September 6 2017
By Bayo Ogunmupe
Economists are unanimous in their view that local and foreign direct investments are key to a nation's economic growth. Investment is particularly needed to complement economic growth and in the transfer of appropriate technology, the transfer of knowledge and access to foreign markets. Moreover, every level of investment is necessary for boosting employment, reducing inflation and in augmenting food production and in improving the living standards of the people.
For instance, Singapore, an inconsequential British colony with a population of 1.6 million in 1960, transformed itself to one of the richest nations in the world through attracting foreign investment to itself.
Therefore any country seeking economic prosperity must attract investment. Central to Nigeria's ability to attract investment is ease of doing business in the country. That was why Acting President Yemi Osinbajo issued an Ease of Doing Business Presidential Order to facilitate improvements in our investment portfolio.
Indeed, fostering the ideals of Ease of Doing Business enhances our infrastructure, access to raw materials, communication and transportation links and the acquisition of relevant technological skills. Also crucial to attracting foreign investment is the upholding of the rule of law, an end to impunity, part of which consists of a robust and independent judiciary, impartial and prompt adjudication of disputes.
Unfortunately, we are not doing well on these scores. Moreso, we can only boast of dilapidated infrastructure and there is insecurity due to periodic agitation for self-determination here and there. Though our huge population promises us much investment which is why investors can overlook these disabilities but investors are unwilling to accept our culture of impunity. It has become our character to illegally terminate agreements, contracts and projects without compensation.
That unruly behaviour has not ended even with the return of democracy. One example of bad faith was an attempt by the National Assembly to illegally and unilaterally amend the Nigerian Liquefied Natural Gas (NLNG) Act to force it to remit three per cent of its yearly budget as funding to the Niger Delta Development Commission (NDDC). This is expressly contrary to the contract agreement freely entered into by Nigeria, the NLNG and other stakeholders covered by the Treaties with France, the Netherlands and the United Kingdom. Nigeria had agreed to retain fiscal and security regimes of the investment agreement and not to amend the NLNG Act without express agreement of the other stakeholders.
The NDDC traversed the courts right up to the Supreme Court seeking to compel NLNG to pay the levy, only for the courts to affirm the right of NLNG not to pay the levy. Apart from large scale looting, this was another atrocity of the Goodluck Jonathan regime. Like in all cases with Nigerian politicians and cohorts with special interests, they attempted thwarting the court judgment by rushing to amend the NLNG Act thereby endangering the continued survival of the NLNG and the flow of future foreign investment to Nigeria.
Regrettably, it is often the case in Nigeria that once investors begin to flourish, Nigerian governments and her regulators begin to heckle these businesses, through seeking to extort money from them or subject them to hurriedly enacted laws and regulations in the name of protecting Nigeria's national interest. This greedy behaviour scares away investors.
In the days of yore, when Nigeria could rely on oil revenue, we could call the bluff of investors, but now with low oil prices, Nigeria will do herself a world of good by removing all the impediments to local and foreign investment. Another poor economic judgment from the Muhammadu Buhari administration is the US $3 billion loan taken by the Federal Government. Recently, Finance Minister Kemi Adeosun disclosed that Nigeria plans to refinance $3 billion treasury bills in order to improve Nigeria's debt profile.
Adeosun said the government wants to refinance her maturing short-term treasury bills with dollar borrowing of up to three years' maturity. The minister said it is the plan to restructure the debt portfolio into longer term maturities by borrowing more offshore and less at home. This, she said, will support private sector access to credit to boost the economy. However, data from the Debt Management Office (DMO) show that the Federal Government of Nigeria (FGN) has N3.6 trillion outstanding treasury bills as well as N8.1 trillion bonds.
Servicing these loans cost the FGN 15 per cent of her budget per year. According to the DMO, the FGN has spent N449 billion as interest payments in servicing these debts in the first quarter of 2017. Thus, $3 billion that would be raised is hoped to boost dollar liquidity by raising our external reserves and strengthening the capacity of the Central Bank to support the naira. It is also hoped this would reduce the cost of borrowing as less demand for domestic debt will lead to lower interest rates.
This economic adventure is untenable in public finance. For the dollar debt service in the same period, FGN paid $127 million according to the DMO. It is expected that such loans should be linked to the building of infrastructure. Mexico's tequila crisis is an example of the dangers of borrowing to pay foreign exchange spending. As we're doing now, Mexico borrowed to buy foreign luxury goods. But when the then U.S. Federal Reserve chairman, Alan Greenspan raised interest rates in 1994, the boom for Mexico came to an abrupt end. Mexico's currency crashed by more than 70 per cent.
It was the International Monetary Fund that bailed Mexico out. Even then, Mexico's economy continues to be on the brink of collapse till today. With an uncertain economic future; without a professional economic team to shepherd the Nigerian economy, this plan to plunge Nigeria deeper into debt should be scrapped.
Borrowing to import goods for the rich exacerbates inequality. And inequality makes it harder for economies to benefit from innovation. However, if people have access to credit it can offset the effect. Inequality is preventing people with less income from reaching their potential in terms of education, creativity and invention. There is also less entrepreneurship.
Having a large market for new products enables companies to create new goods to sell. This boosts national growth and prosperity. When wealth is concentrated in the hands of a small group of people, it increases demand for imported luxuries. In contrast, distributed incomes means more mass produced goods are manufactured locally. But reducing trade and innovation will only make everybody poorer. Giving people access to credit is the panacea for prosperity.