My first reaction to the news of the cancellation or suspension of $22 billion loan sought by Nigeria’s Federal Government, if at all it is accurate and correct, was not to comment but try to understand the implications of such a decision against the background of the current global economic chaos. And what does it mean for Nigeria at this period?
I reached out to Financial Analysts and Economic Experts within my caucus groups in New York to seek their thought process to enable me effectively write on this issue. Again, we always hope someone in Government will review our suggestions if it is found to be admissible.
There is absolutely no doubt that the global economy is already impacted by a cut of approximately 1.86% in slow global growth rate. This is as at recent fact sheets. China, South Korea and Japan already have 2.1%; 1.7% and 1.8% cut respectively in their growth projections for 2020 alone as we speak. By the time we update the global effect in the market by end of the month, the global slide in growth would have reached 3%. Unfortunately, we don’t know the end of this.
Let us remember that the last global melt down in 2005 only created about 2.6% slash in the global growth rate yet it caused so much havoc.
Again, as I had suggested recently that the Federal Government of Nigeria must take immediate action to reduce the impact of the global problem of coronavirus (COVID-19) on the Nigerian economy that is already on the edge. We really simply cannot afford to slide into another big recession in Nigeria. It will be devastating and unbearable. Our economic indexes are so fragile and we must assemble the best brains to tackle this issue on a bi-partisan basis otherwise majority of Nigerians will suffer the consequences.
On the subject of the FGN declining to proceed with the $22billion loan, my submission based on conversation with Market Analysts is that IT IS A WRONG MOVE BY THE NIGERIAN GOVERNMENT.
Of course a lot of us will shout “hallelujah” in approval of that Government decision but ultimately looking at the current threat to the global economy, it is more instructive and advisable to proceed with the loan draw-down if such draw-down has been approved by the Lenders. Except the Lenders are saying they are unable to proceed with the Loans, Nigeria needs it right now.
In my last piece, I did mention that Nigeria will need to reflate her economy and also devise strategies to attract Foreign Direct Investment, FDI, which I stated shall become very competitive in view of the current loss of revenue by Governments and Global Investors. I stated that we may not achieve anything substantial in view of Nigeria’s previous poor records of attracting FDI.
We also have the double tragedy of falling oil prices and low demand for oil and gas currently globally. In fact, it is triple tragedy because there is a current production war between Saudi Arabia, Russia and the US. The big players are flooding the market that is currently stagnant with an unprecedented and unwarranted production with S.A allies in the Gulf region already supporting over flooding of the market. We may see the price of oil falling to below $15 by mid April.(Right now it is less than $20 per barrel well below the marginal production cost per barrel in Nigeria) That will be devastating for Nigeria that has predicated the 2020 budget on $57 per barrel. Considering that we have one of the highest marginal production costs per barrel of Crude oil in the world, we would simply be producing at a loss. We must also immediately figure out how to cushion the effect of this huge revenue loss on the 2020 budget. All effort must be stepped up to find alternative cash funds and that includes draw-downs on already accredited and decisioned loans.
The reason why most of us are paranoid about Foreign Loans by any Nigerian Governments, Federal or State is simply because those loans had been grossly mismanaged in the past. We have taken billions in Foreign loans for projects we could not complete in 40 years. Some of them were abandoned after loans had been taken, mismanaged or diverted. We hope this will not be the case this time around.
Right now, we are back in the era of bail outs; stimulus packages and resuscitation loans at a global scale. China is breaking the vault to assist its economy sustain a reasonable growth arising from the current terribly damaging problems. The Chinese government is coming out with over $2.3 trillion in series of injections into their economy once the pressure on containing the virus is combated. Of course US and other Countries are following suit.
At this time, what is required in any economy is strong liquidity, low interest rates and boost in economic activities to block any inflationary increases. Consumer spending must be boosted and any disequilibrium in the money market must be effectively tackled so that the stock market is not badly damaged.
What we are witnessing is extremely dangerous and very challenging. More inflow of funds to create necessary economic activities in general is a major recommendation at this time. It is not certain that the Central Bank of Nigeria, CBN, has adequate cash to withstand the level of pressure that would come on it if the crisis persists. If it has, the utilization of such funds must be geared towards dispensing stimulus packages that would specifically target real sector production activities and core trickling down projects that will stimulate economic activities and increase or sustain consumer spending rather than focus on fiscal overhead budget spending.
The spending capacity of Nigerians before this crisis has been badly decimated by more than 450% since the last devaluation of the Naira took place. Average per capita income in Nigeria fell from $2,800 in 2016 to an abysmal $1,700 in 2019, one of the factors that led to Nigeria being classified as the capital or headquarters of poverty on earth. The consumer spending index or you can call it consumer disposable income index in Nigeria for 2017 , 2018 and 2019 were 1.2X; 1.01X and 0.85X respectively.
Given the above scenario, it is suggested that any stimulus package this time around in Nigeria should include direct incentive packages in the form of extra cash per household. This will have far reaching effect in stimulating and generating necessary economic activities that will sustain growth and production. This will assist dispense necessary cash directly to increase consumer purchases and consumption and that will translate to increasing manufacturers’ stock by increasing production. Such packages can be dispensed in the form of salary bonuses to employees, direct cash incentives to students correctly accredited to be enrolled in colleges and some payments to non wage earners, non self employed people in whatever formula is agreed. There would be a multiplier effect in consumer spending increase and that would translate to increase in production. Again, there could also be direct incentives to core manufacturers but not the type of stimulus packages that created the current debt trap monster with AMCON debts.
The United States government during the last global meltdown dished out various stimulus packages and bail outs to several corporate organizations and also made direct payroll incentives to citizens. The TAFT program cost the US government about $3 trillion in bail outs and stimulus loans. It is on record that over 85% of that stimulus loans were fully repaid and the US government eventually profited to the tune of $400 billion from those stimulus packages by the time it was wound up and closed. In effect, that was a good profitable investment of Tax payers’ funds. In Nigeria, those loans were flagrantly misused and diverted by the beneficiaries. They were turned to Government largesse and we ended up stacking about N7 trillion in disgraceful debts till today. That is unacceptable and should not happen again. The framework must be properly laid out and terms adequately worked out if we must insist on doling out cash gifts to private sector groups again in Nigeria. Otherwise, it is not advisable. We can learn from the US structure!
Not many people, perhaps including the Government, know that the main reason why Nigeria fell into unnecessary recession in 2016 way after the rest of the world was out of the global recession was traceable to the debt burden created by the reckless self inflicted debts taken over by AMCON. That was a huge hole in Nigeria’s revenue portfolio and there was no way it would not have resulted in creating a devastating effect like the recession it gave birth to. Again, we really cannot afford that type of recklessness again. It will be too costly for a government struggling with revenue sources on top of over N7 trillion debts at the same token.
We heard of a N50 Billion stimulus, that is chicken change in what is being anticipated. Surely we anticipate much more in the nearest future. It is therefore necessary for Nigeria to proceed to draw-down on the $22billion loan at this time to gain traction with the liquidity that is badly required.
We must be concerned about the immediate and short term devastating effect of lack of revenue to oil the economy and create those economic activities, create some employment and generate and stimulate production activities generally in the economy.
This is why proceeding with the loan will assist at this time to step down the effect of the global impact of coronavirus on the economy. Then we would worry ourselves about the Debt Management strategy thereafter.
It is therefore strongly suggested that Nigeria take advantage of these loans to reflate the economy, generate necessary liquidity and also keep the economy active with projects designed under the loan package.
Secondly, if those loan commitments have been completed, we should take them in order not to lose them. Again, the global financial market will be severely milked and denied of funding up till 2022 or more as we stand. The dearth of this funding will not allow any lending group to look elsewhere except its internal problems first. So we should rather take this loan now but at least ensure they are judiciously used and utilized for the specific projects otherwise we are back to square one.
Moreover, China and US will dole out package of stimulus and intervention funds and it is expected that 30% of those funds will target export stimulations to increase exports and expand trades. At least China will surely implement that in view of the unprecedented fall in its exports in February, its lowest in over 30 years.
I understand that significant and large percentage of that loan is coming from China and others from World Bank, ADB and Japan. We should proceed to drawdown on it. China will desperately want to shore up its exports almost immediately and will offer our slots to other willing countries if we fail to act.
We must also remember that the 2005 to 2008 global recession and meltdown only slowed down the Chinese growth slightly. In fact, US and Western Europe were worse hit. China came out of that recession much stronger economically, amassing an unprecedented revenue increase from a reserve of $2 .7 trillion to almost $4.0 trillion in reserves. This time, its will be different and difficult for China.
I expect an aggressive export drive from China to regain its preeminent position as the largest exporting Country on the planet. We should take advantage of that by drawing down on the loans especially from China at this time. We can even play the game of numbers by renegotiating the terms of the loans to make it more favourable to us or more friendly. This time, they are the ones that need us as much as we truly need them also. We need to engage experts to help with those renegotiation process. Those who understands the dynamics of the global play in the financial markets and use it to Nigeria’s advantage. It’s all about zero-sum game and dynamics.
In the final analysis, experts do not recommend that Nigeria should decline these loans for reasons adduced above. We surely need extra cash to keep the fluidity in the economy and ensure there are activities and liquidity. We need it to reduce the impact of global slow growth, we need it to create opportunities at this time when most economies are witnessing serious down sides. We need it because it will soon become a scarce commodity due to an unprecedented need at a global scale that will make it very competitive to attract at least for the next three to four years.
We can continue this debate and hopefully our Economic Managers will see reasons in the interest of the Nigerian Economy.
Dr. Bello is Principal Partner/CEO- Afrique Capital and Equity Funds Ltd, New York, USA, President, Nigerians in Diaspora, New Jersey chapter and Chairman, Steering Committee of the proposed Nigeria Federal Credit Union.