April 24, 2019

Nigeria to borrow US$100 billion to finance the budget, already We have the Money If we only look within…Part 1 & 2


Part 1


By Dr Baba J Adamu

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As reported in Invest Africa Media last week during the World Bank/IMF Spring Meeting in Washington DC, our Finance Minister and Governor of Central Bank of Nigeria (CBN) tried to woo foreign investors to Nigeria.

It is important to know that what investors need to know before embarking on any investment venture is the issue of their personnel security and guaranteed security of their investment including rate of return on that investment, the ability to repatriate funds, access to foreign exchange, other incentives including trainable-educated-employable citizens; then the issues of rule of law/bureaucratic corruption, power supply, transportation, etc. The Investors will also look at the nation's monetary policy and a good local supply-chain. (This, the Chinese and Indians did very well). With an effective monetary policy, government can ensure that the local content bill works and anyone who invest in Nigeria is guaranteed a network of local suppliers (meeting international quality standards) to augment their operations. This is also where entering economic partnership agreement (EPA) with the EU and the USA in critical. Because again, this an era of multilateralism.

For example, if due to Brexit, Jaguar decides to relocate its assembly plant to Kaduna, the FG should be able to guarantee a network of local contractors who can supply some quality, international standard (Jaguar standard) parts like: windscreens, bolts, headlamps, craftsman leather seats, etc. They should promise that if 10,000 cars are assembled a year in Nigeria, Jaguar will not have to import 100% of its required component because our ingenuity and bound Economic Agreement will ensure we supply at least 40% of all required parts to meet their quality standard. Effective EPA will require foreign investors to have at least 40% local content in their hiring and if a Chinese company sells, for instance, 1 million brand of air conditioners, that company should be bound by EPA to set up a company that manufactures the part-components of the brand. Similarly for major products, as this will create tons of jobs for our people. 

Now, this is where monetary and fiscal policy is key to the operations of government. For this to work, the CBN needs $20bn or more to use as an investment fund only to be used as either trade finance or industrial expansion capital. Ideally, it should be handed to the Bank of Industry/commerce who in turn will hand out to those in the industrial/commercial supply-chain. To prevent corruption, only, and ONLY those supplying a company like Jaguar (for instance) should have access to this fund. It should be repayable within two years at an interest rate of no more than 5%. This pattern should be applicable to all other sectors like agriculture, mining, etc. Currently, Nigeria’s interest rates are deliberately designed to stifle industrial growth and perpetuate poverty as the rates are above 20%, which is unbelievable. The only people who benefit from these high rates are either hedge funds who invest money in high interest accounts for say a year or some members of the Manufacturers Association of Nigeria (MAN) who borrow for a short-term to buy dollar at government rate on the premise to buy (import) raw materials while they turn and sell the dollars at the Bureau de Change rate thereby cashing out big-time on the exchange without producing anything. MAN has been the strongest voice against FG signing any EPA. 

For government to woo investors and create an effective local value supply-chain, industrial lending rates for industrial capital must not be more than 5%. This industrial policy will make our people to produce goods of international standard in the right quantities-qualities and on time because they would have had access to short-term and low interest capital. This is not a rocket science, it needs only the political will. Now with the clamour of paucity of funds, should we borrow to finance the budget? Can Nigeria really afford to borrow and fund a US$100 billion budget? Remember, our debt to revenue ratio is more than 50% and probably closer to 70%. This makes borrowing very difficult, unless...

But lets ask ourselves what would happen if in 2020 we spent $50bn on infrastructural expansion, gave local manufacturers $30bn to expand production (monitor that the dollars do not go back to the Bureau de Change) so they could supply any foreign investor who come to Nigeria with components and then spent a further $20bn on education, roads, healthcare and security. Simply imagine!; and interestingly, we don't even need to borrow the money. ALREADY WE HAVE THE MONEY IF WE ONLY LOOK....

Nigeria to borrow US$100 billion to finance the budget, already We have the Money If we only look within…Part 1 & 2

Part 2

To look WITHIN, we need to look at some nations that have already developed, the circumstances, challenges and the responses that caused them to develop, and most importantly the attitude of their Leaders. Take a look at the best top countries in the world, in an assessment and measuring basic human developments, the Human Development Index (HDI)  of all that shapes a country, from quality of life to economic potential, these countries performed the best overall in the 2019 Best Countries Rankings according to  BAV Group and the Wharton School of the University of Pennsylvania, these countries are: 1: Switzerland 2: Japan 3: Canada 4: Germany 5: United Kingdom 6: Sweden 7: Australia 8: United States 9: Norway 10: France 15: Singapore 16: China 23: United Arab Emirates 24: Russia, etc.. Norway for instance has been named one of the best countries in the world to live in - for the 12th year in a row with life expectancy of almost 82 years.

All these nations do not prosper because they have no challenges. It is the response to the challenges that makes the difference. These nations do not develop because they have natural resources. They develop because they have thinkers that show great concern about the well-being of their communities; mobilize the people, to work hard and smart while providing opportunities and tools of empowerment for a better tomorrow. Development is not about raw materials. It is about value addition. Any nation that does not add value will continue to go down. Some of these nations have little or no oil deposits of their own, but have oil companies prospecting oil beyond their shores; or have oil refineries that refine crude oil for countries like Nigeria and sell it back to us. Others have no oil but fifty sixty years collecting royalties without necessarily developing the know how to mine oil by itself, others embraced technology; and developed their human and intellectual capital. Today, UK is in a mess because of Brexit but they are looking for optional solution. It may take a while but it will come to pass, the best minds would have gotten the best outcome and things will be fine for them again. China and India have been burdened with large populations for decades but when they realized that education was the key, they made sure everyone has access to quality, affordable education irrespective of class or ethnic background. People used to laugh at the over production of graduates in India and China but they have turned the huge populations to productive assets that no Western nation can match in a thousand years to come.

Even developed nations have huge problems and challenges but they overcome them because they think and act proactively. Singapore had huge economic challenges yet, they are the most developed nation in that part of Asia today. Look at South Korea, even in our continent; one can take a look at Rwanda that emerged from the worst tribal conflict, see where they are now. One can almost say, the troubles of the past was a blessing for nations that learnt to put their best minds to think; and challenged them to find solutions where none seemed to exist.

Nigeria is either bereaved of deep thinkers, or ensures that great thinkers never reach office, survive or listened to if they ever get there. Our leaders seem to run governments incapable of understanding or tackling the existential issues and the nation’s well-being. We are hobbled by corruption, lawlessness, banditry, kidnappings, herdsmen/farmers clashes, violence insurgency and security-issues of Boko-Haram terrorism, infrastructure deficit, increasing poverty, escalating unemployment, bad governance and political thuggery. Corruption has undermined the credibility of government, impoverished the country in general and has made Nigerians to believe that their government not only condones corruption, but facilitates it. 

Problems that caused other nations to think of solutions only make Nigeria think of importation. Like for example, we cannot guarantee electricity: import generators until we become the highest importer of generators instead of saying, wait a minute, why can’t we produce these generators locally for now, since we need so many of them while we tackle the power production and distribution? Or through Economic Partnership Agreement (EPA) to compel China to set up generator manufacturing plants in Nigeria and employ 40% local content since they sell millions of generators here. Similarly with other products. No good roads. Look for foreign companies to build the roads in billions while we only pay 10% counter-fund while we continue to pay-up past the time the roads are useful. No orchestrated plan to create local road builders with so many engineers in the country. Ministers have short time frames to work and get a return for themselves so they want turn-key projects that take care of their interest regardless of quality for the nation, which is why we see billions of Naira worth of road constructions handed over by foreign contractors without clear road markings, which is impossible in the foreign countries. Nigerian virtually imports everything including, even sporting activities like, going crazy and even fighting each other about Manchester United, AC Milan, Arsenal, Barcelona etc; but where are the Nigerian football club fans? Our educational system is poor. Look for the best schools in the western world and in Asia. When you cannot afford it, start shopping for schools in Turkey, Ghana, Togo, etc. The government continue to give license to private schools which charge a student between N150,000 to N350,000 per term for still low quality education. Hospitals are poor, travel to India, Egypt or Western Europe and America for treatments or checkups. We do not care to fix or build our own, yet we have the capacity to do that.

Today, communities within States are grappling with long-term unemployment, environmental challenges, widening economic disparity, growing social unrest, generational shifts crisis; and a more complex lack of economic development engagement, which possesses significant challenges and brings compelling opportunities for innovative Leadership toward a sustainable economic development. Being innovative is a label that citizens, companies, industries and countries aspire to, yet what it actually means remains a mystery for those that refuse to know. But Great Leaders know and listen; and implement.

Like we posited in part 1 of this article, can Nigeria really afford to borrow and fund a US$100 billion to finance the budget? Remember, our debt to revenue ratio is more than 50% and probably closer to 70%. Hard, but possible to get, but then with lots of conditions and high interest. About 10% will go toward environmental impact assessment (they will give us the company to do that for us) for any project to be implemented with the funds, meaning the 10% goes back to them. They will dictate subtly the type of project best for you (you need to change your entire old roof to prevent water leakages and rats entering the roof but they will tell you to simply patch the roof and build extra guest room). Then they will recommend who will do the job and will ask you to purchase most equipment needed for the job from them. Finally, they will delay giving you the funds allowing inflation to eat some of it while you pay 3, 4 or 5 (compound interest) times the original amount, usually by next generation. But what about being innovative and do the same thing these Powers do: LOOK WITHIN…

Option 1:

Long-term Venture Capital Funds (VCF) for local manufacturing industries and on Infrastructure with private companies for (roads, power, rail, water, hospitals, housing etc

Government can set up a VCF of at least US$25 billion in initial equity, well-positioned to attract additional US$75 billion from both global and local investors, to support local manufacturing industries and infrastructure in Nigeria. That is US$100 billion in long-term venture capital funds, to support both the local manufacturing industries and infrastructure development, which as it succeed, (pays good dividends to investors), it could be raised further under management to more than US$100 billion. The proposed VCF should be established based on global investment standards for venture capital funds and it could be listed on Nigerian Stock Exchange (NSE) and also on a major global stock exchanges such as in New York, London, Beijing etc, to create liquidity in capital and also attract capital from global investors, who may want a long-term equity exposure to last frontier markets such as Nigeria. With the Government International trade-related reforms and export oriented policy in place; and establishment of PPP with private companies on infrastructure, this will give local manufacturing industries a major boost in liquidity and capital, increase economic activities and wealth creation, thereby making Nigeria more competitive for the African and global marketplace.

The initial US$25 billion in equity funds can be sourced from Nigeria’s foreign external reserves and Sovereign Wealth Fund (SWF) to establish the VCF. As we are all aware that in Nigeria, there are two Sovereign Wealth Funds: the Excess Crude Account (ECA) and the Nigeria Sovereign Investment Authority (NSIA). These two are funded by the savings earned when oil prices are at peak. Specifically, the SWF was established to address the controversies surrounding the Excess Crude Account (ECA). The fund is usually expected to generate revenue to meet budget shortfalls in the future, provide dedicated funding for development of infrastructure and keep some savings for future generations. It was recently reported that Nigeria’s external reserves stood at US$44.7 billion.

In fact, this is the sort of innovative catalyst that is required to spur Nigerian economy and the way forward instead of borrowing funds to finance a US$100 billion budget. This strategy would not be booked as liabilities on Nigeria’s balance sheet but as assets, thereby making Nigeria’s credit rating to rise and be stable leading to a rise in GDP over the long-term.

Option 2:

To do exactly like in option 1 except to target ONLY local investors: Nigerian wealthy individuals, wealthy ex-politicians, ex-military or any paramilitary personnel; or any Nigerian that has money to invest or stashed outside the country or even somewhere hidden in the country.  The Government to give ONE YEAR AMNESTY for any such individual to bring out the money and invest on a single-digit return, on the government guaranteed fund anytime within the one-year period, no question asked. Government can then use the money to support local manufacturing industries and infrastructure development in the country, similar to what was done in Malaysia following end of military rule.

Option 3:

While I do not subscribe to money financing of budget deficit through printing of high-powered money also called seignior-age, I often wonder, what if I had a farmland with lots of gold deposit and a legal license to mine the gold. I have all the right machineries, the tools, the technical know-how and the personnel but because I belong to a global gold-mining organization, I can only mine only a stipulated quota determined by the organization. The reason being that instead of driving prices up by mining so much, which would discourage patronage and encourage investment in alternative metals, it would be best to adopt a strategy that works to stabilize prices. This would guarantee a regular supply of gold to consumers, but also provide 100 years of a steady stream of income to me. Ironically, if I continue to abide by this quota, I won’t be able to finance my immediate needs in my farmland, like maintaining and running the gold processing plant plus, already the price is far from being stable and already investment in alternative metals has soared, so therefore I am not sure if in the next 100 years I will still have some value for my un-mined gold. More intriguing is the fact that, I kept having unsolicited visits at night bunkering my gold, so technically my quota is being exceeded but not by me. At the end, instead of making profit I am losing as I have to subsidize to be able to have the gold I need for my local use.

My question is what about if I get my act right, stop those unsolicited bunkerers, mine more gold than my quota, build the required industries that I need thereby eliminating subsidy and use the extra fund for more towards a more multi-sector economy and infrastructure. What if, in looking within, we are able to think outside the box, be creative and innovative with $50bn on infrastructural expansion, gaving local manufacturers $30bn to expand production (monitor that the dollars do not go back to the Bureau de Change) so they could supply any foreign investor who come to Nigeria with components and then spent a further $20bn on education, roads, healthcare and security, without having to borrow one cent.



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