‘Mitigating risks necessary for economic growth, tackling recession’
With the current economic recession, what policies and advice would you give the Federal Government to help tackle the recession?
It is common knowledge that one major issue that led to the recession in the country is the fall in both volume and price on sale of crude oil as the US stepped up shale production leading to a glut in the market. This has further been exacerbated by restiveness in the Niger-Delta from militants. The government needs to adopt both short term and long-term strategies to come out of recession.
In the short term, government needs to put in place structures, which would ensure all eligible taxes are collected. That is, the need to widen its tax base and cut taxes to encourage investment and boost consumer spending. Tax breaks should be given where there is certainty that the extra funds will be spent/re-invested leading to increment in productivity
Government needs to adopt an expansionary fiscal policy. The government needs to spell out the exact course of actions it wants to embark upon to reflate the economy. For example, repeated referrals are made to capital projects as a way of getting out of the recession.
Capital projects are vague. The process of operating the TSA needs to be efficient. Salaries need to be paid to civil servants as and when due. Projects need to be funded as and when due. Contractors need to be paid as and when due to enable them to meet contractual and funding obligations.
The combined effort of government spelling out exact policy decisions, and implementing them would influence the system to spend. Right now, people are not spending. No one is sure what the government is going to do and the government is seen not to be spending. About N3trillion was recovered through the TSA but there has not been clarity on the re-injection of these funds to the system. The government needs to boost confidence both by its actions and by spending. Naturally markets are data driven but sentiments also play some role. The government must be seen to be speaking with one voice, across all its organs.
If banks are the medium of transmission of funds in the economy, policy actions should be directed towards supporting the transmission by banks. Banks do not have public sector funds to lend and of the available private sector funds, over 50 percent is locked up either in government securities and CRR. This limits the available deposit to actually lend to the real sector of the economy. This should be reviewed. Government needs to itemise specific actions and drive performance. The ability of the populace to identify with such would enhance confidence to re-initiate growth and investment.
As a Risk Management practitioner, what are the risks involved if the government sells some of its national assets?
A major challenge for the government now is adequate funding. However, if they need to sell any national asset, would selling the goose that lays the golden egg be an effective strategy?Furthermore, the major risk here is misapplication of sales proceeds.If some assets are actually sold, do we have the structure to ensure the proceeds are utilised for the purpose it was meant for, given previous sale of national assets have not yielded the desired results.
Presently, banks are suffering from liquidity problems since the emergence of TSA and other monetary policies that are reducing their income. What is the position of risk managers in steering them to earn more?
The withdrawal of government funds from banks following the implementation of the TSA has definitely impacted the profitability of
most banks as the withdrawal created gaps, which had to be covered at higher costs. To earn more therefore, we have to do more business, raise more deposits and deepen the deposit base. The financial inclusion drive of the government being supported by the banks is a start to ensure everyone is banked while at the same time increasing available deposits for lending.
Going by a survey conducted in 2010, we had only 36 per cent of Nigerians being formally banked, this translates to about 62million today with a population of over 170 million. This shows the capacity to delve deeper in deepening financial inclusion. Where this is successfully done, banks would have more capacity to increase earnings.
Secondly, banks are using technology to drive earnings through improved service. Most clients do not want to come into the banking hall, but conclude their transactions from the comfort of their homes on their mobile devices among others. The ability of a bank therefore to provide an array of technology driven self-service options therefore increase its earning capacity as fees are charged for these services. This would also translate to more clients opening account with your bank, solving liquidity problems, as these account will be funded while earning fees on transactions executed.
Why has it been difficult for banks to lend to the real sector? Are risk mangers not prepared?
The economy of a nation comprises four interrelated se tors operating to ensure that resources are best utilised in the production of goods and services to maximise the welfare of its citizenry. The sectors are: the financial, fiscal/government, external and real. While all four sectors have important roles in the welfare of the citizenry, the role of the real sector is particularly significant and strategic. It is the sector responsible for the production and distribution of goods and services necessary to meet the consumption demand of an economy. The Real Sector constitutes more than 50 per cent of the country’s GDP.
Banks have been constrained to lend to the real sector for the following reasons; Economic downturn, which has affected economic activities, cost of doing business and consumer demand has impacted on the profitability of businesses. This makes it difficult for banks to lend to the real sector which of course accounts for over 50 per cent of private sector lending thereby exposing banks to the risk of default on repayment.
This is evident in situations where the government is finding it difficult to meet its obligations to contractors who have borrowed from the banks, its civil servants who have taken loans from the banks among others.
On the other hand, when subjected to regulatory review, provisions for losses on non-performing loans are taken against profit and capital. So banks are cautious, because we also have shareholders we are answerable to. Growing NPL figures – Average industry NPL has been on an increase since 2014, breaking the regulatory limit of 5 per cent to 10.5 per cent in 2016. Of the N13 trillion lending provided by the banks, an estimated N649 million were non-performing in 2015, largely due to the dwindling state of the economy. This worrying rise has forced banks to tighten their risk appetite.
It is apparent we are in recession. How did we get here?
Yes, Nigeria is currently in a recession. Economists have told us that an economy that experiences a decline in trade and industrial activity for two consecutive quarters as measured by a fall in GDP for the same period is technically in recession. The Bureau of Statistics revealed that GDP grew by -0.36 percent in Q1 2016 and -2.06 percent in Q2 2016.
Our failure to diversify the economy and sources of government revenue particularly in Dollars, and our failure to prepare for the ‘rainy’ day are the reasons why we are in a recession. Lower revenues from taxes account directly for recession globally. With declining output and rising costs, profits will definitely decline resulting in a decline in corporation tax. Now, a key element of the government’s strategy for initiating a recovery is to boost its tax revenues. This can only be achieved by increasing the tax net and eliminating leakages. If nothing is done, PAYE will reduce further as wages decline or stagnate, VAT may also decline if activity continuesto decline. So, we are in a precarious state.
The country’s debt stock will increase as government seeks to borrow heavily from local and international markets to spend its way out of the recession. With rising debt comes a high debt servicing cost, thus reducing the proportion of government revenue available for recurrent and capital expenditure.If we do nothing, we will be in recession for a prolonged period which will have significant implications for the country. The longer we are in recession, the more likely the country will implode – there may be civil unrests, which could worsen the already precarious political and ethnic landscape.
What are measures that would help tackle this problem?
Many economists have already proffered meaningful and workable solutions. The problem with Nigeria is not in the ‘How’ but in the consistent implementation of these ideas. We must have the political will to not only implement but to stay the course when things appear to become better.
Yes, we need to spend our way out of the recession. Government needs to raise finance to fund significant investments in infrastructure –investments in rail, power, roads and housing are critical to coming out of the recession, as these investments have the greatest potential to impact economic activity, create jobs and more importantly put money in the hands of a large majority of Nigerians to drive consumption.
The problem however is how will the government raise the finance itneeds to stimulate the economy. There is talk of borrowing (government wants to borrow about N2.2 trillion to fund the deficit), taxation (increasing WHT, VAT and the tax net), and recently asset sales.
On Asset Sale, I believe it is an option that is worth considering. Saudi Arabia announced in April of this year that it plans to sell some of its assets in the Oil industry and will use the sale to fund the establishment of a Sovereign Wealth Fund. The country plans to raise about $2 trillion from its sale of shares in the state owned Saudi-Aramco with the sales commencing from 2017. The plan is for the government of Saudi Arabia to then invest the fund in acquiring strategic assets in international markets. This will help the country to diversify its revenue base from Oil to include revenues from its strategic investments.
So technically, if Nigeria adopts a similar strategy, I personally think Nigeria will be the better for it. First, the country will raise the funding it needs, and it will be able to calm the foreign exchange markets as a result of the confidence that such an inflow will have on investors.
Secondly, it will be able to fund strategic investments in infrastructure, which will boost economic activity in the short to long term, and finally, some of the inflow raised from Asset Sale can be invested in strategic investments (within or outside the country) thus helping to diversify the revenue base.However, we must note that in Nigeria, sale of the country’s assets is always an emotive issue due to the corruption and lack of transparency that has characterized such sales in the past. People believe generally, that the country will not benefit from such sales in the long term, as it will only end up diverting money into private pockets.
The expectation is that the inflows that will be raised from such an exercise will substantially be diverted through inflated infrastructure contracts and delivery of low quality infrastructure.There is a fundamental ‘trust’ issue and the managers of the economy need to tell us what assets will be sold (perhaps, we start with non-performing assets), why they need to be sold, how the monies raised will be applied, and the long term benefits for the economy.
In my opinion, if local assets are sold and a substantial proportion of the proceeds are invested in non-oil strategic assets (possibly in international markets), as in the Saudi Arabia model, then Nigeria may stand to benefit from such sale in the long term as it will be one of the ways of diversifying the revenue base beyond the current focus on Agriculture and the Solid Minerals sectors.
How do you rate Nigeria in terms of risk management? Is the country proactive enough?
We do risk management in Nigeria in silo. The banks have a way of doing its own risk management. Every institution, especially the financial institutions do risk management. I have also advocated in the time past that Nigeria should have a national risk assessment centre or a national risk institute and then, may be all the ministries, departments and agencies should begin to have department of risk management that would identify and assess measure and then mitigate and even report risks for the government before project or investments are done but I am not sure we have that systematic process but if you look at last regime and the regime before, we had a sound Minister for finance who was clamoring that Nigeria must save and they introduce the sovereign wealth fund and the excess crude account and so on and savings were made until some governors went to court to say the idea was unconstitutional to save and she kept saying that we needed to save excess of what we are making from the budget benchmark and they went to court. Actually they won because the court must interpret, using the nation’s constitution.
The constitution of Nigeria does not state that Nigeria should save money resulting to excess crude, so they won and what the government did was to share the money to the governors and kept the one that belongs to the federal government. That is risk management that the minister was trying to put in place that we should not be spending all our money. All the excesses, let us keep some but politicians do not know anything about saving, they do not know anything about diversification, they do not know any thing about risk.
It is now that people are shouting diversify but do we have the political will to diversify. But looking at president Muhammadu Buhari, he has the political will, looking at him but a one man does not make up the government, he has a cabinet and I personally do not have confidence in some of the people in that cabinet. So how do we manage risk in Nigeria, we do not have systematic way of managing risk in Nigeria so it is something that has to come in the forefront.
Like I said in the ministries, in the departments and in the agencies and then we can have a national risk assessment centre where we subject all our investment decisions, all our projects, all our construction, everything right there we analyse the risk and know the kind of risk we are entering.
Nigeria does not have a way of ascertaining its risk appetite as a country. So the practice of risk has to be systematic, and it has to be a process and it has to be deliberate.
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