Andrew Nevin joins Timi and Tobi to discuss some of the key policy decisions that await Nigeria's next president like tax reforms, exchange rate management, exporting brain capital, nurturing the diaspora, and putting Nigeria's dead capital to work.
Transcript
Andrew;
It's great to be here guys. I'm really looking forward to the podcast today.
Tobi;
Yesterday, Timi and I discussed the current currency crunch - that’s a phrase I never thought I would be altering - and the whole demonetization. What's your feeling about what's happening currently?
Andrew;
Well, specifically on the Naira and trying to introduce the new Naira. I mean, obviously, this is a policy that's causing untold hardship around the nation and particularly to the most vulnearable communities. Right? I mean, it could make sense to say we're going to replace the cash currency with a new cash currency in order to kind of harm people that have acquired large amounts of cash illicitly or through corruption. But to do so in a way that harms the bottom of the pyramid I think is unnecessary. And, of course, the unwillingness of the Powers to beat to back down, it's terrible. We're all hearing stories about people not being able to eat because they don't have access to cash or even because the banks are not working. NIBSS system is terrible. I know my own bank has not been working for the last 24 hours, it seems. We all know stories about people going to POS operators and, of course, in a tight market they increase their prices. So they charge, for example, for our helper here, 6000 Naira to get 5000 Naira in cash, which is unconscionable. And , of course, now we're hearing stories that's reported in the press that the price of food stuff is dropping. I mean, we all want food inflation to be declining but this is being caused by the fact there's no cash in in the system. So that the farmers are desperate to get all the cash, they pay their labourers in cash, they need cash. So they're willing to accept half the value of the crop in order to do that. So all of these distortions and sufferings have been introduced by a policy that, in my personal view, I can't speak on behalf of PwC, but in my personal view is completely unnecessary and as an outsider it's opaque to me which powers to be are really benefiting from it. But you have to imagine that someone that's putting this policy in place here is benefiting somehow from what's happening in the country.
Tobi;
Yeah, we can speculate from now to tomorrow, but, I mean, let's not bother you with that. As Timi said in that intro, basically, the biggest challenge that will face whoever becomes the next president of Nigeria are fiscal, primarily. I want to draw you to comment more on something you said recently I think it was at a Nairametrics event where you said growth primarily is the problem with Nigeria and not revenue. But some would disagree, right? Because the primary focus of the government, at least in my own observation, is always about revenue shortfall and how to get more revenue and more revenue. And of course, you could sympathize given the collapse of oil revenue, which primarily [the] government depends on. I just want you to expand more on that a bit, when you say growth is the the primary concern. What do you mean?
Andrew;
There was this narrative that said that we have a debt problem. The Honorable Minister of Finance, Budget, and National Planning has consistently said we don't have a debt problem, we have a revenue problem. But we've said for six or seven years, how do you collect more revenue from an economy that's not growing? It just creates dysfunctional situation. And that's in fact what we've seen. So we've had official growth bouncing around between one and a half and 3% for the last six or seven years and it dropped during COVID and came back a bit stronger, but that's lower than the population growth. So in effect, people are getting poorer and poorer per capita, at least to the official numbers, and yet the government's trying to take more revenue out. And of course, the government is desperate for revenue. One reason is desperate for revenue is this self-inflicted fuel subsidy. I mean, it's extraordinary that we collect, I don't know, just guessing, I can never keep track any more of the numbers, we might collect ten or 11 trillion naira and yet we're spending… I think last year the estimate was 7 trillion naira - six, 7 trillion naira on the fuel subsidies. So now you've got a government who's desperate for revenue, so they're introducing all sorts of taxes and levies, and we have this myth that's going around that we're a low tax nation. It's just simply not true. I mean, what happens is that we get all sorts of new taxes introduced. I think we've counted, at PwC, over 50. But the worst of it all is when you pay the tax, you don't feel like you get any service, right? I mean, you don't get anything for it. So you think of the things for why you are paying the taxes - infrastructure, education, health care, power, security, people don't get any of those things. So not only do they pay the taxes, they pay as increasing pressure from the revenue service because they're under pressure from government officials, but after you pay, you then have to pay for the things you thought you were paying for with that. So that, to me, is a dysfunctional system.
So what's the way out of it? Well, the only way out of it, in our view, is we have to have a bigger economy. And I can tell you, having lived through this in China, if the economy is growing 6,8,10 percent a year, your tax revenue can grow 15, 20% a year, and people are happy to pay that tax. But what's happening now is simply not going to work because the social contract is broken. I mean, no growth in per capita incomes, and so the government tried to bring more people into the formal system to tax them. I mean, I was associated with a small company that basically went under, was not successful. We have a harsh business environment, and despite the fact that it didn't make any money, [it] lost money, we still have the revenue service trying to collect corporate income tax (CIT) on it because they have these huge revenue targets. So from our viewpoint, and too often in this country, we don't talk about the root causes, the root causes of the fiscal pressure - one is, the fuel subsidy, which is consuming the nation. The number reported in the papers is close to 2% of the official GDP, which is supposed to be [that] your entire budget deficit shouldn't be more than 3%. So the fuel subsidy alone takes that whole deficit. But the second reason is, we're simply not growing. So instead of standing up and saying we have a revenue problem, I think the federal government should be thinking, why are we not growing? This is the biggest economic opportunity on the planet. As I said, lived in China and lived there for ten years. I went to China the first time in 1983. I watched the greatest economic miracle in the history of the world up until then, I'm heavily involved in India - I'm watching another economic miracle unfold. But the next economic miracle should be in Africa, and particularly here in Nigeria. So it has the greatest economic opportunity in the world, in a world where a lot of economies are shrinking, and yet we're not growing.
Timi;
Is that true? I’ve heard you talk about [this], I remember in the BusinessDay last year where you talked about the population, the demographic dividend that should be coming to Africa and Nigeria in particular. But when people pose this question of, oh, well, is it a revenue question or a growth question? When I look at the budget that has been implemented by the federal government in the last few years, what I see is a spending problem. Right? You look at the level of revenue that is realistic or expected, ou look at the budget, they don't make any sense. You know, we've gone in 2014 from maybe a 5 trillion budget to a 17 trillion budget to a 19 trillion budget. Like, it's always childish to reduce economics to the laws of the household, but it really does look like just reckless spending.
Andrew;
Well, I wouldn't disagree with that. The angle that I focused on from that perspective is the complexity of the federal government, the number of agencies, the lack of implementation of the Orosanye Report. What I've said about this in the past is, look, the government is not using the money it gets wisely. So it's spent 7 trillion on the fuel subsidy, it’s spent trillions of naira on dubious agencies that are not delivering [value]. [And] not only they're not delivering value, they're a negative, because then you have another agency that's trying to collect taxes and fees from either incorporations or companies or people or the informal sector. So the fact is, again, we don't attack the root cause. So the Orosanye Report was done in 2013. His Excellency, president Buhari assented to it in 2020, March 2020, just in the beginning of COVID and yet there's been no action. But it was interesting this morning because a senior official from the Ministry of Finance, Budget and National Planning came out in the press this morning and said, look, the legislature continues to create new agencies, these agencies aren't going to get funded because there is no funding for them. So I think you're exactly right that there is this issue of growth and we need to grow, but there's also this issue of the wise spending. And the way I would characterize it is the social contract is broken. There was an old social contract that said “we need government revenue, but we won't ask the population for it, we'll just get it from oil. So we don't ask for anything, we don't give you anything.” And we could debate the merits of the social contract, but at a certain level, it's kind of fair. Right. So you get on with your life, deal with your own problems, we'll get on with what we do in the government. We've got this machine that spits out money in NNPC and we won't bother each other. What's happened now is the social contract has been changed by one side that said, actually, we said we wouldn't bother you, but now we're going to bother you because the oil machine is broken. And of course, the oil machine being broken is, again, self-inflicted.
Timi;
What that means is they dipped into pensions. Not only do they tax you more, if you're an equity shareholder in a bank, like, they dipped into your central bank reserves, they dipped into your pension arbitrarily and forcibly. It's not just that one party has broken that social contract, they had completely shredded it. And they're almost rapacious in the way that they had gone after every shred of money that the citizens have and are not currently spending. Right?
Andrew;
Yeah, absolutely. But this is also one reason why I've been so focused in recent months on Brain capital. We should be investing in brains because it's harder for the government to extract value from brains.
Timi;
You can't take your pension with you, but you can't leave. And we’re truly see that. If you invest a great deal of Brain Capital, I just have to be honest, they’re going to leave.
Andrew;
I get that. But I'm kind of on the side of the individual in all of these. It’s a totally broken social contract, totally rapacious public sector, federal public sector at this present time, and no one's going to show up with any capital. Because they look at the situation. I mean, they look at numerous situations where the capital has been stripped. I mean, no foreign company wants to do oil and gas in the country. All the DISCOs have lost money. All the manufacturers have lost money. You have a company like Gokada in Lagos. So they come, and I think they invested maybe $5 million. His Excellency Governor Sanwo-Olu came out, welcomed them to the community…
Timi;
The photo-op was in his very office.
Andrew;
Right. And they said they're going to bring safety to the system. They've got helmets, they're registered, we know who they are.
Timi;
They complied with the government standards as to the higher specifications that were needed. And then nevertheless, they were arbitrarily regulated out of the system.
Andrew;
Right. So, very harsh environment. I get approached by other PwC firms around the world to talk to their clients about investing in Nigeria. And even though we're the biggest opportunity in theory, as I said, I'm very hard pressed right now to tell people to invest because of the history. The way that the country has treated capital, both domestic investors, it’s not particularly restricted to foreign investors… but the way they treated domestic investors, the way diaspora has been treated in many cases, and the way foreign investors are treated, why would you put your capital right now in Nigeria? Until we figure that out, we're going to continue to really suffer.
Timi;
Okay, I don't want to get too distracted because you mentioned the Orosanye Report, and I just wanted maybe a minute on that. It took about five years. It was finished in 2013. Do you really think that a report that began in, say, 2008 on the state of the Nigerian federal government has any relevance today at all? It seems like one of those, like, Holy grail things where it's like, oh, if only we could implement this thing. When you actually look through it, it's talking about fiscal structures, agencies that don't exist or are completely different from what they were before. I’d worry that it was the easiest thing Buhari ever did signing its implementation, because it's almost impossible.
Andrew;
To me, the Orosanye Report is a symbol, right? So, again, we had a system that was fit for purpose in a different era. Why were all these agencies created? They weren’t created to add value to Nigeria. They were created to provide jobs for certain people, patronage from the political system, when there were resources to do that and didn't care whether they did any work or not. And everyone likes an agency because they could be the DG and have their own board and control their own bank account. The system is no longer fit for purpose. I mean, it's destroying the country. So one way or another, we need to deal with it. Eliminate agencies, reduce complexity, fold some things, and stop some things that are just completely unhelpful.
Timi;
What do you do with those people? That's always the hard part about civil service reform. It's really hard to tell a 47 year old with three children who has been brought up in the expectation that they exchanging commercial remuneration for the security of a government job and then telling them that they have to go out now and, like, do what?
Andrew;
Yeah. I mean, you'd actually be better off as a country just to pay them to do nothing, right? I mean, them going to work actively harms the country because it creates this complexity, creates more burden on the companies to deal with multiple regulators, more taxation. If you just said, we'll just pay you, stay home. Or we'll pay you four or five year salary and maybe you can go to your state and help them out. We would clearly be better off
Timi;
That’s buyouts, right? Like, buying back their pension by pensioning them off, essentially. You know, I went there about a year ago, the Ajaokuta Steel Company has an eight story building full of civil servants, people don't work there and earn there whilst retired as DGs…That is paying people to do nothing.
Andrew;
Right. But as I said, I still think it would be preferable to pay people to do nothing than to have them imposed at an agency that's creating complexity and confusion and costs for the entire economy.
Timi;
I agree with you. Certainly philosophically, I agree that then the productive part of the economy could be unencumbered. But thinking through, reminding myself of what the Podcast is called - it’s called Ballots and Beyond. And what we're trying to see is that you were called up by whoever of the four realistic candidates won, and during the transition phase, they're thinking about the fiscal position, the sources of revenue available. If you found yourself in that position, the consigliere of president elects, what would you think? What would be your big concern in terms of Nigeria’s financial position.
Andrew;
Well, I mean, I think we need foreign exchange. Right? So where do we get foreign exchange? First off, I'd actually start by doing something that my colleague Taiwo Oyedele says. I think 95% of the revenue, according to Taiwo, or according to us, comes from six or seven taxes. So the first thing I’d do is just eliminate the rest of those taxes because they just create complexity and costs. The second thing, I would just do the fuel subsidy, and we have to float the Naira. What's happening now just creates criminality, right? Round tripping. People trying to get access to the dollars at the official rate. We have such an open economy. We have so much trade that goes in and out, informal, formal people. It just doesn't work. I mean, the idea that your bank gets involved with the CBN to get you $4,000 if you're Nigerian to go is just simply an absurdity, right? And I mean, we went to the central bank governor back in 2017, 2018 on this. He didn't listen to this. Look, it is a mathematical search certainty that if you have this exchange rate regime, you won't get investment in the country. Well, that's proved to be true. No one's going to invest and the situation hasn't improved in it. So deal with those issues.
But in terms of where can we get foreign exchange, I mean, it's extraordinary. We're sitting here at $80 oil and we're not prospering and the Naira is not strengthening. And the reason for this, of course, everyone understands, is I mean, it's partially the fuel subsidy which is consuming us, but the even larger piece is the drop in production. What finances the government. What finances our FX needs is oil. The diaspora and oil. Diaspora is doing very well. But the oil collapsed to 1 million barrels a day. How is that possible when I came [it was] 2 million barrels a day? The most important source of FX you have, or along with the diaspora, the most important source we've let collapse. That has to be top of the priority list.
The second, of course, is the diaspora, which you need to nurture. I actually think the administration has really recognized this, both at the federal level and the state level, and going to see every year 10% increase in the diaspora remittances. Not only because the diaspora is getting bigger, but also diaspora is also moving up the seniority in the places where they're doing very well, like the US. And the UK.
And then the third source of FX is we started to talk a lot about our services, exporting brains like the diaspora, but where the brains remain in Nigeria, so we're seeing more and more companies because there's a global talent shortage, global people shortage. I mean, outside of Africa, the number of children is declining, the number of adults, working age adults is declining. And people in societies are aging, particularly for example in Europe, but really all over the world, Eastern Asia, parts of South America, Canada is aging. That's why it's taking so many immigrants. The people that are going to do the work are Africans increasingly. So it's very important that we participate in those global value chains. People who can work, do the work here, stay in their communities here. They don't have to necessarily come to Lagos. So that's the third pillar is export services. And the reason we say that is that exporting goods is not really feasible in the medium term here. I mean, we have a very harsh business environment. We have difficulty with infrastructure, we have difficult with industrial power. And those things I think, will come over five or ten years. But what we can do in the short term is focus more on exporting services, which we already do. Nollywood, music, sports, finance, access is on the march across Africa. And of course, things like software development, business process outsourcing - Amal Hassan, who people I know by now, a national heroine, runs the company Outsource Global and has 1500 employees in Northern Nigeria like Abuja and Kaduna - that do high end services for companies in Japan, Canada. So I would focus on the export of services in the short term and then gives us a little bit of room so we can get more organized around exporting things like agricultural goods. So those would be my initial priority.
The other thing I would do is, which I think has been a big success in the past decade in this country. States really understand they need to take responsibility for their own economic development. So as the federal government, I think they should continue to work with the state governments, make it clear what the state governments have to do if they want to have a prosperous society, what are the sorts of things they need to do, and give them room. So those would be where I would start with if I became president of Nigeria.
Tobi;
Yeah. So you use the word myth when you were talking about revenue question. So before we move to other matters, I just wanted to do a bit of myth-busting briefly, because we've talked about beyond, right, what the next administration has to do. But we still have an election and people are still campaigning and people are still being misled, in my opinion, about some of the ideas surrounding this. So some very clever people would take revenue to GDP ratio or debt to GDP ratio to assert that Nigeria just does not collect enough revenue. And that really is the problem we have. And they compare it to China 20, 30 years ago, and say, look at this, it's low. We just have to collect more because the state has to have money to do some of these big push ideas. How would you respond to that specific strain of argument?
Andrew;
Yeah, I think that's a very good question. I mean, my friends over at the World Bank say this all the time, and we need more revenue mobilization. Remember, we still have a large informal economy. So the reason that our revenue to GDP looks low is not because taxes are low. It's because a relatively small part of the economy, less than half, is in the formal economy. But being in the informal economy is a choice. So people choose to be in the informal economy. And, of course, Honorable Minister of Finance, Budget and National Funding. She had to push. She recognized this, [she] wanted to bring more companies into the formal economy, [more] traders in the formal economy. She made some steps in that direction. But the truth is it's a choice, and we haven't made it attractive enough. So people want to stay in the informal economy. They'll stay small and less productive. So then the companies that are in the formal economy really get squeezed with these multiple taxations and various fees and multiple agencies they're dealing with. And of course, they don't get the services. So this myth that we're a low-tax environment is incorrect. And I think the World Bank has committed, in my view, exactly the Sin, where they've looked at these numbers and say, we only collect 10% or 6% of GDP in Federal government revenue, therefore the solution is to collect more. But it goes back to what we were discussing a little bit earlier about the social contract. The federal government is not using this money wisely. We're going to kick against those people who are asked to pay more taxes to support the over-bloated civil service or the high cost of governance
Timi;
With the undisguised corruption.
Andrew;
I mean, that's just said, I'm a little bit disappointed by friends in the World Bank,
Timi;
….…. and they always come and they're like, VAT should be 15 percent. That's a mother buying milk for her children. That's who you're targeting.
Andrew;
Yeah, I know. I wish the World Bank would stand up and say exactly what we were saying earlier, which is actually that we need to work on the social contract before you can even think about trying to raise tax revenues. You
Timi;
You mentioned a resource that I wanted to be able to link to. You mentioned that one of your colleagues [Taiwo Oyedele] or listed the six or seven productive taxes. I want to be able to put up that link. Is there a report or something or a tweet?
Andrew;
Taiwo is more vocal than me in this country, he is on television all the time.
Timi;
Okay. So I'll find out
Andrew;
He can more directly critical than I am. I mean, I'm a visitor and I'm Canadian, so I stay a little bit more polite. But he's very direct about some of these issues. But it's been the PwC position for years. Just six or seven taxes. That's 95% of the revenue. The rest of them should simply be eliminated if you actually want to make the country work. But of course, a lot of these taxes and levies are not to make the country work. They're for a particular agency. So it's got its own internally generated revenue, can do what it wants with it without really much accountability.
Tobi;
I want to talk about inflation a bit. I know you're trying to move further and further back from the label, but you're still an economist, last I checked. So inflation is obviously a huge deal in Nigeria. Inflation shock, especially on food, has pushed a lot of people and also into poverty. And earlier we talked about the exchange rate management. The World Bank - though the world bank has taken a beating on this particular episode - has said that the exchange rate regime is a significant contributor to
the current runaway inflation that Nigeria is experiencing. And that's something that the next government would have to deal with. Do you agree with that? And how would you really advise the next administration to deal with inflation? Should we just keep raising MPR?
Andrew;
Well, the thing is that I've said consistently over the years, the MPR is a little bit like Formula One, right? I mean, it's the driver in the car making those micro-adjustments. But if you put an F One driver into a 1950 F One car, it's only going to go to the street of a 1950 car. I mean, it doesn't fix any of the structural problems in the nation. We were saying earlier we need FX, and there's only really three sources in the short to medium term. One is oil and gas exports. Two is nurturing the diaspora. And three is growing the brain exports that are the service exports for people who remain in Nigeria. And I think they should work on all three. But I mean, the root cause, in my view of the absolute current crisis with the currency is allowing oil production to slip 2 million barrels a day when I came to the country 15 years ago, to 1 million barrels a day. And now they're trying to bring it back up. And it's just a tragedy that it was allowed to slip. If we got it back to 1.6, it would really go a long way to stabilize in the Naira. If we got it to 2.0, we probably start to see some appreciation in the Naira. But as long as the Naira continues to depreciate, we're going to see Naira inflation. And of course, the other aspect of this is just what's the real rate of inflation? So I was listening to [Professor Joseph Nnanna, chief economist of Development Bank of Nigeria] ,he's part of the government effectively, but he said, in his view, inflation is 50%. If you really look at what people buy in the baskets they buy and when people hear this 20% and then you hear about what people are paying in the market for products, 20% doesn't feel right. So, the only way we're going to bring inflation under control and get strength in Naira is if we improve our FX position. And given the short-term answer to that but I mean, we have to get oil production up. Why would you take your largest export-producing asset that you have control over? One? Because of course, the diaspora, it's their money, not the government's money. But I mean, NNPC is the government's money, it's the people's money. Yet you allowed oil production in the country to decline by more than 50% over the last year. What an incredible tragedy. Don't you think you should be paying attention to the asset that's kind of keeping the nation going and keeping Abuja going? If you live in Abuja and are a government official without the oil revenue, it's very difficult times,
Timi;
Aren't they driving them out, like Equinox, I know, is divesting? They essentially [drove Addax out], right?
Andrew;
Well, exactly. So, what's the reason for it? I mean, this harsh operating environment. No international oil company wants to be onshore in Nigeria because of the challenges that they face from many dimensions and they're the leaders in this to the federal government. It hasn't worked right.
Timi;
You think the PIA (Petroleum Industry Act), passing it [has not worked] it had been held up for as long as I've been back in Nigeria. I work at Gas, it's always been like, oh, just pass the PIA, pass the PIB. Under the previous Minister Petroleum, they chopped it up into four parts, and passed it through. The passing was supposed to herald a massive change and a sudden inflow of investment and to my mind, it hasn't manifested. So, I'm sure that's a topic in and of itself, but it's just interesting because everyone always said just pass the PIA and then everything will be fine.
Andrew;
Yeah, I mean I think it's kind of part of a broader thing that's going on, which is there has been a change in the last decade where at least the political leaders and the policymakers use the word enabling the business environment. So, they stand up in forums and say ‘’we need an enabling business environment’ and there is now recognition that we need private sector capital, which was not true ten years ago. So, in the Nigerian Development Plan that just came out, so the one that replaced the ERGP, basically says over the plan period we need 300 trillion naira of investment, which is good, and 85% of that investment has to come from the private sector. So, they recognize that which is good, but then they haven't made further connections that say under what conditions will the private sector bring that capital? And the way capital is being treated now, they're not going to bring it.
So, you look at what's happened with electricity. Anyone who took a chance on electricity has lost their money. Manufacturing, automobiles, and solar businesses. I had a solar business that failed. I mean, anyone that's taken a chance on Nigeria the last while has lost their capital e.g. Gokada we talked about. So, until the government really starts to make some progress on truly creating an enabling environment and a good home for capital, capital is not coming. So, any strategy that relies on capital coming in the next two or three years is bound to fail.
Tobi;
I may be wrong about this, but one thing I sort of observed, especially after the passing of the PIA and “restructuring’ of the NNPC governance structure. We seem to be moving towards the SOE model. So, like, maybe they are trying to turn an NNPC to Gazprom, Aramco, which I don't know, kind of sort of fit into what we have been doing in terms of development policy in the past six, seven years, which is this sort of big push Infrastructure projects, infrastructure-led development, of course at the expense……
Timi;
Sorry to interrupt you. Like when you talk about Gazprom or Aramco in particular, the level of human capital development that those countries put behind staff in their state-owned oil companies and exploration and energy companies cannot be compared to Nigeria. The only companies in Nigeria that are putting that kind of human capital development are probably Shell, and NLNG, I'm not even sure of TOTAL. When you talk to anyone in the industry this is where I work, right? The level of human capital development that you would need, you would need to go back 20 to 15 years in order to have the people who are at the current stage where they're senior enough that they should be able to do this job, to actually be able to do it right. So, energy is a red herring.
Tobi;
Yeah, I get right, and I completely agree. But given that fact it seemed to be the direction we seem to be going. As I said, I may be wrong, but it seemed to be the approach of whoever is running energy policy or the industry right now, which again, speaking of the show, is something that the next administration is going to have to deal with. So, my question then for Andrew would be how do you then restructure the energy industry, at least to get more exports, more FX, and investment?
Andrew;
Well, it is a national asset, the NNPC, and it's there for the benefit of Nigerians. I mean, Aramco, certainly the Norwegian equivalent, shows that it can be run very well. I guess what we've advocated in the past is - Aramco did the same thing, some listing maybe not of NNPC itself, but of subsidiaries. And that would do a few things. It would make the subsidiary subject to Nigerian stock exchange rules of governance, transparency, etc., and would give Nigerians a chance to directly invest in those companies.
You still want them to remain government-owned, largely government-owned. But you can imagine supporting 10% of, for example, NLNG, a very successful company. That direction of travel, I think, would really help. And it would really help clarify the relationship between operating companies that have shareholders, including public shareholders, and government agencies. An upstream agency, for example, and regulatory agency, which the PIB has tried to PIA, sorry, has tried to push forward. It would also help develop the capital markets in the country if people could buy a piece of some of the NNPC assets on that. I'm a real optimist, actually, about Nigeria. I think we're going to really be in a good place in two or three years because every day I sort of see progress. People doing things, despite all the challenges we've discussed. But there was a major thing that was in the press last week that people need to realize, I think is really good for the country, which is the movement in MOFI.
Attempt of the federal government of Nigeria to corral all the assets that it has in one place. And we wrote a paper maybe three and a half years ago now, on dead assets. And we said, look, a major problem in Nigeria is dead assets. The federal government of Nigeria has a lot of dead assets. So Ajaokuta steel and the refineries, national stadium, national theater, real estate assets in many states, including in Lagos. Lots and lots of things in Lagos because, of course, it used to be the capital. So this group was set up now to be the ones that are the stewards of those assets of this company. And it's basically private sector led, and has a proper board, has excellent management. So I was really encouraged by that and I think MOFI is going to make a big difference. Because they're going to take all these assets that have been dead and consuming money in Nigeria, consuming resources, and for each asset figure out a strategy, they can start to really create some value for Nigerians. So I think that's going to take us in the right direction. But of course, the NNPC assets fit into those government assets. I don't think they sit under the MOFI framework, I'm not quite sure. But also their value can be enhanced, but particularly by having, as I said, a little bit of like a partial, maybe 20% of the shares to improve the governance and transparency. That's the direction I'm going.
Tobi
Let's talk about the Central Bank for a bit. I don't know how much you want to say about that, because it's something that the next administration is going to have to deal with, which is issues surrounding the independence of the Central Bank. Central bank has been doing a lot of development financing over the years. And there's also the big issue of the Ways and Means, which is the fiscal, that no one really knows what to do with it and is basically being handed over to the next administration. So I'm going to roll two questions into one. Do you think that the Central Bank has been, should I say inevitably, politicized, at least for the next few years?
And secondly, on the ways and means issue right? A friend of mine, Seun Smith, raised a question that it's become a bit of a moral hazard problem. Like, if you securitize this loan at a government preferred rate of 9% or whatever, what stops the next administration from doing that? I mean, why go to the capital market or the private bond market to borrow at the higher rate when you can just have the CBN advance you credit, which you can then choose to pay back at whatever rate you choose in the future?
Andrew;
Yeah, I think that's a very good question. So starting with that issue, what is the central bank? Central bank has the right to create money. That's a pretty important right in society. And of course, governments benefit from that through when you create money, there's an economic term called seigniorage is from that. But the problem with it is, if you create too much money, you kind of destabilize the financial system, destabilize the currency. And in effect, that's what's happened. That's why there is this separation of powers, why central banks have inflation targets.
So the fiscal side of the house is intended to say, the way we can solve our we have to actually solve our problems, not through a monetary solution. And of course, if you go to the monetary solution, it's a little bit like an addiction, right? It becomes impotent over time, right? Because you get inflation and people don't want to hold your currency. And that's where we kind of got to. So I think there's got to be a reset. I mean, one thing it supplies, both within Nigeria and of course, around the world, is a question of confidence. So the question is, how long would it take if there was more of a change back to the kind of traditional independence of central banks? How long would it take to build up confidence? And I think you're exactly right. Kind of two or three years. I mean, I remember His Royal Highness Muhammadu Sanusi II in 2013 when he gave his last Bankers Committee retreat in Calabar, and CNBC was interviewing him, and they asked him, why did you start this intervention fund? And he said, well if not us, who? If not now, when? And his point at that point was Central Bank was the only one thinking about agriculture.
So it introduced the Agricultural Intervention Fund to move things forward. The problem is, unfortunately, in my view and others to do, central bank has become too involved in things that should be part of the other parts of the financial system. So we have intervention funds and MSMEs, I think we have intervention funds in the creative industry. We continue to have intervention funds like the anchor borrower program in agriculture. But at the same time we've had other institutions come up to Development Bank in Nigeria, BOI is doing very well. So by housing everything in the CBN, I think it really kind of clouds the way we kind of manage the economy in the country.
And of course there's a lot of complaints about a number of the intervention programs, even allegations about them essentially again being another conduit for corruption. So I think coming through this election cycle it would be, I think, very helpful for the country if there's some rethinking of how to return. Make sure the Central Bank is kind of focused on its core mandate. I mean, it has very good human capital compared to many other institutions. There are very smart people, there a lot of experience. The MPC, I think is very technically strong. So I think kind of coming back to that core mandate then not allowing the federal government to use it as a backdoor means to finance large fiscal deficits would really help the country. But for that to gain confidence, you'd have to do that for two or three years before people would start to actually believe it.
Timi;
Think about it realistically. Could you assume the office of president of Nigeria and close that door as the new president? Would it even be feasible? Yes, it's an ad hoc method of funding. Could you realistically shut that door off to yourself if you became president or would it just be a thing that you just had to do?
Andrew;
Well, remember, so much of our budget deficit comes from the foil subsidy. So if you deal with and of course you weren't borrowing so much, interest rates would come down. So you would also have savings there. So I mean there is a virtuous circle that says you're no longer borrowing for the foil subsidy. Interest rates decline, economy grows a little bit faster and takes the pressure off having to use this mechanism. And then can you trust yourself to do the 9% securitization one off? That's hard to say. Governments can't bind themselves. But I mean, to get out of where we're at today, I think probably the 9% securitization is the best.
Timi;
It’s ridiculous to ask, but where did this $50 billion that we're going to have to pay for come from and on what was it spent? It's a real (pardon my french) shitbugger to announce at the last hour as you're about to leave. Oh, by the way. Right,
Andrew;
But I mean, whether it's securitized or not, it's still a debt there. I mean, at one level, you could simply just….. Remember, central bank creates money, right? 1s Ultimately, the federal government of Nigeria, like all governments, can create money. So, I mean, it could just simply, in effect, repeat it and it owes the money to itself. So that's kind of like a metaphysical thing. The other officers, rather than pay 9%, they can just say, let's just wipe it off the balance sheet of the central bank and we'll pretend it never happened. I don't know, I think you could probably do that once and then not go back to it.
Will subsequent administrations be that disciplined? Yeah, I hope so. I mean, I think that depends too, on what the electorate does. The saying goes, you get the leaders you deserve. What's going on fundamentally in these situations is you're under a little bit of pressure. So rather than fix the problem, you kind of use the monetary tools to kind of skate through the problem. But of course, in that created more money. And ultimately, if you do that too much, you create inflation, all sorts of problems. But it's not just Nigeria that did it.
If you go back to the great financial crisis of 2008, and I had the privilege of leading the writing of PwC's understanding of the financial crisis back then. So we had the financial crisis. You had massive bailouts of wealthy people and banks and investment banks by the average person in developed nations. But rather than deal with the structural difficulties, central banks and their governments took the decision to effectively extend and pretend. So you remember all these years of ultra low interest rates, quantitative easing. Quantitative easing 1, 2, 3, 4. And of course, after it went through six or seven years, people said, oh, this seems okay. It doesn't cause inflation. Well, inevitably, the mathematics of it, you create enough money, you're eventually going to create inflation, first through assets and now through goods and prices. So it's not just a unique Nigerian problem to use these unorthodox methods to try to delay dealing with fundamental structural issues.
But I think if you had the right government, whether they did the Securitization or a total write off, if they were credible and doing the right things, they could move forward and they just need to do it through actions. But as I said before, what would really help this country is the Naira strengthening, which means getting oil production up, getting more remittances out of the diaspora, which means treating it strategically, getting more services exported, because it's hard to export physical goods in our environment. If you would get a situation where the next government continues to tap that well of unorthodox monetary policy, then you're heading in a direction of kind of total monetary collapse. At what point will people refuse to hold denier? There's a reason why cryptocurrency is a big deal here, right? Because people perceive the Naira rightly, is going to decline. So at some point they're just going to say, we don't want to use the Naira. We're going to dollarize. We're going to go some other direction. And I think we're getting potentially in that zone where the country becomes Dollarized if we continue to abuse the Naira.
Timi;
I have a question that I'm asking this question because you said that the crucial thing is to improve the FX position..[of the country] For non-economists, why is that so important?
Andrew;
I mean, I we don't need a huge amount of FX, but there are things that we need to function that we're not going to make ourselves. It's not a bad thing. I mean, there's this other school of thought of self-sufficiency, but you know, this doesn't exist in the world. No country apart from maybe the US. Can really be self-sufficient. And even if we wanted that as a goal, if it was feasible, it would take 20 or 30 years. We need airplanes from outside, we need computers, we need telephones. There are lots of things we can produce internally, building materials for example. But there's some things that we can't. So we need the FX.
Timi;
Why do we need more than we typically have?
Andrew;
Well, because the naira keeps depreciating, so we don't have enough. We don't have enough because we used to get net 20, $30 billion from oil and now we're getting zero. So we still have the same import needs and we don't have the dollars. I mean, if we didn't have the diaspora, I think the economy would effectively collapse at this stage, right? Wouldn't have the ability to import anything. The other thing that would really help our FX position, really help our country, is if we did a better job in education, we lose in health. Because we lose a lot of FX. People go abroad to be educated. They go abroad to get their health care, but particularly education, I'm guessing it's at least three or $4 billion. We had better education system here, we would stop hemorrhaging that. So rather than try to build a factory that does import substitution for some low value product made in China, we would actually better off putting that money in universities where people would say, actually, I can get a good education in Nigeria. And I don't have to have my parents scrambling around to get British pounds at 900 to the Naira, which is making them suffer. So in terms of import substitution, I'd rather see import substitution focus not on manufactured goods, but more focused on education and health.
Tobi;
That's a very important point. Yeah. So before you came online, Timi and I, you caught us having one simple conversation. He didn't want to bring it up, but I will. The scale of the challenges, I know we've talked about it again, being on the job and doing all these things, it's a totally, totally different ball game altogether. So in your opinion, settle this for us, who exactly do you think would want this job?
Andrew;
Well, people think they want the job, then they find out it's more complex. I would say one thing about being the president of Nigeria, and I have said this publicly before, Nigeria is a self-organizing people, the self-organizing nature. People in Nigeria are not passive. They're doing things all the time. So if I was giving advice to the next His Excellency president of Nigeria, I would say, you don't have to do everything. The federal government just needs to do a few things. And many of our problems stem from having too much complexity, too many programs. The programs then become sources of corruption or diversion to people to focus on that. Whereas if you just let states and individuals get on with what they need to do for themselves and did a few things around security, around bandwidth, not even power, I mean, I think power should be a state matter. For example. I don't think federal government would help enormously. It's not our problem. You do it. So I think that that would really help, because if you look at all the challenges we face and you think you, as the federal government, and ultimately is as excellency the president, have to solve all those problems, it's absolutely daunting. But if you think to yourself, actually, this 200 million Nigerians, incredible energy level, young people want to do things. They want education, they want to contribute to their communities. Let me just do a few things and let the 200 million people work together to do things. Individual states. I mean, it's been huge progress in the last decade in terms of state led development, huge progress in terms of people who have stepped up to solve complex problems even outside of the government. So I was with a very senior Nigerian the other day whose NGO does amazing things in Kano, for example, in health and education and micro lending. He's doing this with his group of people just because they're from Kano and they want to make a better Kano - and it's making a big difference. So I think if the President says, how do we work with all Nigerians to make it better? And we don't need to do so much, so, for example, we're not going to do electricity, I think the task becomes manageable.
Timi;
Well, I mean, thank you very much, Andrew Nevin, partner and chief economist PWC West Africa. In attempting to frame this discussion, which is an advance to the election. What should we really be discussing? Nigeria as regards the economy and next administration? Because I think a lot of people are trying to focus on making sure that they make the right choice.
Andrew;
Well, yeah, I think that's a very good question and I have to say, very difficult to last eight years. I was obviously in the country in 2015. I was very optimistic these eight years we would make real progress. There were three elements of the APC campaign at that time, which were corruption, security and the economy. I think a lot of Nigerians would say that there hasn't been any progress, so we've gone backwards on all three.
I think what it really highlights for Nigerians is you need to choose the right leader. Yes. And so this choice really matters. If you choose is the right leader, then, as I said, I'm actually quite optimistic. If the country chooses the right leader in two or three years, I think we could be in a pretty good place in this country. There's enough people trying to do the right thing around the country and with the right leader to go back to Lagos. His Excellency Governor Tinubu when he came in in the early 2000s, he had a very good team around him. At the time, there was a crisis, fiscal crisis, with the federal government not wanting to send money to Lagos.
So Lagos basically said it was responsible for its own development. And many of the things that you see happening in Lagos started with that group of people. And I think we can do that at the federal level. I disagree a little bit with the states don't know what to do. I mean, I think every state has its strength. I always ask people I bump into a meeting with what state has a governor doing interesting things that you wouldn't expect? And it's just interesting to hear about every state. Not quite every state, but many states where governors are trying to do the right thing on that. So I don't really accept that the federal government has to be responsible for states development. I think every state can figure out from where it's at now, what's the path that would make the most difference.
Timi;
Thank you so much for your time.
Andrew;
No, it's been a great pleasure. It's been an honor for me to be a small part of the Nigerian story for the last 15 years.
PICKING THE CANS DOWN THE ROAD