[caption id="attachment_57297" align="alignright" width="600"] Ifeanyi Uddin[/caption] Ifeanyi Uddin is a manager in a first generation bank in Lagos. He constantly intervenes in the media on how to make the economy better Q: We are in recession right now. What were the causes? Most times you find partisans of the various opinions currently at play, insisting that it was the other party that was responsible. So you find those who support the current government putting the blame on the Jonathan administration. Then you find tribalists of the Jonathan persuasion insisting that Buhari was handed a fairly functioning economy, and that he has messed it up. For me, it is a much deeper story. Over the years since this country became a sovereign self-governing space, we have failed to invest properly. When we have invested, These projects usually have no backward linkages to any sector of the economy. And in those periods when we have had bonuses from the over-performance of our leading export, oil, we have spent as if it was a crime to save. We got to the point where agriculture is still rain-fed; it is subsistent; no irrigation; no rural infrastructure; no roads to evacuate produce; no farm gate pre-processing to ensure that spoilage is not plenty. Almost inevitably, we were going to get to this point in time. Most of our industry have no backward links to the domestic economy. So, where are we? We are at that point where crude oil prices have dropped precipitously from about US$114 per barrel mid-July 2014 to US$44 per barrel for West Texas Intermediate as at 6.00am this morning (26 September 2016). 90 per cent of export earnings is crude oil. About 80 per cent of the federal budget is oil earnings receipt. So you cut that by two-thirds and government has no money to spend. Much of the foreign currency liquidity in the economy to date has been provided by the CBN that also benefitted from oil being sold at elevated prices. Oil is no longer sold at those price levels and corporates that have huge imported inputs needs are also in deep trouble. That is where we are today. Our problems go way, way back in time. At a point, there was this debate on whether to devalue our currency. The president said “I will not devalue”, At the end of the day, the currency has been heavily devalued. What happened? The devaluation debate was another waste of national time, because, when you say you want to devalue something, you presume that there is a valuation that is lower than the current one, which we know, and once we take it to that place, the problem will be solved. Unfortunately, there is no such number. The better argument was a very simple one. The domestic exchange rate had been at US$1/N197 -N199 because the CBN had enough dollars to meet domestic demand. At some point when the central bank was bleeding the external reserves supporting the US$1/N197 -N199 peg, a huge arbitrage window opened between the official exchange rate and the parallel market. There were suspicions that people who were obtaining FX at the official rate may have been going to offload it at the parallel rate and making a fortune. If this was true, then a government that was having difficulty meeting naira obligations was shooting itself in the foot in several ways because if it had allowed the naira to sell at the market clearing rate, it would have earned a lot more naira to every dollar it sold. But by keeping this rate at the fixed peg, it was passing on a subsidy technically to anybody who had access to the official rate. So much of the conversation was simple. Remove this subsidy that was allegedly going to preferred sectors of the economy, but was not translating into net gains because the truth is by that time most operators had marked their prices to the black market, there was nobody who marked their price to the official one even though there were persons getting the money at the official rate. So it was a practical solution too. But the fear was that if you allowed the official market to merge at the parallel market rate you will drive inflation up. Legitimate fear. Except that at the time this argument was being put out, prices were already quoted at the black market rate and inflation was already going up. [caption id="attachment_57297" align="alignright" width="600"] Ifeanyi Uddin[/caption] In the period since the CBN adopted the flexible exchange rate most economic indices have worsened, because we have seen the naira touch almost 400 to the dollar at the parallel market. At this point I am persuaded that the naira is considerably undervalued, but again, we always knew it was going to overshoot, after which a new equilibrium higher than the US$1/N197 -N199, but arguably not more than US$1/N360 will emerge. The difficulty, however, is that in the period in which it took the CBN to move from the fixed peg to a flexible exchange rate regime, the market lost confidence in the CBN’s ability to intervene meaningfully in the economy. So it will take some time for the markets to be reassured that the CBN knows what it means for an exchange rate regime to be flexible. We are going to wait a while to be sure, what it means to be flexible. Unfortunately, that waiting period may hurt as indicated by the recent downgrade by Standards and Poor’s of the country’s ratings, because that makes our ability to attract autonomous sources of FX much more difficult. We are also going to face problems from the outlook for the benchmark rate in the U.S. Everybody is looking to where the Federal Reserve goes on this. it didn’t move its benchmark rate at the last meeting although it did suggest that we could have a rate increase before the year runs out. So, after the November elections, we should see the Fed raise rates. If it does, then the yield on U.S. dollar-based assets will go up, diverting much of the traffic that has come here back into the U.S. at a time when the rating downgrade seems to suggest that this is a particularly healthy economy to invest in. If you look at the rating downgrade and our exclusion from JPMorgan emerging markets indices, a large part of the argument was the way the CBN handled what you call the devaluation. And so it is not so much that the CBN has allowed the flexible exchange rate regime, it is the way and manner it came to that conclusion. How do we fix the problem in the power sector? What we have not seen in the power sector is the distribution companies investing as much in new processes, infrastructure and capacity as one would have thought. You hear today that most of them financed their acquisitions of these power assets with bank debts, short term largely and that not too many of them have the wherewithal for longer-term investment spending. That’s the problem. There is a need for retrofitting and upgrading infrastructure. Without that, it’s going to be difficult to get the levels of service that we desire. But, of course, could we consider distributed generation, so that we have the generators located a lot closer to the consumers in order that the loss power that happens along long transmission lines is removed? Maybe. We will however need further reforms sector especially in aid of the clear financing shortage plaguing the current structure. Ahh! We are not a low rate economy that is the truth. And how do I mean? Look at the costs. I know the banks have their problems. But the cost of that loan, which besides non-interest income is banks’ main revenue source, is distributed over things like the large branch network, and for every branch, you have to provide security, they have to provide their own boreholes, then increasingly too, as they have boosted their online offerings, the ATM does not just feed off the generating capacity of the branch. Each ATM must have a battery of inverters so that it is available 24/7. Of course maintaining those inverters is pretty expensive. These costs are borne across every location where banks have branches. These are costs that have to be recovered somehow, and the lending rate reflects all of these. Would a more competitive banking environment do the trick? Theoretically, more banks should lead to lower rates. But then the other side of that conversation is that if you talk to business people, the so-called high interest rate is a cost. But there are other impediments to doing business here. There is a gentleman who has a dairy firm in Kano and can get his products to Paris from Kano long before they get to Lagos. There is also the problem that for internal freight, every local government collects a tax on the goods when they travel from point to point. All these costs are there. Those costs too feed into the cost of banks doing business, and until you attend to these costs we are not going to be a low interest rate economy. You know there is inflation too, pretty high inflation, we are not a single digit interest rate economy, not yet. In the past our crude output was high, yet the life of an average man was not better. The matter is worse now that there is low output and low per barrel sales. With the example of the FX deal that you just gave, the rich people are still cheating the country. What do you think? I was reading some article recently and it says that elsewhere the rural urban migration was as a result of two processes. First, was increased productivity in the rural areas, mechanisation and irrigation, so rural agriculture did not need as many hands, which then had to move. Secondly, industrialisation was also going on in the cities and the new factories required hands, newly released from agriculture. In our case, the main driver of the rural-urban migration process appears to by the result of excess or free money, rent being generated and spent in the cities so the guy leaves a miserable life eking out a living in the rural areas in search of his own share of the rent; hoping that one day he will be governor. What we have is a subsistence economy. We sell crude oil. Pay salaries off it. 70 per cent of salaries and employment in Nigeria comes off the public sector. Nigeria is technically a huge social security arrangement. On the back of excess crude, we pay salaries that guarantee a basic minimum way of life and then the leaders take what’s left over as management fees. That seems to be what we have been doing since 1960. [caption id="attachment_57297" align="alignright" width="600"] Ifeanyi Uddin[/caption] What is your take on the debate going on, whether or not to sell the national assets? Well, this reminds me of something I put on my Facebook wall recently. Essentially, when governance is poor, then “a ko t’ile ta” (which is a major put down in Yoruba) becomes a time of endearment. You see, even in your business when revenues fall, you have to cut costs, reducing staff, outlets, etc. When this fail, you may have to sell assets too. Now I am also a small government person. I believe that government’s business is not business. Government’s business is to create an environment that is conducive for business to thrive and pay taxes. So you could sell the entire upstream and downstream oil and gas sector. That way you remove the burden of having to meet annual joint venture cash calls. But it also means that the private sector is then free to meet those financing needs. Government may then simply tax and regulate. Most important is the transparency and openness of the process by which we move public assets into private hands. One error is to move a public monopoly and allow become a private monopoly. Once you sell you should ensure proper regulation, ensure competition, free exit and entry so that prices are set at levels that the market clears. [caption id="attachment_57297" align="alignright" width="600"] Ifeanyi Uddin[/caption] We have instances where industrial policy here has meant that Nigerians buy the resulting produce for multiples of what these commodities sell elsewhere. Now, that’s a tax on the people imposed by government on behalf of a private business. The worst way to sell national assets is for government through such process to pass on money from pockets of its people to the various private businesses. Unfortunately, we have often done that in the name of supporting a domestic champion Though you have mentioned some of these as we are talking, what other things the governments are going to do to revive this economy?. This is a difficult question because we don’t have enough money to do much. That’s the first thing, we don’t have money. We are a N94 -N95 trillion economy, last budget was six point something trillion naira. There is only so much you can do in a N95 trillion economy with a N6 trillion budget. There is only so much, especially when 70 per cent of that budget is for salaries. So if we are going to spend enough to push the growth or development needle, we will have to rely on foreign monies coming into this country. We cannot do much about it. The economy is too big for a government this small to push. What it has got to do now is to make it easy, again too, when we talk we say, we are going to make it easy for foreign money to come in, but I am mind to disagree. That’s putting the cart before the horse, a 95 trillion-naira economy of 170 million people. Of the 170, about 78 million are economically active. The latter number I think it is larger than the UK’s population. Accordingly, there is huge domestic market. So how about we improve the conditions for domestic entrepreneurs to thrive, and we support a culture of innovation? The same conditions that would make local entrepreneurs thrive are the same conditions that foreign capital requires to come in. If we focus on making this space conducive, to local investors, then foreign money will come in. Most times, though, we turn the logic upside-down and say it is easier for foreign money to come in. There is a lot of domestic need that foreign money will not solve so. The problem is that much of what is got to be done is already behind us. The government has spent a year and six months now on its haunches. We have allowed the rot to get too bad that all the low hanging fruits rotted and dropped off. Now the structural reforms that we need are of a medium-term nature, so if we started today you will be seeing the result in 3 to 5 years’ time. If we had gone for the low-hanging fruits earlier on, we ought to have dividends today from those efforts. [caption id="attachment_57297" align="alignright" width="600"] Ifeanyi Uddin[/caption] What can individuals do to survive this? We can pray. We are always praying. We are a prayerful people. I don’t know seriously. For the most part like I said, 70 per cent of salaries and employment in the country is in the public sector. The Nigerian salaryman is not an entrepreneur. You need a shift in paradigm and mindset to get this people ready to take part in a private sector-led economy, so you find that the salaries are not paid and there’s not so much that they can do because there is not so much that they have been asked to do up to this point. For most people it is to be more prudent, and try to see if we can string income along without inflation wiping out both savings and current spending. I really don’t know what we can do individually.