Private capital, foreign investment and the ERGP

I am broadly supportive of Nigeria’s Economic Recovery and Growth Plan (ERGP). I do not think it is a perfect document, but in our current conditions, we cannot afford to wait for perfection, as long as the plan’s principles are broadly appropriate and it takes us in the right direction. I fully support ERGP’s underlying principles – tackling constraints to growth identified as fuel, power, foreign currency, capricious regulation, skills and technology; leveraging the private sector; allowing markets to function; and promoting national values, cohesion and social inclusion. The three broad objectives of ERGP are also appropriate – restoring growth, investing in our people and building a globally competitive economy.

These three objectives have policy implications which are articulated in the document. Restoring growth for instance requires macroeconomic stability, economic diversification (agriculture, energy, MSME, industry, manufacturing, services and ICT), fiscal stimulus and monetary stability. The plan itemizes the approach towards investing in people, including promoting social inclusion through social investment programmes for the vulnerable and targeted programmes for the North-East and Niger-Delta, job creation and youth empowerment and investments in human capital while outlining the competitiveness imperatives as enhancing infrastructure (power, roads, rail, ports and broadband services, and leveraging public-private partnerships (PPPs), improving the business environment through the initiatives under the Presidential Enabling Business Environment Council (PEBEC) and promoting digital-led growth. It is difficult for anyone familiar with the Nigerian economy to fault these objectives as well as the five execution priorities specified in the plan-stabilising the macroeconomic environment; achieving agriculture and food security; ensuring energy sufficiency in power and petroleum products; improving transportation infrastructure; and driving industrialization through SMEs.

The first time I read the full ERGP document, I recall feeling that many aspects of the plan were somewhat familiar. On reflection I realized that ERGP is fundamentally similar in objectives and strategy to the National Economic Empowerment and Development Strategy (NEEDS) which we implemented between 2004 and 2007. Indeed the three “pillars” of NEEDS-empowering people; promoting private enterprise; and changing the way the government works directly mirror principles and objectives in ERGP-investing in our people, leveraging the private sector, and removing business-unfriendly regulations/building a globally competitive economy/improving the business environment. The ERGP philosophy is also consistent with other initiatives including Nigerian Economic Summit Group (NESG), our various VISION 2010 and 2020 processes and even as far back as the Structural Adjustment Programme of 1986! The point I seek to make from this is not to diminish the value or importance of ERGP, but to stress the imperative of implementation-government must muster the political will to ensure focused, concerted, swift and committed implementation.

Economic and structural reforms are often politically costly and painful at least in their early stages and may easily be deferred or watered down based on political considerations and the electoral calendar. As we are halfway into the Buhari presidency with 2019 fast approaching, it is easy for ERGP to be put in the cooler and its implementation either subdued or suppressed! A good example relates to foreign currency management-it is relatively easier for ERGP to call for “market-reflective exchange rates” than for the Buhari regime and the Central Bank under Godwin Emefiele to implement same! Allowing markets to function will also have implications beyond exchange rates to electricity tariffs, retail oil and gas prices and airline prices for instance! Leveraging the private sector requires a strategy and “body language” that attracts private capital, both foreign and domestic and requires policies such as PPPs, privatization and concessions, deregulation and liberalisation that so far have not appeared to be favoured or at best very reluctantly adopted since 2015.

In 2015 and 2016 for instance, Nigeria “erected” two structural barriers against foreign investment-one, the structure of multiple exchange rates reaching as many as 13 according to some reports and the huge variance between the rates at a point rising to a difference of over N200 between the lowest and the highest rates; and the absence of clarity over economic policy. The result of these twin barriers was the collapse of foreign investment in Nigeria from $20.8billion in 2014 to $9.8billion in 2015 and only $5.1billion in 2016. Given the structure of exchange rates and policy uncertainty last year, it was highly unlikely that any rational investor, except for mandatory investments, would invest in our economy. Even the Nigerian government had to postpone its $1billion Eurobond which was slated for 2016 to 2017 when a better investment environment had begun to emerge with rising oil prices, larger foreign reserves, a new economic policy document and CBN policy refinements which have significantly increased the supply of foreign currency and narrowed the gap between the various exchange rates.

I made these self-evident points at a forum recently only to be confronted by an academic economist who argued that multiple and widely differing exchange rates were not a deterrent to foreign investment! Apart from the sheer academic worthlessness of the argument (the collapse of FDI in 2016 is an empirical fact such that the argument is of no value!), the evidence offered in support of such a proposition was Nigeria’s successful Eurobond offer in 2017 (how does a 2017 offer which was deferred precisely because the environment was unfavourable in 2016, disprove a hypothesis about the conditions in 2016?) and the fact that in 1994 when two exchange rates (N22 and N85 to the $) were in existence, the investment in NLNG was still made! Again most analysts and academics know that if anyone wanted to demonstrate the strange hypothesis that multiple and widely divergent exchange rates do not affect foreign investment, he could cite the evidence of more recent years, but that obviously not being consistent with the facts, our economist then went over two decades back to 1994 to cite an exception, a single investment in an environment of otherwise grossly low investment, in a sector where people invest even in times of war, to justify a faulty hypothesis! Indeed even with the improvements in the policy environment in 2017, those constraints, though reduced, are still impeding foreign investment as the evidence will so readily show! And by the way, how can a successful dollar Eurobond priced at over 7% be the evidence anyone offers when FDI and portfolio investment remain significantly suppressed in the economy? So much for academic economics!

So back to the substantive and I think uncontroversial point-Nigeria must embark on effective implementation of the ERGP and in doing so, we must remove all constraints to domestic and foreign capital, including and particularly the multiple and divergent exchange rates system. Of course many other steps, some outlined in ERGP and others not quite, must be taken to build a growing, diversified, globally competitive and inclusive Nigerian economy.

Opeyemi Agbaje