What Nigeria needs to avert economic crisis – Chike Obi

Nigeria needs over $20 billion to avert economic instability.

This is the assessment of a former Managing Director of Asset Management Corporation of Nigeria (AMCON), Mr. Mustapha Chike-Obi.

According to him, the $3.4 billion financial support the International Monetary Fund (IMF) approved for Nigeria and the N850 billion approved by the National Assembly as domestic borrowing are not sufficient enough to address Nigeria’s revenue shortfall.

He spoke yesterday on the ‘Morning Show,’ of ARISE News Channel, the broadcast arm of THISDAY Newspapers, and noted that the banking sector, which is pivotal to economic stability, should be properly managed and allowed to be more profitable with monetary instrument easing.

The former AMCON boss explained that banks would not accept another AMCON because they would pay the bulk of the current AMCON’s liabilities at the end of the day.

He commended the Ministry of Finance, Budget and National Planning for securing the financial support from IMF for the country and urged judicious spending in order to facilitate more loans that would be needed.

He said: “We need to compliment the Minister of Finance and her team for arranging this lifeline. It is a loan that is to be paid between three to five years and while it doesn’t come with strings, it does come with strong suggestions as to what should be done with the money and how the money should be spent.

“$3.4 billion sounds like a large amount of money but it is roughly 1-2 per cent of our GDP. It is just a lifeline and it is not enough to solve our economic problems. So, depending on how we use the money and how we are transparent and forward-looking. We are going to need much more money. We are going to need upward of $20 billion from various world agencies and they are watching what we do with this $3.4 billion. And I think that if this $3.4 billion is spent properly, we would be able to get more money down the road.”

On the N850 billion approved by the Senate, he said: “I have always been against foreign borrowing and borrowing in dollars because everyone knows that every five years, FX revalues to about 30-50 per cent and borrowing in foreign currency ends up being more expensive than borrowing domestically.

“So, if this was a loan that was approved previously and now they are changing it from dollars to naira, then I think it is a very smart thing to do and I welcome it. Even if it is an additional loan, I think this is the time the Nigerian government should be borrowing money. However, I think what you do with the money is what matters.”

Chike-Obi, who specified some areas the federal government should not use the monies for, noted that on no account should the monies be used to support the nation’s foreign exchange market.

He said: “There are some things we should do with the N850 billion and the $3.4 billion. We should not use it to support our foreign exchange, let it go to a level that is sustainable on its own. We should not be sharing this money with the states as this is a federal government loan that has to be repaid in 3-5 years and it must be used for specific things that would solve our immediate problem and build for the future. The third thing it shouldn’t be used for is subsidies. As long as it is not being used for those three things, we would do well in borrowing more money to be used for proper things.”

He predicted that Nigeria would have to go back to IMF for a proper loan.

“I think we are going to go to the World Bank for loans and other agencies in the world. Even under the IMF guidelines, if 20 per cent or more of your GDP is affected, there is a new facility you can access.

“So, we would need upward of $20 billion and I think this is a test case and if the government manages this money very responsibly and transparently, I think it will open up the door for money down the road. But if we use this money the way we used money in the past in a way where in six months we can’t account for the money, we would find it very difficult to source the rest of the money we need in the future,” he added.

Also, responding to a question on why AMCON is still in existence as against the initial plan, he said AMCON did not have an end date but an operational end date.

The agency, he stated, was to last for 10 years but the plan was based on the fact that the banks which are going to pay the bulk of the AMCON liabilities would be growing at a rate of 10-15 per cent a year.

He added that Nigerian banks would not accept another AMCON because they would pay the bulk of AMCON’s liabilities eventually.

“What happened is that the Central Bank of Nigeria (CBN) took a very hard and restrictive monetary stance from 2012 upwards and banks started growing at less than the 10-15 per cent they had planned to under 5 per cent. And because of that loan growth in bank assets, the money they were to pay to AMCON has actually been extended to another five years.

“So, there is a plan that would have AMCON totally liquidated in the next five years. I think that plan in the future would be taken up by CBN. So, AMCON has just extended its life by five years because of the slow growth of banks, but the plan at the time was sound and the plan remains sound. I do think that now, the situation if not properly managed, would be worse than the situation that brought AMCON in the first place. So, the monetary authorities and fiscal authorities have to be very careful to handle the banking situation very carefully,” he said.

On the possibility of another banking sector crisis, Chike-Obi said the situation would be more dangerous than the 2008/2009 era, if not properly managed.

However, he stated that the banking sector is now better managed than before.

“I think there has to be some management and without that, there would be a disaster. In terms of a new AMCON, there is neither the political will nor the executive will to have another AMCON. AMCON has attracted lots of emotions and I don’t think the banks would sign up for another AMCON because the banks would pay the bulk of AMCON’s liabilities at the end of the day. So, I don’t think another AMCON is feasible and the best way to go is prevention. We need to sit down and put all our best minds together, deal honestly with the situation and find a way to avert the catastrophe because if we let it happen, it is probably two or three times larger than the 2008/2009 problem,” he added.

IMF Urges Nigeria to Adopt New Borrowing Limits

Meanwhile, the International Monetary Fund (IMF) has advised the federal government to speedily adopt “new borrowing limits to allow additional bond issuance at still favourable rates.”

IMF stated this in a report dated April 22, 2020, in which it reviewed and justified Nigeria’s request for $3.4 billion in emergency financial assistance under the fund’s Rapid Financing Instrument (RFI) that was approved on Tuesday.

The Fiscal Responsibility Act prohibits fiscal deficit of more than five per cent of the country’s Gross Domestic Product (GDP).

But the multilateral institution in the letter obtained yesterday said setting a new limit would enable the federal government to tap debt from the domestic market, especially from the Pension Fund Administrators that have “extra liquidity now that they can no longer use to purchase high-yielding CBN bills because of regulations introduced in October 2019.

It explained that results of the last FGN bond auction showed strong demand, with an average cover ratio of 4.7 times and the 30-year bond receiving the strongest demand at seven times the offer at auction.

According to IMF, Nigeria’s fiscal financing gap remains large at about $11 billion. “Together with a larger deficit, a downward revision in available financing—including less recourse to CBN overdrafts—leads to about $8 billion (2 per cent of GDP), even after accounting for RFI purchases.

“Of that gap, 25 per cent will be covered by existing budget support commitments from multilateral institutions. The authorities plan to cover the rest through a reprioritisation of existing project loans (including from the World Bank and AfDB) towards health spending, drawdown from existing deposits held in accounts of extra-budgetary funds and sovereign wealth funds, as well as domestic borrowing.

“Staff is of the view that the latter option remains the most appropriate in view of the large stock of maturing open market operations (OMOs) of about N6 trillion domestic, which provides substantial space to issue domestic bonds—which are currently trading at very favourable yields— without crowding out the private sector,” it stated.

The fund noted that before the onset of the COVID-19 pandemic, the generally well-capitalised Nigerian banking system had seen both its liquidity and solvency ratios rising, while non-performing loans (NPLs) in the industry had fallen.

It added that accelerated loan write-offs and recent government arrears clearance to bank borrowers, as well as a pick-up in lending, had halved the NPL ratio to six per cent in 2019, adding that high risk-weighted assets and deferred International Financial Reporting Standards (IFRS)-9 related impairment charges had also reduced the overall solvency ratio by 0.7 percentage points to 14.6 per cent at end-2019 (the ratio would have been even higher were it not for three small insolvent banks).

“Banks remain susceptible to deteriorating credit quality due to their exposure to ailing sectors, particularly oil and gas producers (26 per cent of total loans).

“By end-March, foreign portfolio holdings decreased by 46 per cent since the beginning of the year and by almost 60 per cent since mid-2019. The official exchange rate has been adjusted by 17.5 per cent, bringing it much closer to other rates, and the various exchange rate windows have been broadly unified around the rate in the investors and exporters (I&E) window.

“Spreads on credit default swaps and on 30-year Eurobond yields have widened by 700 and 600 basis points, respectively. On the other hand, domestic bond yields remain low, and for lower maturities, at rates much below inflation,” the Washington-based institution added.

It noted that the challenges faced by the economy have also restrained capital inflows, including dwindling foreign interest in central bank bills.

IMF, however, estimated that some of these pressures in the market were expected to ease in the second half of the year.

“The overall general government fiscal deficit for 2020 would widen to 6.8 per cent of GDP (from 4.6 percent expected prior to the Covid-19 outbreak),” it stated.

IMF expressed support for the central bank’s caution in easing monetary policy, in view of potential inflationary pressures arising from the exchange rate and food supply shocks.

It noted that given the uncertainties in the system, the situation needs to be monitored closely and adequate liquidity provided if necessary, adding that a sharp increase in outflows, potentially leading to an overshoot in the exchange rate, would pose a difficult dilemma.

“While a tightening of monetary policy may still be the first-best policy response, it could further damage economic activity. In such a situation, all available policies should be considered.

“With reserves falling, staff welcomes recent steps taken by CBN to allow greater flexibility in the Investors & Exporters (I&E) rate and narrow differences between various FX windows.

“With the spread across the various exchange rate windows now very narrow, this is also a good moment to immediately move to full and formal unification—e.g., by converging all foreign exchange windows to the I&E window.

“This critical step to ensuring a well-functioning market would be helped by the CBN’s calibration of its foreign exchange sales in the market at a level commensurate with protecting central bank reserves while taking into account low international oil prices and reduced FX demand.

“A unified and more flexible exchange rate will be an important shock absorber, especially in turbulent times— with CBN FX interventions limited to smoothing large fluctuations in the exchange rate.

“Rationing of foreign exchange—such as occurred in 2015, with damaging consequences—must be avoided as it would hamper trade and investor confidence, hence further delaying the economic recovery once the crisis passes,” it added.

However, in a letter to IMF requesting for RFI, dated April 21, that was jointly signed by the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed and the CBN Governor, Mr. Godwin Emefiele, the federal government said it was also strengthening monetary and exchange rate policies with a view to moving towards full exchange rate unification and greater exchange rate flexibility.

This, the federal government said, “would help preserve foreign exchange reserves and avoid economic dislocation.”

In the letter, made public yesterday, the duo said: “We are also advancing in our power sector reforms—with technical assistance and financial support from the World Bank—including through capping electricity tariff shortfalls this year to N380 billion and moving to full cost-reflective tariffs in 2021.

“Our anti-corruption efforts will continue unabated. We will strengthen the role of the Federal Audit Board in combating corruption and are committed to strengthening the asset-declaration framework and fully implementing the risk-based approach to AML/CFT supervision while ensuring the transparency of beneficial ownership of legal persons.

“We fully recognise the importance of ensuring that financial assistance received is used for intended purposes.”

Owing to this, the government said it would create specific budget lines to facilitate the tracking and reporting of emergency response expenditures and report funds released and expenditures incurred monthly on the transparency portal; publish procurement plans, procurement notices for all the emergency response activities—including the name of awarded companies and of beneficial owners—on the Bureau of Public procurement website; and publish no later than three to six months after the end of the fiscal year the report of an independent audit into the emergency response expenditures and related procurement process, which would be conducted by the Auditor General of the Federation—who would be provided the resources necessary and would consult with external/third party auditors.

“In line with IMF safeguards policy, we commit to undergoing a new safeguards assessment conducted by the Fund.

“To this end, we have authorised IMF staff to hold discussions with external auditors and provide IMF staff access to the CBN’s most recently completed external audit reports.

“We do not intend to introduce measures or policies that would exacerbate the current balance-of-payment difficulties.

“We do not intend to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, trade restrictions for balance-of-payments purposes, or multiple currency practices, or to enter into bilateral payments agreements, which are inconsistent with Article VIII of the IMF’s Articles of Agreement.”