Monthly Archives: January 2016

Buhari and Zuma should speak cautiously on the economy

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 26 Jan 2016. See link viz.

Nigeria’s President Muhammadu Buhari should probably not make comments about monetary policy. His public declaration of his aversion to naira devaluation in late December 2015 made it quite clear the Central Bank of Nigeria (CBN) was no longer independent. Not that this was news. But at least, in the past, some pretensions were made about the CBN being independent. Under former governors, Charles Soludo and Sanusi Lamido Sanusi, the CBN became a significant power centre, a development that pleased investors but outraged the incumbent presidents. So, even when the right thing is eventually done – that is, devalue the naira and ease foreign exchange restrictions – investors are still going to wonder whether monetary policy decisions are now really taken at monetary policy committee (MPC) meetings or at the State House. This logic has some basis. There is little doubt that were President Buhari to order a naira devaluation this moment, CBN governor Godwin Emefiele would not hesitate to do as he is told. This is not healthy. And it has to change. Most of the Buhari administration’s economic goals – diversify the economy, reduce import-dependence, et cetera – can be easily done by simply tweaking one variable: the naira. Were it allowed to find its equilibrium level, in this case the price at which demand for foreign exchange would reduce enough to equal scarce supply, Nigerians would adjust their tastes for foreign goods with dispatch. Local manufacturers would have no choice but race to meet the subsequent increased demand.

A major concern for President Buhari on naira devaluation is how it potentially increases the costs of servicing government debt, based on his comments in December 2015. A depreciating currency almost always results in higher inflation for an import-dependent economy. As interest rates compensate for price risk, borrowing costs tend to follow in tandem; albeit higher interest rates reduce the discounted value of one’s indebtedness. In the Nigerian case, this concern is needless. Nigeria earns crude oil revenue in US dollars. It can service its foreign debt using those earnings. For its naira-denominated debt, its position is better enhanced if the naira is appropriately priced as it gets more value from its dollar revenue. For instance, the CBN sold about $16.4 billion to banks and bureaux de change (BDC) operators between March 2015 and December 2015 at an average rate of 197 naira, totaling 3.2 trillion naira. This is 16 percent less than the 3.7 trillion naira it could have earned had it sold the dollar at the average BDC rate of 226 naira during the period, which is actually lower than the then widely believed equilibrium rate of 250 naira. The 500 billion naira loss is enough to fund the planned social assistance programme for 2016. In an article last week, Nigeria’s finance minister signaled the likely devaluation of the naira in the not too distant future, perhaps at this week’s MPC meeting. Still, the likely steady devaluation approach would probably be inadequate. If Nigerian authorities are really determined to diversify the economy and reduce the country’s import dependence for the most basic commodities, it must devalue the naira sharply.

The monetary policy committee of the CBN meets on 25-26 January and is expected to keep its policy rate unchanged at 11 percent, based on the consensus view of analysts. That consensus view is not data-dependent, however. Analysts have simply come to the conclusion that the CBN is deliberately dovish, a point Governor Emefiele made only too clear when the MPC took the counterintuitive decision to actually cut interest rates in November 2015 at a time that prices are rising. With expectations that inflation would continue to rise – and mostly above 9 percent, the upper end of the CBN’s inflation target band – for most of 2016, the data-dependent view would be to actually tighten monetary policy. The CBN’s view is that the economy needs to be stimulated hence its expansionary stance. With inevitable naira devaluation imminent, the risk of inflation rising above 10 percent in Q2 2016 is significant. Clearly, were the CBN not to act to stem these price pressures, the headline could be higher. Considering that the CBN has not been perturbed by inflation being above 9 percent since June 2015, inflation targeting is probably no longer a priority for the Bank; at least, not within the current official target band. This haphazard and unpredictable manner of conducting monetary policy is injurious to the economy.

The MPC of the South African Reserve Bank (SARB) also meets this week, on 26-28 January. It would be taking place a few days after the World Economic Forum (WEF) meeting in Davos, Switzerland. The SARB’s MPC members are probably glad President Jacob Zuma did not appear at an earlier scheduled WEF panel event hosted by a South African media organization. After what analysts and investors believe was an attempt by President Zuma to unduly influence the South African Treasury by replacing the widely respected finance minister, Nhlanhla Nene with an inexperienced hand, mainstream South African media has been unforgiving. In the aftermath of that event, the Johannesburg Stock Exchange lost $10.2 billion in just two days. President Zuma’s subsequent indifference to the enormity of his error – even after he rescinded his decision and brought in a “new old hand,” Pravin Gordhan, as finance minister – also fuelled a lot of investor concern. The South African rand depreciated by as much as 9 percent during the first trading day (11 January) after he remarked that markets overreacted to his decision. Had President Zuma appeared on the panel, he would likely have been asked about this and he probably would have answered in a similarly defensive manner. This would have riled investors further, an occurrence he and his officials are keen to avoid. The SARB would have had little choice but to hike rates by 50bps or more had that happened. There are analysts who still believe the SARB may actually tighten rates as much this month. This is based on the outlook that inflation would likely rise above 6 percent – the upper bound of the SARB’s target band – in Q1, as the rand likely remains weak and drought effects become more acute. However, with rating agencies all but decided on a likely downgrade of South Africa to junk status should growth deteriorate further, it is unlikely the SARB would not want to help keep growth up to the extent that it could. So even as the rand has deteriorated significantly since the New Year, the view one takes is that the SARB would likely only hike by 25bps to 6.5 percent at its MPC meeting this month. In an interview at Davos, SARB governor Lesetja Kganyago alluded to this possibility. Markets reacted sharply afterwards, however.

Bottom-line, President Buhari of Nigeria and President Zuma of South Africa should probably rely more on guidance from their officials before making statements on the economy. Recent comments by Nigeria’s Vice President Yemi Osinbajo at Davos – who arrived late to the WEF session that President Zuma excused himself from, indicative of a last-minute invitation – suggest there has been a change in tact. When talking about the CBN these days, Vice-President Osinbajo and finance minister Kemi Adeosun now ensure to point out – if only publicly – that their comments on monetary policy are based on feedback from the central bank. It is not unlikely that President Buhari was made to realize his earlier error. Although the South African media raised their voices again to criticize President Zuma for not attending the main event he was scheduled for at Davos, one’s take is that he probably decided to take the advice of his officials who must have reasoned it would be safer if his appearances were in controlled environments and his speeches scripted. Instead, finance minister Pravin Gordhan did an issues briefing on the South African economic outlook, which to one’s mind was reassuring, frank and very calming. And truth be told, Pravin Gordhan would only succeed as finance minister to the extent that he gets support from his principal, albeit he is probably now the most powerful finance minister South Africa would ever have.

Also published on my company’s website on 27 Jan 2016. See link viz.








Africa’s challenges remain the same

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 19 Jan 2016. See link viz. 

The World Economic Forum Annual Meeting for 2016 takes place this week on 20-23 January. Compared to meetings of the last two years, it would be somewhat Africa lite. The Africa agenda then was positive and growth-focused. There was a lot of optimism. Not this time. Frankly, this year’s meeting is not likely to be as exciting. After the initial good cheer at the beginning of last year, 2015 turned out to be very poor for the continent. Lower commodity prices and China’s economic slowdown unraveled the Africa Rising narrative. While the long-term potentials of the continent remain, there has been a change in views – mostly to the downside – on how quickly the continent can overcome its challenges and emerge richer. Africa’s next challenge, the title of one of the scheduled sessions at the meeting this year, has President Zuma of South Africa and Ethiopia’s Prime Minister Hailemariam Desalegn as discussants. The notion of a next challenge for Africa is deep with meaning if not ironic. Insecurity, poverty, corruption, poor governance, and power shortages have been the topics of conferences on Africa for decades. Yet they persist. The recurring regression is certainly frustrating even for the continent’s ardent supporters.

Africa’s next challenge is how to overcome its current challenges. The old ones are the new ones. Only now, countries like South Africa hitherto seen as relatively better off seem to currently suffer almost all of the challenges of its poorer peers. Corruption, poor governance, and power shortages are now as problematic in South Africa as they are in Nigeria and the rest of the continent. In the South African case, negative perceptions about its leadership add to headwinds. President Zuma would be attending this year’s meeting tainted by corruption allegations and questions about his ability to govern amid student protests, imminent labour strife, a battered currency and the potential downgrade of his country’s credit ratings to junk status. Thus, Team SA would dearly hope that President Zuma engages in a charm offensive at Davos to avoid solidifying growing domestic and international investor antipathy towards his presidency. Sobriety might be the best approach. In recent media statements after his botched cabinet shake-up in December 2015, President Zuma did not seem sobered by the damage his actions have caused his country’s economy. It is certainly now very hard to persuade investors against worrying about the deep-rooted structural issues that require urgent resolution in South Africa. In the Ethiopian case, drought and political repression would be in focus. These issues were and still are the challenges facing modern Ethiopia. These recent and ongoing crises in the countries of the panelists would be hard to gloss over. They are real and typify the regression that supports the irony of a supposed next challenge for Africa.

Nigeria and Kenya do not feature prominently on the agenda at Davos this year, based on the published programme. With the countries planning Eurobonds in the first quarter of 2016, discussions around the costs of this type of financing – and how investors have wizened up to the risks involved – would not be so obscure. Nigeria, which featured prominently at the forum in 2014, may get little mention this time around as global investors still have doubts about the measures put in place by the country’s officials – and their capacity – to tackle the country’s current economic challenges. The panel on Securing a Vaccine for Ebola should feature Nigeria’s success in preventing the Ebola Virus Disease from becoming an epidemic in the country, however. In this regard, the real danger is complacency. On January 14, the World Health Organization (WHO) declared the Ebola outbreak was over in West Africa. Hours later, a new case sprung up in Sierra Leone, with even more exposed. The flare-up highlights the urgency of securing a vaccine. So while the affected countries are now much more able to deal with future epidemics, there is clearly a need for permanent vigilance. And not just for Ebola. Nigerian authorities are currently battling a Lassa fever outbreak, albeit much more easily contained than Ebola and less fatal. Africa’s ability to successfully handle future epidemics – if diligent and swift actions are taken – has certainly been established. Still, capacity and infrastructure remain constraints. Africa and the world should not wait for another epidemic before addressing them. So a discussion on a vaccine for Ebola should also involve how the continent’s healthcare capacity and infrastructure can be enhanced on a permanent basis.

Why have much remained the same on the continent? Drought is having the similar food supply effects of years back because governments did not prioritize weaning their countries of rain-fed agriculture. Ebola took so many lives because of a slow global response, inadequate investments in health infrastructure and limited capacity. Corruption continues largely because of little political will, compromised or poorly functioning legal systems and a complacent citizenry. Power deficits have soared because of poor or no planning, lack of investments, wasteful subsidies and sabotage. Conflicts and terrorism remain because of continuing political interference by world powers and domestic elite power schemes. There is still room for optimism, however. Kenyan and Nigerian authorities are decidedly fighting corruption. Though, the usual political motivations continue to be perceived as driving these initiatives – concerns have been raised about rule of law and witch-hunting in the Nigerian case and in Kenya, opposition figures continue to insist Eurobond proceeds were misappropriated. There is a renewed focus on reducing the power supply deficit on the continent, much of it focused on renewables. Social media is increasing citizen engagement in the political process and forcing increased accountability. Strained government finances have spurred scrutiny of public expenditure to block leakages. Circumstances have also pushed African authorities to seek means to diversify their economies. So while the Africa Rising narrative would be difficult to defend at Davos this year, current forced structural reforms – if sustained – may eventually vindicate the optimistic advocacy of the continent’s many fans.

Also published on my company’s website on 20 Jan 2016. See link viz.

Social assistance benefits the poor

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 12 Jan 2016. See link viz.

Social safety nets help reduce the number of people in poverty by 8 percent on average, a World Bank study shows. They involve the provision of regular and predictable support to poor and vulnerable people. Coverage and adequacy of benefits are crucial to success. For instance, Kenya’s social safety nets, which cover 20 percent of its population, have been found to reduce the poverty headcount by 1.7 percent. In Nigeria and Ghana where coverage is lower at 1-6 percent, the reduction rate is 0.1 percent. More positive outcomes are recorded when more of the money spent by the poor on basic needs are covered by welfare. Less than 2 percent of Nigeria’s population currently benefit from some form of government-sponsored assistance. In South Africa, such assistance is accessible and being provided to more than half of the population. Increasing agitations by the citizenry in Nigeria and across Africa have roots in poverty. There is thus an urgent necessity for African governments to ramp up safety nets targeted at the poorest.

Nigeria ranks among the bottom five of countries in Sub-Saharan Africa that provide some form of social assistance to its citizens. At 0.3 percent of the size of its economy in 2014, it falls short of the average 1.5-1.9 percent of gross domestic product (GDP) in resources devoted by poor and rich countries to social safety nets (SSNs). In his 2016 budget speech, Nigeria’s President Buhari announced 500 billion naira ($2.5 billion) would be spent on social interventions. Nigerian authorities have an opportunity to divert monies hitherto wasted on fuel subsidies into such initiatives. Studies show the rich benefit more from fuel subsidies than the poor. Social assistance would be a better use of scarce resources. If well communicated and implemented, the move could enjoy popular support. Labour unions – which oppose the removal of fuel subsidies – might also be better persuaded. A key part of the initiative is the payment of a monthly stipend of 5,000 naira ($25) to the country’s poorest, subject to conditions of immunization and school enrolment; a conditional cash transfer (CCT). Prior to this major proposal by the central government, the northwestern state of Kano already operated a similar initiative for girls’ education. As at 2014, it covered more than 16,000 girls, based on World Bank data.

There is a rich literature that supports the effectiveness of CCTs in alleviating poverty. The largest CCT programme by scale and perhaps the most successful is Brazil’s Bolsa Familia with 49 million beneficiaries (24% of the population). However, CCTs are just one of a bouquet of SSNs. African countries feature more prominently in the unconditional cash transfers (UCTs) category. UCTs do not require beneficiaries to fulfill conditions to remain eligible for cash distributions. For instance, South Africa provides child support to 11 million of its citizens. 5 million Ghanaians also get free uniforms and books, an unconditional in-kind transfer (UIT). The proposed Nigerian social interventions would include a homegrown school-feeding programme, grants for university graduates after their compulsory national youth service, and micro credit loans for eligible citizens. Nigerian authorities hope to create at least 1 million jobs – less than 1% of its population – from these initiatives in 2016. This would need to be scaled up rapidly to have the desired impact. However, even when there is scale, CCTs could be ineffective if they don’t cover a significant portion of the poor’s consumption basket. According to the World Bank, most CCTs cover just 10% of the consumption of the average poor person, inadequate by most measures. Half of the minimum wage ($90) might be a better benchmark. At a time of great financial strain for Nigerian authorities, a $25 monthly stipend is a good first step. Policy must envisage a need for this to be increased in the future.

For CCTs to succeed, monitoring and punishment for noncompliance with conditions are crucial. Effective monitoring depends on robust social and beneficiary registries. This is a potential bottleneck in the Nigerian case. Without a strong national identity card database, authorities are likely to be accused of dishing out patronage if the eligibility criteria are not rule-based. A fairer and less troublesome approach might be for authorities to only select those who already have national identity cards. As Nigerian authorities continue to grapple with terrorism and other security threats, an identity card requirement for potential beneficiaries would enable it document its poorest citizens who are the most vulnerable to being lured into terrorist acts. Coordination is also very important. In most jurisdictions, a federal ministry is assigned responsibility for managing SSNs. In the Nigerian case, the ministry of labour and employment might be more appropriate. In some countries, a coordinating commission under the presidency is set up. Either model would do well in the Nigerian context. For sustainability, institutionalization is key. Thus, the draft National Social Protection Policy Framework needs to be passed into law with dispatch as a matter of national priority.

Clearly, the planned social interventions by the Nigerian government would require a lot of technical expertise. Tremendous care would be needed to ensure the social assistance initiatives are designed and implemented properly. In doing this, the very complex nature of Nigeria’s polity must be taken into consideration. For instance, eligibility and selection criteria that are not transparent and rule-based could generate ethnic and religious bias perceptions. Rigorous targeting criteria and processes would be crucial to success. Corruption – ghost beneficiaries or outright stealing – and fiscal deterioration are also potential drawbacks. A multilateral institution with extensive experience and a robust governance culture might thus be in the best position to design and manage the initial phases of the planned social interventions. Sources at the World Bank confirm they are working with Nigerian authorities on the design of a new national social safety nets programme that includes targeted cash transfers to the poor. They also confirm a request for financing of the programme has been made by the Nigerian government.

Also published on my company’s website on 13 Jan 2016. See link viz. 


Is the developmental bias of Sub-Saharan Africa’s SWFs appropriate?

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 05 Jan 2016. See link viz. 

Sovereign wealth funds (SWFs) are a relatively recent phenomenon in Sub-Saharan Africa (SSA). Only three SSA countries are members of the International Forum of Sovereign Wealth Funds (IFSWF). Although Botswana set up its own much earlier in 1993, the other two – those of Angola and Nigeria – were operational in 2012. Both have investment policy statements (IPS) and asset allocations with a developmental bias. With infrastructure being a dominant asset class in their portfolios, they could rightly be seen as extra-budgetary structures. These two almost certainly mimic development banks. Their social focus comes with risks. In its simplest form, a sovereign wealth fund is akin to a savings account. A country – often a resource-rich one – decides to save some of its revenue for the future. Ideally, SWFs should provide fiscal relief in times of financial strain. Having only been set up recently, the Nigerian and Angolan SWFs have largely not been able to perform their stabilization function as lower crude oil prices currently weigh significantly on the budgets of their respective governments. Their relatively small size and broad investment mandates may also be why.

Botswana’s Pula Fund currently has US$ 7 billion – 46 percent of gross domestic product (GDP) – assets under management (AUM), based on data from a report by the Harvard Kennedy School in April 2015. It invests only in foreign assets. Almost twenty years later, Nigeria set up its own – Nigeria Sovereign Investment Authority (NSIA) – with a modest US$ 1 billion (0.2 percent of GDP). Nigeria discovered crude oil in 1956, more than ten years before the huge Orapa diamond mine discovery in Botswana. Although Angola’s SWF – Fundo Soberano de Angola (FSDEA) – initially set up with US$ 5 billion (4 percent of GDP) was also established in 2012, a long running civil war made it hitherto difficult for any meaningful development planning. To avoid the mistakes made by Angola and Nigeria, Ghana set up a two-part petroleum fund in 2011 just as it started earning crude oil revenues. The Ghana Stabilization Fund (GSF) and Ghana Heritage Fund (GHF) now have assets under management (AUM) bordering on almost US$ 0.5 billion as at the end of June 2015. Ghana also set up an infrastructure fund – Ghana Infrastructure Investment Fund (GIIF) – in 2015 with US$ 250 million from the proceeds of its US$ 1 billion Eurobond issue in 2014. As it would be investing entirely in domestic infrastructure, the GIIF would probably not qualify as an SWF under IFSWF criteria. The NSIA and FSDEA include infrastructure funds that invest predominantly in their domestic markets, however.

Some experts have raised concerns about the risks associated with SWFs investing in their domestic markets. They relate to whether it fits with their primary stabilization and savings purpose. Corruption is also a major concern. Additionally, there are payoff risks associated with investing in local infrastructure. Most SSA public-private partnership (PPP) infrastructure projects suffer tremendous pushback from local populations. Returns are often low and bankable deals are scarce. Probably in realization of these, the FSDEA has a broader Africa-wide infrastructure mandate. In September 2014, one put some of these concerns to Jose Filomeno de Sousa dos Santos, the chairman of FSDEA and Hon. Mona Helen Quartey, Ghana’s deputy finance minister, at the Chatham House African Sovereign Wealth Funds Conference held in London. While highlighting the social imperative of investing in local infrastructure, Mr dos Santos’ answer included a description of how FSDEA plans to ensure these investments pay off. These were along the lines of how a typical infrastructure fund makes returns and included talk of a social return. Hon. Quartey opined that the infrastructure programmes of the Ghanaian funds would not overlap with those already covered by the national budget. At that conference – perhaps the most comprehensive one to date that focused exclusively on African SWFs – Michael Maduell, the President of the Sovereign Wealth Fund Institute (SWFI), a globally recognized authority on SWFs, actually argued in favour of these views, citing how the Kuwait Investment Authority (KIA) helped rebuild its home country’s infrastructure in the aftermath of the Gulf War. The oft-cited Norwegian SWF also invested heavily in its home country’s oil and gas infrastructure in its early days. So, there are valid arguments on both sides.

There is probably a need for the relatively high infrastructure asset allocations of the NSIA (40 percent) and FSDEA (22 percent) to be reviewed downwards. The United Arab Emirates’ (UAE) Abu Dhabi Investment Authority (ADIA) – one of the best managed SWFs in the world with more than US$ 700 billion AUM – has a 1-5 percent asset allocation to infrastructure. Another fund of the UAE – Mubadala Investment Company – invests domestically and globally in industrial and infrastructure assets, however. From a diversification perspective, it is probably unwise for SWFs to invest domestically. In Nigeria and Angola, lower crude oil prices have exposed the concentration risks in doing so. The political risk is probably not worth the trouble either. There is probably going to be a need for the NSIA and FSDEA to revise their investment policy statements in due course. The Botswanan Pula Fund’s exclusive foreign financial assets focus is ideal, albeit it could probably be more transparent. At 0-4 percent of their respective countries’ GDP, the NSIA and FSDEA are too small to perform their stabilization function. The Nigerian and Angolan governments ought to increase their size. In November 2015, Nigerian authorities announced an additional US$ 250 million capital contribution to the NSIA’s funds from liquefied natural gas export proceeds. They should add more. And if crude oil prices do recover, the governing legislations for these bodies should be reviewed to ensure they are able to perform their stabilization and savings functions more effectively in the future.

Also published on my company’s website on 06 Jan 2016. See link viz.