Tag Archives: Capital

So you want to sell the golden goose. And tomorrow?

By Rafiq Raji, PhD

It is all coming together now. The Nigerian president, Muhammadu Buhari, wants emergency economic powers. His officials have advised him to sell some national assets to raise cash for stimulating the economy. Assets sale, they call it. We Nigerians are a creative lot. Privatization it used to be called once. But then that involves a myriad of longwinding processes, approvals, due-diligence, and so on. A lot of hassle for a government eager to lift the economy out of an ongoing recession. Laws are crafted precisely for a situation like this. With emergency powers, President Buhari would not need anyone’s approval to sell any national asset to anyone. He would have the unprecedented powers to choose the assets to sell and to whom. It is a recipe for increased disaffection. My view.

Make ‘State of the Nation’ address compulsory
The legislature plans to ask Mr Buhari to address a joint session of the National Assembly, albeit principally to present his views on the economy. This is a welcome idea. But it should not be adhoc. Most countries have an annual address by their head of state, to their legislature or citizens. Reading the budget does not suffice as one – finance ministers do that in better climes. Actually, I think there is an opportunity here. We should have an annual ‘State of the Nation’ address by the president. It should be made a matter of law, a way to hold any sitting president accountable. And put pressure on the office-holder to perform: it is not likely an incumbent would like to address the legislature year in year out without anything tangible to show for his stewardship.

Call it privatization. And follow the law
It is believed a prominent businessman first mooted the idea of selling some national assets to fund the government’s budget. Central bank governor, Godwin Emefiele, makes the case recently that he suggested it much earlier – last year; and back then, such a sale would have garnered better valuations than they would currently. A leader in the Nigerian legislature either read the mind of the leading mogul or was privy to his thinking. For he all but read out what he suggested. $15 billion is the amount on everyone’s lips. They all probably mean well. But if you thought they were also being self-interested, you wouldn’t be blamed. I’ll elect to think their views are well-intentioned. Truth is, what is being proposed is essentially a privatization of some majority- or minority-owned government assets and entities. But the government already has a process for that. A National Council of Privatisation (NCP) needs to be constituted. Only issue might be that an NCP, statutorily led by the vice-president, might make the incumbent, Yemi Osinbajo, all too powerful for the liking of Mr Buhari’s inner circle. Otherwise, all that is being proposed potentially falls under the purview of the NCP. And there is a reason the system was designed thus: to prevent the abuse of power.

Liquidity might be a problem. Lever assets instead
There seems to be a consensus in any case: if you must sell assets, sell only the non-performing ones. Incidentally, the non-performing assets are mostly illiquid. They cannot be sold easily and readily. So if the issue is speed, asset sales would not cut it. At least the type that does not amount to pilfering our commonwealth. We often talk about how we saved little during the boom years. And yet, coveted government stakes in the Nigeria LNG Limited, a liquefied natural gas producer, and Africa Finance Corporation, a development financier, have turned out to be quite fortuitous. It is almost a miracle that these investments were ever made during those heady years. These crown jewels must not be sold. Not at this time, at least. More optimal would be to leverage the other so-called non-performing but still quite valuable assets: use them to borrow. Don’t forget that even potential buyers would borrow to fund their purchases. So why not the government be the entity that does the borrowing using assets it already owns. An argument has been made about higher debt service costs consequently. It is weak. If the objective is to get out of the current economic slump at the earliest possible time – optimists reckon a recovery could be palpable by the fourth quarter of this year, higher debt service costs in two years or so, when the economy would hopefully have revved up, would matter little. In any case, there is always the IMF – it agreed to lend $12 billion to Egypt last month. It is no longer the villain we are quick to label it. We should not be afraid to seek the fund’s help. It is now more flexible. Its conditions are not as stringent. And the fund’s endorsement is increasingly de rigueur for raising capital in global financial markets, whose participants now worry that African countries are backtracking.

Policy consistency is what inspires confidence
All these troubles have a source. Confidence. The lack of it. It would take a while for international investors to believe the government would stay the reformist course it has embarked on. I won’t harp on the authorities’ past mistakes, amply discussed in earlier columns anyway. And some were really just honest mis-steps. Even so, some of them are being repeated. For instance, finance minister Kemi Adeosun probably meant well when she advised the central bank to cut interest rates recently. But she didn’t need to say so publicly. An investor might think: was the phone faulty? Thankfully, the bank chose to look at the facts and decided to take the efficient path, as it saw it. A central bank that articulated a tightening stance only just recently after acknowledging an earlier easing move was ineffective was not now expected to reverse course only too soon. At least, not a central bank that knows what it is doing. In any case, a policy rate is a guide. It is not a directive. If policy is not reflective of the prevailing economic realities – and consistent, it would simply be ignored.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/en/so-you-want-to-sell-the-golden-goose-and-tomorrow/

African central banks decide on rates

By Rafiq Raji, PhD

This week, the US Federal Reserve and Bank of Japan (BoJ) meet to decide interest rates. Both would be announcing their decisions on 21 September. I don’t expect any surprises from the former. In fact, I would be hugely surprised if the Fed does anything this year. Market participants are a little anxious about the BoJ though, as it tests the limits of negative interest rates and could increase the pace of its stimulus programme. African central banks, in Ghana (19 September), Nigeria (20 September), Kenya (20 September) and South Africa (22 September), would also be announcing their decisions during the week. Between them, their economies represent about 60 percent of sub-Saharan Africa GDP. The Bank of Zambia could also announce its long-awaited decision this week – see earlier 9 August 2016 column (“Zambians and their central bank decide“) for my views. Understandably, they are mostly in hold mode. Not Kenya though. If the east African country’s central bank desires to cut rates, it has room to do so now. Kenyan growth should be almost 6 percent this year. And its inflation outlook is quite encouraging. The others, not so much. Nigeria is in recession – and growth would probably contract for the year, amid high and rising inflation. Ghana is still trying to curb longrunning double-digits inflation, albeit growth is a little decent; about 4 percent this year is my reckoning. For South Africa, currently in a tightening cycle as the inflation outlook remains relatively bleak, growth remains sobering; probably zero percent this year, albeit authorities plan to revise their forecasts upward. The South African Reserve Bank may not find it apropos to raise rates at this meeting. But the outlook suggests it may need to before year-end. At least, that is my thinking at the moment. Ahead of the monetary policy decisions, my firm, Macroafricaintel, published its Q4-2016 outlook reports. Below are some of the thoughts.

Kenya – Room for another rate cut
After having to pause policy easing hitherto on resurgent but likely temporary upward inflationary risks, the Central Bank of Kenya (CBK) could, if it wanted to, cut rates by 100 basis points to 9.5 percent, as early as its monetary policy committee (MPC) meeting this week – last time was in May, when the CBK cut rates by 100 basis points to 10.5 percent. I actually think it could ease policy further by another 100 basis points to 8.5 percent before year-end, when inflation could have eased to about 5 percent. Concerns about fuel price increases, which rose in mid-July amid resurgent insecurity, have since subsided or diminished. There is risk however of potential electricity tariff hikes, as geothermal power plants shut down for maintenance have created a supply gap of about 200MW and imports – that from Uganda (more than 90 percent of imports) up 32 percent in the year to July for instance – of diesel-fired and hydro-powered alternatives to fill it are relatively expensive. Chances are the electricity sector regulator would not entertain any new price hike requests this year; especially since the disruptions are not likely to be secular. Never mind that electioneering is already in high gear. Otherwise, the inflation outlook looks good. The Shilling has been relatively stable and should remain so. My view discountenances the downgrade of the currency by Fitch Ratings in mid-July. Why? The US$1.5 billion IMF precautionary facilities have proved quite effective buffers thus far. No reason why they shouldn’t continue to be.

South Africa – 25bps rate hike likely in November, continued pause in September
After barely coming within range in July at 6 percent, inflation would likely accelerate enough to breach the South African Reserve Bank’s (SARB) 6 percent upper bound target from August to March 2017. I anticipate a justifiable 25 basis point tightening to 7.25 percent at the November MPC meeting, the likely peak of the cycle. Thereafter, it is probable the SARB may see room to start easing rates from Q2 2017. My revised inflation forecasts see the headline averaging above 7 percent for the five months to year-end, from 6.8 percent in August to about 8 percent in December. Drought-induced food price increases are expected to continue, as the prospects for improved rains have diminished significantly. Some rand volatility is also expected towards year-end as expectations gyrate over a potential ratings downgrade to junk status by at least one of the global rating agencies, SPGlobalRatings especially. Political uncertainty would perhaps continue to hover over all considerations in any case. Above-inflation wage deals also weigh on the outlook. In September, auto workers agreed an 8-10 percent wage increase over 3 years with employers. Other labour unions are expected to take a cue from this. In the past, the SARB expressed significant worries about how these wage deals could be differential to its rate-setting decisions.

Ghana – Policy easing probably next year
My inflation forecasts suggest the headline may be about 14.1 percent by December, the 2016 trough of a downward trend since June – level then was 18.4 percent – albeit there is likely a slight pick-up in September, to 17.6 percent in my view. The most recent inflation data showed a slight year-on-year acceleration to 16.9 percent in August from 16.7 percent a month earlier. But the monthly pace was negative, -0.6 percent, after an almost 2 percent average run in the year to July. Ordinarily, this would motivate some serious consideration of a potential easing of policy. Bank of Ghana (BoG) governor, Abdul-Nashiru Issahaku, who in my view is decidedly dovish, would jump at the slightest opportunity in any case. Elections in December, a few months away, requires that the BoG exercise the utmost prudence, however. Thus, I think keeping rates as they are for the remainder of the year would be most appropriate. As I see the inflation rate in the high single digits in Q1 2017 and lower for the remainder of that year, averaging at about 7 percent in 2017 from about 17 percent in 2016, an aggressive easing of policy then might be justfied. My current view is that the policy rate (26 percent going into this week’s meeting) could be cut by 300 basis points in each quarter next year, with the end-2017 level still significantly positive in real terms against my inflation forecast of about 6 percent for December 2017.

Nigeria – CBN tightening pause likely for remainder of the year
Inflation has accelerated since the last monetary policy committee (MPC) meeting of the Central Bank of Nigeria (CBN). The annual headline rose to 17.6 percent in August. My forecasts put it higher in coming months, probably ending the year at 18 percent. A weaker naira, food price increases, higher fuel prices, intermittent power shortages are just a few of the factors that I expect would buoy prices up. Manufacturers have already indicated more of their inputs’ continued price increases would now be passed on to consumers more quickly. Foreign-sourced inputs continue to be expensive because foreign exchange remains relatively scarce and dearer. Supply of local alternatives have not kept pace with increased demand. The prices for staples have also gone up, bread for instance, hiked by 20 percent in mid-August. After raising the monetary policy rate (MPR) by 200 basis points to 14 percent in May (after a 100 basis points spike to 12 percent in March), amid backlash from influential members of President Muhammadu Buhari’s administration, there are strong signs the CBN would be reluctant to raise rates further. There have even been threats of cutting interest rates via legislation. A likely economic emergency stabilization bill to be tabled before the legislature this month, I fear, may be used to do just that. The CBN governor, Godwin Emefiele, probably had this at the back of his mind, when he recently signalled all tools within the reach of the CBN, would be used to stimulate the economy. I interpret this to mean the apex bank would resort to more unconventional monetary easing. For instance, plans are afoot to boost the capital base of the government-supported Bank of Agriculture. The Bank of Industry could also get a boost – I suggest this in any case. The Nigerian Export-Import Bank (NEXIM) is another government-backed institution that could use some help. My view remains unchanged: the CBN should focus on its primary mandate of price stability. And it should tighten policy as necessary. But then there is now a need for it to balance that mandate with needed political pragmatism. The CBN needs to be able to set interest rates in the first place. That type of pragmatism, it must also extend to not making the mistake of overstretching itself: the CBN’s capacity to stimulate the economy is overrated. And it should not be easily forgotten that it tried to do just that without much success in the recent past. Banks, the health of which remains concerning (about 15 percent or more of total loans outstanding is either bad or non-performing), are currently undergoing a thorough examination by the CBN. Little things like these – tweaking regulations to ease flows, directing capital to neglected sectors, providing incentives to manufacturers, cleaning up banks and so on – could be more far-reaching and effective than undermining whatever monetary policy credibility it currently has.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/en/african-central-banks-decide-on-rates/

What is Japan’s African game?

By Rafiq Raji, PhD

The 6th Tokyo International Conference on African Development Summit (TICADVI), held on 27-28 August in Nairobi, Kenya, has come and gone. But what did it achieve? Some US$30 billion in aid and investments over the next three years were promised, half of what China pledged late last year at its similarly themed get-together, the Forum on China-Africa Cooperation (FOCAC); also its sixth meeting then. Some 73 memoranda of understanding were also signed, a lot of which were related to infrastructure, power generation especially. Others were in the health, education and expectedly, oil and gas sectors. A friend who attended the summit was particularly excited about some of the products on display at the exhibition along the sidelines of the event, like pay-as-you-go solar power, supplements for maize porridge, and so on.

Like China, Japan is involved in quite a few infrastructure projects in various African countries, albeit to a lesser degree. And Japanese companies already do quite a great deal of business in most of these. Chinese companies increasingly so as well. In sum though, China’s engagement with the continent is more intense and widespread. The Japanese make up for this in other ways. Japanese brands evoke feelings of quality, brilliance and efficiency. From electronics to cars, they are quite ubiquitous across the continent. Despite China’s growing closeness, similar sentiments are barely associated with its brands, if at all. Chinese goods are still considered inferior. Surprisingly, their cheapness barely appeals commensurately. Even so, China’s experience and relatively ample resources may be more germane to African needs. No matter. Both are willing. Sand in the wheels? Both are staunch rivals, albeit they feign some level of maturity in front of their African ‘friends’ – an official Chinese delegation attended TICADVI.

They all want the same thing
When there are numerous suitors for a potential bride, it is often ironic that blessings do not always follow. The one being sought after might overestimate her value, dither, or hope for better opportunities that may never come. Africa is one of many frontiers of interest to these world powers. So for Japan and China, longstanding rivals, whose volatile relationship is writ large by a territorial dispute over eight islands in the East China Sea, Africa provides a vast field for them to spar. Even so, they both really want the same thing: influence. Like China, Japan is also interested in the continent’s mineral resources. Resource-poor Japan seeks fuel for its energy needs, as its nuclear-dominated system have been mostly shut down since the 2011 Fukushima mishap. Both are also counting on African countries to pursue varied agendas at the United Nations and other multilateral institutions. Like the Europeans and Americans before them, Japan and China are also building military bases on the continent. Simply put, they are pursuing their own interests. Knowing this could be a blessing for African countries, whose negotiating positions are enhanced as a result. The temptation to pitch one against the other should be resisted, however. Instead, African countries should articulate what their development needs are and then go with the partner that best ensures their fulfilment. Japan is not offering as much money as China is. But it has one advantage over the latter. It is more technologically advanced. Its projects are executed with the highest standards and are delivered on time. And they last. China, on the other hand, knows only too well how steep the road to development can be. It is likely a better teacher on how to traverse that road than Japan could ever be at the moment. There need not be a dilemma in any case. Both can help.

Accept only the help that liberates you
As the Japanese prime minister, Shinzo Abe, was engaged in his charm offensive – the TICAD conference was being held on African soil for the first time – Chinese officials were quick to deride his efforts. It was almost the same way the Americans were all too quick to point out how the Chinese then newfound interest in Africa was going to be similarly or more exploitative. Truth is, these supposed development partners go into these relationships often because they already see more advantages for themselves. Or at least, they see the costs and benefits as evenly balanced – not in the African case: whether the partner is China, Japan, America or Europe, the advantages are tilted towards the other side. And the toast is always the same: we want to help. That is all very well. What African countries need the most, in addition to infrastructure, is technology and skills transfer. In doing this though, the situation can no longer be as it is currently, whereby these so-called partners set up businesses on the continent, bring their own staff, integrate little and barely mask their disdain. The scorecards cannot continue to be about how many billions of dollars our partners’ supposed benevolence allowed for each time. Thankfully, more energy at these summits is now being devoted towards changing this lopsided paradigm.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/en/what-is-japans-african-game/ 

Political meddling costs economies

By Rafiq Raji, PhD

Emerging market economies currently in or teetering on the brink of recession eerily have one thing in common: political wrangling. Brazil recently impeached its socialist-oriented first female leader, Dilma Rousseff, who defiantly held on till the very last moment – hard as nails, that one. Still, Ms Rousseff’s meddling is in part responsible for Brazil’s current biting recession, almost two years old now. Russia has always been a political theatre of sorts, with its leader, Vladimir Putin, pulling the strings at almost every turn; also in recession since early 2015. Apart from soft crude oil prices, the Russian leader’s expansionism – borne out of a determination to retain influence in former Soviet Republics – has been blamed. The very competent former governor of the Reserve Bank of India and globally acclaimed economist, Raghuram Rajan, stepped down this month (4 September), the end of his first and only term. He probably saw the signs: the ruling political elite thought him too independent and a little too popular abroad. His halo was a little bit discomfiting, it is thought, for Indian prime minister, Narendra Modi. In South Africa, it has been one political drama after another, none exhilarating. Bizarrely, as in the Indian case, an underling, a high calibre one also, is supposedly punching above his weight; almost always the raison d’etre of most political conflicts. There is reportedly no love lost between the South African president, Mr Jacob Zuma, and his respected finance minster, Pravin Gordhan. Their wrangling is beginning to take a toll on the economy. Not that it didn’t hitherto: the rand has been edgy each time new disagreements between the two come to light.

Risk models have been adjusted
Last week, two financiers withdrew their support for some of South Africa’s state-owned enterprises (SOEs). Futuregrowth, an asset manager, worried increased political uncertainty now made it difficult to assess risk: supposedly business decisions are likely to be politically-induced. The second, Danish lender, Jyske Bank, went underweight the bonds of state-owned power utility, Eskom, citing governance concerns. More investors and financial institutions have probably done as much, or plan to, quietly. Such is the gravity of the crisis that the South African public enterprises minister, Lynne Brown, has asked investors to talk to her directly on concerns they might have about SOEs. That might seem like a proactive move. But it brings to fore the institutional deterioration there is, if that is what it now takes to reassure investors. She would probably be ignored. Mr Zuma’s cabinet recently announced a presidential co-ordinating committee for SOEs would be set up before year-end. Add to that, the beleaguered national carrier, South African Airways, announced last week, it would need at least US$1 billion in loans for immediate use to fend off a looming liquidity crisis that could cause the grounding of some of its aircrafts and so on. Even as the revelation is a stinging indictment of the carrier’s management led by chairperson, Dudu Myeni, who has been severally accused of mismanagement, Mr Zuma is unfazed: Ms Myeni has been re-appointed.

As if all these were not enough, the South African cabinet last week supposedly considered the constitution of a judicial enquiry to investigate the propriety in banks’ decision to pull the plug on firms owned by the Gupta family – wealthy Indian immigrants whose close ties with Mr Zuma, have been a source of tremendous controversy, based on a press statement (1 September) released by mineral resources minister, Mosebenzi Zwane, who chairs an inter-ministerial committee on the matter. After an uproar, in the press and by market participants, at such brazenness in the face of a struggling economy and already nervous investors, Mr Zuma’s office disowned Mr Zwane’s claims, regarding them as his personal opinion. Had it gone ahead – not that it wouldn’t in the future (in one form or another) while Mr Zuma is still at the helm, the enquiry would have had the mandate to review key banking laws, with the ultimate aim of curbing the influence and powers of the Treasury and South African Reserve Bank (SARB). These series of events in Africa’s most industrialized economy have been viewed in a very negative light. And rightly so. One of the likely consequences may very well be an all but certain ratings downgrade to junk status before year-end by one of the three leading rating agencies, SPGlobalRatings probably.

News that Mr Gordhan might be arrested on graft charges broke last week. Even after fervent denials, the police insisted Mr Gordhan show up at its offices for questioning. As was his legal right, Mr Gordhan declined. To avoid a potential media backlash – the typical refrain is that no one is above the law, Mr Gordhan’s lawyers presented an elaborate testimonial of how much cooperation their client had already offered the police. That is beside the point though. The officials of a well-run government should not have to work at such cross purposes in full glare of the public, especially considering how sensitive Mr Gordhan’s treasury portfolio is. Even as Mr Zuma has made numerous statements about how much confidence he has in his finance minister, even making him come along to the G20 meeting recently held in China, it is abundantly clear they are not on the very best of terms. It may be just the right time for Mr Gordhan to take a bow – my column of 1 March 2016 (“Gordhan’s burden”) might be worth a read.

Take heed
The South African experience is just an example of the potential costs to an economy when politicians begin to interfere – often untowardly – in how supposedly independent and reputable institutions are managed. There are lessons in the whole saga for the Nigerian government, which is currently contemplating more aggressive interventionist measures to stem the tide of a now officially confirmed economic recession. To think only just recently, political meddling at the Nigerian central bank, proved to be tremendously costly. Unfazed it seems, the Nigerian government is believed to desire the lowering of interest rates by legislation, akin to that recently done in Kenya. An economic emergency declaration is also being mulled: it could involve asking banks to issue loans to specific individuals, companies or sectors, irrespective of their risk profiles, determining how interest rates are set, deciding who gets foreign exchange (and at what price) and so on. Such moves would be received negatively by market participants. In the event, Nigerian authorities might find planned foreign borrowings unpalatable, as international investors likely price in a higher political risk premium. Already red-eyed foreign investors would not suffer fools gladly.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/en/political-meddling-costs-economies/

No need for Buhari emergency powers

By Rafiq Raji, PhD

Protect the old man from himself
Good men are rare. Leaders that are good men are scantier, more so in Africa – an old teacher of mine would disagree: she doesn’t think there is a dichotomy between leadership and goodness. Leaders are good men. I did wonder aloud though where she’d put those different shades of grey, that matters leaders sometimes have to grapple with, often take. A country of mixed fortunes, even during the best of times, Nigeria this time has the rather unusual good fortune of having a leader that is at least honest. Muhammadu Buhari means well for Nigeria. He has good intentions certainly. But good men are also human. There is a storied saying: ‘the road to hell is paved with good intentions.’ I have read varied versions of a likely ‘Emergency Economic Stabilisation Bill 2016.’ There is nothing in there that cannot be legislated into laws. Put simply, it is not necessary to grant President Buhari additional powers that he could abuse. Mr Buhari is likely nostalgic, by his own not so subtle admission in any case, of when he could simply issue decrees. One would not be totally wrong if one thought there is a part of him that probably craves the wide-ranging powers that an economic emergency declaration would enable him wield. This is no trifling matter. In my column of 16 August 2016 (“You are hereby directed to cut interest rates. Really?”), I highlighted the unabashed disposition of one of Mr Buhari’s closest eggheads, Nasir El-Rufai, governor of a northern state bordering the Nigerian capital, towards cutting interest rates via legislation. Shortly after, the Central Bank of Nigeria (CBN) directed that banks should allocate 60 percent of their foreign exchange to manufacturing firms. The Nigerian leader’s preference for a strong naira is also well-known. And now there is talk of a bill that could grant the executive branch the very powers needed to do all these without prior legislative oversight or approval. Bear in mind, the highly controversial ‘War Against Indiscipline’ policy of the 1980s military dictatorship of Mr Buhari is set for a rebirth. Surely, it cannot be too difficult to see how these sequence of events is not necessarily coincidental.

Red herring is a fish too
There is a practice in government: when it is about to implement a potentially controversial policy, a media leak is engineered to test potential reactions. If the public backlash is deemed manageable, the policy gets the nod. A similarly well-known legislative practice is to bury potentially controversial laws beneath a deluge of minutiae in supposedly mundane laws. Thus, the fine print of any potential economic emergency bill should be thoroughly scrutinized; clause by clause. Nigerians must come out forcefully against any attempt at turning Mr Buhari’s democratic mandate into a dictatorship. Especially because this time, those who should know, prominent economists and the organised private sector, have chosen to hold brief for the administration; probably in good faith. Even so, they are mistaken. And to think that even as they know the factors – cronyism, nepotism, tribalism, rent-seeking, corruption, and sometimes just plain incompetence – that made past economic emergency measures fail, remain or have worsened, they would still elect to think that things could be any different this time, is a little depressing.

There is an American parallel. Then US treasury secretary Henry Paulson introduced a bill (with the exact same title) during the 2008 global financial crisis. Thing is, theirs was mostly for extra-budgetary spending. Not at first. Mr Paulson’s original meagre 3-page proposal would have granted him a carte blanche to spend as much as US$500 billion to purchase distressed bank assets without prior legislative appropriation. He would also have been immune from legislative and judicial scrutiny. Naturally enough, US lawmakers shut it down. Although what was eventually passed did allow for unprecedented extra-budgetary spending, about US$700 billion for a troubled assets relief programme (TARP), it made sure to require legislative oversight. What the Nigerian government is purportedly about to propose is even more far-reaching. And yet the circumstances are not nearly as dire. Some laws, it goes, designed precisely to guard against untoward executive discretion, are to be suspended for the duration of the planned emergency. Why not simply amend the laws? More puzzling, most of the recommendations of the purported bill that were let slip to the media, are currently within the powers of the executive branch to implement. Visa issuance reforms do not require legislative approval. Reducing the time it takes to clear goods at the ports is totally within the capacity and powers of the port authorities. The Nigerian president can, with the stroke of a pen, instruct the myriad agencies causing bottlenecks at the ports to take a hike. Physical inspection of goods, which increases the clearing time for goods at the ports to days, could be eliminated by simply buying and installing scanners. And how is it that such emergency spending – if haste were key – couldn’t be speedily appropriated for via a supplementary budget bill?

Reform for the long-run
More importantly, the advantage of dire circumstances is that you are able to get buy-in much more easily than during normal times. The Land Use Act, which grants the government an undeserved right to all land and thus stymies investment, needs to be reviewed. The Petroleum Industry Bill, dithering on which has led to an exodus of capital from the sector, needs to be passed with dispatch. Double taxation needs to be eliminated. Multiple agency inspections at the ports need to be abolished. There should not be preferential access to foreign exchange at the central bank. Authorities should take advantage of the challenging but propitious times to enact or review laws needed to put the economy on a sustainable growth path. Not short-term emergency measures. My fear is that the leadership of the legislature may be open to a deal with the executive, in light of its legal troubles. This would be a betrayal. So if it finds at any time that its resolve may waver, it should take heed in the saying that no good deed goes unpunished.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz.  http://businessdayonline.com/no-need-for-buhari-emergency-powers/

Volatile environments test the resilience of firms: The experience of businesses in #Nigeria during the 2015-16 FX scarcity

By Rafiq Raji, PhD

Kindly click on the link below for the article.


What should a chastened ANC do?

By Rafiq Raji, PhD

Change or we will punish you
Local elections this week (3 August), apart from being a test of President Jacob Zuma’s and the ruling African National Congress (ANC) party’s popularity, could also be a turning point in South African politics. Polls suggest the Democratic Alliance (DA) – the official opposition party – may win key municipalities: Johannesburg, Tshwane, and Nelson Mandela Bay. In any case, there are indications the ANC may need to find coalition partners in some, as it may not be able to secure enough votes to remain in charge. In other instances, it is the DA that would need the support of other parties. Even so, DA’s likely triumph would be a victory for liberalism: the ANC would not need to shift all too much to the left. DA gains would be a positive on other fronts. It would be the clearest warning yet to the ANC from the electorate: clean up your act. Furthermore, it would signal a welcome departure – albeit likely still meek – from racial politics.

Even as Mr Zuma is decried by the comfortable bourgeoisie in cities, he remains a popular politician among the common folk. So, elitist and middle-class city dwellers may harp on all the wrongs committed by Mr Zuma, his victories – he survived an impeachment vote and got off many corruption scandals quite leniently – pyrrhic though they might be, are a source of inspiration for black South Africans with similarly poor backgrounds: mostly older, little educated (if at all), live in the hinterlands, and are extremely loyal to the ANC. Still, even these staunch supporters know the ANC is failing them: services are poor, jobs are scarce, and opportunities are sparse.

But would Mr Zuma be bothered? If it is the vantage Mr Zuma that we have come to know, he will probably just shrug it off. In any case, the ANC would likely still win the general election in 2019, albeit probably not as popularly hitherto. Because even as the DA likely makes gains in the cities, it is doubtful it would be able to make similar progress in villages and homesteads far and wide – it can’t easily shake off the perception that it is a ‘white’ party. For now.

The Economic Freedom Fighters (EFF), the ultra-leftist offshoot of the ANC, is better placed to win the support of rural dwellers. But it is inexperienced: only has seats in parliament. Council seats it is able to secure in these local elections, its first, would provide it the opportunity to demonstrate it can deliver where the ANC has failed: improve service delivery, create jobs, and provide more housing.

Nonetheless, the ANC has the higher ground. And its support is the most wide-ranging, and would likely remain so for a while. Thus, a potential rebuke of the ANC at the polls this week, would not be so much a rebuff of the ANC, as it would be a cry for change. A call for a reformed ANC.

Time for ANC reformers to assert themselves
Reformist elements within the ANC need to assert themselves much more forcefully, not just in the back-rooms. First, get Mr Zuma out. Second, insist that Mr Cyril Ramaphosa, the deputy president and Mr Zuma’s likely successor, take a deputy from the younger cadres. Third, reassess the utility of the tripartite alliance with the South African Communist Party (SACP) and the Congress of South African Trade Unions (COSATU). That with COSATU especially: unless organized labour gives way on the minimum wage – which is relatively high – and supports policies that engender labour-intensive industries, unemployment will continue to rise; the rate of which is about 27 percent currently. A 2014 paper by the renowned African political economy scholar, Robert Rotberg, partly blaims COSATU’s ‘labour aristocracy approach,’ for ‘the failure to create myriad jobs.’ ANC’s acquiescence with COSATU’s stance, even as the labour market dysfunction is writ large, is defeatist and has to change. Only visionary leadership, of that ilk by the old man now gone, would be able to bring this about.

Youth and vigour perhaps?
The demographics of registered voters suggest there is a gap that a coalition of opposition parties (or a new centrist party drawing its membership from reformist elements in the ANC, DA, and others) could fill. About a quarter of registered voters are aged between 18 and 29: so-called post-apartheid ‘born-frees,’ oldest of whom are now 22 years old, fall under this group. Together with those aged 30-39, this cohort is about half of the voters’ roll. They do not share the loyalty of older South Africans to the ANC. They simply want jobs. The EFF has been quick to target them. Quite surprisingly, it has not enjoyed the type of wide appeal amongst them that you would intuitively expect, judging from its showing in polls thus far. And even as DA optics are ‘youthful,’ the perception that it remains a ‘white party’ is one that still resonates with the cohort. So, the ANC would probably be able to retain its numbers among their ranks, albeit increasingly less so. That is, those who still choose to participate in the political process. For there are many quite disillusioned. And signs of unrest are emerging: apart from sometimes violent protests against unpopular party choices, there have been at least a dozen politically-motivated killings of ANC members this year, mostly relatively young cadres. Some erstwhile ANC members – not necessarily young – are choosing to contest these local elections as independent candidates. Another group of rebels formed its own political party, the ‘Forum for Service Delivery’ in Rustenburg (a platinum mining city in the North West province), just so it could contest. To keep the youth (and indeed other cadres) in the fold, a reformed ANC may need to purge its upper echelons of older (and veteran) members. Better still, it should make candidates’ selection more democratic. Otherwise, it could have more rebellions on its hands.

Also published in my Business Day Nigeria newspaper back-page column (Tuesdays). See link viz. https://businessdayonline.com/what-should-a-chastened-anc-do/

CBN should focus on its primary mandate

By Rafiq Raji, PhD

Make transparent data-dependent decisions, let the naira be
I do not suppose the Central Bank of Nigeria (CBN) faces a dilemma in the real sense at its monetary policy committee (MPC) meeting this week (25-26 July). True, the economy would probably contract this year – by 2.7 percent is my reckoning – and annual inflation may be as high as 18 percent by year-end. But in the recent past when the CBN tried to spur growth by easing monetary policy, it failed. It was not because it was not diligent enough. Not at all. There were just bigger factors at play, most of which were (and are still) not within its control. There was uncertainty on the fiscal front. This has not abated. Now, officials say revenue targets could be missed by as much as half, albeit better non-oil receipts in recently shared federal revenue suggest things could improve. Revenue would probably be volatile. Pipeline vandalization (by resource control agitators in the Niger Delta region) disrupting crude oil production compound woes from continued low prices. And then foreign portfolio and capital flows that were much looked forward to, after the supposedly free floating of the naira, have not been quick to materialize.

There may actually come a time when the CBN is able to implement measures that succeed in motivating the type of bank lending that boosts the real economy. Not yet: that would only come after pertinent structural reforms. The cost of running a business remains high in Nigeria. Banks have to factor in the ideally unnecessary cost of generating their own electricity, almost permanently via supposedly standby generators. Inflation at above 16 percent also means they cannot lend below that price risk threshold. It matters little how much incentives they are proffered. What policy tightening does, which one advocates (my expectation for this meeting is a 1 percent rate hike to 13 percent), is signal the CBN’s commitment to its primary mandate: price stability; which despite the many inefficiencies in the Nigerian economic system, it has a bizarrely consistent success record in ensuring, when it wants to. So, it is not entirely correct that a balanced tightening stance would not be helpful – some economists have been suggesting the CBN needs to support growth by keeping rates unchanged at this meeting and in the foreseeable future. One is not being dismissive. Banks, not necessarily unhealthy ones, do rely a great deal on borrowings from the central bank. And when the monetary policy rate (MPR) is relatively accommodative, they get some relief. Unfortunately, the hope that such accommodation would incentivize increased lending to the real economy is often – if not always – dashed. Add to that: about 15 percent of total loans outstanding is either currently bad or non-performing. And these are loans given to supposely good borrowers hitherto. Naturally, banks are now very cautious. Still, at current inflation levels, the CBN has to act.

What market participants want is for the naira to trade freely and for policy to be data-dependent and fundamentals-driven. It is not so much the choices that a central bank makes that matter but the rationale and transparency with which they are made. That is where the CBN has faltered hitherto. There is a lot now known about how the CBN operates, especially the almost overbearing influence of the country’s president on policy-making. It is probably now fruitless for the CBN to make pretensions to independence. But with the CBN finally allowing the naira to trade more freely in the week preceding this month’s meeting, committee members may at least get the opportunity to simply focus on discussing a balanced tightening move that signals they are concerned about inflation, but at just the pace that won’t hurt growth materially. Even so, it would help if deliberations result in a formal declaration that it is best if the CBN intervenes less in the foreign exchange market. It simply does not make sense to have a supposedly flexible FX regime and then continue to haemorrhage scarce hard currency, aiding speculators. Best to simply let the naira be. If the exchange rate is determined by market forces, demand would slow. But when the CBN interferes intermittently, the policy becomes even more wasteful than the previous one.

Be decisive with the banks
It is very unhelpful if the CBN has to continually make statements that banks are healthy. It says so and then the deposit insurer, a typically conservative and taciturn institution, comes out to warn about non-performing insider loans. It is well known that problematic loans in Nigeria tend to be insider-related. And such is the influence of these insiders that they rarely get hounded by bankers. When not insiders, bad borrowers tend to be politically connected or active politicians themselves: you only hear about the errant ones in the news when they are either unrepentant critics of the government of the day or have run out of favour with the powers that be. The CBN needs to talk less and act more. Identify the toxic assets on banks’ books, sterilize and park them with the government’s bad bank, sanction and fire irresponsible management teams, and provide liquidity and capital where necessary. But when the problem is not tackled head on and rumours abound, it persists. And by the way, these rumours are not entirely just gossip. Bank treasurers know which banks are in trouble. Because banks lend to (and borrow from) each other on a daily basis, it is easy for treasurers to know which banks are having sustained liquidity issues: they tend to be net borrowers and never have money to lend to other banks. So it is an open secret which banks are having liquidity problems. The CBN should be decisive.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://businessdayonline.com/cbn-should-focus-on-its-primary-mandate/

Brexit risks for Africa are overblown

By Rafiq Raji, PhD

For Africa and the United Kingdom, I choose to be optimistic.

Scare-mongering can stop now, the vote is over
I do not share the pessimism expressed by some on the potential negative impact of Brexit – term used to refer to the now almost certain exit of the United Kingdom from the European Union – on African countries. It is important to distinguish between short-term and long-term impacts. Credible risks – if they materialize – are likely short-term. Once market participants get over the shock, things should get back to normal. Market participants were surprised by Brexit. UK pollsters got it wrong. Again. Considering the margin by which the ‘leave’ side won, it is hard to believe that robust polling would have showed a ‘too close to call’ reading. Brexit-induced market volatility may pass sooner than people think, in my view. That is, after market participants get over the angst of being blind-sided. The South African Rand – the worst-hit African currency in the aftermath of the Brexit vote – is typically vulnerable when there are market jitters. And when negative domestic events – bizarrely intermittent – don’t cause some trouble, happenings in distant lands – a la Brexit – almost always come about to disrupt things. But if a long-term view is taken, it is not likely that increased sovereignty for the United Kingdom would be disadvantageous for African countries, the longstanding primary focus of UK foreign policy – or influence. There is ample time for both sides to calmly negotiate, once emotions become subdued and rationality takes over.

Brexit is an opportunity to rebalance the UK economy
Former Rolls Royce – a British carmaker – chief executive, John Rose, wrote once of the unbalanced ‘post-industrial’ UK economy for The Economist. In the article (“Made in Britain”), he recalls how an eminent British industrialist at a conference he was attending was introduced to a German audience as follows: “Our speaker is now going to explain how you run an economy based on real estate.” Sir John Rose made a case then for more British high value-added manufacturing. Brexit is an opportunity for such issues to get the type of attention they deserve. Also, even as Brexit negotiations could potentially get nasty, London’s place as a global financial centre in continental Europe would be hard to replace in a hurry. Still, some global banks have started to make contingency plans, reportedly transferring some jobs to Dublin, Paris, and Frankfurt. They are probably being hasty. It is still possible that the UK would be allowed some form of nuanced access to the single EU market for some services, probably just enough for financial institutions to be able to continue doing their EU-related business from London. So, upcoming Brexit negotiations may still tilt in banks’ favour. The view that a hard EU stance would be a crucial signaling tactic to dissuade other potential ‘Brexiters’ in the EU is short-sighted. I think the EU would be pragmatic.

Domestic factors matter more for African giants
It is the actions of authorities in Nigeria and South Africa – Africa’s largest economies – that matter more for investors. Structural imbalances in both economies have nothing to do with Brexit. And even portfolio inflows into these countries – expected by some to slow due to volatility and uncertainty in global markets owing to Brexit – would depend on the actions of their monetary authorities. Both countries clearly need to remain on a policy tightening path. And in the Nigerian case, if authorities follow through on ongoing structural reforms, the investment case for that country is hard to refute. Morever, capital seeking African assets are now more diversified. Long-term investment plays for asset classes like infrastructure are likely to continue unabated, in my view. The African Development Bank, Africa Finance Corporation and other African infrastucture or development-focused financial institutions are not going to cut back plans just because the UK decided it wanted more sovereignty over its own affairs. Furthermore, fears about a potential reduction in African diaspora remittances may be misplaced. Actually, I think Africans – who now see an increasingly insular West – may begin to build closer ties with their home countries.

Recessions don’t last forever
UK recession fears are the main argument behind negative African Brexit impact fears. Pray tell, do recessions last forever? The key question is whether Brexit would have a long-term negative impact on African economies. It is hardly robust to base an assessment of this on a potential UK recession; which would likely pass – if it happens – within the two years or so that Brexit negotiations and modalities are expected to be completed. Fears that Britons would buy less Kenyan flowers – expressed no less by the Kenya Flower Council – seem defeatist to me. Say that happens during a UK recession that everyone seems to think would occur this year, what about afterwards? I think things would either go back to normal or improve. Morever, there are other markets that could be explored.

British outwardness was never about the EU
There is a need to distinguish between the increasing insularity of some Britons – mostly the white, less educated and older ones, borne out of fears about immigration, and the likely rational decision-making of UK authorities. Whoever succeeds David Cameron as prime minister is not likely to jeopardize the advantages that the UK currently enjoys in global trade and finance. Now free from its EU obligations, it would likely ramp up its foreign policy reach through The Commonwealth – a multinational association of fifty-three member states formally under British colonization, which it controls. A likely renewed British Commonwealth focus would be an additional positive for African countries’ trade. Thus, I am sceptical of the view that the UK would need to renegotiate each and every trade deal it agreed to under the aegis of the EU, especially those with African countries. Brexiters are not dumb. A simple conversion would do.

Also published in my BusinessDay newspaper back-page column. See link viz. http://businessdayonline.com/2016/06/brexit-risks-for-africa-are-overblown/

On the economy, Buhari has to do more

By Rafiq Raji, PhD

Okay, Nigeria is back on track. It is all about the economy. President Muhammadu Buhari certainly knows this now. He made a mistake. But now he has changed course. For the better.

Floating the naira was a bold move. But the real test is yet to come
That time when it may begin to seem like it was all a mistake, as the naira potentially weakens to jaw-dropping levels. When this happens – if it does – Mr Buhari must keep his nerve. If he does, the long-term benefits could be huge. His resolve would be crucial to helping spur the much-needed diversification of the economy. If imports are expensive, Nigerians would adjust their tastes.

Foreign investors remain wary
I have received enquiries about how committed the Central Bank of Nigeria (CBN) is – or would be – to its new floating foreign exchange (FX) regime. Foreign investors are wary. There is a reported FX demand backlog of US$4 billion. It is probably twice as much or more. To meet this, the CBN would need to deplete its FX reserves by at least 15 percent to US$22.7 billiion (FX reserves were US$26.7 billion as at 10 June 2016) over the next month. Add say, US$600 million in crude oil earnings in the period, and the level could be about US$23.3 billion by mid-July. Beyond this threshold, it would have to give in if pressure persists.

Central bank is still well-placed to ensure stability
Considering the lingering scepticism of President Buhari, the CBN is likely going to try to ensure there is not too sharp a drop in the exchange rate; to the extent that it can. By still banning some 41 imported items from the FX market and the stern anti-money laundering stance of this government, it would probably still be in a good position to ensure stability. In the past, corrupt proceeds made for a signficant portion of FX demand.

Do not backtrack
More importantly, what investors would be looking to see is whether authorities would not backtrack if there is a negative surprise. If there is more FX demand than anticipated, for instance. Why should this be a worry? Some of the demand backlog are mostly requests in the normal course of business. With capital controls now lifted, some investors and businesses might have decided it would be best to get out while they still can. They cannot soon forget the utter despair of having their funds stuck for so long while the capital controls lasted. So expect some panic demand. The tentative view I have taken is that the CBN – which remains the main FX supplier and would still be able to determine the price – would try to hold the naira exchange rate for a US dollar at the 300 level. If that is not market-clearing and crude oil receipts remain challenged, expect further depreciation.

Appoint an economic management team
There is more to be done. Mr Buhari must appoint a proper economic management team to advise him and serve as a think-tank for the National Economic Council – which consists of governors of the federating states with the country’s vice-president as chair. The team should be dominated by independent economists who are not afraid to speak truth to power. A special adviser of cabinet rank should lead it. I recommend Dr Doyin Salami of the Lagos Business School, an independent member of the monetary policy committee, who was courageously consistent throughout the period of the wasteful CBN policy.

Leave the central bank alone
It is also quite clear the CBN is not going to be independent under President Buhari. So, he is the one that needs to be admonished. It is important to point out to him that the benefits of a floated currency would only come if it is sustained. Because if the CBN buckles when things seem like they are about to get out of control, it would all have been for nothing. The Nigerian leader should be told to expect some initial volatility. He must not be given a false sense of comfort. The exchange rate would balloon. Prices for imported goods would rise significantly. But Nigerians would eventually adjust, boosting demand for locally-manufactured goods. That is how to create jobs. What Mr Buhari really fears is a Babangida-era structural adjustment programme deterioration of the 1980s – which could have worked if it were sustained. As it is his mettle – not that of the CBN governor – that really matters, more courage is asked of him.

Also published in my BusinessDay newspaper back-page column. See link viz. http://businessdayonline.com/2016/06/on-the-economy-buhari-has-to-do-more/