WE NEED DIFFERENT FORMS OF TRANSFORMATIVE CREDIT PRODUCTS ACROSS THE VALUE CHAIN; AN EXTENSIVE CURRENT X-RAY OF THE NIGERIAN ECONOMY

Tuesday, 14th May 2024.

CreditEconomy News Interview

…Over 500,000 people read our news story, number still counting

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Dr Oluwatayo David Aduloju, FICA,

Chief Executive Officer (CEO), Nigerian Economic Summit Group (NESG)

WE NEED DIFFERENT FORMS OF TRANSFORMATIVE CREDIT PRODUCTS ACROSS THE VALUE CHAIN; AN EXTENSIVE CURRENT X-RAY OF THE NIGERIAN ECONOMY

The Chief Executive Officer of the Nigerian Economic Summit Group (NESG), Dr Oluwatayo David Aduloju, FICA, speaks on how to use credit to stimulate the economy to the Credit Economy News of National Institute of Credit Administration’s interview article:

 

What is the way forward for Nigeria’s economic development?

Well, I think if we want to discuss the way forward for Nigeria’s economy, we have to define where Nigeria’s economy is and maybe what the problem is. If we can, at least, attempt to describe the situation, we may more readily be able to tackle how to make that economy grow or move forward.

“First thing, in my view, I think that the Nigerian economy is currently going through massive macroeconomic instability that is caused by a huge macroeconomic reforms, subsidy removal, and, of course, FX unification that was removed without corresponding sequencing and onboarding of other reforms to cushion the effects, which should help to harvest the gains of this type of macroeconomic changes”.

Nigeria’s economy has been fundamentally oil-dependent; in other words, we are a resource-dependent economy. We are almost a low-income country. GDP per capita is low, meaning many Nigerians working from a credit point of view have barely enough wallet or household income to meet basic needs. As a result of this slow macroeconomic growth, we have been through two recessions in the last decade. One was in 2016, and the other was in 2020, coupled with a pandemic. With that, the average Nigerian’s GDP per capita and the standard of living have worsened because we have sustained a high inflationary environment and a high interest rate environment. For an import-dependent country, we are now sustaining FX rates. When we take these macro risks, and we pass them through businesses, and we look at everything. The cost of doing business, raw materials, working capital, inventory, and other logistics and administrative expenses of running that business has changed if we take these macro risks or pass them through the household. If we compare our food budget last year and our food budget today, it is like the difference between the night and the day. I think we are almost at 40% food inflation. Now, the challenge with that is, at least from the credit administrative point of view, businesses and individuals are at risk of crystallizing into failures. Imagine a company budgeting to bring in import or raw materials at N465/$ in January last year. By February this year, it was bringing those goods at N1,800/$. There is no comparison to plot a financial projection. So, the truth is where Nigeria is, is very complex. And unfortunately, there is no one solution to a very complex problem like this. Instead, there is a combination of things that Nigeria must do to go forward.

 

The Way forward:

Let me now answer what Nigeria must do. We are dealing with a radical macroeconomic instability. While the solutions can be stated, they are not easy to implement. Because of where we are, we must strive. So, the first thing to consider is monetary policy transparency and accountability. For years, the economic policy system was not transparent. So if we ask the question, for example, what the size of the foreign reserves is, nobody will tell us. Nobody will tell us how much Nigeria has printed or CBN’s audited account. What is the size of the FX backlog? The problem is that the lack of transparency increases the country’s risk, affecting the international credit administrator’s calculation of the risk of giving credit to Nigeria.

We calculate all these risks on the monitoring side, the cost factor, and the cost of the risk we add to the investment becomes so high that the investment is not a good deal. So, the monetary side has this problem. To solve that, we need to set aside several things on the monetary side, such as transparently and efficiently discovering the actual cost of naira and cleaning the system up from racketeering. It would be best to end the broad liabilities in the bad loans in the Asset Management Corporation of Nigeria (AMCON). So, AMCON is sustaining a large volume of liabilities that, to be honest, the government should no longer carry on this balance sheet. In liquidity, let us find a way to end the liabilities we carry on the bad loans of banks’ balance sheets as part of country liabilities. Then, we must make our assets perform better. Nigeria has significant assets will create liquidity in the system that is not performing well. NNPC is not performing at parity with its pairs like Saudi Aramco in Saudi Arabia and the rest because it is still very inefficiently run when we look at assets like oil and gas production. When we hear that oil bunkers and thieves are still stealing 1,000 barrels of crude oil, it does not make sense that our country is losing up to $4.8bn to $5bn a year on an asset that should be helping us solve our problems. There is a lot of work to do to improve liquidity, which gives us FX. And for now, we earn 90% of our FX from fuel.

“If all the assets we have as a country are not yielding liquidity in terms of external revenue, the same problem will continue. The other way to increase liquidity is to reduce the country’s risk and become a better place to do business so that we can attract Foreign Direct Investment (FDI). FDI coming into Nigeria in real terms has been under a billion dollars on average for the last eight years, which means investors’ appetite to bring their money here is low”.

We should have a pipeline of $6 billion on board, an average of $8 billion annually. A billion dollars now tells us something is wrong. Of course, we know that there are structural reasons for that, which are: Difficult environment to do business; Two – Insecurity; Three – Cost of electricity; Four – Infrastructure deficits; Five – lack of policy predictability; and six – A challenging environment to adjudicate. So, people who put their dollars into the Nigerian economy a few years ago spent about four years trying to get their dollars out. That created the backlog, of which $7 billion less than $2.4 billion has now been paid. If we brought our money into a country, and it took us four years after we wanted to repatriate it to get it out, are we bringing it back? Not likely. So, these things went wrong on the monetary side and are now being fixed. On the fiscal side, we must become better spenders in our public finances.  We need to ensure revenue efficiency and a transparent accountability system. It is one thing to borrow money, but if we borrow money and we do not administer it properly, it doesn’t work. In the last eight years, we spent our way through the first recession by borrowing in 2016. We went through COVID by borrowing again from 2019 to 2023. Now, what that means is that we are using credit to drive the economy. Imagine that we borrow money but do not put it into any productive activities; it does not translate back to productivity. So, in the future, for any credit we get, we must focus on the fiscal side; we need an investment plan. How are we going to borrow money? What type of money will we borrow, at what rates, when we borrow the money, and where will we apply it? This way, our investment or spending plan comes in. Nigeria would benefit from a robust liquidity management plan. How do we grow our external reserves? How are we going to expand non-oil export revenue? If so, what sectors will we enter, and which products can Nigeria compete with? So, if we put all these plans together, I think we can begin to move Nigeria forward. But like I said, none of these things are easy.

 

How can credit be used for economic and social transformation?

That is an excellent and essential question. But already, we can see I have tried to point to where credit enters this conversation. Suppose we think about how the current crisis has impacted economic actors. In that case, it has impacted three sets of economic actors: the worker at the individual level, the household, and the firm level; these actors either own, manage or work in the micro, small and medium enterprises and large corporations, which have been negatively impacted. As I said,

“across every sector of the economy, agriculture, manufacturing, trade, financial services, services oil and gas, power utilities, and construction of healthcare, if we take our macroeconomic model to look at the 45 sectors, there is no sector among the fourty-five that the cost channel has not been impacted. In other words, the integrated macro risks have affected the cost of doing business across all the sectors of the economy”.

Everybody is solving for the high cost of raw materials and the high cost of inventory. Everybody is solving for high-cost overhead. Everybody is solving for the high cost of distribution.

“Now, what can credit do? The question we must answer is, if these businesses will not die, that is, large firms, small and medium enterprises and non-enterprises, what type of credit can we deploy to ensure that companies of different sizes or levels can refinance their pipeline and raw materials”?

So imagine that we had an export trade in line and was priced at N465 to a dollar towards last year. Now, what we need to buy in March is three times the cost; we need new credit; old credit will not work.

Regarding restructuring credit to match the new requirement, I do not think commercial banks are doing it yet because they are resolving their recapitalisation. First, we must answer the question of how credit makes the entire business sector resilient. We need to deploy single-digit, longer-term credit to manage the way the books look right now, including better trade finance, inventory refinancing facilities, and working capital finance. Overall, we need to see a combination of commercial and development finance credit to fiscally stimulate the private sector in Nigeria. That means several things. One, it means that we will not use credit like that again for business because, while we are having this conversation, the Monetary Policy Rate (MPR) has moved to about 24.5%, which means the cost of credit in commercial banks is increasing. We cannot use commercial banks because commercial banks with high interest rates will bring us high costs of credit and short-term loans. So, the question is, what can CBN do to recalibrate the financial system for the crisis we are in, at least for the next 12 months, before we return to average finances?

We need to stimulate consumption. The problem with stimulating consumption is that most companies have not raised salaries because we are struggling to survive, which means the workers and households are dealing with higher costs of living without a higher income. As we know, we are still battling minimum wage with the Federal Government, State Governments with public servants and private citizens. So, the question is, how do we apply consumer credit at cheaper interest rates and longer tenure that allows households and individuals also to adjust and survive? What the government is doing is not credit; they are doing more of palliatives and free initial transfer of grants. Many of those workers, like ourselves, are not eligible for it. Our income has not increased, but our cost of living, the cost of a bag of rice, the cost of a bag of beans has gone up, and the cost of meat, too.

“There is nothing in the food basket that is not up by almost 40%. So, we now need to stimulate or re-stimulate the entire credit economy and spread the risk across a worker’s lifetime. Maybe now is the time we need deep consumer credit architecture, which will allow people to continue to maintain a standard of living, even if their income in the short term does not radically transform”.

The question is whether we will see that sooner or later. So, what I think we need to do with credit on the consumer side, like consumption credit, is refinancing an asset credit. But with asset credit for micro-entrepreneurs, for instance, if a younger person wants to buy a new machine or a new generator, those things have to be now refinanced over a longer term just to spread the costs and reduce the burden on the wallets because the wallet has not grown, for this to happen, regulators need to create fiscal space for it to happen. Countries around the world develop some economic stimulus. That is disbursed through the banks, financial institutions, or institutional clusters to manage and cushion the effects. I think that is where we are. Suppose we can stabilise the economy, on the macro and the fiscal side, if we can stabilise businesses, homes, and households, stabilise people’s wallets, and give them access to cheaper credit that can be refinanced over a more extended period. As the economy begins to pick back up, as the government solves the problem of revenue, security for oil and gas starts to drive investment promotion to bring in FDI, as the new government begins to invest in security to reduce insecurity around the country and increase food production, the system will start to pick back up, and credit plays a significant role.

“A big part of the problem is that we haven’t invested in the food system as aggressively in the last three years, which is why we have the food deficit. The credit government needs to get and administer differently in terms of efficiency, transparency and accountability; for all the credits that businesses need, we need the whole layer of different structures of credit, value chain finance, logistics, and finance; we need other forms of transformative credit products across the value chain, and I don’t think enough work is being done in that regard”.

 

What sector of Nigeria’s economy suffers development neglect?

If we look at what we call the traditional growth drivers and if we were looking for growth in the Nigerian economy, historically, these are the places we will go to find some form of growth. We have ICT or digital economy as a critical driver of growth. We also have trade and agriculture. These three sectors I have mentioned have managed to stay in the region of growth in 2023. That is, trade, ICT, and finance. Other than ICT, finance, and trade, most other sectors have stagnated. So agriculture is stagnating, manufacturing is stagnating, construction is stagnating, and so is real estate, professional services, water, accommodation services, the electricity sector, and education. Oil and gas have been in a recession and just coming out of recession after many years. When we ask which sector, I think we have to restructure the question to say how do we make traditional growth sectors of the economy move from stagnation back to growth because our growth drivers are contracted. What usually was growth in the Nigerian economy, their own is contraction. So the proper question for me, from a point of view, is, what sectors must we stop stagnation in?

“The sectors that are still performing are ICT, finance, and trade; we can move them better by having more access to credit and opening them up for investment. Another form of investment we need to open them up is clarity of government policy and stability. Then, the sectors that have gone into stagnation, agriculture, manufacturing, construction, real estate, etc, these sectors need economic stimulus, and credit plays a big part in economic stimulus. We should sit down together, look at monetary, fiscal policy, and business, and negotiate the terms of economic stimulus”.

In my mind, I think it should be low interest rates and longer-term credit tied to productive activities. We are either financing working capital, inventory, or input for manufacturing. People are not looking for money to go out and buy a new limousine or car, but people who are putting money into productive activity. We also need to do liability refinancing because, if we think about it, last year was a bloody year for many businesses. Some businesses have gone under, their operations are grounded, and they owe the banks. So, if we give them new credit, they will pay their loan. That is all. They will not necessarily restart the business.

“Legitimate organizations that we can refinance their credit and restart their businesses is something we need to think about. Countries build reconstruction funds. I think for some of our sectors, they will need that type of thing. Agriculture is a big problem because of the amount of consumer wallets that food wipes out. Inflation jumped from 15.6% in 2022. We ended last year with 28.9%. We entered the New Year at 33%, now at 40%. So if our food inflation is this high, it is tough to ask somebody to borrow money and pay it back because it means that from the person’s wallet, the person is spending all their money or most of their money on food, which means that they do not have money to pay our credit back”.

If we give them credit, they will default. I was in a different session with some of our institute (NICA) members; everybody complained about credit default rates. The default rate is tied to the income per capita, the economy stretches, and the wallet structure collapses under food inflation pressure. So, the government must do something to bring down food inflation this year. There are two ways to do it.

 

How can the food inflation rate be brought down?

One way is to do more production. We have wet season farming now; we have to cultivate for wet season farming, target millions of hectares of land, cassava, rice, maize, wheat, and soya, and bring the price down. If we have soya, we can feed stock; if we have feed stock, we can expand livestock production. So there is a logic to that, but again, we have less than six months to do it. If we cannot do it like that, remove tariffs at the border or crush them to nearly zero for food and bring cheap food into Nigeria in the short term while investing in rebuilding and boosting the agricultural food sector. I think those are the sectors we should focus on. We must focus on anything that we can export. As oil underperforms, imagine if the $50 billion we are doing in oil we can match with another $50 billion we are doing in non-oil export; if the oil price goes down, there will still be a way to earn dollars, and it will bring down the exchange rate. So, some of these things have to work hand in hand; they are systemic. Unfortunately, none of the things I’m saying are easy to do. Bring oil out of recession by increasing our production and keep the top growth sectors rising. If we do not, unemployment will increase, more hungry people will be on the road, and insecurity will increase. Some things interconnect and interrelate authentically, so we cannot solve one and leave the other. Now, if the sectors that employ more of our people are the sectors in stagnation, it means we have more people out of work. That is why we must focus on some of the mentioned sectors.

The government needs to pursue an economic transformation programme. An economic transformation programme is not Vision 2020; it is a time-bound strategy for stabilising the economy for about eight to 12 months. We need to say look, in 10 months, we need to stabilise the economy. Then, maybe in 24 months, we can consolidate the economy by getting these key sectors to grow.  We need credit to intervene in those sectors so that those demand channels and cost channel risks can be addressed. The balance sheets need to improve, and we can now have growth. When we have done that for maybe three or four years, we can now pursue economic development and acceleration.

“So, I advise the government that we need an economic transformation roadmap with a clear stabilisation plan for the next 12 months. That stabilisation plan focuses on strengthening fiscal and monetary framework, minimizing volatility everywhere. Increase activity by providing transparency and clear policy communication in advance. Say to people that this is what we plan to do in six months. FX will be stable at XYZ. So that people can plan and foster productivity to attract investment and boost economic growth. The government needs to provide those better plans”.

The last thing is countries that are where we are today, how did they get there? They came out with a well-bundled set of reforms that are appropriately sequenced and coordinated between fiscal policy, monetary policy, trade, and investment, with tight sanction management and transparent and accountable mechanisms for which every dollar and naira is accounted. That is how countries come out of economic wounds like this.

 

As a National Institute of Credit Administration (NICA) Fellow, what advice and support do you have for the Institute and its members?

The first thing was to join NICA. Credit administration is a profession that not many people understand. That is partly why we have gotten into all these problems; we do not have enough credit administrators to consider how the country has used credit to develop the economy. If we look at the issues we are pointing to, they are all credit problems. So,

“I advise NICA to pay more attention to the country’s credit problems. We know there are firms’ credit problems and individual credit problems. I think that NICA needs to pay attention to the fact that Nigeria is where it is because the captains of credit administration at the national level have failed to a significant degree”.

I joined NICA as a member because I thought it is necessary, and I believe we should participate in serious conversations during our time. We can see that with the crisis and the kind of solutions that we are looking for, we are the ones that have it. We must be seen to be engaging the problem. For people to rent a house, they need credit; for people to live their lives, they need credit. For people to go to school, they need credit. Look at this student loan that the President has introduced.

“Have we at NICA done our independent assessment of the student loan’s credit structure to ensure it is sustainable and does not fail as other things have failed? So this is the problem of our time; it is not going anywhere. So, we must bring some of these skills we are learning and cultivating to the institute to build the country. This is the only Institute that serves the economic interests of everyone in the economy”.

 

 What sector of Nigeria’s economy do you want foreign investors and business partners to enter?

The thing about investment is that investors go to sectors that are ready for investors. So, how do we get a sector ready for investment? One, we have to de-risk the sector. Nobody wants to go to any sector where the market forces cannot determine price, cost and profitability.

“The electricity and energy sector is one of the most critical sectors in the world. Still, nobody will invest in Nigeria’s downstream electricity sector today because it is not market-reflective, transparent, or accountable, and any market forces or demand analysis does not drive it. Even though we all know that it can be operated, nobody wants to put their money there because of the electricity supply structure. So, my advice on investments will be the sectors in which Nigeria wants to become attractive to foreign direct investment, legal regulations, and policy de-risking to provide clear guidance for investors and business leaders who want to put their money in those sectors should be done. Second, we must have investment-grade data that allows business people, credit administrators, and investors to calculate and do their own economic viability and economic and financial feasibility studies. If we look at the sector, we do not have the data. So, if we look at the sector that we as credit administrators score high risk, it is a lack of data most of the time. We do not understand that we are just putting a high risk against it. So, the more opaque and ambiguous sectors are, the higher the risk of investing in debt”.

So, we also need to open up these sectors and create industry data. For example, I want to invest in mining in Nigeria; I want to invest in gold. Where is the gold? How much gold do we have? What is the process of reaching the gold? What licenses do I need? What time will it take to get the first gold out of the ground? How will I export it? What are the rules of the game? If there is opacity around these things, an investor will not come, no matter how blessed we are with natural resources. Investors need clear forward guidance that shows that we have legislatively, policy-wise, and regulatory de-risked the opportunities that we can provide them and a well-bundled set of forward guidance that can give them investment-grade data so they can use the data and do their risk assessment using visibility studies, economic viability assessment, and it is only then that we can now create for them the ease of onboarding their investment; what we call investment promotion, that they can go to one place, register their business, get all the information they need. In most parts of Africa, we can finish all our onboarding for business, including acquiring capital assets like land. Here in Nigeria, we can pursue our land title for six years without getting it. Following what I said, we need to take critical sectors of the economy by making them investment-ready. We de-risk them, provide investment-grade data, and then do efficient investment promotion, coordination and onboarding. That is how we bring investments.

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