Floating the naira without a life-jacket – Part 3

Continued from yesterday

In the past because of the urge to devalue the naira, the government never took advantage of the impact of a major development project on the economy and the naira. During the projection of the cost estimate of the NLNG base project (trains 1 & 2), we made provision of US$ 139 million for naira escalation cost (naira appreciation). Unfortunately, the government budget framework was targeted at devaluing the naira. The official Naira average yearly exchange rate (source: IMF) was: 1993 (22.07/$), 1994 (22.00/$), 1995 (21.90/$), 1996 (21.88/$). Surprising in 1999, the CBN devalued the naira to a disastrous rate of 92.34/$, year 2000 101.70/$. This was the case despite the fact that oil prices had picked up. At the end we realised 100% favourable cost variance as the naira never appreciated as was originally projected because government policy went against our forecast. The main lesson learnt is that our economic managers should establish sustainable and effective channels of cooperation with businesses.

The game changer (in addition to diversification) that could impact positively on the economy and the naira and return it to its original value as fast as possible is investment in new refineries and rehabilitation of old ones. Privatisation is not the answer. There is still a valid reason to expect the government to remain an important if not dominant player in any economy even in this age of the so called “privatisation”. The share of government in Gross Domestic Product (GDP) is never less than 10% and is over 50% in many industrialised economies. We should not forget that developed economies attained a comfortable level of development and stability prior to ringing their affirmation of market economy and privatisation.

There is no doubt that while markets determine the potential for good, private sector investments market failures determine the best opportunities for public (government) investments. The starting point of modern public finance theory is that if the market economy is working well i.e. satisfying consumer demand at the lowest cost, then there is no need for direct government intervention by way of investments or introduction of a subsidy. It is when markets fail to function well i.e. demand is not met or costs are high that government’s intervention becomes necessary. The government should be concerned with the high prices of products, supply distortions and outflow of large amount of forex which is impacting negatively on the naira and the economy.

I have no doubt that NNPC can deliver in a commercialised and deregulated environment with less control from government. I have stated that NNPC has some of the finest brains in the industry. The general view about National Oil Companies (NOCs) is that they are not strictly created as commercial entities to generate value for their shareholders as they have to undertake other social services.

With the passage of the PIB, a commercialised NNPC will deliver on new refineries and rehabilitation of the old refineries. In 2003, NNPC had sound proposals to get the refineries rehabilitated to their installed capacity by the original construction firms and as usual, that proposal never saw the light of the day. The government did not act and we lost the opportunity. NNPC showed leadership in ensuring that the jinx that trailed the NLNG base project was broken and that effort led to the declaration of FID in 1995. There are a number of honest and hardworking individuals in NNPC although it is not easy to operate and add value in the midst of politics. Of course, the government owns 100% of NNPC’s equity investment and has legitimate right to intervene or monitor its operations to ensure accountability. I believe this can be done effectively through the enforcement of high quality financial reporting, independent and credible auditing, sound corporate governance and representation on the Board.

The President has already demonstrated the political and financial will to show that he can deal with the current economic and social challenges. In 2002, USAID conducted a study of Nigeria’s environment and identified three major threats which included the petroleum industry operations. Part of its conclusion was that “Nigeria’s environmental problems are extensive. Reversing these trends will require significant political and popular will not to mention huge amounts of financial and human capital.” That was the story since 2002 and sadly even with the windfall in 2004 and price surge of over $100.00 per barrel nothing positive happened. With the crash in oil prices, as an accountant, I virtually lost hope that the government may postpone the clean-up of Niger Delta. However, my hope was rekindled when President Buhari, despite the fact that oil price has fallen below US$40 per barrel, mustered the political and financial will and commissioned the clean-up of Ogoniland pollution with a promise to extend the clean-up to the rest of the Niger Delta. I have also never believed that any Nigerian government will be involved in a law suit against the oil giant Shell for oil spill in the Niger Delta as has been the case in developed countries.

President Buhari’s government is currently driving a law suit against Shell for the Bonga field oil spill in Bayelsa State. Even if the law suit will take decades to settle which I hope not, before compensation is paid, the issue here is about the political will to seek justice for a devastated community. This is a pointer that the President has the political and financial will to do what has never been doable. He can be trusted with the economy through fiscal stimulus that works and would not be hijacked by corruption.

Concluded
Naphtali Iringe-Koko is a chartered Accountant.