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Tuesday, May 9, 2017

Explaining our Journey into Recession: Nigeria's Trade with the rest of the World III

      The rallying point for the East Asian countries that facilitated their rapid economic growth was 'export push strategy'. Among other factors, the East Asian success stories pushed for macroeconomic stability and low inflation; they also avoid deficit financing at some stages of their development story. They do all they could to accelerate export including using preferential treatments, soft credits, protectionist policies, currency devaluation. Buhari government aim at reviving the economy should not just stop at supporting local firms to produce for domestic consumption but must include export push as done by the East Asian success stories. In both the developed and emerging economies, one barometer widely use to measure health of an economy is export. Export is at the heart of German economy leadership of the euro area economy, likewise the extraordinary performances of both Japaneses and Chinese economies. We can barrow a leaf from both the US and Germany where states and regions have specialised in exportation of specific commodities and services. In Nigeria, for example, Kano shall start by exporting Agro-allied products such as processed foods, Shoes, and Garments as well as retails services; Lagos can specialised in exportation of financial services, and electronics; while Port Harcourt specialised in petrochemicals.  Federal government must find ways to rekindle export rivalry between the 36 states of the federation including allocating export quotas to be filled by each state. The  main difference between the economic strategy of China and India from 1980 to 2010 is very clear to the observers of the region; while China aggressively push export growth, India on the other hand emphasized on producing for its domestic market. Today we all know who is the winner, China has moved hundred of millions of its citizens out of poverty while India's population remain one of the poorest in the world.

     The case of Japan and South Korea is worth mentioning here, these two countries are not very much endowed with natural wealth like most African countries, but that notwithstanding they were able to import the raw materials they need, process them into finish goods and export them. There example is a case of what is called 'forced growth'.  In the case of South Korea, at the end of the Korean wars that led to the creation of today's North and South Korea, almost all of the industrial capacity of the Korean nation before partition were located in the North. Thus, after the war South Korea was left with nothing but agricultural lands; but now compare where the two countries are today - South Korea is a developed economy while the North is a developing economy. Innovation and entrepreneurship are at the center of Israel successes over the last decades. Small firms that were established as start ups with contributions from academia, military, and business later turned to become export power houses, exporting everything from security software, microchips, to agricultural outputs. The successes of the US in information technology can rightly be linked to small businesses (start ups) established in Silicon valley in the 1970s and 1980s. In the last two decades, these start ups have become the engine of US economic growth, accounting for large percentage of total US exports to the rest of the world. The great Austrian economist Joseph Schumpeter, for example, see economic development as synonyms with innovation, without technological innovation there would be no development. But, the kind of development Schumpeter was talking about can only be actively promoted by a serious government, which is the case in the US, Israel, Taiwan, South Korea, Denmark and many other developed nations. Schumpeter also emphases the role played by entrepreneur in all these, who is the innovator that make it all happens. Thus, at the end everyone will see that entrepreneurs are the back bone of export growth around the world.

      In most times, in the management of foreign exchange, it is much easier and practicable to use manage float than fixed exchange rate system, as it is not easy to know the actual rate that brings both internal and external markets into equilibrium.  The amount of human and material resources that will be devoted to the task of determining fixed exchange rate will then be put elsewhere in the interest of the economy progress. Multiple exchange rates do no one any good, CBN shall go for single exchange rate for every one with interest in Forex . Multiple exchange rates encourage corruption and inefficiency. Some of the problems we are having today with our foreign exchange can be linked to the activities of speculators who hoard Dollar thinking they understand very well the mind game of Buhari and his economic advisers. As recent discoveries by EFCC and other security agencies have shown, a lot of Nigerian elites have buried millions of Dollars somewhere in their houses, farms, and other properties; which contributed in no small way to the scarcity of Dollar we are facing today. Nigerian banks cannot be said to be innocence in the speculative attacks on Naira, either on their own or in collaboration with some powerful elites Nigerian banks have been working to undermine Naira to their own advantage. We all remember what happened during former President Babangida military regime's deregulation of the economy, when virtually all our banks abundant their primary assignments and become overnight Bureau De changes. But no matter what, Buhari government must also control inflation in order to establish the needed economic stability for healthy economic growth. CBN must double on it current effort to subdue inflation including stabilizing the foreign exchange market and reduction in interest rate. Buhari government push to revolutionarise our agricultural sector shall be encouraged. Agricultural export shall provide a short term solution to our over dependence on crude oil export.


Saturday, May 6, 2017

Explaining our Journey into Recession: Nigeria's Trade with the rest of the World II

     Foreign Direct investment (FDI) has played important role in the growth and development of developed and emerging economies of today. US itself could not be where it is today without the contribution of businessmen from Europe during its early history. The same thing goes  with China in the 1980s and 1990 after opening its doors to the world, substantial foreign direct investment came from Chinese residing in Taiwan, Hong Kong, Philippines, Indonesia, Malaysia as well as from Japan and South Korea. Every country has at one time or the other protected certain sectors of it economy from competition abroad. Before now, Nigeria virtually have no any active policy in place to protect it local industries apart from the localisation policies of the 1970s and early 80s. This turn of event become worst after return to democracy in 1999, as elected leaders fear backlash from their citizens for putting protectionist policy that would lead to increase in price and reduction in welfare. While over the last three decades, we have failed to established ourselves as an exporting country; but we have become very good at exporting one commodity, i.e. Labour. It is estimated that there are hundred thousands of Nigerian expatriates working in North America, Europe and Middle East. While the remittances they have been sending home serve as important source of foreign exchange in this period of scarcity of Forex in Nigeria, on the other hand their absence has deprived Nigeria of needed human resources to achieve rapid economic growth and development. This particular issue has been the genesis of now growing market in medicine tourism, foreign education, and capital exportation out of the country that have contributed to deterioration in the value of Naira against world major currencies.

       Our rate of inflation is not sustainable as it erodes gains this government want to achieve in term of encouraging domestic production and exportation. The simple true here is that higher inflation means foreign countries who want to purchase made in Nigeria goods find it expensive relative to that of other countries like China. While  domestic consumers find Nigerian goods expensive compare to those imported from abroad. This is why it is important for Nigeria to be careful in fixing its foreign exchange rate to avoid scenario where it achieves opposite effect of what it intends to achieve. There are empirical evidences that linked higher inflation with depreciating currencies around the world. Hence, CBN shall watch over inflation as at the same time it tries to stabilizes Naira. At this point one is forced to ask the question what happen to our previous priorities of focusing on agro-allied industry as our export base? A simple visit to Bompai, Sharada and Challawa industrial estates in Kano state left one stun. There are hundreds of closed plants in the three locations that (before they stopped production) specialised in production of agro-allied products for Nigeria markets and neighbouring countries. But today they are closed down because they cannot compete with imported commodities that flooded our markets. Like i have made mention before, with our high interest rate, poor roads, lack of power and unfavourable government policies of the last three decades there is no way these industries would have survived. Thus, as Buhari government tries to build roads, power plants, railways and new airports, it must have these industries in mind. Particularly, how current reforms connect to the issue of reviving our manufacturing?

    The point i have been trying to make shall be clear by now. That Nigeria as exporter of primary products, with declining international price relative to final output they are processed into, will continue falling behind those countries who purchase raw materials from her and turned them into finished output. Raw materials, in themselves, constitute small part of total monetary value of inputs into production of  outputs.  At the end, the amount of money Nigeria receives from selling her primary products will be lower than the amount she pays for her imports. under this scenario, Nigeria has no other alternative than to start producing those imported products herself as it is cheaper to produce locally than import, taking into consideration the deterioration in her term of trade i have made mention of earlier. This is how countries like China, South Korea and Brazil moved away from being primary producers to manufacturing power houses with active government support to private sector producers. These countries put local companies first before firms from other countries. In Nigeria, if not of recent, foreign companies were given preferential treatment over their domestic rivals. Look at our West African neighbour Ghana which in recent years was able to attract manufacturers away from Nigeria despite small size  of her domestic market compare with Nigeria. At the heart of the attraction of Ghana to manufacturers over Nigeria is combine impact of business friendly policies, constant power supply, good infrastructures, and political stability. These factors persuaded many foreign firms to move their head offices from Nigeria to Ghana from where they export their finish goods to back to Nigeria. The size of Nigerian market in Africa is enough to give Nigerian government bargaining power over any foreign investor coming to Africa who want to enter Nigeria market. One such condition must be that before any foreign businessman is allowed access into the Nigerian market she/he must establish plants in Nigeria.

Watch out for the concluding part of this series.....

Wednesday, May 3, 2017

Explaining our Journey into Recession: Nigeria's Trade with the rest of the World I

     No country in the world can be defined as an island to itself, as every country in the world trades with others through selling commodities or services to them and buying other commodities and services from them. Nigeria can be described as a mono-economy that depends solely on the exportation of crude oil to the rest of the world for most of its foreign exchange, while at the same time importing everything from car to cotton underwear. Thus, contribution of Nigeria to globalization virtually amount to its position as a consumer nation that supply raw materials to more serious economies around the world. From this vintage point one can see some of the causes of Nigeria's  current predicament i.e. when you consumed more than you produced. This is to me what Buhari government has being battling to correct  through it recent emphasis on reduction in importation and localization of productions. The collapse of crude oil price clearly exposed our precarious balance of payment position and the subsequent deflation in our foreign reserve position. Thus, we have negative balance or rather we operate with a trade deficit. Unlike the  Gulf oil producing nations who have very large savings which they fall on when oil price collapsed, Nigeria as at the time Buhari came to power has no such luxury, but depended on borrowing from other nations in order to balance the deficit in its trade with the rest of the world. As many commentators have observed, it was the spending spree of the PDP years in power that brought us to where we are today. Had it been previous PDP governments have saved for period like the one we found ourselves today, we would not be in the present mess.

    I do not know what happens to Nigeria priorities in term of its foreign relations which previously have Africa as it focus? Do we have its foreign trade equivalence today? Figures from NBS show that Nigeria trade more with countries outside Africa than with African countries; if we can remedy this and focus on Africa it will go along way in changing our current economic fundamentals from consumer nation to a producer nation. Because with our relatively low industrial base we can be able to supply African countries with some of the things they need. If China, which is today the second largest economy in the world, started this way by producing first for it Asian neighbors before others, why not us. Our real interest rate is today higher than the average real interest rate in our main trading partners which means that Nigeria is a net importer of capital from these countries. But, international capital do not move freely as domestic capital does, it takes time and come with stringent conditions attached. Thus, when the Chinese said they would lend Nigeria some ten billion dollars to finance railways and energy infrastructure, you shall remember that there are conditions attached that includes buying the equipments needed for the projects from Chinese manufacturers, using Chinese companies for the project, employing Chinese labour and the interest rate charged on the loan is higher than what Chinese banks charged their domestic borrowers back home in china. In short, China is using its foreign loans to find markets for its exports. Another negative side of our precarious position is that nations that agree to lend us money do so charging premium for the risk of default doing that taking into consideration our international credit rating as provided by rating agencies such as S&P, Fitch and others.

    With current high domestic interest rate in Nigeria, it is difficult for any  domestic investor to borrow and invest profitably without some assistance from the federal government in, say, imposing higher tariffs on imported commodities from abroad that compete with locally produced goods. But, this also come with its negative side effect in term of higher inflation; thus, more worries for domestic consumers of the same commodities who are used to cheaper alternatives from China and other low cost countries. Another incentive for local producers is where government reduce the amount of tax paid by certain industries that are considered strategic in our economy. Specifically, tariff policy should be used by the Buhari government to attract foreign producers into Nigeria in order to establish local production plants to replace those being imported. Nigeria has failed to take advantage of it abundant cheap labour and lunch itself as Africa's cheap labour alternative to Asian producers, but instead continue to depend on oil which is not sustainable, more especially with increased agitations from oil producing states in the Niger Delta. Everywhere around the world, oil producing nations from Saudi Arabia to Russia have come to the conclusion that their future do not depend on oil.This explain Saudi authorities current change of direction through emphasis industrialization, tourism, and service industries. In this kind of atmosphere such as we are in here in Nigeria, the best thing for the government to do is to put things in place for possible attraction of foreign investors in order to bridge the gap created by low investment in the domestic economy. But, central in that arrangement is getting our foreign exchange right first, which as we are now the foreign exchange position is not in a good shape to perform that function. No foreign investor invest his money where he is not certain about the country's foreign exchange regime.

To be continued...

Monday, April 24, 2017

Technology Start Ups in Nigeria: how, why and where?

      Now a day, when the term Start ups is mentioned the first thing that come to mind is Silicon valley in the United States which as technology hub come to being sometime in early 1970s. The name Silicon itself originated from the silicon transistor which serve as the building block of transistors use in making computers. It started with two to three companies and decades later it becomes what it is today, the world largest technology hub. In this set up is found a unique combination of technological know how and business acumen, with seed capital provided by venture capital firms. Today celebrated internet celebrities such Mark Zukerberg, Sergey Brim, Steve Jobs, Bill Gates, Jeff Bezos and numerous other less well known started as computer/internet enthusiast who possessed good ideas without the needed capital and entrepreneurship skills to transform them into money. It was the venture capital firms that came to their aids by providing capital and entrepreneurship skills needed to create today giants such as Facebook, Apple, Google, Yahoo, Amazon, LinkedIn, Twitter, Cisco Systems, Hewlett Packard, Adobe, Intel to mention just a few. Today, Silicon valley has the highest concentration of millionaires and billionaires per head in the United States itself. This phenomenon of establishing Start Ups is fast spreading around the world. In a very recent global innovation ranking released by World Economic Forum, smaller countries like Switzerland, Israel, and Finland were put ahead of US which came fourth in how fast countries are innovating. This show how countries around the world are competing to stay ahead in term of technological innovation.

   Nigeria need it own Silicon valley with its combination of young technology geniuses and venture capitalists. Internet giants such as Facebook, Google and Transport companies like Uber have realized the potentials of Nigeria in this field and are working hard to get there first. The recent visit to Nigeria by Mr Zuckerberg is a clear signal of the potentials Nigeria has in this direction taken into consideration the abundant talents and huge population we have. Up till now Nigerian government does not have a clear blueprint on how to make Nigeria the technology hub of Africa. At the level of state governments, what are they doing to develop this sector? Virtually nothing, with the exception of Lagos where the concentration of various kind of businesses and talents led to the start of one to two start ups here and there, there is not much to show. It take combination of academia, businessmen and government to produce something akin to Silicon valley in Nigeria. Ideal places for such combinations in Nigeria will include Lagos, Ibadan, Abuja, Kano, Kaduna, Enugu and Portharcourt. Many countries around the world have established their own Silicon valley like hubs, India, China, Israel, Pakistan, Russia, Brazil to mention just a few.Young Nigerian entrepreneurs such as Oscar Ekponimo base in Abuja uses technology to bring wasted food to the hungry through his new software application Chowberry. People like Oscar Ekponimo are not few in number in Nigeria, there are hundred others waiting to be discovered. Nigeria shall learn from the example of Israel where government provides part of the money invested by venture capital firms in new start ups. In Pakistan young technology enthusiast are provided with free working tools, office location, and internet access to start developing there talents.

Saturday, April 22, 2017

Economics of Whistle Blowing: what next for Buhari!

      Because of the recent importance professional economics attached to corruption related matters, there is today a large body of literature on economics of corruption where corruption is rigorously study and analyzed. There is current change in academic scholarship from the era when economists saw corruption as a research topic for scholars of sociology and political sciences, to now when corruption is seen as very important in understanding the economics of developing countries of the world. There is no way one can understand economies such as that of Nigeria without delving into matters related to corruption. Here in Nigeria the most talk about issue is the new Whistle-blowing policy of President Buhari, the rate at which corrupt government officials are being exposed on daily basis, more especially the amount of money being discovered is alarming. Since coming to  office in 2015 President Buhari has made fighting of corruption the epicenter of his government activities. According to some government sources, Billions of Naira of stolen government fund have been recovered. But, of more immediate impact on people understanding of this government war against corruption is the whistle-blower policy which empower citizens to report any case of corruption to secrete phone numbers operated by the federal ministry of finance, from where government official will take the case and investigate. The new campaign has help in making government efforts to close leakages in its sources of revenue and ensure financial discipline. In just about four month of the start of the policy over 80 billions Naira of stolen money has been found due to the policy.

      There is wide spread believe that effective anti corruption war spur economic growth. The fight against graft in China, south Korea, Taiwan and Chile was instrumental in their economic successes. Nigerian government need to engage with its business community as they are very important in the present arrangements. It is a known fact that our business men have in the past collaborated with corrupt public officials to launder stolen money. Foreign investors are another important source of corruption, where they spread the ill practice from one country to another with the expertise of some one who has been in the business for a long time. But, government must be careful and very intelligent in it fight so as not to scare away foreign investors from coming into the country as this will have an adverse effect on economic growth. For example, according to some analysts poorly executed war on corruption in China has caused the country lost of about 1.5% of gross domestic product (GDP). Here in Nigeria, the epicenter of corruption (in the entire system) is the public service where enriching one self from government funds is seen as the norm. How much Buhari war against corruption is  contributing towards pulling Nigeria out of recession is not yet made public by federal government. But, figures from IMF and Nigerian Bureau of statistics show the economy is moving away from recession gradually.

      Considering the devastating impact corruption has on Nigerian economy, it is high time for Nigerian universities to introduce courses on Economics of corruption. This will help students of Economics, Business Management, Finance, and Accounting to know more about corruption. I can give an example here of what happened in the United States after the collapse of the Energy giant Enron, some business schools immediately started running courses on corruption related matters including students' visits to prisons in order to highlight to them the consequences of their future actions or in action. Finally, to make the current successes being recorded by President Buhari anti-corruption efforts sustainable, government must introduce an effective Whistle-blower protection framework. This will go along way in encouraging other people to come out and tells the true concerning the whereabouts of looted government funds. Buhari's government shall rise up to the expectation and expose all past leaders who contribute in installing Nigeria's corruption culture as well as put things in place to cleanse our national assembly off rotten members in order to pave way for effective legislation against corruption. Someone has described the two chambers of the national assembly as 'chambers of corruption'. But, whatever policy Buhari put in place it shall be done carefully and intelligently, i will suggest that people shall be encourage to vote-out the present governors, corrupt senators and members of house of assembly.

Tuesday, April 18, 2017

Questions on Nigerian Stock Exchange profitability

      Looking at the huge losses incurred by investors in Nigerian stock exchange (NSE) after the 2009 financial crisis, many professional investors were asking the important question of whether it was possible to make money by investing in the market. Since 2009 to date, the performance of the market has been moving up and down making the market one of the most volatile in the world. Beta as measure of investment volatility in the market has been high over the period, while profits paid (in form of dividend and capital appreciation) has not been high enough to compensate for the high risk. Considering the current unpredictability of Nigerian foreign exchange management system operated by CBN, how safe is it for a foreign investor to include Nigeria in his portfolio? Added to this is the fact that Buhari's government is yet to have a complete blueprint on ways to manage Nigerian economy in the face of dwindling revenue. According to conventional finance models, such as Capital Assets Pricing Model (CAPM) developed by Sharpe and others, and Arbitrage pricing theory (APT) developed by Stephen Ross, return to any investment is payment for non diversifiable risk. And, an investment is good only when it is able to earn an investor reasonable return with minimum risk. Taken the above into consideration, investment in the Nigerian stock exchange will look unattractive to investors. Of course, this is actually what has been happening over the years as the level of investments in the market keep falling.Though, the market has recovered some of its mojo, but it is yet to return to it pre-crisis level.

    Like other African stock exchanges, with the exception of South Africa's, Nigerian stock exchange is segmented from other major stock exchanges in the world. This has important implication, it means that Nigerian stock exchange is  good for inclusion in international investment portfolios created by various fund management companies and other global investors - since lack of integration means the market does not move together with the rest of the world markets. Hence, Nigerian stock exchange will be perfect for portfolio investment. But, on the other hand, lack of integration means absence of efficiency and underdevelopment of the market. Here the simple lack of efficiency will among other things means poor service provision, high cost of transactions and bureaucracy. Thus, foreign investors who decided to include the market (i.e. NSE) in their portfolio must be cautious and calculative. While segmentation of the market will provide opportunity for realizing non diversifiable risk as assumed by finance theory to be provided by any good portfolio. It is also argued,  under CAPM and APT models, that higher beta (due to volatility of the market) and high cost of transaction (due to lack of efficiency) will mean risk is high in the Nigerian stock exchange. In summary, looking at things from the portfolio diversification point of view, Nigeria stock exchange is good for investors looking to gain from investing in African stock markets. While from the perspective of efficiency and predictability of returns, Nigerian stock exchange look unattractive.

Saturday, April 15, 2017

2017 Budget: An Observation

    When President Buhari made 2016 budget presentation to the national assembly he apparently was unaware of the politics and corruptions that went with passing of budgets through the two chambers of our national assembly. Mr President state of mind might have been formed under the impression that the budget would be scrutinized diligently and pass over to him in due course to start the implementation of it recommendation. Alas, our honorable parliamentarians had different idea on mind. By the time the budget was pass it was already middle of the year, people in budget office (including the director) have lost their jobs, national assembly was in crisis due to budget padding, and Nigerian economy was on the brink of recession. Up til today, 2017 budget has not reached implementation level, and 'if' and 'when' it is ready for implementation what shall the world expect from it? According to the minister of finance about N1 Trillion worth of projects have been executed in the 2016 budget, a record in the history of Nigeria corrupt budgetary process. Is this a glimpse of what to expect in 2017 budget as Buhari government continue to pump money into capital projects? Already one can noticed the increase in number of infrastructural projects being undertaken by this government from roads, railways, power to airports buildings, as well as increase in commitment toward human development and social projects.

    In term of budgeting for development, Buhari government can learn from the example of China, Malaysia, Singapore and South Korea in the 1980s and 1990s. How they were able to maintained rapid economic growth with equity? According to authors of 'the East Asian Miracle', they combined rapid demographic changes with dynamic agricultural sector and rapid export base. They also maintained macroeconomic stability with human capital investments, strong institutions and effective legal framework. so far Buhari has shown his old conservatism in managing the Nigerian economy in the mids of cash crunched and falling global oil price. One area that Buhari is doing well is in creation of strong institutions and legal environment to ensure corruption free atmosphere for rapid economic growth and development. Looking at the borrowings arrangements of his government over the next two years one can rightly say that Buhari government would not back away from deficit budgeting. Deficit budgeting is not bad in itself in as much as the borrowed money is put into most productive sectors of the economy that will quickly facilitate the creation of conditions necessary for smooth repayment of the loan and the general development of the economy. My advice to this government is that it shall find it priorities and focus on them as time is of essence.