Sale of assets as dangerous policy myopia?
I have just read the wide media coverage regarding the recommendations of the National Economic Council (NEC) as well as the Senate on the ways to reboot the economy out of the current recession. Times such as this require all brains at work and all hands on deck. Consequently, I commend both institutions for their patriotic duty in advising the President. Surely, the proposals are still mere advice or recommendations, and not approval as wrongly reported by some media. Only the President can approve any of those recommendations to become policy (both NEC and Senate are advisory bodies on matters of national economic policy). Without a doubt, several of the proposals deserve serious consideration. In particular, the Senate suggestion for active coordination between monetary and fiscal authorities is urgent. Furthermore, the suggestion to urgently review legislations that impede the economy and enact new ones iscommendable. The National Assembly and the Presidency should declare an emergency on these legislations and ensure that they deliver on them over the next 100 days for the sake of Nigeria. I expected this to have been done within the first 100 days of this administration.
I am not in the habit of joining issues except when I consider the matter critical. Specifically, I am troubled by the proposal to sell some valuable national assets in order to “build reserves and provide funds for immediate spending” and thus ensure that this recession will be the “shortest” ever. Some people had bandied the same suggestion in the past but I largely dismissed it as a joke. But when the Senate and NEC joined the convenient but flawed call for asset sale, I have a citizen duty to join others in letting our voice be heard. Part of the legacy of the oil resource curse on matters of public finance is a mindset that resorts to easy, albeit lazy approach to ‘quick fixes’ – with a gaze on the short term even when the issues are structurally long-term. So, I understand the mental framework that drives such a proposal especially given the pressures to show immediate results.
But for the record, it is our considered view that the proposal is based on a false foundation. Our thesis is that in extreme, exceptional circumstances, sale of certain assets could be a last resort option but that Nigeria is currently not near that threshold and the institutional framework for its effective use is also not in place. Furthermore, we argue that any sale of assets now amounts to chasing pennies when by acts of omission or commission, we are losing pounds. Such a hasty auction of national assets can only benefit a privileged few with cash and access while jeopardizing Nigeria’s long term economic interests. It will be a historic mistake for the reasons stated below.
Let me start by noting that the objective of policy is mistakenly identified in terms of getting the economy out of recession. Recession is short-term. With good rains and bumper agricultural harvest, GDP growth can easily recover with tepid positive growth and bingo, we are out of recession! A GDP growth rate of even 0.01% next quarter will mean that we are out of the recession. What does this actually mean for the average Nigerian? Really very little! The fundamental issue to focus the attention of policymakers is that the economy has dramatically compressed by more than 50% in US dollar terms. The GDP compressed in dollar terms from about $575 billion (as at the time this government took over) to about $252 billion currently—depending on the exchange rate used (currently estimated to be about third largest economy in
Africa after South Africa and Egypt; with per capita income closer to $1,300 from over $3,000 in 2014).With the current policy regime, it will be a miracle if the current government can, after eight years in office by 2023, succeed in returning Nigerian economy just to the size of GDP (in US dollars) it met it in 2015. To be fair, the wheels of the economy were already falling off by the time this government took over plus other complications of the oil sector and I sympathize with them. But it is also fair to note that some of its policy choices have made matters worse. Now that the government is showing seriousness in tackling the crisis, focusing on short-term next quarter GDP growth misses the key point and has the danger of understating the serious work required.
Second, there is little basis for the figures being bandied (only God knows how they did the valuation and by whom to get $10- 15billion expected from the asset sales), and there is no basis for the expectation that shoring up reserves by this amount will magically restore investor confidence and stop speculation on the naira. What they seem to suggest is that there is a sense of “optimal level of reserves for confidence” such that once investors see $35 billion or $40 billion as reserves, they will stop speculation. This is a strange argument. Private economic actors are much smarter. There is more to investor confidence than temporary boost in stock of reserves when everyone knows that the underlying political environment as well as the policy regime and its credibility make the flow of reserves unsustainable. The IMF calculates reserve adequacy in terms of the amount to finance at least three months of imports especially for countries with flexible exchange rate (which we claim to have), and of course also enough to cover short term forex liabilities for countries with open capital account. Nigeria currently has much more reserves to cover even six months of imports (size of imports also depends on exchange rate). So, what is the problem?
No amount of reserves can stop currency speculation in a poor policy environment. There is much more to confidence than absolute or relative size of reserves.
Look around our West African neighbours that are doing far better in economic terms and check out the size of their reserves (even as percentage of GDP). Until 2004, Nigeria never had more than $10 billion in reserves, and we have survived oil prices below $10 without selling Nigeria. The British pounds has been down for months against major currencies since the Brexit vote in June, while China (with trillions of dollars in reserves) experienced major stock market and currency attacks recently and the Yuan had to be devalued. Before the 2008/2009 crisis, Russia had robust reserves but it lost tens of billions struggling to defend the local currency and eventually yielded to the market.
We spent one year trying to reinvent the wheel of macro management and exchange rate regime at a time of adverse terms of trade shocks with twin deficits. Finally, we have admitted that we had used the Nigerian economy and Nigerians as guinea pigs in the futile experimentation with tried but failed policy – edand the dead bodies are littered everywhere with a recession, escalating unemployment and factory closures, rising inflation and poverty. Now we have started to make some progress with so-called ‘flexible exchange rate’ but still combined with a black list of 41 items ineligible for forex as well as other crude controls, and the consequent huge parallel market premia that is one of the highest in the world. Parallel market exchange rate has now become a very important leading indicator in the economy. There is a saying that “confidence grows at the speed that a coconut tree grows but falls at the speed a coconut falls”.
Investor confidence is not like a tap you can turn on and off. Restoring policy credibility by swiftly correcting the persisting errors and demonstrating commitment to sound macro management rather than the “trial and error” mode will be the first important step forward. If we sell assets and lodge into the reserves under the current policy framework, I am willing to take a bet that in a few months’ time, it will be frittered away and we will be in even a bigger mess as economic agents know that we have nothing else to resort to.
Prof. Soludo is former Governor Central Bank of Nigeria