December 5, 2022

Why foreign investment has not recovered in Nigeria – World Bank’s country director – Punch Newspapers

  • November 1, 2021
  • 11 min read
Why foreign investment has not recovered in Nigeria – World Bank’s country director – Punch Newspapers

Punch Newspapers © 1971-2020 The Punch newspaper
World Bank Country Director for Nigeria, Shubham Chaudhuri
The Country Director for Nigeria, World Bank, Shubham Chaudhuri, speaks to SAMI OLATUNJI on the foreign exchange policy of the Central Bank of Nigeria, the country’s rising debt and insecurity challenge, among others
As World Bank’s country director for Nigeria, how would you describe the current state of the Nigerian economy?
 I would like to put my answer to this question in a historical perspective, both in terms of Nigeria’s history and what is happening globally. On the global front, the COVID-19 pandemic and the global economic recession that it brought about have affected all countries. Regarding the depth of that recession, in the case of Nigeria, it was the most severe recession in 2020 that we have had in four decades. The economy recovered more quickly than any of us had anticipated and certainly, the government did many things, especially on the fiscal front, to make sure that businesses and households were, to some degree, cushioned from the worst impacts of the economic crisis. The point though to keep in mind is that if you put this in historical perspective for Nigeria, the fact remains that real per capita income in Nigeria in 2021 is about the same as it was four decades ago in 1981. So, even as the economy has recovered from the latest crisis, the question to ask is: is the economy growing fast enough? More importantly, is the economy growing to the potential that Nigeria has, given its resources, the dynamism of its young population and, frankly, given what Nigeria needs for all the young Nigerians who are coming of working age?
Nigeria is one of the largest countries in the world. About three million Nigerians come of working age every year. They have aspirations and tremendous potential to contribute to the growth of this nation. The question is: is that potential being realised? I think that has been our basic message for the last one and a half years. Nigerian needs to do better for its own people and future generation. Nigeria has potential. I would say the economy has started to grow again. But the real challenge and the task ahead for all of us, especially the government, is that do not be satisfied with a growth rate that is in the one per cent, two per cent range, but a growth range that Nigeria is capable of in the six, seven per cent range. That is what it is going to take for Nigeria to realise its full potential.

 The Nigerian government in the last six years has resorted to constant borrowing to close its fiscal deficit. Do you think this is a wise decision? What does that mean for the country’s international reputation?
Most countries at some point in their histories, especially as they are developing and even once they are developed, borrow to finance the everyday workings of the government and for investing in the future. From a global cross-country perspective, Nigeria has actually in some ways an exceptional case because the overall level of public debt that the Nigerian government has accumulated is not that high relative to the size of its economy, compared to many other countries. On the other hand, Nigeria’s revenue base to service the debt is very low. While the overall debt to the size of the economy is not high, the debt service relative to the government’s revenue is very high. It is a situation where we won’t say this is a country that is in debt distress yet. However, Nigeria has to do more to increase its revenue base.
Whether or not borrowing is a wise decision depends on how that debt is used. In the case of Nigeria, there is certainly a need for financing. Nigeria needs to invest in infrastructure and human capital. At the moment, the government does not have enough revenue to invest in at the levels that it needs for Nigeria to grow in the future. Hence, that is where the impetus for borrowing comes. But once the borrowing is done, it is critically important to ensure that those funds are used to invest in the country’s future, build the base of the economy, and increase the productive capacity of Nigeria’s citizens, especially children. That is where the international reputation of Nigeria will rest at this point, not with how much it borrows, but how it uses its borrowings, and debt transparency.

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 With the high debt service-to-revenue ratio, should this not be a signal for the government to reconsider the need for certain loans and then boost revenue? What advice do you have for the government in this regard?
 I think it is Nigeria’s choice. One choice when facing a situation like this is do not borrow. However, the implication of that particular choice would be that certain core government services will no longer be financeable. Already, Nigeria is among the lowest in the world, in terms of public spending on, for instance, primary healthcare, on a per capita basis, given the size of the country. The consequence of not borrowing may be an inability to make certain kinds of investments needed for Nigeria to reach its full potential.
The second choice will be to redirect spending from other sources and, in some ways, recover what we call ‘foregone revenue’. For example, the nearly N1tn-N2tn spent yearly on subsidising Premium Motor Spirit is foregone revenue. If PMS was not being subsidised, the money will come into the federation account instead of being retained by the Nigerian National Petroleum Corporation to cover the cost of the subsidy. That’s another choice.
There are many ways of recovering revenues that are being spent in other ways without coming into the federation account. That also is a policy choice.
A third choice will be to do both: safeguard foregone revenues and try to recover these revenues to ensure that while Nigeria continues to borrow, the borrowing is directed to the right investments and, in parallel, raise new revenues. There is a great potential for raising non-oil tax revenues and tax excise revenues. What we try to do is to lay out the options, to spell out in very specific evidence-based terms what the physical, economic, and poverty implications are of each of these choices.
 The CBN stopped sales of foreign exchange to Bureau de Change operators in July. Do you think this is a necessary policy, and what are the possible implications? What do you think the country can do to enhance the value of the naira?
Nigeria, like many other countries, has gone through a very tough time, especially last year, with the price of oil falling, which had an immediate effect in terms of foreign currency inflows into the country because sales of crude oil are one of the biggest sources of foreign currency inflows into Nigeria. So, we recognise that in the middle of the economic crisis, Nigeria was under tremendous pressure, alongside the naira. One of the core mandates of CBN is price stabilisation. However, we differ with the CBN on how best this aim can be achieved.

In the FX market, the way it works is to let the naira respond to very real pressures but in a way that let the steam off rather than bottle it. Because if you bottle it, the pressure does not get released, and at some points, there has to be a massive adjustment. Over the last year, the pressures have been building up. Finding ways to release some of the pressures by letting the naira adjust more gradually would help and keep the naira in a long run from depreciating by a very large amount.
Also, the structure of the Nigerian FX market is complicated. What’s really important is the transparency, credibility and predictability on which ways the currency might move. To that extent, having the CBN’s intervention in the foreign currency market and the way it regulates the market be more predictable so that all stakeholders – whether people who are interested in bringing foreign currency into Nigeria or people looking to access foreign currency because they have some foreign currency obligation – get a sense of clarity and predictability is crucial. Having a more predictable, clear mechanism for the FX market would help in restoring and enhancing the confidence in the FX market and that becomes self-fulfilling. We haven’t had foreign portfolio investors come back to Nigeria since the COVID crisis, not at the levels that we saw earlier. Some of that has to do with what is happening to interest rates locally but some of that also has to do with their confidence that if they do come into the market, they will be able to get the FX out again – repatriate their profits.
What’s more concerning is foreign direct investors. FDI has not recovered. That also has to do partly with the level of confidence in terms of the ability to predictably access foreign exchange. While we understand and see what the CBN’s overall objectives are, we do differ on how those objectives might be obtained.
 What’s your take on Nigeria’s digital currency, eNaira?
This is something we are trying to study more carefully and understand better some of the details. The World Bank globally is contributing to the efforts on how Central Bank Digital Currencies can address longstanding aims for financial sector development, such as deepening access to finance and enhancing competition, strengthening the integrity of the financial system. But right now, globally, this really needs to be talked through as there can be unintended consequences of CBDC, such as currency substitutions; financial stability challenges, and risks to data protection and privacy, particularly in emerging markets. Therefore, this needs to be done carefully.
 We have witnessed a rising spate of insecurity in the country. What would be the implications for the economy?
The links between security and development or economic activity go both ways. Insecurity can slow down economic activities because individuals and firms are more hesitant or less able to engage in economic activities because of concerns about security. That is one link going from insecurity to low economic activity.

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But there is also the link going the other way, which is when individuals who have aspirations and want economic opportunities are unable to find them. They have to survive and may have to resort to crime or illegal activity to survive. So, there is a real risk of this becoming a vicious cycle, where insecurity hinders economic activity, and, therefore, the creation of economic activities, especially for all the young Nigerians coming of working age. And in the absence of economic opportunities through productive, legitimate economic activity, some of the youth then end up in illegal behaviours that increase the insecurity.
So, how does the government respond to this? Obviously, restoring security through law enforcement agencies is critical. But we will also emphasise the fact that there is a development dimension. It is about restoring faith and trust in the state in restoring economic opportunities and delivering basic services. Citizens have to feel that the state will deliver and we don’t have to resort to other means to survive.
It cannot just be a law and order focus. The problems of rising insecurity in Nigeria require a holistic approach, which recognises that restoring trust in government and delivering not just basic services but also economic opportunities for citizens by letting private firms grow and thrive is part of the solutions for dealing with the rising insecurity.
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