Nigeria faces a paradox of internal shortage of liquidity despite a world awash with it. Its banking sector has remained largely transactional in nature and for the most part does not embrace giving out loans outside of the most blue chip of companies or the risk free sovereign.
The banks should probably not bear all the blame for this though.
Total banking sector assets are only equivalent to 20 percent of GDP, while a Cash Reserve Ratio (CRR), a specified minimum fraction of total customer deposits, which commercial banks have to hold as reserves with the central bank of Nigeria (CBN), is elevated at 22.5 percent, soaking up much of the extra firepower banks have to create new loans.
Oil export earnings, which usually is a good source of liquidity in most oil producing economies, have slumped some 71 percent in Nigeria from a high of $140 billion in 2012 to about $40 billion in 2014, as oil prices fell from its recent peak.
At the same time Central Banks have flooded the global economy with liquidity.
The world’s four biggest central banks – the U.S. Federal Reserve, European Central Bank, Bank of Japan and the Bank of England – have pumped around $13 trillion into the global economy since the crisis year of 2009, sharply expanding their own balance sheets of financial assets.
The surge in central bank liquidity has largely found its way into every asset class in global markets, from bonds and equities to real estate, in developed and emerging markets.
However Foreign Direct Investment (FDI) flows into Nigeria the past few years have been abysmally low, while Portfolio flows have only been attracted at a high cost of double digits interest rates.
So Nigeria has not gotten the benefit of global liquidity, while it suffers the consequences of low oil prices.
Ayo Teriba, an economist reckons that in recent years capital flows have overtaken trade flows, meaning that Nigeria cannot sit back and wait for exports alone (earned through trade), when it could aggressively court global capital/ liquidity by being innovative.
Teriba likens liquidity to the lifeblood of a system, and if that is the case, then the country should be prioritising policies that could lead to an inward surge in liquidity.
For Nigeria there are 3 major sources of external liquidity, including exports, diaspora remittances and portfolio flows.
Of the three, diaspora remittances is the largest; however it probably receives the least attention from authorities.
The CBN’s annual economic report shows that in 2018 the total revenue from oil was $18 billion, while Nigerian emigrants sent home some $25.1 billion, the highest in four years.
The importance of remittances is growing as a new normal of low oil prices takes root amid a supply glut.
While oil revenue has fallen some 57 percent from the $42.7 billion recorded in 2014 when oil prices were as high as $100 per barrel, diaspora remittances grew 20.6 percent in the same period from $20.8 billion in 2014.
The funds Nigerian emigrants send back home could even be closer to $40 billion per annum when unofficial channels are counted, according to estimates by the African Development Bank (AfDB).
Sadly, while Nigeria dissipates a lot of energy trying to boost exports, nothing much is being done in the area of portfolio flows and remittances.
Take the policy of forcing citizens sending money home through official channels to exchange at a less than market exchange rate, which serves to discourage the same flows we seek to attract.
The last CBN monetary policy committee meeting of July 23 acknowledged the problem when a part of its communique said:
“The Committee also called on the Bank to intensify efforts to encourage Nigerians in the diaspora to use official sources for home remittances, noting that the effort will complement other measures geared towards improving Nigeria’s current account balance. It enjoined the Bank to consider introducing incentives such as the reduction of charges on diaspora home remittances into Nigeria.”
The multiple exchange rate system and lack of commitment to privatisation of moribund and underperforming assets is also a repellent to portfolio flows.
Egypt recently unified its exchange rates and was able to boost its supply of forex as capital poured into the country.
Unlocking vast brownfield assets for private sector capital injections is a part of the solution. Everything from refineries, airports, smelting plants, steel mills and other decaying FG assets can be sold in full or parts to help raise capital.
The Nigerian Sovereign Investment Authority (NSIA), could be authorised to manage other Federal Government assets for optimal returns and could co-invest with other Sovereign Wealth Funds (SWF) to attract capital to such assets.
Nigeria must understand that the era of the commodity super cycle and the vast oil revenues that came with it is probably over for good. It’s time to think outside the box and tap into the vast global liquidity pool.
Patrick Atuanya
