FX: CBN should address financial system stability in the best way – Aduloju

Dr. Tayo Aduloju, is the CEO-designate of the Nigerian Economic Summit Group (NESG). In this interview with BENJAMIN UMUTEME, he talks about the efforts the CBN is making to address the lingering FX pressures. He also bares his mind on other issues in the economy.

JPMorgan did suggest in their report that the IOCs should sell forex to commercial banks instead of CBN, is that not a dangerous suggestion considering…?

Look, I think honestly, we should allow the monetary authority to one map out how best it thinks its financial systems stability strategies should work. I think that if you’re looking outside in you don’t see all the vulnerabilities in the system. That’s my view, I think the central bank governor, now that he and his team have been briefed to come on board. They’ve looked at likely the financial system vulnerability from inside and might be privy to a couple of things that JP Morgan may not be privy to.

So, we don’t want to simply just jump into the room and say, well, JP Morgan is right or wrong. These are good ideas generally, once you apply them to Nigeria, you must look at the context in which you are applying some of these great ideas, a lot of brilliant ideas that have been imported into the country over the years that when it landed here, how we Nigerianised the idea did not quite work. So, I think the big question is should there be a liquidity management strategy and a liquidity mobilisation strategy. And the CBN is clear about that, how they go about it. Let’s see. Again, remember that there is also a big role in fiscal policies in mobilizing assets that can create more liquidity. I would not want to preempt the minister of finance or the CBN governor. What we’ve heard in the last two weeks from Nigeria’s Economic Summit is the president has committed to the sanctity of contracts and dealing with the backlog etc, is the CBN has said it will do its work and it would clean up the acts of the authority.

I think just 24 hours ago, he mentioned a different public image and I’ve used the CBN based on a different set of values. I think that those are the things that will create system stability. So, where we agree with JP Morgan, along with all the experts, is that of course we need more liquidity, the strategy for posturing that more liquidity will depend on trade-offs that the government feels it can make, what you must have. I mean, if you don’t have the effects, what you must do is mobilise FX, it’s just that simple. But I think it’s now the strategy to do it. And you’re going to pursue more FDI. Are you going to utilise some assets that you’re going to sell, concession, privatise, etc. Or you know, whichever way you go about this, you need to think about strengthening the financial system as a whole. And financial system stability requires a lot of work this is now the degree to which we want your

commercial banks and other financial institutions to perform and behave in certain ways.

So, we’re yet to see a full blown strategy on financial system stability from the CBN and maybe when we start to see that we’ll be able to predict some of these other outcomes, when some of these other constraints may go. That’s my view about it.

It does seem that energy inflation will continue to fuel inflation. What’s your take on that?

The accelerations of inflation are here to stay for the short term, what some of us think can be done differently is, look at the different costs right, there are costs that make the cost of inflation meet the size of inflation. There’s a cost of production, right? There’s a cost of doing business outside the cost of production. And then when you add, when you knock on this cost, and it is introduced, of course, interest rates, exchange rate, these are real costs.

When you look at a system, inflation is driven by those costs. The question with inflation reduction is which of those costs can you control in the short term that allows you to target and bring down inflation? We think that for example, cost of production is something we might want to look at in the short term but for that you need of course, longer term patient capital, single digit interest rates that development finance can bring in and that could have allowed many of our manufacturing firms to refinance their inventory at lower rates. It reduces the cost of operations, but also allows them to manage their books over the medium term, that kind of adjustment would have allowed for some price adjustment on the production side, which could have allowed some easing of inflation for example.

Of course, the harder thing to do with inflation is remember that we have infrastructure deficit inflation, those ones don’t go away unless you invest in infrastructure. So, as we use borrowed money, a big strategic expenditure choice to make is how to use some of your borrowed money to do the kind of infrastructure investments that remove deficit costs because deficit costs don’t go away. That’s why you find that Nigerian inflation cannot go below it when it was low, cannot go below a certain number, because you have infrastructure deficits creating a default knock on with certain inflationary pressures.

The first thing is to start to think about how the total costs of operating in Nigeria is created, what are the drivers and then we tackle them and this requires monetary, fiscal, sectoral policy coming along, it can’t be done by one policymaker. So you need almost coordination across the economy for some of these things to happen. But it’s doable. For example, if we really see some of the crude that needs to go to the Dangote refinery to begin to produce locally, when other local modular oil refineries begin to get crude, which means you’re going to produce more crude than we’re producing now, because right now, your crude is solving a combination of things. Your crude is encumbered in forward swaps.

So, when you take that out, then you must sell some crude to make some revenue, then you must now have crude you are using to meet your commitment to local refineries. It means that a big part of this whole operation is based on crude oil production, and that as you know is not just an economic activity, it is now a national security operation. And so I think what we need is a whole governance approach so everybody understands that, all hands on deck, you know, and if you can pull that off, then looking at the price of crude a certain level of production will make these problems, these short-term problems almost vanish.

I think that those are the big questions on the table. Can we see a consistent national security operation now to keep crude production, you know, at least hit its target. You know, two million barrels a day would be exciting. That automatically allows you to sort the current commitments undelivered to the refineries. The refineries, if they’re producing, bring down the price of refined products. There’s some of those medium term effects that we hoped would kick in, can kick in, but if you can’t produce more crude because you can’t manage the security problems, then my brother, you don’t need a prophet to tell you where we will land.

Why has it been very difficult to get private capital in infrastructure development?

The NESG has spoken about private capital in infrastructure development for years. Most of Nigeria’s infrastructure stock is bankable. Nigeria has an infrastructure stock of $3 trillion. The challenge is that the binding constraints legal, legislative binding constraints, policy binding constraints regulatory binding constraints, makes it almost impossible for an investor to bring his money. For example, no investor will put one more dollar in the electricity sector because the multi-year tariff order (MYTO) is not market reflective. You can see that if they put money in it, it won’t come out.

It’s not going to go in. Why did investors invest in telecoms? It was because they could see a market reflective sector where they knew the investments would come out. So, it was a no-brainer to see the kind of money that went into GSM in the first decade of GSM, right. We’ve done it before! By the way, it’s not rocket science. We saw investments come into telecommunications, what we did was that we de-risked the sector, took it away from a monopoly called NITEL; and then we created a market led approach, gave licences and allowed people to compete based on market reflective rates, and those market reflective rates you remember if you those of us that bought Sims at the beginning brought at N60, 000, N70, 000, some N80, 000, but all those things have crashed to zero because the market has now played its role. But that’s because the investors could see how their money would come back.

You know, there are three things an investor wants, one is an environment in which they can put their money and contracts and the sanctity of contracts and an environment where they put their money, and the money won’t go into a hole? Of course, you know, investors invest in good deals, they don’t invest in countries. And that is what it is!

The day we make some of the infrastructure stock in Nigeria good deals money will chase them. I mean in the middle of prosecuting a war against AlQaeda in the Sinai, Egypt was attracting $40 billion. By the way, insecurity is not the only reason why investors say away. The middle of the Iraq war this was invested in Iraq. What you need to deal with is do we have internationally graded investment projects that are de-risked properly, and they will attract money. If you remember with the seaports in Nigeria that’s what we did.

The construction of the sea ports we de-risked. We took the NPA out of port operation and it automatically heralded for liquidity to come in for investment by some of these international and local players in port operations.  We’ve done it before when we when it worked, the government wanted it to work, and made it work.

The question would be whether infrastructure stock and private sector investments are de-risk. It builds them into internationally graded investment projects, where the legal, policy and the regulatory framework is clear to all and where people compete based on the ability to pay and invest in the asset and the technical ability to do the business. That’s what created the GSM revolution. It was people that knew how to run GSM that came to play. And the result is what we’ve seen. If you look at our struggle with electricity, it is the opposite of what happened in electricity. The market was over regulated politically. You know, for a long time, the procurement of the players had till today people say we have big questions as whether they had the financial and technical capacity to run those assets. And we’re still struggling till today.

I think if we want to get this right, a bankable infrastructure stock worth $3 trillion worth, how much is our debt, if you think about debt, $100 billion, we’ll have sorted those out. The point is this; imagine that the government picks $200 billion of high priority assets, and takes it to a competitive international process of preparing them for investments, takes it through a transparent, competitive process of bringing those investments in.

We might just be calling stories of today, stories of yesterday, but that requires hard work and coordination across both. And as you can see, this is not even easy work. What we’ve just described is not something you just wave your hand and it happens. And so we don’t lack opportunities for those investments to come. No, I don’t think that that’s. I think what we’ve lacked is the institutional cohesion and coordination and efficiency to make it happen in a way that Nigeria wins. And that’s something we hope that this new team can now settle down to the matter of doing.

The president seems to be hungry for investments. But if you look at FDI markets, FDI follows a particular trend it goes to countries with competitive FDI projects. So, you have to translate your infrastructure stock into competitive FDI projects. And that requires people stopping the local fights. BPE ICRC, National Council on Privatisation, MOFI,;all these guys must get together and say for Nigeria to win we must work together to build some projects that can win because when FDIs is coming to Nigeria, it doesn’t say it’s coming, it’s coming to Africa, then he’s looking for a way in Africa to go and make real money and our return on investment.

That’s how investment thinks, investment is very sentimental. It’s like you have to woo it. Where is it coming, what will I get? How long do you want me to stay? You know, so it’s almost like romancing you know, to attract or court a woman it’s not a killer storm now. I think with investment that’s what we need to do. We need court investments. How do I make you come? How do I make you stay, how do I make you stay forever.

I don’t want to stay longer. You know, the whole Apapa port needs transformation. To transform the whole Apapa port needs $150 billion. There are countries that will give you that money but you must answer, is this a good deal? If I come, will you chase me out in four years? If I come, will you allow me to repatriate my money in 10 years or 20 years or 30 years? I come up tomorrow your local communities will not burn everything you know you have to answer. It goes back to the point I made about integrity.

Once you start to show consistency that people can invest and you will keep your word, reliability that the contracts stand not in the short term but in the long term that they can see a future with Nigeria. Oh, there’s money around the world and there’s no lack of money around the world. I think that the current team has to take from the infrastructure master plan, a small set of projects and put that maybe into an investment plan and say look in the next 12 months we want to attract $250 billion from these projects. We will do what Saudi Aramco did; Saudi Aramco did take every project in Saudi to the global community. They took a few for oil and gas.

Our biggest assets may be NNPC. And NNPC is still a limited liability company. You know, when is NNPC going to be a globally public company that everybody can invest in? You know, Saudi Aramco set a timeline, they pushed through the timeline, they met the timeline, they went to the international market, you know, and they basically sold almost $300 billion worth of stock for just selling less than two per cent of Aramco. The truth of the matter is, these things are doable, but we must be serious, we must be in a hurry to make them happen. We must be intentional. We should set timelines for ourselves because the world is not waiting, you know.

I think there are those big moves, but the big moves require big thinking and big ambition for Nigeria, and then a lot of capacity. We have to tell ourselves when we are struggling and then we need to bring some additional capacity to get all this stuff done. So, that’s all so infrastructure, pick your most competitive assets, take them out of the infrastructure master plan, put them in an investment plan, set some clear targets or how you’re going to use those assets to attract investments and go to a transparent process where the money really comes in. And Nigerians can see the money comes in handy liquid will come. It’s doable, but it’s hard work

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