Last week, the Emir of Kano and immediate past Governor of the Central Bank of Nigeria (CBN), Alhaji Muhammad Sanusi II, roundly criticised both the monetary policies of CBN as well as the fiscal policies of the new Muhammadu Buhari administration.
Given his public profile, it is not surprising that his comments have received strong media attention but sadly in a manner that strengthens the popular, simplistic and ill-informed arguments of some so called experts and international forces led by the International Monetary Fund (IMF), the World Bank as well as portfolio investors who want to buy Nigerian assets on the cheap entering and exiting as they choose. As an analyst, who has closely monitored the evolving global economic developments, and the measures taken by the CBN and the government to manage their challenging consequences, I believe it is important to respond to the issues raised by the emir who seems to have all the access to the corridors of the presidential villa, Abuja.
Has the emir told the president all of these privately and then given the presidency – where the emir also has good friends – ample time to consider policy actions before using the platform of the CNBC global media to advise his president who he says needs help? Does the emir realise that Buhari came to power on the back of the support of millions of teeming poor masses of Nigeria? Would he then be “helping” the president by advising a devaluation that will immediately drive up inflation and reward the support base with more economic hardship?
I will not discuss some of the politics and contradictions of these comments but will dwell mainly on their economics as one wonders how someone who vehemently opposed any form of devaluation as governor of the CBN would suddenly become its most vocal proponent as Emir of Kano? Though some have suggested that the emir who is now Chairman of the Board of Directors of Black Rhino, a leading US-based private equity firm, is speaking for the global private equity establishment, who will be the biggest beneficiaries of devaluation, I know the emir is smarter than to allow himself to be used. While the motives and politics of these comments are legitimate grounds to explore, one must now go on to the economics of his arguments.
It is truly disturbing that someone as knowledgeable as a former governor of Nigeria’s CBN, who was one of the key backers of the Nigerian Bureau of Statistics (NBS), will so insouciantly dismiss the size of Nigeria’s economy and its ranking in the world because of fleeting concerns about the size of our debt. According to Emir Sanusi, we “spent years deceiving ourselves as the 21st largest economy in the world because of rebasing but our Debt-to-GDP ratio is 11 per cent”. There are several points to note here. The new size of Nigeria’s GDP was arrived at after years of painstaking work at the NBS with close assistance from international statistical agencies and the CBN in line with global best practice.
In fact, all the leading international financial and development agencies, including the World Bank and the IMF have applauded and approved both the methodology and outcome of the process. It is therefore not fair to either politicise or diminish our GDP estimates. While it is critical to keep an eye on our rising debt (which, of course, was not accumulated by the Buhari government), one must note that a debt to GDP ratio of 11 per cent is not a disaster.
The real question that should be interrogated is not the size of the debt but what exactly the money was used for. It is in fact advisable to incur debt as long as the money is spent on basic infrastructure and other capital projects that can spur long-term economic growth. This is why some of the largest economies in the world today also have some of the highest debt-to-GDP ratios. For example, Japan’s debt to GDP ratio is a whopping 246.1%. Italy is at 132.6%, Belgium’s ratio is 101.5% and France is at 97%. Even the United States, the world’s largest and leading economy has a debt to GDP ratio of 105.6%, far larger than that of Nigeria. This means that the amount of money the US Government owes is more than the size of its entire economy! Nigerians should therefore hold the government accountable for what our debt is spent on rather than on its size.
Furthermore, the continued calls for devaluation sadly do not recognise that the naira has already been devalued by over 20 per cent in the last one year, from N155 to N167, and then to N197 per US dollar. So the question is not whether the CBN should devalue or not, but how much devaluation is warranted by current economic conditions. We have to keep in mind that determining the true value of a currency is not an exact science. Although there are widely accepted methodologies for exchange rate assessment, their accuracy depends on lots of underlying assumptions and data. For instance, a key input for the methodology is the volume and value of imports. But in Nigeria, we all know that most of our imports are either not captured, under-declared, or over-invoiced. How then can one speak so clearly about the true value of the naira when some of the critical data needed for its computation is flawed?
Relatedly, the emir blames the slow GDP growth of the first half of 2015 on the CBN’s refusal to devalue the naira. Yet, in making this statement, he willfully ignores several facts. First, Nigeria is dealing with a set of exogenous shocks including the sharp decline in oil prices, the slowdown in global growth (which means less imports from Nigeria), and the geopolitical tensions along important trading routes around the world, which has also significantly lowered prospects for global growth. In recognition of these shocks, the IMF recently reduced its forecast of global growth in 2015 from 3.5% to 3.1%. Every country in the world has slowed down markedly, and Nigeria is not an island of its own. How then can one simply blame Nigeria’s slow growth on the value of the naira while ignoring the fact that the government is losing more than 50 per cent of its revenues as a result of falling oil prices?
But if devaluation were the simple answer, let us consider what has happened to comparable countries that allowed a full depreciation of their currencies during the last several months. For example, Ghana, Russia, Zambia, and Brazil have all allowed depreciations of their currencies to the tune of 27%, 40%, 45%, and 42%, respectively. Yet, Brazil and Russia are in recession. In fact, analysts now expect Brazil’s GDP to shrink to 0.8% in 2016. In Ghana, the latest growth rate is less than 1% while Zambia just declared a National Day of Prayer because of slow growth! What is clear from these countries is that depreciation is not a silver bullet to the economic challenges that we are facing today. To accurately interrogate these issues require much greater analytical depth than is being shown these days.
Similarly, the assertion that the demand management policy of the CBN has deprived certain industries of critical imports ignores the fact that these are the same policies that have helped the country become self-sufficient and a net exporter in cement and other areas. Today, cement imports would have been costing Nigeria about $3 billion yearly.
That comment also ignores the fact that most manufacturers of the 41 items restricted from accessing FX are witnessing tremendous increase in demands for their products. For instance Erisco Foods (manufacturers of tomato paste), GZ (manufacturers of aluminum cans), Obasanjo Farms, and the association of cold rolled steel manufacturers of Nigeria have all reported significant increase in sales and are already employing much more Nigerians and expanding their operations to meet with the demand.
What is the “essential raw materials” for the production of items like tomato, palm oil, toothpicks, rice, cement, margarine, vegetable oil, poultry products, chicken, wooden doors, furniture, clothes, and table wares? We have no choice other than to revitalise and encourage the growth of local industry. Not too long ago, Nigeria used to control 40% of the global palm oil market but today we spend billions importing palm oil yearly, while Malaysia and Indonesia control 80% of the global palm oil market. This is clearly not the way to go and we must not allow personal interests to becloud our sense of objectivity.
The emir also incorrectly stated that the central bank is currently “pursuing tight monetary policies” and that “it is time to loosen monetary policy”. At the last Monetary Policy Committee (MPC) meeting of the CBN, the Cash Reserve Requirement (CRR) was reduced from 31% to 25%. And owing to the policies of the CBN, the interbank interest rate has crashed to a 5-year low of 0.8% and both lending and deposit rates are falling accordingly. The truth, therefore, is that monetary policy is already loosening significantly. The Nigerian banking system is awash with both naira and dollars and there is no sound economic basis to call for a further slackening, especially in the face of rising inflation.
While the emir’s declaration that “portfolios flows are gone” is true, he presented it as if their exit is a result of flawed policies in Nigeria. However, it is a global phenomenon. According to a recent report by London’s Financial Times, portfolio outflows from emerging market countries, including Nigeria, in the third quarter of 2015 has been the worst since the 2008 global financial crisis. Portfolio investors from emerging market countries have offloaded an estimated US$40 billion worth of securities.
Everyone knows that portfolio investors settle their fears on their side of caution, and as such, once commodity prices start to fall, they quickly pull their resources out of commodity-exporting countries. Besides, there are strong indications that the US Federal Reserve may be raising interest rates sometime later this year. Of course, given the perceived stability and safety of US securities, most portfolio investors prefer such investment and are therefore preparing to invest in the US market once the Fed raises US interest rates. It is therefore a symptom of intellectual laziness for anyone to simply blame outflows of portfolio investments from Nigeria on the country’s monetary or exchange rate policies.
One must also highlight the perils for policymakers when everybody pretends to be an expert on the current economic situation facing our country. All through the emir’s four full years as governor of the CBN (2010—2013), the average price of oil was a very healthy $108 per barrel, as against the current average of $52 per barrel. The last time Nigeria was in this situation was in 2005 when the price of oil averaged $55 but with an import bill that was about N148.3 billion per year. Yet, today, at about the same average oil price of $55 per barrel, estimates from the first nine months of 2015 show the country’s import bill is about N917.6 billion.
In truth therefore, we have never been in this kind of situation before as a country. Likewise, the emir never experienced this magnitude of exchange rate crisis or foreign reserves pressure and cannot claim to have expert opinions on how it should be resolved. It is unfortunate that the emir who obviously enjoys his status as the darling of the western media is attempting to create the impression that any economic policy of the Buhari government that western “experts” don’t approve of is wrong. If his forays into public discussions is to make simplistic and biased prescriptions to Nigeria’s complicated economic problems, may be it is time for him to spend much more time thinking about how to create employment and spur real growth in Kano.
This article was originally published on Thisday