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Nigeria risks financial ‘blockade’, frosty relations with funders

By Geoff Iyatse (Assistant Business Editor)
29 June 2022   |   4:29 am
• World Bank calls for sovereign debt changes ahead of looming recession • Cold attitude to reforms harming domestic investment outlook, experts say  • ‘Challenge western countries but with better policy options’ • Nigeria’s Eurobond rises by about 100% in six months Nigeria is gradually inching towards a financial ‘blockade’ at the international financial market,…

World Bank

• World Bank calls for sovereign debt changes ahead of looming recession
• Cold attitude to reforms harming domestic investment outlook, experts say 
• ‘Challenge western countries but with better policy options’
• Nigeria’s Eurobond rises by about 100% in six months

Nigeria is gradually inching towards a financial ‘blockade’ at the international financial market, as its working relationship with international development and funding partners, including the World Bank and the International Monetary Fund (IMF), deteriorates to its worst level in recent years.  

  
This comes with dire consequences for the prospect of raising cheap funds. Already, the yields of Nigeria’s Eurobond have increased significantly, from an average of 6.5 per cent at the start of the year to about 12.5 per cent this month, about a 100 per cent rise in six months.
   
Several external factors such as the global hike in interest rates and high inflation rate have significant impacts on the cost of borrowing from the global market, a reason the United States’ 10-year bond has also increased from 1.75 per cent in January to over three per cent.  
   
But the country is wallowing in a web of self-inflicted missteps with some experts arguing that its rising risks and deteriorating sovereign rating would have contributed to the sudden sharp rise in the country’s already under-priced bonds.
 
Last month, JP Morgan, an American leading investment bank, delisted Nigeria from the class of emerging market sovereign recommendations that investors should be ‘overweight’ in.
   
“Nigeria’s fiscal woes amid a worsening global risks backdrop have raised market concerns despite a positive oil environment,” the bank said while it upgraded Serbia and Uzbekistan for their low risks. 
  
JP Morgan’s decision is interpreted as a grave red light with negative implications on the country’s investment outlook and credit worthiness. Other credit rating agencies, including Fitch Ratings, have raised countless questions about the country’s competitiveness while calling for reforms, suggestions often rebuffed by the government.

YESTERDAY, a senior official at the World Bank added to calls for changes in sovereign debt laws, so, governments have more control when crises strike. World Bank economists estimate that low- and middle-income economies owe a record US$9.3 trillion to foreign creditors and that 40 poor countries, and about half a dozen middle income ones, are either in debt distress or at a high risk of it.

“As global growth fizzles and interest rates surge, the risk of a spate of debt crises is rising – and yet the available mechanisms for tackling them are deeply inadequate,” Indermit Gill, the bank’s vice president for equitable growth, finance and institutions and Lee Buchheit, sovereign debt lawyer said, in a statement.

First, they said government bond contracts should stipulate that all creditors have a legal duty to cooperate ‘in good faith’ in sovereign-debt restructurings.

Second, all sovereign debt contracts should limit how much a creditor can collect through law suits outside the Common Framework and, in addition, include ‘Collective Action Clauses’, which mean all bonds can be restructured as long as the vast majority of bondholders have agreed.

That, in turn, would clip the wings of so-called vulture funds that try to hold out and then take governments to court to score a bigger payout for themselves.

Third, it should be made harder for creditors to seize the assets of a debt-distressed government if it has acted in good faith.

IN recent times, recommendations and advisories of the World Bank and IMF have been received coldly and, sometimes, with outright rejection. While the organisations are not in a position to apply sanctions on the country for not embracing market reforms, much of their funding programmes are conditioned on the country’s willingness to either align with popular choice at home or modern economic thoughts.
  
Nigeria has had an unpleasant experience adopting the Bretton Wood System economic philosophy; hence, it is a somewhat populist decision to ignore their recommendations.

The Structural Adjustment Programme (SAP), which set the tone for the perennial naira flip-flop, is a significant example. But the World Bank officials are quick to push back, saying the government of Nigeria implemented its recommendations halfway, which is worse than no implementation at all.   
   
Some of the issues Nigeria has had sharp disagreement with the development organisations on in recent years include trade restrictions, liberalisation of foreign exchange (FX) management, multiple exchange rates, oversized development financing role of the Central Bank of Nigeria (CBN), alleged abuse of the Ways and Means (W&M) window of the apex bank and low debt transparency.
   
Whereas the international development partners have taken a clearly defined pro-market stance on the issues, engagements are often stalled or frustrated by lack of clearly articulated positions on the part of the Federal Government.  
  
In some instances, there is absolute silence, ambiguity or contradictory positions from different ministries, departments and agencies (MDAs). Some other times, the government changes its position after it has committed itself to certain processes.
   
The handling of the Premium Motor Spirit (PMS) subsidy is a classic example of how the government mismanages its communication with the international community. President Muhammadu Buhari had, last year, signed the Petroleum Industry Act (PIA) with a proviso to remove petrol subsidy, a decision that was hailed by the anti-subsidy World Bank with a promise to fund the proposed palliatives. 
   
But less than six months after his assent, President Buhari backtracked, suspended implementation of the act and effectively extended subsidy payment till the end of his administration. 
   
A consultant to the World Bank and close associate of its officials in Nigeria told The Guardian, at the weekend, that President Buhari’s decision “was a deal-breaker” and embarrassed the bank’s executives who were ready to fast-track any support request to assist the country to transition to a post-subsidy era.
   
In its latest Nigeria Development Update (NDU), the bank points out subsidy payment as a major drain on the country’s resources and paints different scenarios on how the economy could achieve a much-faster growth if more resources are freed from subsidy and channeled to more productive activities.
   
From the World Bank, IMF to Fitch, no development organisation or rating agency has drafted a report on the Nigerian economy in the past decade without highlighting the hole created by inefficiency in resource allocation, with a special focus on subsidy payment and its irritating deadweight loss.
   
Petrol subsidy is a deciding factor in the decision of JP Morgan to delist Nigeria from its emerging market benchmark. The investment bank explained that the delisting was caused by the inability of the Nigerian National Petroleum Company (NNPC) Limited to transfer any revenue to the government from January to March this year, a challenge caused by petrol subsidy payment and low oil production.  
   
While subsidy takes a chunk of the proceeds of oil sales, oil production dropped to the lowest level (in the recent memory) during the same first quarter as the sector reels in crude theft. The World Bank and IMF had earlier lamented about the country’s inability to take advantage of the bullish oil prices and pinpointed it as a major setback to the country’s growth outlook.  
   
PMS subsidy, slumping oil production and waste in the public sector are overstretching the country’s fragile fiscal position. Yet, President Buhari told the World Bank and others, in an interview with Bloomberg, last week, that it would be hypocritical to advise Nigeria to discontinue subsidy payment while the western countries are administering the same.

   
“Most western countries are today implementing fuel subsidies. Why would we remove ours now? What is good for the goose is good for the gander! What our western allies are learning the hard way is what looks good on paper and the human consequences are two different things. My government set in motion plans to remove the subsidy late last year,” the President said in a response that flies in the face of decorum and history of the discussion.   
   
In reference to the CBN’s intervention programmes, which the World Bank claimed had a crowding-out effect on risk-adjusted or commercial lending, the President said: “The governor is following an alternative economic model that puts people at the heart of policy. Nigeria should be free to choose its development model and how to construct our economy, so it functions for Nigerians.”
  
Stakeholders say the President’s interview falls short of how a country’s major creditors should be communicated with and that the country’s regular media posturing is a source of worry to the organisations who see Nigeria as a partner.  
   
Godwin Owoh, a professor of applied economics and consultant to the World Bank, wonders why a serious country will ignore established channels of communication with its partners to speak with media on subjects as important as economic reforms.

He argued that the World Bank’s Article 1V Consultation offers every country an opportunity for idea-sharing but that Nigerian officials often ignore the space in preference for media campaigns that are not taken as official communication channels by the institution.
   
“Those reactions are not channeled through the official means of communicating with the World Bank. The official channel of communication is Article 1V Consultation where they discuss with members their economic policy issues and the general mandate of the bank,” Owoh said.

   
Article 1V requires officials of the World Bank to visit member countries to engage stakeholders on their findings after which an extensive report is sent to the board for approval. The platform gives the officials of the bank and representatives of member countries opportunities to debate policy thrusts, the deficiencies, prospects and options.  
   
But Owoh argued that Nigerian officials historically feel threatened by the visit of the officials of the World Bank owing to their involvement in the failings exposed by the reports produced after the visits.

He warned that the international market had stopped taking Nigeria seriously because of the “country’s poor response to the reports.”
   
The implications of this, Owoh added, is taking a toll on the country’s outlook in the international market. “Genuine investors have gone. The only investors you see are representatives of countries with imperialist tendencies and others with ulterior motives. Real investors have started ignoring Nigeria’s economy; they will not even want to come close to our bonds,” he said.
   
As bad as the situation seems, the economist said reports by the World Bank and IMF are the mildest “we can get”, arguing that the rot is deeper than what the “whitewashed reports” present. 
  
“They don’t even talk about the mind-boggling corruption. It is terrible. When you carry out research, you juxtapose it with empirical issues on the ground. Look at this, why is it difficult for the country to run a university system today? We should begin to ask these questions. The World Bank and IMF are mild in their report; what would the government do if a truly independent neutral body comes up with a report of the state of the economy?” he asks.
    
The scholar agreed that members are expected to differ with an advisory body but argues that such is only possible where the economic managers of the country have a superior policy option.

He insists that subsidy and CBN interventions, which the international organisations have been tasking the government on, are fueling inefficiency as well as corruption and amounts to misallocation of resources.     

   
Another professor of economics and research expert at the Lagos Business School, Bongo Adi, noted that most of the interventions frowned on by the international organisations provide incentives for human and financial capital flight and create all sorts of inefficiencies. He admitted that market could fail in resource allocations most times, hence intervention is required.
  
“The World Bank and IMF say the government is harming the economy. The reason is that they intervene where they shouldn’t. The reason is that they are not driven by economic value but rather socialist and public and nepotistic agenda. These are what drive their investments in those areas.  
  
“They need to redirect their intervention strategies. That has not happened in the past seven years. We saw something like that in the build-up to 2015. Can one remember the Agricultural Transformation Agenda? Can one remember the Value Enhancement Programme that received funding even from international agencies? The government should begin to think of how to incentivise the private sector to take up the transitional service sectors. We have not seen a move towards this direction in recent years, and I think this is what informs the disagreement from the international funding agencies,” Adi submited.     
   
The expert supports subsidies for inferior sectors such as agriculture (that is sectors people abandon when the economy is growing) as many countries do. Such intervention, he said, must maximise efficiency and performance rather than serve as a setback to growth.     
   
Ken Ife, a professor of economics and trade expert, corroborates Adi’s position, saying it is understandable to disagree with the development organisations as “no member state takes their recommendations hook, line and sinker.”  
   
Ife agrees with the World Bank and its sister organisations on subsidy removal, which does not do “any good and inefficient intervention” but argued that Nigeria has sufficient rationale for the CBN intervention programme and the FX management approach, adding that there is little the country could do in the face of a gaping hole between demand and supply of FX.
   
An ex-director at the CBN, Stan Ukeje, holds a similar view but with a note of caution. According to him, Nigeria is a voluntary member of the IMF and the World Bank, which demands that the country takes its recommendations seriously.  
   
He also shares the position of the global bodies on the need to prioritise production against consumption, questioning the rationale of liberalising the price of diesel, which is more relevant to production, while subsidising premium motor spirit.
   
“In reference to reforms, even if others do not advise us, can’t we advise ourselves? If you have a public service that is too large, it may not be efficient. Somebody advises us to cut the cost of governance. Rather than taking the advice seriously, we find a political reason to evade responsibility because you want to please politicians and certain group interests,” Ukeje said.
   
He added that it is easy for the government to get away with some recommendations on how to increase efficiency owing to the public sector dominance of the economy and dependence on commodities for revenue. A country that depends on tax revenue and is driven by the private sector, he stresses, cannot afford the nonchalant attitude successive administrations have paid to economic reforms.
  
High inflation, volatility in the FX market, falling reserve and rising political risks are some of the disincentives to foreign investors. The headwinds were highlighted in the first quarter capital importation, which dropped to $1.57 billion, down from $2.19 billion in the preceding quarter. Though these are back-looking data, this year’s net capital flow is expected to be worse than any of previous recent years owing to rising risks and the shrinking international finance market.     
 
 
Against the odds, Senior Vice President, Global Market Department, Parthian Partners, Ola Oladele, believes the “international market has shown sustained interest in Nigerian eurobond papers despite our deteriorating local economic conditions” in terms of high demand for both Federal Government and corporate-issued instruments.
   
On the sharp rise in the price, she noted that “yields have been on the rise due to inflation pressure, subsequent rate hikes from the Federal Reserve System and a general reduction in liquidity” which have resulted in a massive global sell-off.
   
Noting that yields have risen from 5-8 per cent levels at the start of the year to 12-13 per cent this month, Oladele said: “However, It is quite difficult to isolate the impact of Nigeria’s poor rating and perception from the current global economic realities of historically high inflation levels, reduction in liquidity and rising yields. At this time, cash is simply more expensive globally and every country is affected – some more than others. We can’t rule out the fact that we are in election season. Historically, there is reduced focus on the economy at this time. Experienced investors know this and if they invested in Nigeria previously, they would have exited now to wait to see how the elections pan out before returning. 
   
“However, given Nigeria’s track record and oil revenues, investors are usually still open to our papers- albeit with the right risk premium attached. The flow of liquidity to Nigeria is more likely to be hindered by global liquidity crunch and the possibility of a recession than our current lack of focus on the economy.”

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