State of the economy

Nigeria’s Minister of Finance, Kemi Adeosun says the recession in the country will soon end as the fiscal authorities are working round the clock to reset the economy to put it back on a path of growth. CNBC Africa’s Esther Awoniyi spoke to her on the measures being taken to achieve this.

What do you say to people and economists who say it doesn’t appear that the fiscal authorities have a clear economic policy on how to get this economy out of the current recession?
ADEOSUN: Recession is technically successive quarters of negative growth. Actually, if you look at the trend of the Nigerian economy, growth has been slowing down consistently since 2012. We had one little uptake which was sometime around 2014/2015 which was largely driven by election spending. So really, this trend of negative growth has been building and it has culminated into where we find ourselves, which is the recession. Now when we started, we had looked at this situation and realized that the way to counter the negative growth which has now become a recession was to act counter-cyclically. That is the government to provide a stimulus spending to counter the threat of recession and we put together the budget as far back as December last year which had a fiscal stimulus; spend your way out of trouble. That was the plan and we have stuck to that plan and that plan was very clear. One, we were overly dependent on oil, two we needed to invest in our infrastructure because our infrastructure would do two things. i.e it will allow us spend but more importantly, it will unlock the competiveness in the latest opportunities in the economy and so that plan remains, we have not changed that plan. We are also looking at some of the processes and the procedures that slow things down for example, we were just working on a transaction with General Electric (GE) which will allow us to use the old rail system for freight but the bureaucratic bottle necks need to be sorted out so what we did about that was to put a multi-sectoral team together which included myself, the chief of staff, the minister for transport, minister for budget and planning, minister for environment, minister for power, sitting together with all the relevant stakeholders and trying to sort out the problem and get the transaction moving.

So, let’s talk briefly about the naira. The FX issue that we have continued to experience. Many economists believe that, the naira would have been better off today if it was allowed to float earlier. What do you say to that?
ADEOSUN: Well, we had indicated that we would move to a flexible exchange rate as we had recognised that we needed a flexible exchange rate and the problem with the naira is that the source of 90% of our naira is oil and the price of oil has fallen but there is a shortage of naira but more demand for naira. Pent up demand and current demand because our economy is largely import driven. So, we were always going to have a foreign exchange problem and I think the monetary authorities were trying to manage it in the way they saw fit but at the beginning of the year, the president did say we were going to move to a flexible exchange rate. ‘Would the naira be better had it floated earlier?’  I am not sure how to answer that question other than to say that at the moment, we still have two rates. So, I think rather than answer that question, what I would say is that we still need to make some necessary adjustments to be sure that that spread is narrowed so that you have a true price discovery for the naira. So the question I think that economists and investors are asking is ‘what is the true price of the naira? Is it the parallel black market rate or is the official rate or is it somewhere in the middle and how do we get that price discovery resolved?’.  That’s the issue that I think the monetary authorities are working on and I believe the monetary policy committee has a meeting soon and I am sure it is something they will be looking to address.

As finance minister, what kind of adjustments would you like to see the monetary authorities take?
ADEOSUN: Our fiscal policies have always been to stimulate the economy and much of what we were doing was driven by debt. We were going to be borrowing. We had said that we would borrow domestically and borrow internationally which is what we are doing. So, what hurts us more from our strategy is the interest rates. We need lower interest rates because of course when we are borrowing, and interest rates go up, it increases our cost of debt servicing and reduces the amount of money that is available to spend on capital projects. From our perspective, the alignment we’d like to see is that increase that happened at the last MPC to be reconsidered and I think the rationale for that is that, the attempt was to manage inflation and the tradeoff for the economy right now is; what’s the bigger problem. Is it growth or inflation? For me it’s growth. I would rather seek growth. We can manage inflation but you know, you have to have a tradeoff and I think for us at the moment in the Nigerian economy, growth is the most important thing Let us go for growth, let’s stimulate the economy.

It is interesting you say all this because we know that the monetary authorities obviously always look to the fiscal authorities first to drive growth and I have heard the Central Bank Governor say on several occasions that every time they keep having to dig deeper into their tool box to get policies that could keep the economy afloat but they keep saying that growth has to come from the fiscal side.
ADEOSUN: Well, the fiscal strategy as I said is very clear. From the beginning we said we had to move from consumption led economy to an investment led economy and we need the investment to drive the growth that we need. I don’t think it’s a tradeoff between monetary and fiscal. I think what it is, is that there’s got to be an alignment which both complement each other. I feel that’s the solution and I’m not sure whether or not they throw the ball into our court, I think what they are trying to say is that they are trying to do what they can do but we are of the opinion that the fiscal strategy is clear. The fiscal strategies we need to invest and grow this economy and so monetary, and that’s the long term strategy.  Remember, we have the medium term strategy which shows where we are going for the next three years so the monetary will align with that and adjust to accommodate that.

Let’s talk about the cabinet retreat on the economy that was held recently with the ministries, department and agencies, the economic team, the president and the vice president there were talks about having to ensure that ministries, departments and agencies are all aligned in terms of planned targets and budgetary outcomes. Talk us through what the key outcomes were.
ADEOSUN: It was an interesting interface because we had a number of presentations from various economists and then we moved to groups and began to really deep dive into what the challenges are. I think from the economic perspective  the big outcome is just reinforcement that; the strategy we have put together is the right strategy and we have got to stick with it but we’ve got to monitor it, we’ve got to manage it, we’ve got to make sure that the expected outcomes are delivered to the people.

At that meeting also, there were economists and financial experts. It’s not the first time that the fiscal authorities are meeting with these experts from the private sector and we know that there has been a lot of talk about how the federal government perhaps does not listen to the experts but we have seen you engage with them now. So, what is going to be different going forward?
ADEOSUN: I think that perception is a wrong one and let me correct it. We have always engaged with the private sector; always. It will be very foolish of any member of government to sit down in your room with civil servants and begin to design policies. That is not the case and I think this one has been misinterpreted. Governments all over the world consults with private sectors but they consult with them quietly. You don’t have a situation were certain member of businesses are associated with a particular administration, that is wrong but you do consult with them. The same names incidentally that were on the economic management team before, we still consult them. We speak to them off record, we speak to them sometimes on record, they come and address the economic management team but it’s not a formal ‘’you are part of those making policy consultative body’’ every government does that by the way and usually, it’s done quietly and that’s the best way to do it. You consult with people quietly; you get subject matter experts that you speak to on policy issues before you design them. So, engaging with the private sector is not new. The problem is people are used to seeing it very formal where everyone sits together.

It is an informal engagement and that’s the way it happens all around the world but when it’s formal, you’ll see them. However, those same economists that you saw, we have probably met once a month since we have been in office but they won’t tell anybody and they really shouldn’t tell anybody because they are the think tank, they are the people sitting behind government and helping the government formulate policies. They are also the people that you bounce ideas off. So once people know who they are it’s very easy to influence government policy. You shouldn’t know who the government is speaking to, but we have formal engagements with the Manufacturers Association of Nigeria (MAN), Nigerian Economic Summit Group (NESG), and they are televised and covered so I think that it’s just a different style that has been misinterpreted. People just think, “Oh they’re not engaging.” No! We engage fully and we’ve engaged fully at every stage of the process from the Lagos Business School, to the CEOs of Banks and Captains of Industry. Of Course! We engage them fully

I want us to talk about spending. The Government’s spending in 2017. You are looking to review the Fiscal plan in 2017 and also to reprioritise spending, tell us about that.
ADEOSUN: Well, we have a medium term strategy already in place for the next three years and as you said the fiscal strategy remains. It is moving from a spending or consumption driven strategy to an investment for growth strategy so we’ll continue with that. One of the big things that will change in 2017 is that we have a number of platforms that we’ve put together that are more along the Public Private Partnership (PPP) line and that’s because we’ve had a chance to analyse our infrastructure deficit, and its very clear this is necessary. Even with hugely improved allocations of capital between the time the budget was passed which was May and now the gap persists. We have spent over N420 billion on capital alone. Today we will release another N350 billion for capital. We have spent more than what was committed last year in four months. We’re going to continue at that pace. We’re raising money so that we can keep the money pumping into the economy until we start to see the growth that we need.

Be that as it may, we’ve looked and analysed the infrastructure deficit very carefully and realised that even the increased allocations to capital projects, the infrastructure deficit is such that the government can’t do it alone. So we’ve consistently said that we’re looking for opportunities to partner with the private sector. We have a number of PPPs and Foreign Portfolio Investor (FPI) type platforms where the government will contribute some of the money and then the rest of the money will be sourced from the private sector, and we will have user fees to actually pay for them particularly in the area of roads,where it is very clear that the deficit is huge. People say that when you say the user pays that means tolling the road, but my argument is this; when you spend six hours on a journey that takes an hour you’re paying anyway. You’re paying in terms of the petrol, you’re paying in terms of your time, you’re paying in terms of the wear and tear on your vehicle, so why not just pay a toll and do the journey in an hour. I don’t think the Nigerian public have a problem with paying. In fact we pay very heavily for everything now. It’s just a different kind, of more formalised kind of paying so what we’ve been doing is we’ve been working with the National Pension Commission (PENCOM), the Sovereign Wealth Authority, and the Debt Management Office (DMO) to structure instruments that will enable us to raise infrastructure bonds specifically for toll and tollable projects and that will considerably increase the amount spent on capital to complement what the government is doing. It will also bring private money in. We’ve had quite a lot of interests, both locally and internationally to come and invest in such instruments, and we have a similar platform for housing. We’ll be rolling that out soon.

Obviously, that is a lot of spending. What are the expected effects on the domestic market?
ADEOSUN: Well, our sense of the domestic debt market is and I’ve always been of the view that the government has to come out of it more. One of the things we are working on is how we restructure our inherited debt portfolio. The debt to GDP ratio is comfortable but the debt service ratio is very high and that’s because most of the debt that we owe actually matures or is repaid in the next two years. Now infrastructure projects are long term endeavours. There is no point in borrowing short for long projects. It will take time for some of these projects to payback. Take your standard railway project. It takes 30-40 years to get payback from railway. For roads, it takes 30-40 years as well. There’s no point in borrowing short term, issuing treasury bills and driving up the treasury bill rate to fund the long term projects so one of the things we’re working on with the DMO is how do we restructure this debt portfolio come out of the short term, look more to the international markets and raise long term money for long term projects.

Now you’ve talked about the fact that you want this economy to be an investment led economy and we know that all the monies that are going to be borrowed in 2016 are going to be borrowed for projects, what are the assurances that these projects can pay back the costs?
ADEOSUN: It goes back to the question, what is the role of the government? We provide public goods. If I build roads, that’s the job of the government. That’s the payback. The payback comes in taxes. The payback comes in improvements in business. The payback comes in unleashing the competitiveness of the Nigerian economy that drives growth and business. The payback is having fewer Nigerians unemployed. For me the payback is that if we drive the economy and there’s growth there’ll be returns in terms of taxes, in terms of reducing the burden of unemployment, and in terms of improving the quality of life of the people. That’s one of the jobs of the government. The government has to provide infrastructure. We can’t just look at it like a private sector endeavour. We can’t think, “Okay, this project must pay back this amount.” Infrastructure does not work that way. Infrastructure is really the oil that drives the growth of the economy and the payback may not be direct. The payback may be indirect in terms of the growth of the economy, the opening up of some areas, and unleashing certain industries. From the growth of those industries there’ll be payback.

Still on financing we know the government is also at this time preparing a $1 billion Euro bond, tell us more about that, the kind of rates that we’re looking at and when we can put this deal together.
ADEOSUN: The procurement process for the appointment of advisers closes next week and I’ve said to the DMO, “let’s just quickly appoint so that we can hit the road”. We have already started the work. We started reaching out to investors and talking to investors with a non-deal approach, where we just began to speak to investors around what we are doing, and we already have strong indications of interest. And indeed we already have commitments. Even though we weren’t doing a deal we already have commitments to our bond offer so we’re very confident. It’s just a question of pricing and of course we’ll try to price as keenly as possible. The international markets are awash with capital. They’re awash with liquidity as we’ve seen in the Ghana deal so I think we’ll do very well in the market. We believe we have a very compelling economic story. We’ve been working with the international community for a year now. Nigeria’s macro-economic picture has weakened slightly so we expect that our ratings may be downgraded a little but I don’t think that this changes the outcome of the Eurobond Issue. I think that before the year is over we’ll have closed.

So you don’t think international investors will demand more assurances given our current macro economic situation?
ADEOSUN: Absolutely not. If anything we’ve seen a strengthening in the trading of our bonds. You see, Nigeria remains a compelling story. We may be in recession but we remain a compelling story.

But aren’t there uncertainties within this market that may make international portfolio investors nervous?
ADEOSUN: The portfolio investors like the Eurobond are investing in dollars so it’s a dollar trade. And as I said we already have commitments for the Eurobond even without asking we already have commitments. So we’re very confident around raising a billion dollars. What I’m more interested in is looking at 2017. How do we fund the 2017 budget? We’ve started to work on that. We‘re looking at a mixed strategy of debt and asset realisation. I don’t have any fears about the Eurobond. We don’t get that impression.

When you go out to meet international investors what signs have they given that they are interested?
ADEOSUN: People understand what we’re doing. People understand that we’ve been honest about our challenges. That we have a credible strategy for working on those challenges and that those strategies are beginning to yield results. They see that we’re clearly serious about reducing our recurrent expenditure. They see that we’re clearly serious about increasing international investment, transparency and fighting corruption. They can see that if Nigeria just does what it says its going to do, which is invest in infrastructure and capital, the economy can be turned around.

The potential has always been there. The problem is has always been that we never done what needed to be done. Which is sort out the infrastructure. The infrastructure is our biggest problem. Ease of doing business is also clearly a problem, The Minister of Trade and Investment is working on that. There’s a presidential initiative on the ease of doing visas. We’re actually working on all of these bottlenecks around everything from getting visas to getting business permits that’s what we’ve worked on as well. We still think Nigeria is a very compelling story.

Back home to the fiscal authorities, We know that you have a huge personnel cost – over N150 billion on salaries every month, is this a burden that the federal government can continue to carry?
ADEOSUN: I would answer by saying that it actually started at N165 billion and we’ve brought it down. We continue to bring it down with an initiative that we call the Continuous Audit, because when we came in there were no controls. There are still some opportunities to bring that burden down further. I think that at a time when unemployment is one of the biggest problems Nigeria faces we have to live with that salary bill. The question is what is the value being delivered for that money. The questions are how do we get civil service reform? How do we get public sector reform? So even if we’re going to employ all of these people, what exactly are they doing? What value are they adding? Are they being deployed to the area of greatest need or are they just sitting in offices doing nothing? I think the authorities have been challenged and I think there will be some restructuring and new initiatives that will make that money work better for us. If you’re paying N165 billion on teachers and your education indices are improving then we don’t have a problem. If you’re paying N165 billion and all of it is going on health and midwives and the mortality rates of expecting mothers and infant mortality are going down and your indices are improving then we don’t have a problem. If you have more social workers then we don’t have a problem. So the question has to be what exactly are we spending money on. What is the quality and then what is the deliverable? And if we see that certain agencies are over staffed do we need to redeploy them and move them in other directions? This is the sort of narrative being discussed.

And finally honourable minister one last question what keeps you up at night?
ADEOSUN: Work. In a single word.

What part of the economy, because you’re dealing with so much.
ADEOSUN: I’m not worried about any aspect of it. My only fear is can we move quickly enough? That’s the only concern I have. What keeps me up at night and makes me send texts at three O’ Clock in the morning is asking, “Have you done this?” “You! You’re meant to be doing that where is it?” I’m in a great hurry, I think there’s a sense of urgency around what we’re doing. I think there are things that we could do a lot faster. So that’s what keeps me up at night firing off emails. I really just want to get this thing moving because we can see clearly the payoff of the few initiatives that we’ve done. So we start to think, “What if we start to consistently do things properly? What if we remove the corruption, we remove the wastage and start to have proper value in our spending? What could Nigeria do?” So that’s the question that keeps me up at night. It’s the potential of Nigeria and the real desire to see the Nigerian economy really fire. I don’t think anybody has really seen this economy fire. I don’t think anyone has seen this economy go into fifth gear. We’ve always been on third gear. Oil and then we leave everything else. It’s always been either or. Now we’re saying AND. Let’s have oil and manufacturing. Let’s have oil and infrastructure. Let’s have oil and agriculture. And I think that’s when the economy will really begin to show what it can do.