Emir Of KANO, MUHAMMADU SANUSI Gives Practical Solutions
A few weeks back, we published the 1st part of the speech of the Emir of Kano, Muhammadu Sanusi. This is the 2nd and last part where he spoke about the good news concerning the economy. Read on!
What’s the good news? It’s that Nigeria is not all about oil. I know we all think it is oil. But it is not!
Oil does not form even a critical part of our GDP, or our growth. Look at these numbers. That’s your GDP per capita.
The present value of your oil reserve in 2016, which was calculated based on 37.2 million barrels, $60 a barrel and production horizon of 40 years and discount rate of 12 per cent.
If you sold the entire oil reserves of Nigeria today, the proceeds will add only $1164 per head, compared to GDP per capita of 3000 in 2016.
So, those making noise about oil should stop making noise about it. People should stop being afraid, because oil is not critical. It is just a working capital. We sell it. We get the dollars that we use to import.
If you can find another source of working capital, we can do without it. It is 15% of GDP.
When I was Governor of Central Bank, the economy was growing at 37%. The oil sector was not adding
anything to GDP growth. The growth was coming from agriculture, services and trade, which is also very
revealing. If we are now saying we are in a recession, because of the collapse in oil price, we are not being sincere.
You can’t be in recession, because a sector that is 15% of your GDP has declined. What happened to agriculture, trade, services and health?
Something else to look at. This is the slide that got me sacked from my job. You know the truth will always be there and I like these power point presentations because the figures tell you more than a thousand words. These are our external accounts, now look at Nigeria and look at Kenya up there in the blue line. These are current accounts surpluses we have had from 2005 to 2014. Not even one oil price rise in 2014 did we have in our current account deposit. I think today, up to 2014 we have current accounts surpluses. Now, below there you have other investment assets, which will be your capital inflows. I mean your reserve, and you have something called net errors and omissions.
Look at 2014, the errors and omissions were about $20 billion, from about minus 5 to minus 35, about $30 billion actually. So, when you are an accountant and you produce accounts and errors and omissionsthat are 70% of the numbers, or 60%, what does that tell you?
These are national accounts published by the Central Bank of Nigeria and the Central Bank is telling Nigeria: “Look, all we know is that this is money that we think should be in the economy, but we cannot
find it.” And people didn’t want me to talk. Now, we are hearing where the money went. All sorts of revelations that nobody thought where possible. Every day they were captured in errors and omissions.
Now, look at Kenya. They do have errors and omissions, but compare the errors and omissions bar to what they were able to account for. 5%, even 10%, is acceptable. But when you cannot explain where 50% of your earnings went and the country continues and nobody is asking any questions, and even when you tell Nigerians that this is the thing, they will say: “Don’t mind the man.”
Look at that, so where do we have a problem? First of all, as you can see we have not been able to attract investments. All the other investment assets headed as errors and omissions had been headed out. Which means, the money went out and did not come back? Anything below the zero line represents money that went out of Nigeria and did not come back.
Anything above represents what came in on the net basis. Now, a country like Kenya was having huge trade deficit, and that’s why the blue lines are below zero, but is able to attract investment. And that’s all above the line and that’s why Kenya is growing. We earn the money; we don’t attract any kind of investments, apart from portfolio flows. How much investment do we have in the oil sector, roads, economy, agriculture, refineries etc.? When you talk to people, they will tell you this sectors are not profitable. But why are people investing in Kenya agriculture? Why are they investing in roads in South Africa? Why are they building bridges? Why are they investing in power plants in Ethiopia?
I am Chairman of a company called Black Rhino. By the way, I don’t have a kobo in that company, but I am a Chairman. This short man who owns black stone said to us: “Gentlemen, here is $5 billion to invest
in power projects in Africa, a joint venture with Dangote on a condition that for every $lbillion you put in, Dangote puts in $1 billion, so we have $10 billion to invest.
We have projects in Ethiopia, Eritrea, and Kenya. I accepted to be Chairman on one condition only that
he will allow me to fix a power project in Kano. And he said: “If you can find a good power project in Kano, I am okay.”
Now, power companies are here trying to invest, negotiating. And what did we hear? One day some judge in a court sits down and says reverse the tariffs. I am here talking to someone in New York who cannot understand that a government can issue a power privatization plan; that investors can come in; that there is a regulator for power; that they looked at the numbers, looked at the cost of power, looked at what is cost recovery, agree on a tariff, announce that tariff, they bring in their money to invest on the basis of that and a court in the same country says this is illegal.
You know, for you sitting here and for Nigerians, this may not sound well, in fact people were saying yes!
They are cheating us. But, what that one judgment does in terms of the signals to foreign investors is very disastrous. There is no country in the world where a court had agreed to interfere with commercial transactions between the government and private investors that are in to attract investments. There is a contract!
The judge did not even say do not give this going forward. He said the ones that have been done is illegal, and you expect somebody now to bring in $3 billion to invest in power in Nigeria?
Knowing that you can tell him this is the tariff, and tomorrow your court can wake up and say the tariff is illegal? So, as planning ministers and commissioners, if you decide upfront that investment is important to you, the entire system has to be searched, to make sure that these signals are not set.
Your Customs officers should know that okay, this is the duty; pay correct duty. Don’t add anything on top. It is the economy’s investment. If a man is entitled to 5 year visa for bringing some kind of investment, he will get it. He doesn’t need to know anybody in immigration.
The court should respect legal agreements. And the right incentives should be provided, and when you provide incentives, do not review. Every government comes in and the next thing you know, some businessmen comes to them and says: “Your previous government gave this one tax incentive and you start reviewing and reviewing. The next time you offer somebody your own incentive to invest, he will not come, because he believes that the next government will reverse it.”
If the government that has made the mistake is gone, you then offer your own set of incentives and make sure that they are transparent. If you offer somebody an incentive in cement, make sure that every cement manufacturer gets that incentive. Fine, its sectoral.
Assuming cement is important to you, if you offer an incentive for agriculture, make sure that everybody who meets those conditions should get those incentives, not just somebody who knows his way around
Abuja. The farms are not in Abuja anyway.
You can see this. Basically, no investment has come in, and as you can see, I am building a consistent story that you have had growth model driven by commodities and consumption, which is your problem, and you now need to shift and you have a growth model that is driven by investment. And for this forum, it means you got to stop thinking so much about how much the government can spend, as in how much can we get into this economy.
ON EXCHANGE RATE
Let me start by congratulating the government for making changes. Unfortunately, those changes were
a bit late. But, the adjustment has been very severe. My sense is that where we are today, the Naira is already undervalued. If you look at the real effective exchange rate, we are below the zero line. Basically, what this means is, if the Naira were to strengthen to about 9%, you will get exchange rate palliatives. So, you are not really under any more pressures for devaluation. This is the nominal exchange rate adjusted for relative prices, and also adjusted for rates of our trading partners. So, on a trade basis, the Naira has gone from one of the most overvalued currencies when we were at N197 to the dollar, to the one that is undervalued. So, that adjustment has been made by the Central Bank. And what the Central Bank needs to do is just to allow this system to operate properly and stop panicking. You know, from what you can see here, even if the markets start at N320, N340 or N350 to the dollar, if you allow it to operate, it will revalue itself and adjust.
What is causing the problem is all the sense that we are not entirely flexible, and sometimes wrong signals. After you have allowed the flexible markets, you act as if you really don’t believe in it. These things don’t just work on fundamentals. I was in the Central Bank, the markets works on the basis of confidence and perception. There was a time speculators started hitting the market when I was with the Central Bank. The Kenyan Shilling got hit and got divided by 25%. Ghana got hit by 30%. South Africa got hit and they started heading towards Nigeria. And I called an emergency monetary policy committee meeting jerked up the monetary policy rate (MPR) by 200 basis points, jacked up CRR (cash reserve ratio) by 400 basis points and declared that I will defend the currency. I didn’t have the money to defend the currency, but everybody believed me and they left me alone. The market works based on confidence. By the time you have taken over one bank, fire one bank MD, they will believe you when you make a threat. I made many threats as governor of the Central Bank that I never carried out. If banks messed up, I will say, I will remove you, and because I have removed bank MDs, they will say sorry sir. They fell in line. So, if you are going on a flexible exchange rate, have the nerves. You have produced a fantastic document, stick to it. You can’t be any worse than you were. You are in a recession anyway, so you are trying something different. So, try it and try it properly.
REAL INTEREST RATES
Again, Central Bank has raised it and people have been attacking the Central Bank for raising the rates. Why? It’s not just about Inflation. It is about stabilizing the currency, because the truth
is that where we are today, the only way we are going to reverse this recession is to increase liquidity in the foreign exchange markets and reduce the gap between the official rate and the parallel market rate. And this is what I think the Central Bank needs to keep doing.
A flexible exchange rate regime and a positive real interest rate will combine to bridge that gap. Bring in the dollars that we need to finance imports, and those imports of raw materials are the things that will increase production, and that production is what will lead to growth. I have been very critical of what the Central Bank has been doing since the beginning of this administration. I am very supportive of the decisions it has taken in the last few Monetary Policy Committee (MPC) meetings, all that we ask is that they have produced a fantastic document on foreign exchange rate they should do it.
On the Treasury Single Account (TSA), they should just realize the difference between the dollars balance sheets and the Naira balance sheets, because I have seen this whole thing about banks being banned from foreign exchange markets for dollar TSA. The Naira balance sheets of banks are highly diversified.
The government deposits may be 20% of deposits. Banks are financial intermediaries. They engage in what is called maturity transformation. They borrow money short term and loan for long term on their Naira balance sheets. They have this money coming every day – current accounts, savings and deposits. If you tell them to payoff government deposits, they payoff and send marketers out and raise money.
On the dollar balance sheets, Nigeria only raise dollar on oil sales. The 10Cs (international oil companies)
have their money in international banks. NNPC is the only provider of dollar money, and they have lent out that money. If you apply the same rules on the Naira balance sheet and dollar balance sheets, without looking at concentration risk, you bring the banks down. They have lent out these dollars. Look at the maturity of their assets. Give them time to pay back these dollars. For them to pay back these dollars, they have to find dollars elsewhere. Where are they going to find? Who is the other exporter, apart from oil? What do we export in Nigeria?
And that is the point. So, they need to be very careful. So long as you know where the money is, give them the time to sort out their assets and pay back. Don’t precipitate a banking crisis and this idea of banning banks from foreign exchange market.
In the history of this country, and Dr. Shamsudeen Usman knows that, very few banks have ever survived after being banned from foreign exchange markets, because banks has lent money to customers who depend on import to produce. If banks can’t buy dollars for those customers, they can’t produce. They can’t pay back their debts. You build up non-performing loans. So, let us think through the consequences of some of these decisions that we take. But, apart from that, I am extremely supportive. I think the Central Bank is doing the right thing, and I think we should encourage them. I think the government should be given credit to say we are going to retrace our steps.
The government has said we are going to eliminate wasteful subsidies. I don’t want to go deep into this. I have been saying a lot about fuel subsidy since 2011-12. We have seen everything. Just an interesting thing. If you look at 2011-2012, in theory 0, because I don’t believe it, we were importing about 60 million liters of Premium Motor Spirit (PMS) every day. Now, we are down to a little above 30million liters every day, has our population gone down? Do we have fewer cars? Are we consuming less? All those numbers were fake.
Again, you can go back to the record 2011- 2012, I sat in front of the House of Representatives and made a presentation. I produced documents. I had documents that showed people claiming trey had 15 vessels of 30,000 metric tons offloading in Lagos on the same day, and they were being paid subsidy based on those documents. People sat in their offices produced bills of lading, bribed everybody from Customs to PPPRA (Petroleum Products Pricing Regulatory Agency) to whatever and got money out. All they needed was a paper that says you have allocation, and based on that allocation they will go. I am glad again that we are moving towards removing these subsidies. They are painful. Let me make that rlpilr. If you have to pay more for fuel, it hurts, it bites. The truth is that no system is perfect. And the subsidy system benefited very small groups of criminals much more than it benefited the poor people.
And if you are going to subsidies, please provide this subsidy in production. Provide cheap gas to power
plants and set power prices to a level where they can make a profit without passing on high gas prices to customers. Reduce the cost of setting up a business. Reduce the tax burden on pioneer industries.
Subsidize production. Do not subsidize consumption. Rather than give poor people subsidy on fuel that never gets to them, take that money and put it in their hands. We were spending $6 billion, $7billion per
annum on fake subsidies. And where is that money today? It is all in private jets, private yacht, expensive jewelries, property abroad, that’s where it is. It is not in this economy. Its gone out. One number I will give you is that Nigeria earned $16 billion from the oil sector in 2011. I was the governor of Central Bank. We established LCs worth $8billion for importing petroleum products and spent another $8 billion in petroleum subsidy. Every dollar we earned from the oil sector went back to petroleum sector in 2011. Not one dollar went into education, roads, power. It went into importing fuel and paying subsidy on imported fuel. The numbers are there. And if you look at that town hall meeting that has been going on, on Channels TV I gave this number then. Not that this one I am saying will change anything o! I am just saying it. But, tomorrow if you invite me, you will hear.
Look at power generation. That is where we need to focus on. Let’s get the power reports back on track.
Fantastic policy. Power was privatized. What happened? People bought DISCOs (distribution companies), because they had connections. Dr. Usman was head of what was called the Technical Committee on Privatization and Commercialization in the 1980s. I know because as a Merchant Banker, I privatized Okomu. Okomu oil mill is still there. As a solid company, because when they were in TCPC, they have a process where you don’t just buy a company. If you say you are going to invest, they had a process of making sure that after you bought that company, you make those investments. They don’t just sell assets to you. Privatization is not just about selling assets to people, it is about making sure that they make the investment they are committed to making when they bought it. So, we have people who bought DISCOs who said they will invest, but they have not invested. Land Registries. Lagos has done well, but you need to do more. In Lagos alone, you have 13 procedures to register land, according to World Land in Business Report.
It takes 77 days, 10% of your property value and the quality of land is 7 out of 30, compared to 22 in the
OECD countries. Lagos has now moved up, they are merging all relevant laws into a single piece of legislation. The only reason why I am not praising Lagos is, because I want to see the result first. But, they have at least realized that this is a problem. And I hope all states would look at this. Power and Land reforms are very important and having that data base is critical, especially for agriculture. Mark your land, give a C of O; let the farmer be able to use that land as collateral to borrow, or as security. Many of you had read Henandez De Sotos’ The Mystery of Capitals. Land is capital. I have that big problem here in Kano, especially in the Muslim villages. A woman’s husband dies and leaves her a farm. She doesn’t farm. So, her husband takes over the farm, he farms it, but that is her capital, and she gets no return on it. He uses her farm. He earns a living and he gives her chop money from her own money.
I am Chairman of a group call “Babbangona”. We are working on farmers trying to improve their yields, and I am having that problem, and I get to the district heads and say: “Look, get all Muslim women that own farms to sit with their husbands. This money that is being given for seeds, for fertilizer, for inputs is being given to the woman who owns the land. If your husband wants to be the labourer, let him be. If he doesn’t, let her get someone else. You are the boss, because she owns the land.
If your husband is ready to farm for you for a fee, let him do it. Otherwise, we will find a farmer for you.”
So, this issue of land is crucial to addressing poverty, especially poverty among rural women. Many of them own lands being hijacked by their husbands and they remain poor. And it is all cultural, but what we learn from “Tudun wada” is that the Christian woman has learned to farm and they come out to farm, because they love it. But, the Muslim woman has been stopped from farming, but in the name of culture. What the men had done is that they have taken over their capital, and it’s not religion. And therefore, as leaders, we have to address these social issues as part of economic rejuvenation.
Trade Policy: You know, I keep sounding like a broken record 2012 – 2012. I wrote an article in the Financial Times in London in which I criticized China’s relationship with Africa. It was very controversial. I don’t know if you read it. But, if you goggle it, you will see it. Now, look at this.
These are our trade with China. We are all importing from China. Those that export to China are exporting oil or solid minerals. China’s interest in Africa is not our development. America’s interest in Africa is not our development. Europe interest in Africa is not our developments. China’s interest is China’s developments. Likewise America and Europe. Please our government! Our interest should be Nigeria’s development.
If the Chinese are going to come back and set up textile factories in Nigeria and buy cotton from our farmers and employ Nigerian workers and produce these textiles and sell to us, they are welcome. If they are going to produce textiles in Shanghai. Subsidize them. Bring them here. Bribe our Customs Officers. Come to our markets and destroy our industries, we have to say no sir!
If China is lending us money, and we are going to pay back that money to import equipment from China,
we should please check that those equipment are properly and transparently priced; that we cannot get
them cheaper from another part of the world; and that they are of high quality. This idea that am lending you $lbillion to buy rice mills from me, which you can get at halfthe price elsewhere, you have already paid interest of 100%. If you don’t know it, the price is not a cheap loan.
Now, we go to these countries and we think there are no strings attached, especially at this time that the World Bank and the IMF and the Europeans are saying we want you to pursuit policies, China does not interfere. So, we are running to China, it is a good partner.
We must trade with China, India, Europe with America. I have nothing against any ofthem. What I want us to do is to sit on the table with them and negotiate trade agreements that protect our interest, because that is what they are doing and that is what every reasonable country in the world does. So, I think we have talked about Fiscal Policy, Monetary policy, Trade and Industrial policy and if there is any message I have tried to send is that we have a model historically, that was driven by commodity growth, by consumer spending. We have a future that is based on investment that should come in. We need to move to an investment-driven model. We need to have some elements of state planning. We cannot just allow the market. The market will not put money in agriculture, refineries. So, you have to provide the incentive and lead capital so that’s where you are important and that what for me is the way forward.
So what’s the summary? The years of Africa rising where one child could lift us up are behind us. Sustainable inclusive growth now depends on investment. Please every planning commissioner should remember that its investment.
The role government can play is now by getting appropriate market growth, and we said that you don’t have enough money. You have seen how much money you are raising per head. It is not much. Even if you move money from recurrent to capital expenditure, if the pull does not increase, it is not much. So, the government doesn’t have the pocket to do. If you got to look for private investments, local and foreign, to to do that, and you do that by having a corporate micro-policy and the government is getting it right, finally, and also creating a supportive business environment.
So, set excess rate to intensify it flows, eliminate subsidies that has been done. Now, address failures in the power sector value chain, starting with the DISCOs, digitize state, land registries, prioritise public spending towards investment and protect infant industries.
Anybody who tells you not to protect your industries is deceiving you. Create a level playing field between the infant industries and the big ones. I am not saying go and protect everything, but they must be a way of ensuring through power, infrastructure, industrial plasters, research and technology, technical and vocational education and through appropriate trade and tariff policies that critical policies are incubated before they are allowed to go out on the streets.