I am the ‘academic economist’ that Opeyemi Agbaje referred to in his BusinessDay column of Wednesday 10th May 2017. I had clarified some misleading statements he made to the effect that ‘investors would invest in Nigeria in 2016, only if they were mad’ because of ‘the lack of clarity about government’s policy direction and the presence of multiplicity of exchange rates were deterrents to investment inflows’, at the Nation Building Dialogue organised by Apostles in the Market Place (AiMP) on Saturday 5thMay 2017at the Civic Centre in Lagos. His comments offended the sensibilities of other panellists who believe that Nigeria remains one of the world’s most attractive investment destinations, despite heightened short-term policy and exchange rate risks resulting from the fall in oil price in the last three years.
He had made his points right after I submitted that to ensure economic recovery, growth and exchange rate stability in the aftermath of the recession and devaluation in 2016, Nigeria urgently needs to solve two problems: (i.) foreign exchange shortage and (ii.) infrastructure shortage; and that the single solution to both problems is to immediately open Nigeria up for foreign investment inflows, especially diaspora investment that government is issuing foreign currency bonds to attract, and foreign direct investment (FDI) inflows into all other infrastructure sectors apart from telecoms where we have attracted investment in abundance[1].
The panellist that spoke after him, Funmi Ogunlesi, happened to have been a member of the Nigerian delegation that went to consummate the Eurobond issue. She quoted a prominent foreign investor who informed the delegation that he was ‘transfixed on the promise of Nigeria’ just hours before issue was oversubscribed almost eightfold, to demonstrate the fact that investors do not necessarily share Opeyemi’s pessimism. Although I had informed Nididi Nwuneli, the moderator, that I would like to clarify issues about the exchange rate before Funmi eloquently made her points, I began by saying that Funmi had nailed the point I wanted to make when I was given the mic.
But I went on to urge Opeyemi not to group direct investors, who I had urged Nigeria to attract, along with portfolio investors who are, to an extent, understandably deterred by short-term policy and forex risks. I explained that foreign direct investors are undeterred by such risks because they are more interested in the long term returns from the wealth their investment will create in the country, and those returns would normally be large enough to cover the costs imposed by short-term risks. I then illustrated my point with the joint venture partners in the Nigeria LNG project who took the final investment decision in 1994, a year in which foreign exchange and policy risks in Nigeria had been worse than we experienced in 2016.
He made no response and left before the questions and answers session, I had thought he accepted the clarifications, only for me to receive text messages from him on Monday, two days after the initial dialogue, claiming that I had attacked some of his views with explanations and examples that amounted to ‘intellectual sophistry’, and to now read a lot more misconceptions of the issues and misrepresentation of my views in his column.
I had told him in my response to his text messages that I saw no point in joining issues with him in private over a matter we had concluded in public, and that ended the text conversations. Now that he has brought the matter back to the public sphere in his weekly column, I have no choice but to restate my points, and clarify some of his misconceptions. This provides us a valuable opportunity to advance the conversation about how Nigeria can get out of extant economic difficulties. We must thank him for the opportunity.
My view is that, despite the absence of clarity about economic policy directions and the presence of a multiplicity of exchange rates in 2016, Nigeria could have easily attracted significant FDI inflows, just as we did with the LNG in 1994, when the country faced even worse exchange rate crisis. All that the government needed to do was to break its own monopoly in large infrastructures like oil and gas pipelines, power transmission network, railway network, among others, and encourage foreign investors to acquire equity stakes in those sectors.
The Nigerian government maintains 100 percent equity stakes in oil and gas pipelines across the country, nationwide electricity transmission network, national railway network, all teaching hospitals and national universities. It is my view that inviting foreign investors to come and acquire equity stakes in these sectors in 2016 or any time would elicit similar responses from investors as we saw in the NLNG company in 1994, and in the GSM companies since 2001, regardless of policy direction and exchange rate regime. And that will reduce the forex supply shortage, and narrow or close the gaps between the multiple exchange rates in the market.
Foreign direct investors take a much longer view than portfolio investors. The foreign investors who committed U$2 billion for 51 percent equity stake in the NLNG in 1994 committed it for 27 years, the first five years of which was for the construction of two trains of LNG liquefaction plants and distribution network, the remaining 22 years was for collection, liquefaction and exportation of the gas. With such long-term plan, they are unlikely to be concerned about short-term policy and exchange rate risks. This no sophistry. At different points since 1994, the NLNG Joint Venture partners have increased their stakes to support the addition of four trains to the original two, thereby lengthening of the investment duration.
There have been large and steady FDI inflows into the financial sector since government liberalized the sector in the 1990s. There have also been overwhelmingly large and steady inflows of foreign investment into the Nigerian telecoms sector since Federal government broke its own monopoly and opened the space to foreign investors in 2001. In recent years, there have been steady inflows of FDI into shopping malls and five star hotels around the country. A lot of luxury estates have been steadily springing up in Lagos since the nineties, including Banana Isla, Parkview, VGC, and now Eko Atlantic City. One could aldo mention huge private investment in Lekki expressway and Ikoyi-Lekki link bridge. And there is the ongoing Refineries and Petrochemical projects being implemented by Dangote group. None of these have been deterred by exchange or policy risks.
My main point is that government monopoly is an entry barrier to foreign investment, and is the main deterrent to additional large foreign direct investment inflows into Nigeria. Removing such entry barriers by breaking the monopoly will trigger an influx of foreign investment, regardless of short-term exchange rate and policy risks. The long-term returns to large scale investment in Nigeria are so huge that only irrational people will ignore those returns and be worried about short-term forex and policy risks.
Nigeria now urgently needs to attract long-term investment inflows like FDI and Diaspora investment in government foreign currency bonds to ensure adequate foreign exchange supply that is required to stabilize the exchange rate itself. This view is the direct opposite of Opeyemi’s: I argue that we must open Nigeria for increased long-term foreign direct investment inflows now as the only practical way to ensure sustained convergence of the multiple exchange rates and ensure long-term strength and stability of the Naira; while he seems to argue that exchange rate convergence is needed to attract investment. He does not seem to appreciate the fine distinctions between the determinants of long-term and short-term inflows.
I wish to state that exchange rate convergence/policy clarity is neither necessary nor sufficient for attracting long-term foreign investment:
- Even if exchange rates were convergent and policy directions were clear, long-term investments still cannot come in into sectors other than oil and gas, telecoms, financial and other services that are already open and are probably saturated with foreign investment, unless and until entry barriers imposed by government monopolies in large infrastructure networks are administratively demolished.
- Once entry barriers into those sectors are removed, foreign direct investment will flood into those large network infrastructure sectors, as they did into previously liberalized sectors, even in the face of multiple exchange rates and policy uncertainty. Taking steps to remove entry barriers in the way of foreign investment will brighten the macroeconomic and exchange rate outlook. Action speaks louder than words.
- We must not confuse the requirements of irreversible, long-term brownfield and greenfield foreign direct investment inflows, needed to rebuild infrastructure and boost long-term forex supplies, with the requirements of reversible short-term portfolio inflows that will not be committed to any physical investment projects, but perch in bank deposits, government bonds, and equities in search of interest rates and/or capital gains, but certain to flee at the first signs of economic difficulties.
- Portfolio investors are understandably deterred by exchange rate and policy risks, because of the high vulnerability of their assets and returns to macro risks. It will however be misleading to imply that other foreign investor groups are similarly deterred by short-term risks. Long-term foreign direct investment decisions are based on long-term estimations of sector risks and returns, rather than on short-term macro risks and returns. Nigeria’s success in issuing Eurobonds shows that even portfolio investors will still invest in Nigeria once the foreign exchange risk element is taken care of, as the Eurobonds would. Thus, issuing FPI in foreign currency abroad rather than in local currency at home still means Nigeria is successfully attracting FPI, contrary to Opeyemi’s claims. Within portfolio investments, a further distinction can be made between foreign portfolio investment (FPI) and diaspora bonds which are essentially diaspora portfolio investment (DPI), with DPI being more empathetic of exchange rate and policy risks than FPI.
- For foreign direct investors in large network infrastructure sectors, the size of the long-term returns from the wealth they will create in the country will outweigh short-term policy and foreign exchange risks in their decision framework, as we have seen in the very apt Nigeria’s LNG example, and the telecoms experiences. Portfolio investors are unlikely to arrive in a period economic crisis, but foreign direct investors would, as would diaspora direct investors. Apart from remitting funds into government foreign currency diaspora bonds (DPI), the diaspora also contributes significantly to FDI inflows. Increasingly, the debate about direct investment is focusing on differences between foreign direct investment (FDI) and diaspora direct investment (DDI), with evidence increasingly showing the DDI account for a growing share of FDI, with the share been as high as 50 percent in China over the last three decades, with DDI being more empathetic about policy and exchange risks.
Finally, it is important to point out that the re-emergence of a multiplicity of exchange rates since February 2015 when the Central Bank of Nigeria was forced to close its Wholesale Dutch Auction System (WDAS), after over a decade of convergence, is a problem occasioned by an external shock, the fall in global commodity prices, to which Nigeria is trying to find a lasting solution. We cannot wish this externally induced crisis away. The average investor understands this to be short-term cyclical problem, rather than the structural problem that Opeyemi wishes to label it as. Given this context, the following points should be made:
- Constructive conversations about Nigeria’s current economic situation must not merely bewail or condemn policy and exchange rate risks, they must address what should be done to solve the problems. In the face of a major global shock, it will be naive of anyone to be asking for sustained rate convergence without addressing how supply shortfalls will be met, especially given the current global commodity price realities and what they mean for Nigeria’s export revenues, and the current Nigerian infrastructure realities and what they mean for continued dependence on avoidable imports.
- In searching for a solution, I argue that demand restriction and or price adjustment is the wrong response to a supply shock. If you experience a crop failure, arguing that government should force people to eat less of the failed crop or eat something else to reduce demand would be misguided, just as arguing that the market price should be freed to clear the market (as those who bewail multiplicity of rates tend to proffer) would similarly be misguided, government will be obliged to boost supply by drawing down on reserves or procure emergency imports to boost supply. By that logic, Nigerian government needs to boost foreign exchange supply to stabilize the market, not obstruct demand or float price in the face of acute supply shortage.
- Once you start thinking of how to solve the problems, it must dawn on you that opening attractive infrastructure sectors to foreign investment is the clear way forward. The emphasis here is on opening for foreign investment, as government needs to break its age-long monopolies that shut foreign investment out of sectors that can attract larger inflows than oil and gas or telecoms has ever, or could ever, attract.
Ayo Teriba
CEO, Economic Associates
