‘COVID-19’s effects on Nigeria’ll be devastating’
A former Minister of Finance, and later Minister of Industry, Trade and Investment, Olusegun Aganga, speaks with IFEANYI ONUBA on the management of the country’s Sovereign Wealth Fund and steps that can be taken by the Federal Government to address the potential economic crisis caused by the coronavirus pandemic
What informed your idea of a Sovereign Wealth Fund for Nigeria?
Many factors were considered. You may recall that I was appointed Minister of Finance at a time the world was just beginning to recover from the global financial crisis. And given my background as a professional accountant, appointed from Goldman Sachs, an investment bank, one of my priorities was to look at the sovereign risks and put mitigants in place to ensure that we were fully prepared for the next crises.
I also looked at the strength of our balance sheet-the quality and sustainability of revenues, the quality of spending and the loan portfolio. I concluded that to build a strong and resilient economy that would deliver sustainable and inclusive economic growth, we had to manage our risks better and address the issues identified. For example, the entire financial ecosystem was overdue for comprehensive reform. We needed to manage our loan book better and set up sinking funds to repay the loans; there was room to optimise the value and economic returns for a larger proportion of our borrowings. The economy was not diversified and resilient enough to absorb a major shock among other things.
We relied almost entirely on one source of revenue-oil, which is a finite asset, and we had no influence or control on the price of oil. When you dig deeper you also realise that at that particular time, of all the OPEC countries and commodity-dependent countries, Nigeria, Iraq, and Ecuador were the only countries in the world without a Sovereign Wealth Fund. Even countries like Ghana that had just found oil were already in the process of setting up a Sovereign Wealth Fund.
I also anticipated that with the discovery of oil by many countries, the supply would be more than the demand in a matter of time. So, we had to take a bold action immediately.
But did we really need a Sovereign Wealth Fund when we already had Excess Crude Account in place?
We knew that President Olusegun Obasanjo’s administration had taken the first bold step to set up the Excess Crude Account when Dr Ngozi Okonjo-Iweala was the Finance Minister. But the ECA is not a SWF and would not achieve the desired goals. We, therefore, decided to set up a SWF that would achieve the following: Help reduce the country’s vulnerability to significant external shocks resulting from global oil price fluctuations; ensure intergenerational equity, as oil and gas are finite assets; support domestic development efforts by investing in critical and trade-related infrastructure; serve as a catalyst for attracting additional local and foreign investment; and provide a powerful signalling effect to credit agencies and external investors in terms of improved fiscal management, with an associated positive impact on Nigeria’s sovereign credit ratings.
But many governors kicked against the idea then. What exactly was their point?
You see, we all complained about the over-dependence on oil and the lack of savings and yet it was unbelievably difficult when we decided to set up a fund to save and to diversify the economy. I recall a governor telling me that there was no need to save for a rainy day because it is already raining heavily and the state is flooded. To be fair, I understood where he was coming from and knew I just needed to be more persuasive- explain more, share the vision, and get them to buy into it.
Some told me point blank it was impossible and others argued that a section of the Constitution required all revenues to be paid into the federation account and distributed. While this is true, other sections of the Constitution supported the creation of such a vehicle but more importantly, it was possible to structure a Sovereign Wealth Fund that complied with all sections of the Constitution, including the section on paying all amounts into the federation account and distributing it. It only required creativity and political will. I had to get a legal opinion to support our interpretation of the relevant bits of the Constitution. Generally, it required patience and attention to every detail and side comments. I made about five presentations to NEC, and at a point, they insisted I present it to the Attorney Generals and Commissioners of Justice of the 36 states– we did and got the nod from them and then represented to NEC.
Also to be fair, I had constant support from some (former) governors like Peter Obi, Liyel Imoke, Murtala Nyako, Aliyu Babangida who nicknamed me “the father of the SWF” but that number grew as they got a better understanding of what we were trying to do. We then took it to FEC twice before we got the final approval from NEC. All through, I had a strong team working with me which included a former Chilean Minister of Finance who set up their SWF; international and Nigerian law firms led by Kayode Sofola, SAN, Udoma, and Bello Osagie. In all, it was a team effort. The bill was eventually passed into law on May 17, 2011 and signed into an Act on May 27 at 4.30pm. That was the last working day of the administration and the last major approval for that administration. Just imagine what would have happened if we didn’t work hard to secure the approval before the end of that administration! I am sure you know what I mean.
How would you assess the progress of the SWF to date?
On its implementation, I must commend my former colleague, Dr Ngozi Okonjo-Iweala, for the operationalisation of the fund. She did a terrific job. We also secured a first-rate investment banker, Uche Orji, as the pioneer Chief Executive Officer of the NSIA. The current administration has engaged well with the NSIA, increasing the Asset Under Management and has started to involve the SWF in infrastructure development. My only major disappointment is the size of the fund. By now, we expected it to be more than $15bn, not the $1.7bn; and that includes the seed capital of $1bn which I secured in 2011. The innovative structure for infrastructure development has not been fully utilised and the ECA should have transitioned to a Budget Smothering Account with a set limit as prescribed by the law/Act in the account. The aspiration was for the SWF to grow to about 15 per cent of the GDP at least. The support of the three tiers of government and the quality of the leadership at the board and management levels will ultimately determine the on-going success of the fund.
The Federal Government has had cause recently to fall back on the SWF to cushion part of the effects of the Covid-19 pandemic on the economy. Would you say it was to unlock the stability component of the Fund for this purpose?
Yes, it was in order and there may be more in subsequent quarters if the triggers are met. It is the first time such a withdrawal has been made but I am glad because it tested the structure and the controls we had in place and it was done transparently. I received so many emails, WhatsApp messages, and phone calls when it was announced– most people were asking whether it was legal, some had concerns that it could be the end of the SWF as all funds could be withdrawn, etc. My only regret is that we could have had more to cushion the effect of Covid-19 and the fall in oil price at this particular time if we had invested the excess over the benchmark price in the SWF for the past eight or nine years as contained in the Act. As I explained earlier, once the trigger points have been met, the government can withdraw funds from the stabilisation fund. That is what it was set up to do– to provide funds to support the budget when there is a sustained fall in oil price.
How exactly would you advise the FG to tackle the fallout of the COVID-19 lockdown on the economy, especially now that the IMF has predicted tough times?
Unfortunately, the International Monetary Fund is right. I have to admit that the effect on the world and Nigeria’s economy will be devastating. We were already heading for a tough time pre-Covid-19, but I expect it to be much tougher now because of the twin effects of COVID-19 and the significant and sustained fall in oil price. The glut is going to hit Nigeria harder because we do not have any refining capacity or solid long-term oil contracts as the Saudis have with China and we are almost entirely dependent on oil revenues to support our budget and reserves. I will give you some examples from a global perspective. In the US, 22 million people have filed for unemployment benefits. This is a disaster if you consider that it took almost 10 years to create 20 million jobs, it is feared that the US unemployment rate could reach 30 per cent. JP Morgan reckons that the global economy contracted by 12 per cent between January and March this year. The UK predicts upside scenario of Gross Domestic Product falling by 2.6 per cent in 2020 and picking up in 2021, but on the downside scenario, it predicts a contraction of 5.4 per cent in 2020 and by another 1.4 per cent in 2021. The UK expects a 35 per cent drop in economic output as a result of the virus and lockdown. For oil-dependent countries, all these have been exacerbated by 60 per cent or more slump in oil price.
What are the developed nations doing to tackle the adverse effects of COVID-19?
Spending, spending and spending to save jobs, to keep businesses open and to save small businesses. In mid-March, the UK announced its first rescue package worth £330bn to assist businesses struggling with the economic emergency caused by Covid-19. This is in addition to £12bn extra spending for public health. Since then, more spending has been announced. In the US, the Small Business Administration ran out of money meant to save small businesses within days.
So what should Nigeria be doing now?
The good news is that we appear to have started well with the committees set up by the President and with some of the announcements made by the Governor of the Central Bank of Nigeria. But I must emphasise the importance of coordination between the monetary and fiscal policies and measures. There is also the need to keep both eyes, not one, on exchange rates, reserves and inflation. I also have to commend the private sector and in particular the banks for the credit facilities, products, and moratoria granted to Small and Medium Enterprises and some vital sectors of the economy. As they say, one good turn deserves another. The taxpayers bailed the banks out during the global financial crisis, now the banks are bailing out businesses and Nigerians. That is how it should be.
We have to come up with a plan made by Nigeria and for Nigerians based on our peculiarities and resources. We cannot and should not aim to copy the western world hook, line and sinker, because we have a very different economy, the resources available are very different, the spending priorities and commitment as of today are different. The UK has to fund the NHS and the social security system. The levels of poverty and unemployment are also different. My view, given where we are today, is that our first focus should be on what we can control, and that is cost. Cut or remove all wastages, block all leakages, cut the cost of governance now, reprioritise spending, implement fully “buy made-in-Nigeria products”, spend to boost the economy and create jobs. Support consumers. The warehouses are full because there are no buyers, no disposable income. The rescue packages must start from the drivers of the economy – the MSMEs. There are about 41.4 million micro-businesses, 71,000 small businesses, and 1,700 medium businesses in the country – the approach should be bottom-up.
One lesson I learnt from Brazil is that most ministries always financially support the agency for MSME because this is the only sector that continues to create jobs in good and bad times. An unemployed person or a person laid off will not just sit at home he will find a way to become self-employed even if he has to buy and sell, drive a taxi- that is a micro business. We should also be thinking of expanding the safety net programme.
Food security is key to avoiding any social unrest at these difficult times. This means we have to continue supporting our farmers and the food industry in general but revisit the distribution channels. There should be incentives for companies to retain and employ new staff. Job-creating and fast-growing sectors like the entertainment industry and Information Technology will need some assistance. I am glad to see that some of the banks are already doing this. We should then support the larger businesses as we accelerate the implementation of the Nigeria Industrial Revolution Plan. We have delayed the implementation of the plan for too long. We must diversify our economy away from oil. Now is the time to seriously start the implementation. We need a structure that will ensure continuity in place. Without rigorous planning and continuity, countries like Singapore, Indonesia, Malaysia, etc, will not be where they are today.
With the drop in oil revenue due to the impact of COVID-19, what areas should the Federal Government be looking at to raise revenue to finance the budget?
As I said earlier, my first focus will be to cut and control costs in a significant way. Cut the wastages, block revenue leakages, and take this unique opportunity to cut the cost of governance. We all know that the presidential system of governance is an expensive one. And we now know we cannot afford it.
Why can’t we do something about it now?
This is a unique opportunity to make certain structural changes; we should not miss the opportunity. History will judge us well if we did. We also need to reprioritise spending and improve the quality of our spending. When we talk about sources of finance for the economy as opposed to the budget, there are four main sources. The first is the government-sourced revenue including loans. This is limited now but if we make our case well and we are seen to have taken some tough measures already, we may be able to access some grants, soft loans. I believe the government is already doing this.
But expect revenues from taxes, Customs, and Value Added Tax to fall. Some may have a dramatic fall. The second is the diaspora remittances. This is also affected because Covid-19 is global and has had an impact on jobs globally. The third is international investors and local investors. I am not talking about hot money here. We should focus more and give incentives to local investors. Tell me, what is the government doing funding infrastructure projects that are economically viable? This was what the Infrastructure Concession Regulatory Commission was set up to facilitate but since it was established, please tell me how many public-private-partnerships have we had? And yet we are spending money on the ICRC annually. We need a rethink, I think. Our debt-servicing cost is a relatively high percentage of our annual revenue. We should be engaging our lenders now to suspend all payments of financing cost and work towards renegotiating some of the loans and where possible seek debt forgiveness.
The IMF had predicted a negative growth rate of 3.4 per cent for Nigeria’s economy in 2020 due to the impact of COVID-19, how soon do you see the economy getting back to the path of sustainable growth?
This is a very good question but it is hard to tell. There are too many variables. It depends on the actions we take now, the quality of implementation, and when the vaccine against COVID-19 will be ready. Many governors kicked against the idea then.
Based on your experience as Nigeria’s former Minister of Industry, Trade, and Investment, to what extent would the COVID-19 pandemic affect the implementation of the African Continental Free Trade Agreement?
Just like everything else, COVID-19 will have a significant effect on the implementation of the African Continental Free Trade Agreement bearing in mind that trade is about the availability of goods and free movement of goods and people. For a start, we know that the commencement of trading within the AfCFTA is slated for July 1, 2020 but we now know that there will be no free movement of goods in the way we understood it until a vaccine is found and that could be sometime next year. The lockdown, physical distancing, and other measures taken by different governments to curtail the spread of Covid-19 have also led to an environment of low productivity, border and airport closures, and prolonged disruption in the supply chain. All these will affect the implementation of AfCFTA. On the technical level, some instruments that are required to be in place before the commencement of trading. For example, the Rules of Origin and the schedule of liberalised tariff lines have yet to be submitted. So, I expect to see a revision in the timetable. One final point is that Nigeria must not make the same mistakes we made with EPA. We had 10 years to prepare and assume our role as the leader in ECOWAS but in the end, we were not ready. The AfCFTA is good for the continent, but let me be clear that Nigeria is the market or one of the main markets in Africa.