How reforms, financial flows can ease Nigeria’s liquidity shortage - BUSINESSDAY
By not taking the steps needed to unleash massive inflows of foreign direct investments (FDI), Abuja is being needlessly exposed to liquidity shortages and the economy is at risk of sustained sub-par growth, according to leading economist, Ayo Teriba.
“Such liquidity shortage is to blame for recession, stagnation, negative per capita real GDP growth since 2015, devaluation, weak currency, rising unemployment and rising incidence of poverty,” said Teriba, CEO of Economic Associates.
“Nigeria must put an end to these setbacks by taking steps to embrace financial globalisation and join the liquidity race in order to regain its place among peers. The government needs to open new spaces for foreign investors to unlock Greenfield FDI,” he added. As surprising as it sounds, there are limited opportunities for Foreign Direct Investors looking to park their cash in Nigeria, which is in dire need of investments to grow the economy and provide jobs for a teeming population.
That’s because Abuja has maintained its 100 percent ownership of key infrastructure, including rail transport, pipelines, power transmission, stadiums, public universities and tertiary hospitals across the country, effectively limiting options for private investment in the country. Even the oil and gas sector, which has typically attracted the larger chunk of new FDIs to the country, has come unstuck, as a set of fiscal reforms (contained in the Petroleum Industry Bill meant to unlock new investments) has stalled for decades.
Incumbent President Muhammadu Buhari, who seeks a re-election at this month’s polls, refused to assent to the bill at the eleventh hour.
The lack of investment-friendly reforms has been telling. FDI flows fell to $2.2 billion in 2018, the lowest in 13 years, according to United Nations Conference on Trade and Development (UNCTAD).
“What’s frustrating is that Nigeria’s loss on the FDI front has been a gain for peer countries locked in a global race for capital,” said Kyari Bukar, a former chairman of the Nigerian Economic Summit Group, a private-sector think-tank.
Many of Nigeria’s peers recognise the benefits of financial globalisation and have implemented reforms to attract record inflows of FDI, by liberalising infrastructure and privatising a growing share of government ownership in infrastructure assets.
With its Liberalisation, Privatisation and Globalisation (LPG) policies since 1992, India is a worthy example of this. Saudi Arabia, with its National Transformation Plan (NTP) announced in 2016 and the 16-sector privatisation programme announced in 2017, is fast becoming another exemplar.
Up to the early 1990s, Nigeria had a larger stock of Foreign Direct Investment (FDI) than India, South Africa or the United Arab Emirates.
Enter 2018 and Abuja has been left for dead, with India now having more than triple, and Saudi Arabia having more than double, Nigeria’s FDI stock.
The need to privatise redundant state assets and adopt the model of the efficiently-run Nigerian Liquefied Natural Gas (NLNG), where the government owns 51 percent and the private sector holds 49 percent, is hardly a new counsel to the government, but it has fallen on deaf ears. An overbloated public sector desperate to exert itself on business is a main reason why reforms have stalled, according to Wale Okunrinboye, head of research at Lagos-based Pension Fund Managers, Sigma Pensions.
“The public sector is small but looms large,” Okunrinboye said. “There is massive private capital waiting on Nigeria to get its head right in terms of implementing reforms before they start pouring in, but there has been a lack of urgency in pushing those reforms,” Okunrinboye told BusinessDay.
Critics of the current government say it has acted as though it has enough cash to make the investments required for sustainable economic growth. They say President Buhari’s absence at the 2019 World Economic Forum in Davos only backs their claim.
The Nigerian government was notoriously absent as the leadership of smaller African countries from Ethiopia to Rwanda were present to sell investment opportunities at the Davos meeting which gathered elite private investors.
Ethiopia’s Prime Minister Abiy Ahmed particularly shone at the Forum. Ethiopia is slowly becoming an investor’s delight on the back of a rapid set of reforms being pursued by 42-year-old Ahmed, who is bringing down age-long barriers to investment in a market seen as rival to Nigeria because of the size of its population.
The results of Ethiopia’s approach are visible. Ethiopia attracted $3.1 billion in FDI in 2018. That equates to an FDI per head of $29.5. For Nigeria, FDI per head is less than half, at $11. Ethiopia was also the fastest growing African economy in 2018, after expanding 8 percent. Nigeria, on the other hand, marginally grew 1.75 percent as at the third quarter, less than the country’s 3 percent birth rate.
“Nigeria must wake up from its slumber before it’s too late,” a business leader who did not want to be named said.
“We must understand that financial globalisation has changed the trends of foreign resource inflows into developing countries and begin to key into it,” the business leader said. Up to the early 1990s, Official Development Assistance (ODA) or Foreign Aid was by far the largest inflow to developing economies like Nigeria, being twice as large as any other inflow. Until then, developing countries either relied on export revenue or foreign aid. However, from the mid-1990s, FDI, Remittances and Foreign Portfolio Investment (FPI) caught up with and overtook ODA one after the other, as the countries embraced Financial Globalisation.
FDI overtook ODA by 1994 and remained the largest type of inflow until 2016. Remittances overtook ODA in 1996 and remained the second-largest and the most stable type of inflow into developing countries until 2016 when it caught up with FDI, and is now projected to become the largest inflow into developing countries from 2017 onwards.
FPI has proved the most volatile of all inflows, often surging past ODA at different points since 1996 but perennially falling below it before surging past it again, backing an earlier claim that FPI is volatile and insufficient in building a sustainable economy.
“Sadly, Nigeria is now in the FDI and Remittances relegation zones as we had much bigger shares of both in the past than we do now,” Teriba said.
To salvage the situation, Nigeria must not only liberalise key sectors but privatise, by converting corporate assets to financial assets to unlock Brownfield FDI, according to Teriba.