We must come to grips with the strategic implications of the widening divergence between weakening global export flows and surging capital flows for countries and companies.
Technological advances boosting supply of shale oil, genetically modified crops and livestock created the commodity glut that weakened global commodity prices, exports, and growth.
Liquidity injections by leading central banks created global liquidity glut that boosted flows and foreign direct investment (FDI) stocks , triggering a liquidity race among emerging market economies.
Capital inflows are fast displacing net-exports as the main source of external liquidity and countries with investment-friendly policies now attract record capital inflows for sustaining growth and stability.
Diverging Global Economic and Financial Paths
Diverging paths of global real and financial flows raises growth and stability challenges for countries, as Nigeria grapples with liquidity shortfalls in fiscal, financial and forex spheres, calling for strategic realigning of income, liabilities, and assets.
Exports Lost its Dominance in the 1990s
Real globalization had raced ahead of financial globalization prior to the 1990s because governments held on to capital controls as they liberalized trade. Slogans like ‘export or die’ underscored the fact that net export inflows were the main source of external liquidity inflows before the 1990s. Global foreign direct investment (FDI) stocks of US$2.2 trillion were just half of global export flows of US$4.3 trillion by 1990. Countries however began to liberalize their capital accounts from the early 1990s and financial globalization gained speed as FDI flows and Remittances surged. Global FDI stocks surged during the nineties to equal global exports of US$7 trillion by 1999.
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Exports and Capital Stocks Remained Equal in the 2000s
Both types of globalization remained roughly equal forces until the global economic and financial meltdown of 2008/2009 challenged both, but they remained equal at about US$20 trillion by 2010, each gaining US$13 trillion in the decade.
Capital Flows and Capital Stocks Became Dominant in the 2010s
The last decade has however seen financial globalization outpace real globalization with FDI stocks surging again by US$13 trillion to US$33 trillion by 2018, fuelled by quantitative easing that underpinned a global liquidity glut, while exports struggled to grow by US$5 trillion to US$25 trillion, weakened by technological progress that created gluts of shale oil and genetically modified crops and livestock that depressed commodity prices. Net capital inflows is now the more reliable source of external liquidity.
Covid-19 and Global Economic and Financial Divergence: Fallouts of the Pandemic
Following the confirmation of the index case on 27th February 2020, the President acknowledged an outbreak in a nationwide broadcast on the 29th March and announced a temporary lockdown involving inward travel restrictions, and restriction of movement in Lagos State, Ogun State, and the Federal Capital Territory (FCT), in addition to prohibition of public gatherings already announced in many States.
Covid-19 pandemic thus forced the country, like most other countries across the world, into a lockdown that brought the economy to a halt since March 2020, and would most probably end at some point in May 2020, with 2170 confirmed cases and 68 deaths as of 1st of May, when Nigeria must push policies that could brighten the post-pandemic outlook.
Apart from grappling with the epidemiology of this pandemic, Nigeria has also endured:
Social fallouts, including anxiety and panic buying of nose-masks, sanitizers, chloroquine-based antimalarials taunted as remedies for the virus as the public took precautions ahead of the outbreak.
Economic fallouts as the weakening of the global oil price since the lockdown in parts of China in early February threatened to derail the budget and inflict another round of devaluation of the Naira. These could combine to precipitate another recession as absence of adequate foreign reserve buffers makes Nigeria’s economy vulnerable to oils price contractions.
Political fallouts like the breakdown in OPEC’S collusion with OPEC+ countries, travel bans, and export bans on medical kits as some exporting countries fear they may not have enough for residents.
How long the adverse social, economic and political fallouts for
Nigeria would last depends on how long it takes the world to bring the pandemic sufficiently under control for the lockdowns to end. This could be short if the impact of the disease weakens by itself, by changing weather, or a vaccine crops up; but could be long if the pandemic must run its course in full rage and without a vaccine.
The uncertainty about how severe the pandemic might get before things get better and uncertainty about the duration of the lockdown bring uncertainty into our assessment of how much of the economic consequences are likely to fizzle out once the lockdown ends how much are likely to persist beyond the lockdown, as knowledge of these will help us to figure out the likely impacts on the economy.
While these assessments are admittedly blighted by uncertainty, it is worth hinting that the shorter the duration of the lockdown, the milder the economic losses will be, as palliatives, furloughing, and moratoria on rents, loans, trade credit, etc. should absorb the likely shocks from two or three months of lockdown without much lasting adverse consequences.
But the longer the duration, the harsher the consequences and the higher the likelihood of the temporary bit protracted lockdown inflicting permanent/irreversible economic damages like job losses, bankruptcies, bank failures etc. It has been only about two months since Nigeria reported its first case on 27 February, and one-month since we locked down. We are preparing to unlock in phases from tomorrow 4th of May. If this works out, we can hope that we will avoid harsh economic consequences.
If for any reason we are forced to retrace our steps and resume another lockdown, the we should brace up for the worst possible economic outcomes that in the African context may likely have social and political backlashes like mass uprisings or even political upheavals. We hope these dismal scenarios do not play out so we can hopefully get back to life as usual by June.
Finally, how should we respond to this situation? We should be clear about the responses we are proposing for the lockdown period and those we are proposing for the post-lockdown period. In general, we should prepare for the worst and hope for the best. We must remember that presumption blights precaution, as Mr. Trump’s attitude towards the pandemic has clearly but painfully taught us all. Economic Essence of Covid-19 Pre-lockdown: The Status Quo Ex-ante •Slowing global growth and trade owing via technology induced supply gluts •Surging global liquidity and capital flows via massive decade long QE •In-person interactions for work and leisure dominated virtual interactions Lockdown: What the Pandemic Reinforced or Reversed •Freezing global growth and trade via demand and supply disruptions of lockdown •Injections of over US$8 trillion liquidity induced by Covid-19 pandemic •Virtual interactions grew as frozen in-person interactions led to lockdown
Post-lockdown: What is Transi tory or Permanent •Global growth and trade will be slower as both gradually unfreeze •Global liquidity and capital flow surges will intensify right after lockdown •In-person and virtual interac tions will continue the battle for supremacy Post-lockdown Green-shoots
On the negative side, global lockdown has cut export and growth opportunities. It is not just that the price of oil is weak. It is also that oil producers cannot get enough buyers, because importing countries are locked down. Exports have been halted. Growth has slowed.
However, a positive side to the story is that, in their efforts to cushion the adverse effect of the lockdown on their people, countries have injected ‘about US$8 trillion’, according to IMF’S April 2020 Fiscal Monitor, thus pumping more money into a global financial system that was already in a liquidity glut. They are giving people money they cannot spend until the lockdown ends. When the lockdown ends, the injections will further increase the liquidity glut in the global financial system.
Some of that liquidity will end up in developing countries that have investment-friendly policies. The combined inflows of foreign direct investments and remittances into developing counties were already in excess of US$1 trillion by end of 2018. The Covid-19 induced injections might push that above US$2 trillion by end of 2020. The net effect of Covid-19 on the global economy would be to further widen the eco-financial divergence: ensuring more financial green-shoots than economic.
Getting Ready for AFCFTA and Eco: Realigning with Global Realities
African continental single market and West African single currency were conceived in a global environment in which net-exports dominated net capital inflows. They must now be realigned with a new global reality in which net capital inflows dominate net-exports. Nigeria and Africa need to realign with the evolving reality that surging Foreign Direct Investment (FDI) and Diaspora Remittances are more reliable sources of external liquidity than meagre Donor Funds, also known as Official Development Assistance (ODA), or volatile Foreign Portfolio Investment (FPI).
Steps Towards Readiness
In general terms, Nigeria and Africa must align their policies with unfolding global realities by: repositioning themselves through effective investment friendly policies to obtain a fair share of the financial green shoots needed to promote growth and stability; attracting large FDI/ Remittances inflows as their main sources of external liquidity; deploying these into transport and energy
Social fallouts, including anxiety and panic buying of nose-masks, sanitizers, chloroquinebased antimalarials taunted as remedies for the virus as the public took precautions ahead of the outbreak
infrastructure to boost production and trade growth.
In more specific terms, Nigeria and Africa must identify the corporate assets they are willing to sell to equity investors to attract Brownfield FDI inflows, the intangible assets they are willing to license to foreign investors to attract Greenfield FDI inflows, the financial assets they can securitize to attract remittances, and the idle/underutilized lands and built structures they can repurpose, redevelop and commercialize for lease/sale.
Nigeria (and Africa as a whole) should proactively make the above investment opportunities clear to the global investment community, rather than passively waiting for investors to come and then provide them with incentives once they are in the country, as it is also common knowledge that, unaware of the real opportunities, these investors never enter the country with adequate investment funding to make an impact and reap the benefits.
They can offer equity investment opportunities in the following ways: Securitizing Financial Assets- issue foreign currency bonds based on JV equity stakes
Privatizing Corporate Assets- sell up to 51 percent of all wholly owned SOES
Liberalizing Intangible Assets- break government monopoly infrastructure sectors
Commercializing Non-financial Assets- optimize underutilized lands and buildings.
Credible Roadmaps
We should articulate clear visions of our future with national and continental plans that we can engage diaspora and foreign investors with, like India, Saudi Arabia, and Egypt do. We also need to optimize underutilized public assets to open large non-tax, non-oil revenue streams that can compensate for lower commodity export and tax revenue, while issuing large-scale equity to replace debt.
The National Liquidity Challenge: Types of Illiquidity & The Problems
Since the weakening of the global commodity prices in the second half of 2014, the Nigerian economy has been weighed down by three types of liquidity stress: fiscal, forex and financial.
Fiscal- Low Revenue and High Debt Burden
News headlines express concerns about Nigeria’s weak fiscal situation- dwindling revenue, low capital spending, soaring deficits, growing debts levels, and escalating debt burden. These have led IMF to repeatedly urge government ‘to lower the ratio of interest payments to revenue and make room for priority expenditures’ in its annual Article IV Consultations with Nigeria, while some local/foreign media organizations and commentators have flagged issues about Nigeria’s solvency.
Forex- Low Reserves and Weak Exchange Rate
News headlines have since 2015 been concerned about weak foreign reserves position of Nigeria, which made the central bank ration foreign exchange, devalue Naira, and maintain multiple exchange rates. The fear of devaluation in the face of inadequate levels of foreign reserves has constrained the central bank’s ability to ease monetary policy levers to spur growth. The IMF also often called upon the central bank to end the multiple exchange rate regime in its article IV consultations with Nigeria. Although the IMF has often commended the tight monetary policy stance of the central bank in the Article IV Consultations.
Financial- Tight Credit and High Interest Rates
News headlines have harped on the increasing tightness of the Nigerian financial system as reflected in banks’ low loan-to-deposit ratios, high lending rates, high interest rates on government bonds, and perennial contraction of the stock market. The central bank has targeted subsidized funds at sectors it considers as priorities, while directing banks to raise their deposit-to-loan ratios. The federal government has expressed preference for ‘cheaper’ foreign bonds for which it has very slim headroom.
Overcoming Illiquidity: The Prognosis Fiscal conversations in Nigeria should be focused on net worth, not revenue and debt in isolation. We must situate revenue and debt in the broader context of assets owned by Nigeria and the enormous equity issuance headroom the assets bequeath the country in a post-boom environment in which we are assetrich, even as income shortfalls have trimmed debt issuance headroom.
This ties well with the IMF’S recent declaration that, ‘It’s not just what governments owe, it’s what they own’. Although the IMF is yet to reflect this insight in its Article IV consultations with Nigeria. It is hard not to agree with Gaspar et al (2018) that, ‘Knowing what a government owns and how they can put their assets to better use matters because they can earn … as much revenue as governments make from corporate income tax receipts’. Finding new streams of non-tax revenue will be helpful.
Nigeria’s debt liabilities are wellknown, but her assets are not. Harris et al (2019) says, ‘When governments know what they own, they can make better use of the assets for the well-being of all their citizens’. Not knowing what we own depress perceptions of our net worth as the bulk of our assets do not come into reckoning in assessing our solvency. Nigeria should list all assets owned by government in a National Asset Register, value them, and rationalize/optimize them to align use values and market values.
We identify ways of unlocking liquidity from four asset classes. Large stocks of under-exploited assets owned by the Government mean Nigeria could be sitting on a treasure-trove of assets whose value could be larger than GDP, not to speak of debt. Since 1997, Hong Kong has funded its capital budget, ‘with a slight surplus, with liquidity unlocked from underutilized land’, from which India also gets a tenth of government revenue.
Forex- Maintain Reserve Adequacy to Underpin Stability: Raise External Liquidity Threshold
Forex conversations in Nigeria should focus on foreign reserve adequacy, not narrowly on levels of reserves, devaluation overhang, or multiple exchange rates. We must situate these in the broader context of the minimum foreign reserve thresholds that Nigeria must attain to meet foreseeable payments and capital flow obligations plus some precautionary buffer to insulate the stability of the Naira exchange rate against unforeseen adverse developments like the impact of the Covid-19 pandemic on oil price.
Financial- Deepen Financial System to Underpin Growth: Make Naira a Preferred Store of Wealth
Financial conversations in Nigeria should be focused on the store of wealth function of the Naira, not narrowly on banks’ loan-to-deposit ratios or lending rate as the central bank has tended to do. Strengthening the Naira relative to the US dollar to make Naira denominated assets the preferred stores of wealth over foreign exchange and real estate is the only way of deepening bank deposits, bonds and equity to thresholds required to guarantee increased access to financing at low interest rates in Nigeria.
Ways of Unlocking Liquidity: The Solutions
We suggest four ways of unlocking liquidity: Nigeria needs to securitize its equity holdings in joint ventures by issuing large-scale foreign currency bonds that Nigerians at home and in the diaspora can invest in, privatize state-owned enterprises to attract large-scale brownfield foreign direct investment, liberalize infrastructure sectors to encourage inflow of large-scale greenfield foreign direct investments, and commercialize idle/underutilized public lands and buildings to open new non-tax revenue streams.
Assets to Unlock Liquidity From
Financial Assets: Government’s minority equity holdings in JVS and other companies
Securitize Government’s equity stakes in LNG and other oil sector joint ventures though issuance of diaspora bonds and other foreign currency denominated bonds to provide much needed external liquidity that will lift Nigeria out of the current growth and devaluation traps.
Corporate Assets: Wholly owned or majority equity holdings in SOES
Partially Privatize until Government holds no more than 49 percent stake in any entity, such as Nigerian Pipeline and Storage Company (NPSC) with 5000km Network of Pipelines; Nigerian Railway Corporation (NRC) and its Rail network, Termini and, Lands and Buildings; TCN and its Power transmission network; National Universities and their lands and buildings; National Hospitals and their lands and buildings, DICON, etc.
Non-financial Assets: infrastructure networks, lands and built structure
Commercialize or Decumulate assets such as, Valuable but underexploited or idle, lands and buildings owned by Government Ministries, Departments and Agencies (MDAS) on prime commercial land across the country, especially educational, health and sports institutions, such as 2000-plus Nigerian Postal Services (NIPOST) lands and buildings; 2000-plus Police lands and buildings; Lands and Buildings owned by the defunct Nigerian Telecommunications National Carrier (NITEL) and the defunct Power Holding Company of Nigeria (PHCN); 235 aging and uneconomic inner-city prisons; Many aging and uneconomic inner-city barracks; and Numerous aging and uneconomic inner-city stadiums.
Intangible Assets:
Rights, Licences, Spectrums, flight routes- Liberalize by replicating the GSM and Pension Fund Liberalization in other sectors, such as e. g. liberalizing government real estate portfolio management, Us-style, by encouraging the entry of wholesale Re-developers, Lease Managers, and Facility Managers.
How to Unlock
Specifically, Nigeria could raise domestic and external liquidity thresholds by doing the following:
Securitize government equity stakes in Joint Ventures with foreign currency bonds to give Nigerians at
home and in diaspora opportunities to invest while shoring up our foreign reserve thresholds.
•Issuing Asset-based Securities and/or Diaspora bonds against financial assets
•Issuing Asset-based Securities against new income streams from non-financial assets
Privatize all wholly or majority owned corporate assets to attract brownfield FDI by encouraging foreign investors to own up to 51 percent, while keeping 49 percent securitizable equity stakes.
Liberalize to attract greenfield FDI by breaking government monopoly in all infrastructure sectors to encourage entry of foreign investors to operate in parallel to the Joint Ventures.
Commercialize idle or under-utilized public lands/built structures by relocating uneconomic activities from prime locations and redeveloping the sites to open non-tax revenue streams.
How much, how easily, and in what sequence? Some rules of thumb
Close Value Gaps: We need National Asset Registers for the four assert types. We should then value the assets know the gaps between use values and market values. This will give clear ideas about how much could be unlocked across the four asset types to close the gaps.
Raise Liquidity Thresholds: We however should unlock enough to raise our fiscal, financial and forex liquidity thresholds to levels required to underpin growth and stability.
Sequence: Securitization is the quickest of the four options. The other options could in many instances take time to consummate, but we can always securitize verified new income streams, pending consummation of privatization, commercialization, and liberalization.
Develop a National Roadmap: How much should be unlocked, how easily, and in what sequence should ideally be determined for each asset category in the context of a National Roadmap for Unlocking Liquidity in Nigeria that should offer guidance to all tiers of government in the same way as the National Pension Reforms did. Where there is a will, there is a way: each of the four levers require political will, transparency, and general acceptance by key stakeholders. A roadmap can help to articulate the vision needed to strengthen the political will and provide a step-by-step guide from vision to consummation that would help to get stakeholder buy-ins.
Doing these will change Nigeria’s economic, fiscal and financial narratives by unlocking the liquidity country needs to strengthen the Naira, rejuvenate fiscal, financial and foreign exchange streams, break dependence on volatile oil revenue and costly deficits, rebuild infrastructure, diversify and accelerate growth, eradicate poverty and unemployment, and lay the foundations for shared prosperity. Leading developing countries adopt different combinations of these four options to fuel their transformation.
Dr Ayo Teriba is CEO of Economic Associates (EA) where he provides strategic direction for ongoing research and consulting on the outlook of the Nigerian economy, focusing on global, national, regional, state, and sector issues.
