Olusegun Aganga * ‘COVID-19’s effects on Nigeria’ll be devastating’ A former Minister of Finance, and later Minister of Industry, Tr...
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| Olusegun Aganga |
* ‘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.
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