A slow-growing Nigerian economy will continue to limit growth to a few of sectors and delay the realisation of its true potential, unless focus is placed on the root of the country’s problem – external illiquidity.
Nigeria is falling behind some of its emerging market peers and would likely end 2019 below pre-recession growth levels. Recent warnings from the World Bank and a downgrade from Moody’s Ratings have further heightened concerns.
“Nigeria has struggled with growth because of domestic illiquidity and struggled with exchange rate stability because of external illiquidity,” said Ayo Teriba, CEO of Lagos-based Economic Associates. “To restore growth and stability, Nigeria must reorder economic policy priorities to external liquidity which leads to exchange rate stability then to domestic liquidity and consequently growth.”
External liquidity refers to a country’s holdings of foreign currencies. Measured as a percentage of external reserves to GDP, Nigeria in 2018 had an external liquidity of 10.8 percent, underperforming South Africa (14.1 percent), Angola and India (14.6 percent), Indonesia (11.6 percent), Egypt (16.7 percent), Brazil (20.1 percent), China (23.3 percent), Algeria (48.4 percent), Saudi Arabia (65.1 percent), among others. Most of the comparable countries are growing faster than Nigeria and some have bigger economies.
In Nigeria where there is low external liquidity, exchange rate is not stable and this crunches domestic liquidity because Nigerians would rather hold dollars or invest in real estate than keep money in the bank where it would erode value, Teriba said.
He explained that without adequate domestic capital, there is no fuel for growing businesses and this limits growth in the domestic economy where only six sectors accounted for 66 percent of GDP in 2018 with similar trend seen in the Q3 2019.
However, Nigeria can learn from the Asian Tigers which in the aftermath of the 1997 crisis started building their external reserves to create buffer for their economies.
The Asian Tigers borrowed to build their reserves and were even criticised by the IMF for paying interest on the idle capital. The Asian countries, however, viewed the interests as ‘insurance premium’ to ensure stability in events of external shocks to their economy.
While the move paid off for the Asian Tigers, Nigeria cannot borrow without a certain revenue source, Teriba warned.
Missing revenue target is a fiscal risk Nigeria faces next year and the country needs to raise foreign exchange supply and domestic financing thresholds to levels required to underpin faster and sectorally inclusive growth on the monetary side, he said.
This means Nigeria, which is in a post-boom era with low revenue that leaves little room for debt, should unlock value in its national assets to tap into a record-high global liquidity.
To come out of this conundrum, government must develop a national plan to join the global liquidity race, regain and grow Foreign Direct Investment (FDI) and remittances market share.
He noted that countries that attract more FDIs and remittances would be able to export in the future.
To achieve this, government needs to borrow the Liberalisation, Privatisation and Globalisation (LPG) model which has been embraced by countries such as India, Saudi Arabia, and Egypt. The model is aimed to slacken government regulations hurting the growth of investment in the country, transferring of state-owned assets and position the country for consolidation among various economies of the world.
Teriba advised that for Nigeria to move tops of FDI table, it must privatise by converting corporate assets to financial assets by partially privatising majority owned or wholly owned FG enterprise to unlock brownfield FDI. He said the country should liberalise by opening new spaces for foreign investors to unlock Greenfield FDI just like India is doing.
“Attracting investment is about proactively offering to sell part of state-owned company assets to foreign investors just as Saudi Arabia is doing,” he said.
FDI inflows to India grew 6 percent in 2018 to $42 billion just as the country remained the highest recipient of remittances at $79 billion the same year.
Saudi Arabia through its national privatisation programme plans to raise $200 billion from privatisation in 16 sectors ranging from oil to healthcare and airports.
FDI inflows to India grew 6 percent in 2018 to $42 billion. It is the highest recipient of remittances at $79 billion in 2018. Egypt through its MEGA slogan (Make Egypt Great Again) has kept its position in 2018 as the largest foreign direct investment (FDI) recipient in Africa with investments totalling $7.9 billion, which accounts for 7 percent of foreign investments in Africa, and got $29 billion in remittances.
Sadly, Nigeria’s share of diaspora remittances has fallen behind Egypt since 2016.
To unlock liquidity, Teriba suggested that the country must as a matter of urgency take inventory of all government-owned assets, value them and rationalise or optimise those with higher market values than what they are currently used for.
“We need to unlock liquidity through exploitation of the identified assets, through securitisation of future income streams from all financial and non-financial assets via issuing asset-based securities/diaspora bonds against financial assets bonds, and against heavy newly created non-financial assets equity,” he said.
OLUFIKAYO OWOEYE & SEGUN ADAMS
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