Private capital, foreign investment and the ERGP (2)
I am constrained to make this final intervention on the impact of multiple and hugely divergent foreign exchange rates as well as unclear, unarticulated and confusing economic policy on foreign direct investment in response to our “academic” economist’s long treatise of May 18, 2017 in this newspaper. I will confine myself to the issues originally in contention, rather than red herrings brought into the debate. Put simply my statement which the academic economist found objectionable was that multiple and wildly divergent foreign exchange rates and unclear economic policy were a deterrent to foreign direct investment in 2016, which he disputed contending that in spite of those conditions, Nigeria could still “attract” significant foreign direct investment in support of which he offered two illustrations-a purported 1994 investment in Nigeria LNG when he claims a dual exchange rate system existed and the recent Eurobond fund raising.
I must first correct the facts-anyone who googles NLNG would quickly find that the company was started in 1989 and not 1994! In addition, the CBN Statistical Bulletin 2015 confirms that we operated a dual exchange rate between 1995 and 1998. So the academic economist’s argument is wrong on two accounts!
Let me quote directly from my first article, “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 $5.1 billion 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 remarks at a public forum on May 6, 2017 which attracted the “academic” economist’s ire! By the way, both those comments and my subsequent article of May 10 were not a “single purpose project” designed to attack anyone,but the substance of both interventions was to focus on government’s Economic Recovery and Growth Plan (ERGP), highlight lessons Nigeria could learn from failed or sub-optimal implementation of previous economic blueprints, and discuss constraints and/or impediments which must be removed for the plan to succeed, especially in relation to private capital and foreign direct investment. I maintain and the evidence is overwhelming that multiple and widely divergent foreign exchange rates and policy uncertainty were significant impediments to foreign direct investment, whether real or portfolio FDI in 2016 and would remain so if not addressed. I am also confident that except for the surprising exception of our “academic” economist, those assertions are uncontroversial. I must add that I am inclined to discuss substance rather than personalities, and unlike some who may get their testosterone levels enhanced by mentioning individual names multiple times in a 2,200 verbiage, I remain interested only in the issues!
At the forum where these pseudo-controversies arose, I had pre-informed the organisers that I was teaching at a business school at 1.00pm and was therefore unable to wait for the combined Q and A session holding after a subsequent panel. The moderator was standing up and closing the session immediately after the “academic” economist’s statement having previously highlighted time constraints, and other panelists were rising and departing as well. Indeed the moderator only very reluctantly yielded the microphone to the correspondent for a “final word” which turned out to be a frontal attack on my position. And I had subsequently made efforts to discuss issues with our correspondent privately. At that point, it became my duty to clarify the public record, else the patently erroneous view that multiple and divergent exchange rates and economic policy confusions do not negatively affect FDI, become accepted as truth.
I have quoted the figures for total FDI in Nigeria between 2014 and 2016 above-$20.8billion in 2014; $9.8billion in 2015; and only $5.1billion in 2016. A deconstruction of those figures reveal that the decline pervaded all categories of foreign investment: in 2014, real FDI was $2.3bn; in 2015 it fell by 36% to $1.47bn; and it fell again by 29% to $1.044bn in 2016, a cumulative collapse of 55%! Portfolio investment was $14.9bn in 2014; it declined 60% to $6.09bn in 2015; and by 2016, it declined further by 70% (!) to only $1.8bn in 2016! Other investments were $3.57bn in 2014; it was lower by 38% ($2.22bn) by 2015 and stayed flat in 2016. Even if we accept the narrower and more restrictive interpretation of the opposing contention by limiting the argument to only real FDI while ignoring portfolio investments, these data show categorically that all categories of foreign investment suffered from the conditions in 2015 and 2016. While it is obvious to everyone that portfolio investors have a shorter investment horizon than real FDI investors and are naturally more brittle, yet the data and our practical experience confirm that all investors are concerned about sensible and predictable economic policy and exchange rate management systems!
What do other economists and economic institutions have to say on the issue? The International Monetary Fund (IMF) conducted a very recent Article IV Consultation on Nigeria published in March 2017. Some news media in Nigeria and abroad titled their reports on that publication, “Dump Multiple Exchange Rates, Forex Curbs, IMF Tells Nigeria” or words to the same effect! I should take quotes from the report:-
- “The external current account turned into a surplus in 2016, as import compression continues to offset falling exports. The foreign exchange regime was liberalized in June 2016, but FX restrictions remain in place and the market continues to be characterized by significant distortions that have contributed to a 50 percent parallel market premium which was halved following recent increases in central bank interventions and the removal of prioritized allocation of foreign exchange. Under unchanged policies, the outlook remains challenging…policy uncertainty, crowding out, and FX market distortions would be expected to drag activity”
- “The authorities’ Economic Recovery and Growth Plan, published March 7, 2017 is a welcome step forward. It appropriately focuses on private sector led economic diversification, supported by government efforts to strengthen infrastructure and the business environment. But without stronger macroeconomic policies-notably higher non-oil tax collections (to create fiscal space) and a more transparent foreign exchange regime (to facilitate adjustment and promote diversification)-the plan will not meet the objectives of fostering higher growth and employment”
In these quotes, the IMF makes essentially the point I was making! Multiple media reports also highlighted the African Development Bank’s (AfDB) approval of a $1bn facility in the first instance for Nigeria, with prospects of a larger $4.1bn approval that could even rise to $10bn. However AfDB disbursed only $600million of these insisting on further policy reforms before continuing further disbursements. Nigeria’s delisting from the JP Morgan Government Bond Index for Emerging Markets in 2015 which cost us huge portfolio flows in 2015-2016 and till date was due to the absence of liquidity and transparency in our foreign exchange markets. Quite frankly on further reflection, given the publicly available data and information, it is simply astounding that we are now engaged in this debate! I should take a quote from “Equities Market Outlook in 2017” issued by Afrinvest reported in the media under the headline “Multiple Exchange Rates Stall Foreign Inflow into Nigerian Equities” in January 2017, “Our interactions with several foreign investors with interests in Nigeria suggest that a decision to stake any position in the Nigerian market will be a function of currency liquidity and a greater certainty on their ability to repatriate capital anytime they divest. As a result, we do not see significant foreign capital flowing into Nigerian equities in the short to medium term as the discrepancy between the parallel and interbank market rates continue to deter interest in Nigeria”
Former Chief Economic Adviser and CBN Governor, Professor Chukwuma Soludo has also been on record on several occasions against policy and exchange rate uncertainty. In a widely reported intervention in April 2017, Soludo advised the FGN/CBN to end the multiple exchange rates and wide divergence between exchange rates saying, “Nigeria must get out of multiple exchange rates and we must eliminate the premium…the uncertainty that is created by that is so enormous”
In relation to the two examples offered in support of a flawed hypothesis, I wondered in the first instalment of this article “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 “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?” Incidentally Businessday featured in its edition of May 18, (the same day the academic economist’s treatise was printed) a report that “Senegal raises $1.1bn Eurobond at lower cost than Nigeria’s $1.5bn”. Senegal is a far smaller economy than Nigeria, but while our Eurobond was issued at 7.87%, they raised money at 6.25%. Andrew Nevin, an economist with a Doctorate from Harvard explained that “in Nigeria’s case, the relatively high rate demanded by investors reflects continuing uncertainty about the path of economic development (i.e. policies)…investors are concerned by our poor Ease of Doing Business and confusing FX policies”. With regard to the NLNG investment I also re-state my previous position-“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”. It should be easy to understand that exchange rates are not a major concern for an investor who is coming to take mineral resources from your country (oil, gas, diamonds, copper etc.), sell them in the international market and retain the proceeds in foreign currency in its home country. That is why IOCs continued to invest in Nigeria throughout our years under military rule and why there are still global companies taking mineral resources from D.R Congo, Iraq and Libya inspite of war and instability! And even then, investments have been significantly reduced in our contemporary oil and gas sector due to the absence of fiscal terms, regulation and other legal and policy gaps!!!Most importantly our academic economist’s whole hypothesis is founded on an easily verifiable falsehood-NLNG was incorporated in May 1989 and the dual exchange rate system only happened between 1995 and 1998.
By the way, most readers know that I am a big advocate of private capital-domestic and foreign, and I have consistently advanced positions in support of FDI, FPI, Concessions, PPPs, private investments in infrastructure, deregulation and liberalization, and other policies and strategies for improving investment in the Nigerian economy. Indeed most people are aware that my major critique of economic policy since May 2015 was a “body language” that appeared to disdain private and foreign capital, a point ironically that I also made on May 6, 2017. Attempting to cast a treatise as if the argument was over the desirability or otherwise of foreign real FDI investment amounts to intellectual sophistry! And by the way, how do you “attract” real FDI without clarity in your policy positions? Isn’t our “academic” economist perhaps actually calling for POLICY designed to attract real FDI?
I acknowledge(and I did so in my comments of May 6 and article of May 10) that conditions have somewhat improved for FDI and overall economic growth in 2017 with a decent policy document-the ERGP, greater FX availability and increased rate convergence, amongst others. As I concluded in my original article, the substantive and I insist uncontroversial take-away from all this is that “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”.
So much for academic distractions!
Opeyemi Agbaje