Great Expectations

After much ado about #TheList which involved several airborne trips, baton changing, false alarms over its delivery, President Muhammadu Buhari kept his promise to deliver names of his ministers to the National Assembly. Anticipation over the list has reached stratospheric levels as indeed has been nationalistic fervor in recent days, as driving through the streets of lagos yesterday, lots of cars were flying the Nigerian flag –  something I haven’t seen happen in recent history. Beyond the euphoria however lies more pressing issues none more so than the recent collapse in global oil prices and its implications for government finances. The last time PMB was in office, a similar event occurred and resulted in implementation of economic measures so harsh that the same people who rejoiced when Buhari toppled the Shagari government jubilated at his ouster by the cunning IBB regime.

Between 2011 and June 2014, global crude oil prices remained over $100/bbl providing a boon to the Nigerian government coffers. To put things in context, I looked at CBN data and during that time, Nigeria’s oil revenue totaled N30.5trillion which is at par with the receipts from crude oil between 1981 and sometime in 2008. That’s right sum up all government revenues from oil between 1981 and 2007, you get circa N27 trillion. The biblical phrase, “eyes have not seen nor ears heard, the wonderful….” springs to mind. Now during the boom years, economic growth also boomed with Nigeria averaging 6-7% over the period which together with improvements in tax revenues underpinned an expansion in the share of non-oil receipts. Now over that period, again looking at CBN data, mean recurrent expenditure shot up from on average 67% during the Obasanjo years to 77% between 2007 and 2014. Put simply the gains from the boom in crude oil prices were frittered away on the government on itself: salaries, transfers debt service etc. Completing the amazing paradox, again using CBN data, debt service rose from 8% of the budget to 19% as at the end of 2014 largely reflecting impact of a 21% average rise in government borrowings over the period and higher interest rates pre-inclusion of Nigeria in the JP Morgan EM index.

Fast forward to the present and oil prices have halved from above $100/bbl to $45-50/bbl, implying oil inflows should contract while as the economy slows more companies are likely going to struggle which means tax receipts should also dwindle. Top that with the deliberate CBN policy to ban some classes of imports, which would have yielded tariffs and duties, the Nigerian government faces several years of lean incomes. The JP Morgan ejection now comes at a hard time as it implies bond yields will have to be higher. At the first bond auction in September following the exclusion, the DMO had to jettison its plan to raise N70 billion for N45 billion despite offering yields of 15.9% – around levels they were borrowing before JP Morgan included Nigeria in its index in 2012.

Nigeria’s interest expense is knocking at the N1trillion territory in 2015 (2014: N865billion) while Government’s commitment to maintain the subsidy bills (N700-800billion) and its huge personnel expenses (N1.8trillion in 2014) implies a certain portion of government spending by default cannot be deferred. If total government revenues shrink by nearly half the budget deficit needs to be financed. Thus, whoever ends up as finance minister now more than at any time in our history needs to be innovative. Thanks to the great global monetary divergence: as the US Federal Reserve looks to raise rates vs. a dovish rate outlook across most countries, dollar borrowing will come at a steep price implying that borrowing will have to be done locally.

Given that backdrop, CBN’s no retreat no surrender NGN appropriately priced mantra implies all kinds of FX restrictions, admin measures and in the past would have implied monetary tightening. This would have implied that domestic borrowing would equally attract at a steep price. So how should the government navigate this? There’s been a lot of big talk about diversification but as ever that is medium to long term gist. Nigeria has a liquidity problem that needs fixing and no better way to borrow than in a currency you print.

To lessen the cost, the incoming finance minister must lean heavily on the CBN to commence easing with immediate effect. The CBN should commence cutting its policy rate, the cash reserve ratio and the key standing deposit facility to levels that drive a surge in domestic liquidity which is the ultimate arbiter of domestic yield direction. Once there, the CBN must let the system know it will flood the system with cash by driving its standing lending facility to even lower levels just like the US and European central banks. As Nigerian banks recover from the shocks to their loan book quality, they are unlikely to be in credit extension mode implying more demand for government paper. With few outlets to invest as a weak macro backdrop underpins weaker equities performance domestic pension funds

Contrary to previous times when liquidity was a problem the CBN should flood the system with liquidity. In short, monetary policy must stand pat to enable the economy recover. The fiscal side must use this window to follow through on reforms: the TSA should be followed by rigid pursuit of the IPPIS and GIFMIS to scale back and curb government spending. In addition, certain components of the recurrent budget such as transfers to the National Assembly should be up for negotiation. Over the last four years, the Nigerian legislature has demanded N150billion per annum. During that period Guaranty Trust Bank’s operating expenses averaged N81billion (2014: N98 billion) for over 4,000 employees delivering actual value vs. our lawmen whose output is off debatable value. If the entire country is up for austerity our legislators should also share the people’s pain. Lastly, capital spending will suffer, though this need not be the case as government should start re-engaging the private sector via PPP arrangements or self-funded construction projects. Tap aggressively multilateral projects.

In all the new finance minister must be flexible and open to all options with a proviso: less expensive, consistent with reform mindset and greater engagement with the non-oil economy on all fronts. So help him/her God

One comment

  1. nice write up!

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