Officer, Economic Associates, Dr. Ayo Teriba is one of Nigeria’s leading economists whose experience transverses both private and public sectors. Currently, he is the vice-chairman of the Technical Committee of the National Council on Privatisation (NCP) and on the Board of Economic Advisers in the Office of the Economic Adviser to the Vice-President. In this interview with Gboyega Akinsanmi, Teriba dispassionately dissected the triggers of the heinous liquidity crisis confronting governments at levels and offered alternative measures to manage the crisis without inflicting additional debt costs on the federation

With the declining revenues and rising costs of debt servicing, what public finance model can Nigeria adopt to get out of its fiscal doldrums

We must learn from other countries. What clever debt managers are doing is issuing debt against assets and not against revenue. Nigeria is rich in assets. Nigeria needs to unlock liquidity from publicly owned assets. We should stop issuing debt linked to revenue. Rather, we should issue debt linked to assets. We do not have the revenue to debts tied to any longer. Until the economy returns to the path of accelerating growth, we should deemphasise tax revenue. Other countries are giving tax holidays and granting massive income subsidies now, even when they must borrow to fund the income subsidies. When other countries are subsidising their people, we should not be trying to tax our people more. We should turn to assets for revenue, by securitising the assets. We should only issue securitised debt that is asset-based or asset-backed. Saudi Arabia and Malaysia are currently borrowing at home and abroad much more than Nigeria. But they are issuing mostly securitised debt, both conventional and Sukuks. The advantage of securitised debt instruments is that they are issued against assets, rather than against revenue. They do not promise to pay any interest but offer opportunities to earn profits or dividends. In these regards, debt securities are equivalent to equity, except that debt securities have fixed maturity dates, while equity securities have no maturity date. Debt securities are often convertible to equity.

From the examples of Malaysia, and Saudi Arabia you just cited, how can Nigeria adopt the same approach?

Nigeria is not issuing any debt based on assets. We have huge assets all over the federation. But the assets are mostly idle. We do not take advantage of them. The potential market values of our publicly owned companies, real estate, and networks of infrastructure assets are humongous. But they are still mere potentials. We do not even know their market values. Saudi Arabia figured out the market value of Aramco towards the end of 2019. That company is now worth more than $2.4 trillion, which is thrice the value of the country’s GDP, and is the most capitalised company in the world today. Saudi would not have unlocked this wealth if they had not taken the necessary steps to figure out the market value of the company. If Saudi neglected to figure out the market value of that asset, they would have been burying their talent. Valuing it has unlocked the asset and easily opened new doors of valuation gains and asset securitisation headroom that will not just improve revenue and debt sustainability, but also change the economic, fiscal, and financial narratives of the country. Nigeria owns hundreds of publicly owned companies in lucrative energy, power, transport infrastructure spaces, and real estate. We can list them on stock markets at home and abroad to figure out their market values and open new doors of valuation gains and new securitisation headroom for us. But we keep neglecting to list them. No one is saying that we should sell these assets. Saudi Arabia still owns 98.01 percent of ARAMCO, having sold only 1.99 percent of its stake just to figure out the market value. We should list every company, not to sell them, but to figure out their market values. The advantage of knowing the worth of our assets is that we reap valuation gains from them to boost non-tax revenue and we can securitize them to unlock the liquidity needed to change our economic, fiscal, and financial narratives.

When compared with our public debt stock, is Nigeria rich in assets that can help generate liquidity and guarantee fiscal stability? 

Nigeria is the richest country in the world today in terms of underexploited assets. Most other comparable countries have used the bulk of their assets. Brazil, China, Egypt, India, Malaysia, and Saudi Arabia are good examples. Nigeria is the most notable large population economy that is yet to use its vast stock of publicly owned corporate, real estate, and infrastructure assets to unlock liquidity. We can use the assets to unlock hundreds of billions of US dollars to overcome revenue headwinds and cut debt costs. It is not only corporate assets that we can securitise. We can also securitize real estate. In real estate, for instance, Nigeria is fortunate to own a large parcel of land next to Eko Atlantic City. We choose to use Bonny Camp as the military base. We know the value of one square metre of land in Eko Atlantic City today. The potential market value of one square metre in Bonny Camp will not be far from that. There is also Ikeja Cantonment next to Ikeja GRA. We choose to use it as a military base. We know the value of one square metre of land in Ikeja GRA. The potential value of Ikeja Cantonment may not be too different. Growing urban congestion means that Bonny Camp and Ikeja Cantonment are no longer the most suitable sites for military bases. We cannot move the city. But we can attract the investment needed to move barracks to more suitable locations around the country, repurpose the prime locations, and redevelop them into luxury residential apartments, luxury offices, or shopping malls. We can create mini-Dubai in those spaces. We do not have to sell them. We can lease them to unlock the revenue needed to change fiscal narratives.

How can you categorise these assets that Nigeria can leverage to unlock the liquidity required to change the fiscal narratives?

There are four clusters of assets. First, we have companies. We must figure out the market values of all state-owned corporate assets to open the door to valuation gains and securitisation opportunities. Second, we have real estate. We must figure out the market value of the government’s real estate portfolio, including every metre of state-owned land, to enable us to find opportunities for valuation gains and securitisation opportunities in real estate. Third, we have the infrastructure. We must figure out the values of greenfield, brownfield, project financing, concessions, and public-private investment opportunities in all infrastructure assets and attract adequate investment into all the spaces. Fourth, we have human capital. Countries that invest heavily in sponsoring their nationals for innovative research programmes at home and abroad end up with growing pools of knowledge assets in the form of patents, trademarks, brands, skills, and talents that we can figure out their market values to open the doors to valuation and securitization gains.

What are the major triggers of the fiscal crisis that governments at all levels are currently facing?

A growing number of local and global observers are repeatedly warning that Nigeria’s fiscal narratives are approaching a cul-de-sac where declining government revenue and rising debt costs may become equal. What we however need to say more loudly is that those narratives are extremely easy to change. The government only needs to recognise the need and muster the will to take the actions necessary to effect the changes, drastically, quickly, painlessly, and sustainably. Nigeria enjoyed oil windfalls from 2000 to 2014, before oil prices started weakening in July 2014. The windfalls lifted government revenues and supplied adequate foreign exchange to lift the economy, and stabilise the exchange rate, consumer prices, and interest rates. Both oil and tax revenues grew impressively for these reasons. Stable, in fact slightly appreciating, Naira meant there were no revenue illusions. We have left that era of revenue windfalls for a new era of revenue shortfalls for eight years now, and we cannot but take the lessons of those years to heart. The government keeps trying to manage revenue generation and debt issuance in this era of shortfalls with the same approaches that have worked so well in the era of windfalls. That approach is now backfiring as revenue continues to decline and debt costs continue to rise. Debt costs are now getting as high as revenue.

Does your explanation suggest that it is no longer wise for Nigeria to borrow?

It is not that we should not borrow at all. Every country whose revenue is falling needs to borrow. But we must replace debt instruments that are ill-suited for a period of shortfalls with debt instruments that are more suited for the era of shortfalls. Writing IOUs or issuing promissory notes against future revenues made sense in a windfall. However, it makes no sense in a shortfall. Nigeria’s domestic and foreign debt portfolios are 100 per cent promissory notes against future revenues. We should stop issuing IOUs against revenues that everyone now knows that we no longer have. Nigeria must now make two simple fiscal adjustments that are more suited to the era of shortfalls that we have found ourselves in for eight years. First, to regenerate revenue streams, Nigeria must generate non-tax revenues from publicly owned corporate, real estate, and infrastructure assets rather than trying to increase tax revenue. Second, to cut debt costs, Nigeria must open opportunities for massive investment in the three clusters of publicly owned assets rather than continuing to borrow to fund them.

How then can we Nigeria migrate from its practice of contracting revenue-based debts?

We can sum up the fiscal lessons of the last eight years as follows: Nigeria needs to overcome three historical illusions. The fiscal narratives of the past eight years must have thought us how to overcome each of the three illusions. First, we have been under the illusion that easy money would always come from the sale of our crude oil. Everyone can now see clearly that oil revenue is neither stable nor dependable. Second, we have been under the illusion that even if oil revenue fails, we can easily get more revenues by tinkering with personal and corporate tax regimes. That was the idea behind the resort to annual Finance Acts and the resulting increases in VAT and other taxes. It must be clear to all now that we cannot get more tax revenue out of an economy that is sinking in and out of recessions. Third, we have been under the illusion that we could always borrow our way out of any liquidity crisis. It must be clear to all now that our revenues have now fallen so low that it is becoming equal to rising debt costs to impose a binding limit on our ability to borrow. Government revenues at the three tiers of government are from oil exports and taxes. But global commodities have been weak since 2015 and revenues at the three tiers have been declining in line with the weakening commodity prices. The ongoing Russia-Ukraine war has temporarily lifted the price of crude oil. But oil theft has made us unable to reap the full benefits of high crude oil prices. This is one of the reasons revenues have remained low this year, despite the war-induced temporary surge in oil price. A combination of economic recessions and the pandemic-induced economic lockdown has also held down tax revenues at all tiers since 2016.

Is the bid of the federal government to introduce new taxes an appropriate approach to manage the fiscal crisis?

The economy has twice slid into recessions in 2016 and 2020. An economy that is struggling to get out of recession cannot be a source of rising tax revenues. Whenever the government says actual non-oil revenue is better than budget, what they do not add is the exchange rate is now only worth half of the value we budgeted for. We should adjust increases in naira revenue for movements in the exchange rate of the naira before declaring that actual revenues are better than budgeted. 

The federal government’s retained revenue increased by 50 per cent from N4 trillion in 2015 to N6 trillion in 2021 but the exchange rate increased by 275 percent from N160/US$ in 2015 to N600/US$ by the end of 2021. Thus, Nigeria’s retained revenue dropped steeply from $25 billion in 2013 to $10 billion in 2021, despite the time we waste debating how to raise more tax revenue with the finance bill every year. We have, among other things, increased value-added tax from 5 per cent to 7.5 per cent and introduced taxes on alcohol, tobacco, and sugar. But government revenue has continued to decline anyway, underscoring the futility of trying to get more revenue from a recessed economy.

Amid these festering fiscal crises, what is the way forward for Nigeria?

The way forward for Nigeria is clear. Nigeria is revenue-poor. But we are not asset-poor. We are asset rich. We are keeping the assets idle. We can easily solve Nigeria’s revenue problems by attracting investment into these assets to unlock non-tax revenue from them. Nigeria’s public debts are potentially sustainable if we link new debt issues to assets. Nigeria’s fiscal liquidity is potentially vibrant if we attract investments directly into assets that are currently idle. Our revenues are declining, and rising debt costs are almost equal to revenues because we are not tethering our debts to assets. Rather, we are tethering debt issues to declining revenues. That is not sustainable and external observers are beginning to place Nigeria’s foreign currency bonds on their watch list. The negative narratives will give way to more positive narratives once we tether new debt issues to assets. This is the path to fiscal sustainability as is becoming the practice in Brazil, China, Egypt, India Malaysia, and Saudi Arabia, Nigeria can learn from these countries.

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