Experts say the wellbeing or otherwise of the Nigerian economy in 2018 will be determined by the strength of its foreign reserves. They told MARK ITSIBOR that the FG must offload equity – ownership in some sectors to attract long-term foreign direct investment, going forward
“The key variable the authorities must focus on in 2018 is the reserves,” Chief economist at Economic Associates, Ayo Teriba posited in an interview with our correspondent on the search for economic outlook for Nigeria in 2018. His view is premised on the fact that the rate of foreign reserves is central to economic stability because it has direct bearing on inflation and exchange rate. Hear him: “If we build up reserve the naira will be stable. If the naira is stable, inflation will come down. If inflation comes down, interest rate can come down. The key variable for Nigeria today, either for GDP growth or government spending or interest rate or exchange rate is external reserve. Where the reserves head, the economy will head. If you push the reserve up, you push the economy up.”
Dr. Teriba has a potent argument. In 2017, reserves increased steadily to end the year at about $38.73 billion from a low of $25.84 billion in the first quarter of 2017. The increase in reserves was accompanied by Nigeria exiting the recession that exposed how much the country has only, but paid lips service to diversification of the economy in the past, and failed to get buffers for it. “If in 2018, we see further increase in reserves, then you will see the recovery being sustained. You will see the naira continue to strengthen and inflation continues to fall,” he aptly predicted in line with other public watchers who also agreed that the reserves will be vital to signalling the direction of the economy and its ability to respond to any shock that may occur.
The fact is that the federal government is actually faced with the key policy challenge of how to ensure that reserves continue to grow. The buildup in the reserves in 2017 was solely occasioned by recovery of oil GDP and increased foreign debt issuance by the federal government and some banks in Eurobonds, all of which helped to build the reserves. But for economic and investment analysts in the country, Nigeria cannot continue to let the economy depend only on what happens to oil and debt alone for obvious reasons. The suggestion is that government can increase the pace of accretion of foreign reserves by taking pragmatic steps to raising Dollar equity.
Those who belong to that school of thought say the federal government has two options: offload its equity in key sectors of the economy as it was done in Liquefied Natural Gas (LNG) where the government currently owns 49%, with private sector owning 51% equity – ownership; or open up other sectors of the economy to foreign investors – like the telecoms industry to ensure adequate capital investment and efficiency of operations. If that alone is done, “the value of your 49% will soon be multiples of the 100% you have now,” the university Don said.
As it stands, the Nigerian government exclusively owns a lot of sectors 100%. Power transmission, rail, pipelines, network of national teaching hospitals and network for federal universities, among others are owned 100% by the federal government. Yet, those sectors are not performing. The sectors are in decay, dragging the rest of the economy down.
If compare with Saudi Arabia in the same category of major oil producing countries with Nigeria, it would be discovered that Nigeria needs to change her investment policies. Saudi Arabia recently announced privatization of some sectors of its economy, including hospitals, football clubs and universities to attract long-term foreign direct investments, with a target of raising US$200 billion. With about 40 million people, Saudi Arabia currently has over $450 billion in its reserves, which enables it to comfortably respond to any revenue shock as it did in 2015, 2016 – during the global fall in oil price.
The expectation is that the All Progressives Congress-led government will either sell some of the national assets as earlier hinted, or license new investors now before inadequate foreign exchange liquidity creates more problems for the economy like the recession. “If we took this action ahead of the recession, you would not have had any recession and devaluation. So, keep your focus on reserves. Don’t wait for oil sector to dictate the pace at which your reserves will emerge,” he warns, adding: “Don’t try and do debt because debt is a temporary solution.”
There is an area of disagreement for the analysts. Former deputy governor of the Central Bank of Nigeria (CBN), Dr. Obadiah Mailafia thinks on the monetary side, urgent moves should be made to merge the different rates: official and parallel market rates into a single exchange rate without any further delay. His argument is that it makes for more credibility as well as transparency, noting that interest rates are presently way too high. “We need the MPC to bring down the Monetary Policy Rate (MPR to sustainable levels. Interest rates matter particularly for SMEs who need affordable credit to build their businesses and generate jobs,” he said. Aside from that, Dr. Mailafia said: “The CBN also needs to streamline the numerous intervention funds that have been created. It seems to me that they are getting out of control. Good intentions are not enough. Rigour in application and monitoring is vital to achieving results on ground.”
Dr. Teriba would not agree with him. For Teriba, unless the reserves continue to grow, there is no reason for the central bank to reduce interest rate in 2018. While he observed that reserves are now rising and the premiums (the gap between the exchange rates) are narrowing, he holds his argument for retention of the Monetary Policy Rate (MPR) and other variables of the CBN on the point that the premiums have not disappeared. “If reserves continue to rise, the premiums will disappear – the parallel market will converge with the interbank rate. When you get to that level, the central bank can ease. Before that level, any easing will destroy the strengthening of the foreign exchange market. Once all demands for forex have been met, you can ease because if you ease, it will create problem for the foreign exchange. The key variable is adequate level of reserves,” he opined.
None Performing Loans
They however agree on the fact that the challenges faced by some of the commercial banks in the country relating to non-performing loans need to be frontally and squarely addressed to safeguard the stability and integrity of our financial system in 2018. They also advocated for a more coordination between the fiscal and monetary authorities who, they say have seemed to be singing from different hymn books so far.
Impact of oil price on government revenue in 2018
There is expected increase in crude oil production to capacity in 2018, with a projected hike in oil prices higher than it was in 2016, 2017. All things being equal, government revenue will be even boosted if prices remain at such elevated levels near two-and-a-half year highs than it was in the last quarter of 2017, especially when the 2018 budget is predicated on $45 per barrel. There is the likelihood that the price will be up to over $68 this year. For instance, oil prices reportedly rose last week to new two-and-a-half year highs as robust output in the United States and Russia balanced tensions from a sixth day of unrest in OPEC member Iran. Brent crude futures LCOc1 – the international benchmark for oil prices – were sold at $67 per barrel, up 43 cents, a day after it was sold for $67.29 that was the highest since May 2015. What that means is that funds will be significantly available for governments at all levels to implement the incoming 2018 budget.
If that be the case, Dr. Mailafia says, “Speedy finalisation and implementation of the budget is key to unleashing the kind of spending that will sustain the recovery and get the great Nigerian people back to work. More prudent fiscal responsibility is needed.” He has a supporting voice in Teriba who said despite the huge revenue that is expected to fund capital projects this year, “We should have consistency plans that even if there is a shock to oil price, we have these buffers that will ensure that government budget will be fully funded.” As it stands, Nigeria does not have buffers that will ensure that the economy is insulated from negative developments in the oil market, a situation experts say is a risky way to run an economy of the size of Nigeria’s, – the 7th largest population in the world.
Industry watchers expressed fear that inflation might rise about the current level of 15.90% year-on-year in November of 2017. The concern is that much of the food consumed in the country is grown in the Middle Belt that is currently under siege or genocidal warfare by marauding Fulani headsmen destroying lives and farm produce across the region. “If their activities go unchecked, we may sooner or later face an agrarian crisis in our hands and, of course, a spiral of high inflation,” Mailafia warned. According to some econometric studies, food accounts for 62% of the determinants of inflation. So much will depend on the extent of food availability and food security. Those who call for disciplined spending in 2018 point to the fact that whatever happens to Inflation will be one economic indicator for 2018 being election year.
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