Q: How will Nigeria be impacted by the volatility in the Middle East and north Africa and the rise in oil prices?
A: There are a number of dimensions to the oil price increases as far as we are concerned. One of the sad things is that we do have fundamental structural problems where we are an oil-producing nation but we import a lot of our energy. So some of the benefits that we get from higher crude prices are eroded by the higher cost of imported petroleum products. That translates into a much heavier burden on the government because the government subsidises refined petroleum products and that increases the fiscal deficit. Rising oil prices are good for our [foreign exchange] reserves, they are good for our export earnings – but they are not good for the government deficit until we get our refineries up and running and stop importing petroleum products. By and large, the benefits outweigh the costs as oil revenues account for 80% of the government budget.
Q: But you could be impacted by a downturn in the international economy?
A: There was a time when there was panic in the markets about oil going over $100 a barrel and the [likely] recessionary effects. But at one stage it got to $147 and nothing happened. In terms of the price shock it’s not a big problem – but what could be a big problem is if there was a major supply shock with a significant production shutdown. [In the current situation] Libya is just 2% [of global oil output] and Saudi Arabia is saying that it can pump that and right now the oil price is far below what it was in 2007.
Q: When Nigeria issued its debut international sovereign bond in January, some investors were concerned that the government’s excess crude account (ECA) had been depleted. Were they right to be concerned?
A: Some of the criticism was valid, some of it was out of context. The ECA was built up at a time when oil prices were high so that in the event of declining oil prices and falling revenues it could be used to smooth out the trajectory of government spending. In 2007, the oil price peaked at $147 a barrel and we were producing more than 2.3 million bpd [barrels per day]; by 2008-09 the oil price crashed to at one time below $40 a barrel and because of what happened in the Niger Delta [a series of security issues] production fell to 1 million bpd or less. That totally wiped out government revenues and the reason for the ECA was to compensate so we drew on the account. At the same time we had the issue with the banks. They were undercapitalised and not lending, so if banks are not lending and the government is not spending we would go into a full-blown recession. The reason the economy kept going was because the ECA was drawn down.
Now the legitimate part of the criticism was that when the oil price came back up to about $70 to $80 a barrel and we then addressed the Niger Delta crisis and stabilised production; we should not have continued spending at that rate.
Q: Have Nigerian banks started lending to the real economy rather than using their funds to speculate in the markets?
A: First of all, we have to finish with the basics and get the banks out of the woods in terms of liquidity and capital. In 2009, we fixed the liquidity position by injecting money into the banks and we have been fixing some of the governance issues by changing management and by coming out with new regulations and guidelines. The asset management corporation [the Asset Management Company of Nigeria or Amcon] has started purchasing non-performing loans [NPLs] but that was just part of the problem; some of the banks still have negative capital after the sale of NPLs, and therefore we need to conclude this process of consolidation. We have got about four of the banks where they are ready to sign – and one has signed – an MOU [memorandum of understanding].
At the end of that process, the banks will have [sufficient] capital because the asset management corporation will also inject money into the banks and bring capital to zero. We should get a merger process going on. Now that means the banks are in a position to lend.
Now for the real economy, what we have tried to do over the past year is address the structural constraints that stop banks from lending, because sometimes it has not been a lack of capital nor a lack of liquidity [that stops banks lending] but the absence of commercially viable counterparties.
Q: Can you give an example of what you mean by this?
A: Agriculture is 42% of Nigerian gross domestic product but it doesn’t get bank lending because it is primary production and there has been very little focus on the value chain. If you take tomatoes, 60% to 70% of tomato production in Nigeria gets lost between the farm and the market so if you double or triple tomato production it will not make it commercially viable. No tomato farmer can borrow at commercial rates and pay back the debt unless there are investments in storage, logistics, handling, processing and markets. So we have signed an MOU with the Alliance for a Green Revolution in Africa run by Kofi Annan [former secretary-general of the UN]. We are on the verge of completing the framework of something called Nigerian Incentive-Based Risk-Sharing System for Agricultural Lending which is a model that has been adopted in eastern and southern Africa, and takes a number of commodity value chains and the tries to unlock them. By fixing the value chain we can get finance into every stage... at every stage we develop risk-sharing products such as a first-loss guarantee or maybe just insurance is required and at other stages shared losses... what we are trying to do is develop capacity within the banking industry for lending and develop capacity in agriculture for borrowing.
Q: Is there a target for this kind of lending?
A: It’s important to be realistic and realise it takes time. You don’t move from 1% [of total lending to agriculture] to 20% to 30% in two or three years. It took Malaysia 20 or 30 years to get to that point. Our target is to move from 1% to 5% by 2013.
We have never started properly, before it was always just political statements – ordering banks to lend or complaining about them for not lending. But this is serious and hard work – it involves things like providing inputs to farmers such as high-yield varieties of seeds, irrigation and infrastructure facilities... In Ethiopia they have got to a stage with coffee production where Starbucks has made them a single source for its coffee... It takes the entire government machinery to make this work, you can’t just beat up the banks and complain that the banks aren’t lending.
Q: How much will bailing out the banks cost Nigeria?
A: Amcon purchased N2200bn [$14.1bn] of NPLs for N700bn but then you also have to recapitalise the institutions and I count the additional capital injection as part of the cost. But what we have done in Nigeria that is unique is limited the cost to the taxpayer at N500bn coming through the central bank and the rest is being paid for by the banking system.
The new capital will be owned by Amcon and the sale of those shares and the recoveries from the loans plus the N500bn from the central bank over 10 years plus about N1000bn from the banking industry will cover the cost.
Q: How are you improving the legal process for making loans and recoveries?
A: We have three credit bureaus licensed by the central bank; we have a law going through the National Assembly on credit information and one on alternative dispute resolution, because that is a major problem when there is a default and recovery can take years. The third law that would have been important for us is the land use act but that is a constitutional matter because the land [ownership] is vested in the state government, so technically you need the governor’s consent to alienate it and to get a mortgage. There are all sorts of complications when you want to sell and in a court of law it’s not easy to just sell it if someone defaults. The governors are keen to hold on to this because it brings in a lot of revenue from issuance of certificates of occupancy, and giving consents to mortgage and transfer of title. It’s a strong revenue base for states that are not oil-producing states. So it’s a political question and we are trying to find ways around it.
Q: In Nigeria you have decided against a universal banking model. How is that working out in practice?
A: The fundamental question is which interests and objectives of stakeholders reign supreme. I am very clear that the interests of depositors and creditors are far more important than that of shareholders or borrowers. Therefore the decisions we take at the Central Bank of Nigeria are aimed at protecting the safety of deposits. That might squeeze margins for shareholders, it may make things a bit cumbersome and not very convenient for borrowers, but a structure that allows high returns but risks deposits is not acceptable to us.
The second thing is the universal banking model in Nigeria was premature and hampered the development of proper institutions. We never really had proper private equity firms or proper investment banks. Commercial banks set up subsidiaries, sent out retail and commercial bankers to run them and used depositors’ funds to fund equity [investments]. It was a deposit-equity swap. Very few of those investment banks were able to convince investors to part with funds; they did transactions and went to their parent bank for the money. What we have said is you need to have proper private equity firms and venture capital companies, proper asset managers and advisory services and that’s how you build financial services. If all you are doing is using current and savings accounts as venture capital or private equity – that isn’t how you run a banking system and that’s how we got to where we got.
