Boosting growth in Nigeria
While you were the CEO of AMCON you were obviously trying to help not just the banking sector but quite a few businesses dealing with very difficult times. Now, times are even more difficult so before we get into a conversation around AMCON’s activity I want us to get your perspective on the Nigerian economy today, the challenges facing businesses and maybe add your voice to the many suggestions as to the way out for this economy.
CHIKE-OBI: Well it’s a pleasure to be here again. I have not had any public appearances since I left AMCON over a year ago. There are obviously a lot of opinions, and a lot of suggestions. I think they all mean well but this situation we are in at the moment has been coming for a long time. It was not the 16 years of PDP administration. It has been coming for over 30 years. We have not done things right for over 30 years, and for that we must all agree that we are to blame. All of us that love foreign goods, and send our children abroad to study instead of building better universities here, we are all to blame. I think that we should now focus on the solutions. The solutions are fairly dramatic. It is nice to hear the Minister of Finance, Kemi Adeosun say that she’s stimulating the Nigerian economy with 350 billion naira, but that’s 2000 naira per Nigerian citizen. It will have no impact. We need to start thinking bigger, and start dealing with the problem from what mathematicians call first principles. The answers while obvious are very large, the stimulus required is also very large, and to get that stimulus we will need to be creative. We should stop trying to cut down the iroko tree which is Nigeria with a pen knife. These low measures will not solve the problem.
Asset Sales has become a big topic now but they are largely irrelevant. Even if we got 15 billion dollars from Asset Sales it is not going to solve to Nigeria’s fundamental economic problem which is that we must become an industrial nation. 15 billion dollars won’t do it. If we get the 15 billion dollars, we’ll solve the problem for a year and then the problems will continue. It is like somebody who is out of work and has a child in school not being able to pay the school fees for one year. So he or she says, “Let me sell my car so that I can pay the school fees.” That’s not the answer. The answer is how I can get myself gainfully employed so that I can afford to pay the school fees over the next 15 or 20 years. It is not, “Let me sell a car today and deal with this year’s problem.” I don’t want to get myself engaged in the argument of asset sales or no asset Sales. What I really want to do is focus on how we get Nigeria from where we are to a major industrial nation.
So let’s talk about that because we need that long term outlook in the debate now. As you mentioned, it isn’t going to happen overnight so what are the big decisions that you think we have to make now?
CHIKE-OBI: We have to manage around some key variables. To me, the key variable that we must manage around and the big mistake we have made is poverty reduction in Nigeria. How do we accomplish significant poverty reduction? Since 1991, Nigeria has reduced poverty by a mere six percent; we still have close to 50 percent of Nigerians in poverty. And we define it as those living with roughly under two dollars a day. How do we reduce that? If you look at all other countries, China has reduced theirs in that period by 77 percent, and we have the numbers for a few countries. The number that is closest to ours is Pakistan. Pakistan has done the worst but they have reduced it by over forty percent since 1991 because they took a long term view. The single thing you that all these countries have in common is that investment in infrastructure cannot be less than thirty percent of GDP. We need to get our investment in infrastructure, public and private from 9.9percent to thirty percent and that involves spending thirty trillion naira a year on infrastructural development for the next five years. I think we are aware of the problem but I think that people don’t want to deal with the institutions and people that could solve these problems.
How do we raise that type of money to put in infrastructure? There’ve always been concepts around co-investing – people coming on board with the government bringing private capital. We’ve seen a little bit of that with the sovereign wealth fund, but clearly not on the scale that we need. So what’s the best way forward in your view?
CHIKE-OBI: In the last 30 years, Nigeria has invested roughly 9.9 percent- they call it ten percent but I like the nines because they are less dramatic. In infrastructure spending, it is called fixed capital formation and it includes private and public infrastructure spending. Of that, the Nigerian federal government and states have invested roughly ten to fifteen percent and the rest of the 85-90 percent has been invested by the private sector. That ratio is skewed. In a developing country like ours it should be more like 30 percent Government and 70 percent private sector, so the question is how does the government find a steady percentage to invest in infrastructure every year? With the numbers I am quoting that is 9 trillion a year and there are ways to do that. From the government side, it involves fiscal and monetary policies. Fiscally, it involves more efficient tax collection, not higher, but more efficient. Higher in a recession is unwise. It also involves creating a different way of budgeting; what I would suggest is that they have two separate budgets. One budget should be for recurrent expenditure for which there should be absolutely no borrowing. We should not borrow to pay salaries. The second budget should be for capital expenditure and that should allow up to a 10 percent deficit. Right now the law says three percent, so we will need to change the law so that it allows up to ten percent borrowing. This will get us about five trillion naira on the fiscal side.
Do you think that borrowing should be more local than foreign or should it be an even split between the two?
CHIKE-OBI: I have a religion about borrowing. If your revenues are in naira, borrow in naira. And if your revenues are in dollars, borrow in dollars. If your revenues are in naira and you borrow in dollars, you will eventually have a problem, which many people are having now.
Can the local markets supply enough cash for that?
CHIKE-OBI: Yes. For example, on the monetary side the CRR is too high.
So we need to ease?
CHIKE-OBI: When people tell you that if you raise the rate it does not affect credit, and if you lower rates it does not affect credit, I say to them, “why raise it in the first place?” You cannot raise something and it has one impact and lower it and it does not have the opposite impact.
Many that argue for the higher rates are looking at the impact on inflation. They are trying to take out money from the system and reduce the pressure on the currency. I think that’s what the argument is.
CHIKE-OBI: You have to ask yourself why there is inflation. Inflation that comes from capacity constraints for example is different than that which comes from currency adjustments. If you have inflation that comes from capacity constraints, the answer is actually to invest in capital, because that creates more supply. So when people talk about inflation in Nigeria, our inflation is caused by the fact that we are simply not a productive nation. If we are not a productive nation and we are not competitive, our currency will continue to lose value. It is not the oil prices. It is the fact that our country cannot produce things that are competitive globally, so after a period of time, no matter where you start, your products are no longer attractive at the price and quantity you produce them in. You must really deal with the fundamental issue at hand and that is; how can we as a nation with all our national resources, people, and waterways with the most beautiful coast line in Africa become more productive? That is the issue I’m addressing and so if we have to pay for a short term rise in inflation let’s pay for it, but that’s the price we’ll have to pay.
If you go on the monetary side like I was saying and you lower Cash Reserve Ratio from 22.5 billion naira to 10 billion naira which would be my target and of course you will do it over a period of time, you will get close to three trillion naira on the monetary side available for lending. If you lower interest rates for example – I think the Monetary Policy Rate (MPR) should be at eight percent. If you go to eight percent on MPR it allows the government to service almost twice as much debt or it reduces the debt cost. Even if we don’t increase our debt and that releases approximately one trillion naira to the government, either in savings from debt servicing or in the ability to borrow more at the same difficulty of debt servicing. We can’t stop inflation by raising rates, it is not going to happen. What you will do is you will squeeze things. People won’t be able to buy foreign goods and because we’re not productive, people won’t be able to buy local goods in any case. Let’s deal with productivity, let’s deal with creating companies, let’s deal with creating value and then ultimately inflation will come down.
There’s a sense that there has to be a framework and a fiscal policy that will stimulate the investment that you are speaking of because if that is not in place then there is a real risk that if they allow the rates to come down, there will be an attack on the currency.
CHIKE-OBI: I don’t think there is an attack on the currency, I think that it is an unwise mindset to have that people are attacking the currency. We’re expecting foreign investment, but I tell people if I went to my wife tonight and said, “I need the thousand dollars that I saw you hide in the cupboard last week. Please give it to me and I’ll give you 313 thousand naira for it.” She will laugh at me. If my wife will not give me dollars at 313 naira, how will a foreign investor give Nigeria money at 313 naira? Those rates have to come together. They have to come so close together that foreign investors feel they can invest. And contrary to people’s beliefs, foreign investment plus remittances in the last five years have been close to revenues from oil sales. So when you do things that discourage both foreign investment and remittances at the same time as your oil revenues are declining, you are doubling down on your problem. You must make it very easy and comfortable for foreign investors to invest in Nigeria. They are not our enemies. Foreigners are agnostic about profits. If you make it easy comfortable and profitable for them, they will come, and if you don’t they won’t. No amount of talking and no amount of road shows will change that. I lived with them for many years, and right now they’re not going to come.
So you think with the current state of the market and the current state of the currency market there is no way that we can get significant flows from foreign investors and currency investors?
CHIKE-OBI: There is no serious institution abroad with a compliance department that will bring money here at this time, in any volume. It’s not going to happen.
Let’s look back at your tenure as CEO of AMCON. What would you say was the biggest challenge for you in terms of trying to fix not just the banking sector in terms of providing relief but the companies that you inherited, the thousands of loans that AMCON had to deal with?
CHIKE-OBI: Let me start by saying that AMCON was set up for a very good reason and I defined the mandate of AMCON quite narrowly. I never had the grandiose idea that we were going to save the economy. I thought the idea was to make sure that the depositors in the bank didn’t lose money, that the banks were recapitalised so they could continue with their activities and then in the process recover the non-performing loans we acquired at a minimum cost to the stake holders: the government and the banks, because the banks were paying back the forsaken funds.
Do the best you can recognising that these are loans that the banks had tried to collect for many years and had practically given up on, so it was never going to be easy. Secondly, do not throw the baby out with the bath water. If there was a situation where you could resuscitate a company, save employment and help the economy then you do that. We went in there not with the attitude of a recovery agent but with that of a creative financial institution with those three functions. We did the best we could. On the issue of making sure the depositors didn’t lose money and recapitalising the banks, we can tick those two. But the issue of recovery at the minimum cost to stake holders was always going to be a long term thing, and we structured it in a way that the banks ultimately paid for any losses over a long period of time. We felt that it was a good structure because we didn’t want the burden to fall on the tax payers and as far as I’m concerned that is still the plan. The new management came in at a more difficult time than we did. The economy is in a difficult situation. We dealt with the easier cases, so they’re left with the tougher cases in a tougher economy. I wish them well but I think it would be unfair to compare what we did with what they’re doing now because the circumstances are very different and theirs is far more difficult.
From what you know about the portfolio that the new management is dealing with what do you think will be the biggest challenge? I’ll read you a line from the current CEO’s recent interview. He said, “Some businesses had cancer where we thought they had malaria” In other words it is a lot more difficult than perhaps was envisaged in earlier years. The big question is in hindsight would you say that the process to liquidate these companies should have started several years ago considering that it would have been extremely difficult to save them at all?
CHIKE-OBI: Well in hindsight, there are things we should have done that we didn’t do. I won’t sit here and tell anybody that we did everything perfectly. We did the best we could. The statement that some companies have cancer where they thought malaria is fairly easy to make because it’s correct. You cannot know the extent of somebody’s problem in the medical profession unless you’ve actually diagnosed them closely so, they were always going to find out that things were worse than they thought from outside. It is a fair comment, no questions there. Are there some companies that should have been liquidated that we didn’t? Yes.
Are there some companies that we should have been tougher with that we were not as tough with? Yes. But, that’s all hindsight, and when they’re done, five or ten years from now, they themselves – if they’re fair, will look back and say that there are things we should have done differently. But AMCON was an important idea. It is still an important idea. It still has a big role to play and honestly I wish them absolutely all the success in the world, and I am there to support them because I look as AMCON as my child. Whatever happens to AMCON, my name will be attached to it, and my team will be attached it, and so we hope well and we’re routing for them from the sidelines.
It is definitely a tough challenge. In your view what help can they get in terms of perhaps the amendment of laws because one of the challenges that I see quite clearly is just the process to get people to either relinquish their assets or repay their loans. Some are suggesting that it is no crime to take a loan and in a sense it isn’t a crime if you don’t have the money to pay back but at the end of the day they need to recover whatever they can from that company but then the process in Nigeria when you look at the court system and so forth it seems to be quite challenging. Do you think that maybe some changes to the laws could help?
CHIKE-OBI: I think that we need to understand the architecture of AMCON. First of all most of the investment that was made was to recapitalise the banks. The banks were recapitalised with more than 60 percent of AMCON investment. From those recapitalisations there was no recovery except through the sinking fund. So even if you got all the money from all the non-performing loans, you would still have a hole of 60-70% that has to be filled by the banks. So AMCON was never going to settle all its obligations by recovery. I think there is too much emphasis on recovery. In addition to that, even if AMCON recovers zero tomorrow, the burden of the debt falls on the banks where it should be.
What do you mean that the burden falls on the banks?
CHIKE-OBI: The sinking fund has to continue to pay until AMCON’s liabilities are liquidated. It is the banks that actually have an interest in AMCON’s performance not the federal government. If AMCON recovered all its debt by tomorrow, what will happen is that the sinking fund period would shorten and as soon as the liabilities are extinguished, everything is over. So when people say, “well, if they recover, it will help the federal government.” No. Federal government by law cannot benefit from any AMCON recoveries directly. They can benefit indirectly from taxes paid by the banks, but recovery from AMCON cannot by law benefit the federal government in any way. It only pays back its debt and when the debt is done, that’s it. And if AMCON recovers zero today it just means the banks have more to pay and longer to pay it, and I think that should be quite clear. However, AMCON as a public institution and for the sake of moral integrity should do the best it can to cover as much as it can even though the burden falls on the banks.
But would you say that there’s a need to amend any laws to support them in that process?
CHIKE-OBI: We had an amendment done in May 2015. I think that amendment fairly covered all the problems we had at AMCON at the time had identified with the existing law. If there is some new burden that we didn’t identify on AMCON today, I think that the current management team is best placed to say we think we need to change this or change that.
Would you say that, that amendment assisted AMCON in recovering loans in a quicker fashion?
CHIKE-OBI: I think that the answer is unknowable because things are always going to get more and more difficult. The people that are left are going to have fewer resources, or less willingness to pay. That’s just the nature of recovery. You recover the easy ones, the responsible ones, the ones that really want to work with you first and then you’re left with the hard nuts, no matter what laws you amend at some point, some people just can’t or won’t pay. I don’t think you can know. All you can know is that it gets more difficult, and it requires more creativity, discipline and effort and I think that the current management is doing all of those things.
But let’s talk about the sinking fund though; do you think there’s a need to tweak that because we are caught in a very difficult place? AMCON needs to make recoveries and pay down its debt but on the flip side, banks that are providing the funds for the sinking fund are going through their own struggles so how do you think we should manage that situation now. Because we have seen the contributions for the sinking fund tweaked over time.
CHIKE-OBI: Well it’s in the law. The amendment has made it a law so it isn’t easy to tweak it anymore. The law is there that says this is what it is and for it to be changed, I think the approval has to come from the President. The National Assembly wanted to have the power over that decision and there was a debate about it, but I think it ended up being the President. What this means is that the President can raise or lower the sinking fund through some process that’s in the law. The best thing for AMCON is for the bank assets to grow rapidly because the sinking fund grows with bank assets. When we have policies that restrict bank asset growth it hurts AMCON. So if you want AMCON to get out of the woods and pay off its debt as quickly as possible, the fastest way is for the assets of the bank to rise.
Again that ties in with my idea of a very expansive monetary policy. We take the inflation hit, we manage it as best we can, and 5 years from now you’ll see lower rates, lower inflation and if we improve our productive capacity I see the exchange rate going to 200 naira to the dollar in the next five years but it may go to 500 naira first which is okay, as long as we see a clear path on which to walk. If the foreigners, see that we are intent on becoming an industrial nation, with all our resources and with all our people, they will come here in droves. Until we show them that clear intent to industrialise and be serious about it and pay the price this won’t happen. But if we show them that we’re intent on becoming an industrial nation it will solve AMCON, the currency, and all the issues we’re talking about. Most importantly we must reduce our poverty rate by fifty percent in the next ten years. We must! If we don’t we have a problem.