Okonjo-Iweala: Our Economy is Strong, But with Vulnerabilities

As Co-ordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala has a lot on her plate, driving the economic policies and activities of the government. During a visit to Lagos over the weekend, the minister took time off to field questions from THISDAY Board of Editors on a wide range of issues, which included the state of the economy, its strong points and vulnerabilities, the challenge posed by shale gas, government’s concern over growing oil theft, soaring interest rates and what to expect in the nearest future. In the team of editors were Ijeoma Nwogwugwu, Tunde Rahman, Kunle Aderinokun, Festus Akanbi and Business Correspondent Obinna Chima…


How is the Nigerian economy today and what are we expecting from the economy?

I will like to say there are several recent reports on the Nigerian economy done by international investment analysts and houses. There is one by Goldman Sachs that is recent and that you can look at, the JP Morgans, and Razia Khan and so on. So, there are quite a few, as well as IMF Article IV. There are a few reports that can support some of the things I’m about to say because it is good to have objective and independent analysis of our key strengths and vulnerabilities.
I think the two situations show that Nigerian economy is strong but has some vulnerabilities; so that is my opening ambit on the issue.

I say that because we have to look at it in two stages; in terms of macroeconomic fundamentals, the economy is quite strong and you can look at a number of indicators starting from the growth rate. We had projected 6.5 percent this year but the National Bureau of Statistics is looking at something in the region of 6.75. Inflation, which has come down to 8.4 percent from 12 percent; the exchange rate, which has been relatively stable between N155 –N160 around the band that is being managed; the reserves have built up quite nicely from $32 billion in August 2011 to about $47 billion till date. This points to some consistency in the fundamentals, but there are vulnerabilities. Those vulnerabilities are what we need to look at.

We should also look at a very good fiscal deficit. It’s about 1.8 percent of GDP as projected this year and we have done very well in terms of a tighter budget in the past two years compared to the kind of fiscal deficit you see abroad and even in nearby countries. In Ghana they have 12 percent of the GDP fiscal deficit; in the UK the fiscal deficit exceeds the 3 percent goal they have set themselves. So you can look at all that and see that the fundamentals are good.

I want to talk about one aspect of our strong fundamentals and it’s what some people have been talking about, and that is our debt situation. There are lots of writings on debts that I think are not well informed, that made me set out on the Back Page of THISDAY, the situation about our debt. What is the true situation? We have the debt to GDP ratio that is the envy of others in about 19 percent of GDP, most of that is domestic debt, so our external debt is about 2 percent of GDP; domestic is about 17, so about 19 in total, compared to the benchmark for countries of our level of per capita income, which is 40 percent. And beyond that you know what is happening in other places; Japan is doing 25, the US is above 100 including those in the Euro zone, the statistics is not very good.

But does that mean we are comfortable or saying there is no issue? I have always maintained that domestic debt is a debt that has gone up quite quickly and it needs to be watched and that we need to change our strategy about our domestic debt, which we have done by trying to stop the rapid accumulation of the debt, as you know, the debt builds up rapidly. Part of it was due to the fact that when salaries were increased in 2010 by 53 percent and there was borrowing at that time to help pay for this to meet the agitation. That is why I tease people when they say there is trouble; I say where were you when this was happening? Why didn’t you protest at the time and say the government should not have done this. This is what happened so there is need to talk and take decisions in the country. If you keep quiet as domestic borrowing is being done to fund recurrent expenditure like increases in salaries, then you cannot at the same time turn around and complain that recurrent costs are too high and that debt is too high, so it’s a question of choices. That choice was made and that’s part of the reasons why our domestic debt is high. People need to know that in 2010, the President recognised that this situation needed to be turned around because that was one of the things he told me. We have done that. We have borrowed N852 billion in 2011 but in 2012 budget, we have brought that down to N644 billion and to N588billion in 2013, so we have reduced the domestic debt quite sharply.

At the same time, we put in a strategy to actually start paying off some of the accumulated debt stock because we were just rolling over these bonds. For the first time, we paid back N75billion of the debt that fell due instead of just rolling it over, that’s quite substantial. That’s half a million dollar in payment. We have developed a sinking fund where we saved N25billion each year in order to save up so that we can start paying up these bonds as soon as they mature.

So this is a completely new approach that say let’s decelerate the borrowings, we cannot stop it abruptly because it will throw the country into problem, but we can. But I don’t think that people will accept if we are not able to bridge the gap between our expenditure and our income but we can do that through borrowing what we need to do now is to increase our revenues sharply to fund our expenditure and borrow less and if you see the pattern you will see that we have been doing that. I think on that front we have done relatively well. We have to watch debt service to revenues because if you look at that indicator that has been increasing, so that has been the vulnerability we have. So debt service to revenues is going up and that is why we have to drop sharply because if we keep doing what we were doing before, more of the revenues will be taken to service the debt and if you look at those numbers, the truth is that they have been going up. So that is where the vulnerability lies and this is why we need to have a sharply articulated debt service structure and which we do.

Now what are the vulnerabilities?
I have just told you one that we have to watch our debt service to revenue. In terms of the micro, we are presently suffering a quantity shock in terms of the production of our major export and that has brought the revenue available to government down by about an equivalent of $1billion a month.

That’s how much percentage drop?
Don’t worry about the percentage for now; I prefer to quote the absolute numbers because we should ask ourselves, percentage of what? Is it the federation revenue? It varies from month to month. In some months we experienced 17 percent and in some months it had been five percent. It’s very volatile so it’s pretty better to look at absolute numbers. You can look at it on average over the year but I can’t tell you a percentage now because it could improve towards the end of the year, which will be much better. So what I’m talking about now is the first half of the year. We have been about N168 billion short due to this quantity shock. The country has been able to weather the shock. When you have put in place the instrument of management, you don’t need to panic, you don’t need to go to the IMF, and you don’t need to go to the World Bank. Have you seen us going for any budget support? Have we gone for balance of payment support? No, I think this is something we should be celebrating because we have put in place a mechanism once and for all for dealing with this so what we have done is through Excess Crude Account. By the way, the Excess Crude Account is a component of our overall reserves. Our reserves are $47 billion, of which our excess crude is $5.1 billion.

Does that mean the excess crude has been the shock absorber?
Exactly, and that is the other thing I need to explain to people. The rationale for putting the Excess Crude Account and the oil price fiscal rule is that our economy is tremendously volatile and that is why this country is not growing. We were growing 2.2, 2.8 percent for the decades of the 90s into 2000, people have completely forgotten that, so when people say growth doesn’t matter, I ask them, do you want to go back to the era when you were growing less than your population growth rate and your per capita growth was negative and poverty was worse. So those are some of the things that we need to look at. That we did these things is cushioning volatility. We didn’t have it before. When oil prices were high, we cooked up many things, embarked on many projects, and that was why when it fell we came down with a brutal impact, sometimes government could not even pay salaries let alone finish the projects that were there. It’s not perfect yet but we have put in this mechanism that has smoothened things and because we put it at a time that oil prices were rising we did it well. That’s the Excess Crude Account. The idea is that when we have price shock, we are used to price shocks though, when prices drop, we go in and that was what we did. In 2008, we used it correctly.

Now we are experiencing the quantity shock and we are also using it correctly and that is why we were able to weather the storm and we can continue to weather the storm in the next three to four months, giving us enough time to try to solve the problem. We will be trying to sort out the problem of oil. We are also experiencing the drop in non-oil revenues. So Customs revenues have decreased and the reason is because of some of the measures we put in place. This was anticipated. If you put in place high tariff barriers because you want to produce your own domestic products and do not want to substitute, what will happen? The import will diminish for those products and the duties that you collect are going to be less. It is not a surprise so when we look at it, rice has been the biggest culprit. We announced in the budget that the tariffs would be up to 100 percent for all types of rice products, another 50 percent levy and so on and so forth to keep the pressure on rice. So you don’t see any shortage. There is a lot of rice in the market; I think they are also smuggled. There also appears to be a lot of smuggled rice in the market coming from the borders. We are talking to the Republic of Benin about this phenomenon and that is the flip side of the issue. Sometimes when your tariff is high, that’s what you have.

But that is the period when the economies of border countries boom.
Yes, but the quantity of rice imported through our borders have gone down and so customs duties have gone down. Because of the drop in oil output also, some of the oil receipts of FIRS have also gone down. These are some of the things that have happened with revenue and the issue is, what is the government doing on the oil theft issue because it is a problem we just have to solve, because it is a vulnerability and that’s when I talk of what is the key, it is a big task to the country and it’s one of a fiscal vulnerability so the President has set up a task force chaired by the Governor of Delta State (Emmanuel Uduaghan) and we have all the Niger Delta governors as members, I’m a member, the minister of petroleum resources is a member, minister of national planning, armed forces, including everybody that has anything to do with oil, including oil companies and I felt quite good about the direction of the committee under the Delta governor and we are focusing on short term.

What can we do now to restore one or two key pipelines-Nembe Pipeline and Trans-Niger-? I believe that in the next few weeks you will see these pipelines repaired, restored and protected in such a way that will add value again. If we restore Trans-Niger alone, 200,000 barrels of oil a day will come back into production. Now when we say 400,000 barrels are missing, it does not mean that 400,000 barrels have been stolen, may be about half of that but we have to shut down the entire pipeline when we experience this and the shutdown kept that amount out of the output so the net effect on the budget is the same but it does not mean that that entire quantity is stolen, we need to make it clear, about quantity lost because that will be a huge amount. The fact that they shut it down and that pipeline Nembe carries 100, 000 barrels a day. If you shut it down because 33,000 barrels have been stolen from it, the net effect is that 100,000 barrels is out of production and we are losing that income so we are moving to restore these pipelines for them. We are focusing on trying to be very specific on how we repair, and after repairs how do we protect the pipelines and I think a very practical approach is being taken by bringing all the concerned people around the table and we have started pushing this in a manner that will yield fruits. So this is something everybody has now started recognising that this Excess Crude Account is performing the function, which it supposed to perform and this is good.

What about micro economy?
On the micro level, the key challenge we face is of two-fold-the challenge of unemployment and the challenge of inclusion- and that’s what Nigerians keep complaining about. The fact that unemployment rate is 23 percent, and for youths, it’s higher at 37 percent. You know all these numbers; it is something that the government worries about all the time. When you now leave and look at the micro economy, you begin to look and see what we need to do. The biggest issue there is job creation. That’s what we focused on. I want to say one thing. If you look at the history of our economy in the past, especially of all African countries, not just Nigeria alone, things have now changed for the better.

We had never recognised that unless you have strong macroeconomic fundamentals, we cannot even begin to deal with the sectorial and micro and that was why Africa’s economies did not get it, the decades of 80s and 90s were completely lost because they thought they could just go and do agriculture when exchange rate was wrong. They thought they could do this, inflation was sky high, and of course you can’t. So no one must further minimise this, when people minimise this achievement that takes away three percent of growth in the Nigerian economy in the unstable micro-economy, all African countries have now got their macro fundamentals right and that is why they have been able to focus on sectorial issues. This is now where we are strong and now we go down to say how we can now improve. Where are those sectors that can create these jobs and have we got the prices right? For years agriculture went the wrong way because prices for agriculture were wrong.

The exchange rates favoured imports and not producing the thing in your own country. Now we are doing all of those things right. Inflation was so high that even if you are a farmer you produce, you can’t even get your money back. Now we are focusing on agriculture and I think what is happening in the sector is truly transformative in the sense of the value chain approach. This, to me, is one of the most interesting things that have happened. Before we used to talk of increasing agriculture output but if you do so and you don’t transform it you won’t create jobs. The fact that you are now saying if we grow cocoa, we grow rice, whatever we grow will transform to success as long as we keep the jobs. It’s a new mindset. It might not sound like a rocket science but we will be thinking that way, saying let’s go for research, improve seedlings and input, to production, to processing, marketing and possibly to export. You can now see these things.

The minister of agriculture is taking some few crops and trying to focus on them. An example is rice and I think the rice story is a very interesting one because it is evident-based. What has happened? You can go to 10 of the northern states, Kebbi, Zamfara and others, you can see that 1.1million metric tonnes of dry season rice has been produced for the first time and if you talk to people who have bagging factories there, they will tell you demand for their bags has increased. Output has gone up. This is a fact. We need to produce another 3.4 million metric tonnes of rice by 2015 and I’m saying if we were able to produce 1.1 million metric tonnes of rice in dry season, which is being done, that means in the raining season and with irrigation that should be something we can accomplished.
The dry season rice alone has generated 460,000 jobs.

They are seasonal jobs, most of them, but remember that all those people, who used to loiter during the dry season, that were not doing anything were gainfully employed and some of them were interviewed, they made up to N1 million for the work they have done. You can interview the farmers, they have had great surplus and proceeds, so even if it is 460,000, although I don’t have the breakdown to determine those with permanent or temporary jobs, the process took people off the streets and these are the kinds of things we are aiming at because a lot of people in the countryside who have nothing doing will be gainfully employed and we are trying to transform that rice to millets and that’s going to add quality. We have processing units in Ebonyi, I just got some bags of rice, very wonderful rice all over the country, and we have many types of rice; that is one. When you look at the value chains we are working on, the cassava for instance, you will see that cassava is a big success on the transformation side. Companies are coming in to make starch out of cassava. A South African company just visited me last week-SAB Miller- that are in Anambra State to make beer out of cassava like they are doing in Mozambique. They want to open another factory to start making beer not just one but several. They discovered that what they projected for this country they are doing multiple times of that business. The uses to which cassava is being put are very important because that is going to add jobs.

We are working on the housing sector now-Nigeria Mortgage Refinance Company- which is going to be private sector-led, which by September should take off and by January –February, we hope we will be able to increase the number of mortgages in this country which ranges from about 20,000 to 50,000 mortgages. We hope to quadruple that like 200,000 mortgages within three to five years and then move on from there using mortgage Refinance Corporation and we are setting it up, it’s government-sponsored but private sector-owned. The bank will be supported by primary mortgage institutions and of course the $300 billion World Bank loan.

These mortgages will be okay for middle to upper income people. So we need a parallel solution from the working class to the poorer people because even with the affordable rates, they will still not be able. So the parallel thing is that we are working with the ministry of lands and housing, we are working on several mass housing solutions, where we can have lease to own because they may not be able to get all that is needed for mortgage. We are working with so many Chinese, American and other companies and we are starting with 14 pilot states. Next week we will be having a meeting and at the same time we are doing this mortgage thing for the middle and upper income, we will be asking the states to be getting into mass housing to meet the low income earners and that is what we are doing.

The inclusion part is that we are concerned that people at the lower end of the ladder are not benefitting as much from the growth and that is one of the vulnerabilities. The two key vulnerabilities are unemployment and inclusion.

On inclusion part, if you create jobs, you will have jobs included but the other thing is the safety net because there will be some people who will still not benefit from this entire success story. Look at the issue of maternal mortality and infant mortality where we have our human development indicators are not among the best in the world but it’s no reason why women should be dying in Nigeria at the rate which they are dying. Should children be dying because they don’t have immunisation? So those are some of the things we are targeting to say let’s put a safety net on the maternal mortality and infant mortality and we are using SURE-P money to do that. This present development is saving one million lives. It is an initiative, which projected that by 2015 one more million lives would be saved in our attempts to prevent maternal mortality, infant deaths, death from malaria, HIV and so on.

As of now, more than 400,000 lives have been saved in this scheme. For people who would have received the benefits of the scheme and who would have died. We have the data of all the beneficiaries, this is all computerised, so it’s like what I said during the mid-term review, you could go and check. With SURE-P resources, we have been able to create a midwife service and this has already won a Commonwealth award. 3000 young midwives have been sent to the rural areas and they are the one doing this pre-natal care and we are also accompanying it with cash transfers and this is working.

To build countrywide safety nets, we need some kind of identification system, which we don’t have. In India, they are putting together database in order for India to create a countrywide safety net. Once you have got everybody and ID then you can move on, right now we don’t have it and that is why we are doing women and children because a pregnant woman is a pregnant woman, and a child is a child so that people who don’t deserve it will not benefit. We are working on the safety net, it needs to be broader and more inclusive and once you have got this card system in place and get the data of poorer people, and we will be able to do that.

We need to work on employment and we need to work on accompanied safety nets. These are the two things that were done in other countries like Brazil. They did cash transfers for the same thing we are doing here including education. We have started with education in places like Kano with cash transfers for girls to be in schools and it is working. We are going to spread those modules to other counties.

We need to open up many more sectors at the micro level to really push the housing. Housing is beautiful, do you know why we have in the US the Kayshella index, which they watch every month to see houses that have started, housing numbers… we just hear of this. The US sees the housing sector as the biggest driver of the economy and it is non-tradable, the same way Malaysia developed its economy for three decades through agriculture, housing and manufacturing. Housing and agriculture drove the economy but they didn’t focus all their attention, so we have not even begun to deal with the housing sector in this country. We are just doing it in a sporadic and unorganised manner. Many people cannot afford to buy in this country and it is part of inclusion. But the lower income people have to have roofs over their heads somehow. For the middle level people, they have to feel that one day you can walk in somewhere and take a mortgage, you don’t have to steal or do anything corrupt to get money, you can legitimately borrow money and buy a house.

So opening the housing sector will do a lot. So plumbers, electricians, interior decorators, carpet makers, the sectors which this housing touches are vast and can take a lot of unemployed people off the street. Government has not been the driver, we are now working with the private sector to try and find the way to get intellectual property and help in distribution. Those are the things we are doing.

On solid minerals, next week, we will have a presidential retreat on that sector. That sector, as you know, has not been opened up at all but we need to consider how to put infrastructure in some of the places where we have deposit, people will not want to go there to bring the things out. These are some of the things I think can help in the inclusion. Now to make all these work, you need infrastructure and that is the Achilles heel of the economy as well, a big one and everybody knows this, this is nothing new, so how do you deal with it? You have got to watch the power sector like a hawk and I have to tell you that this president has a power sector meeting every two weeks to ask for a read out from the key actors in the power sector to know the things he said we would be doing and what we have done. I think the biggest push to the power sector is just finishing with the privatisation, handing them over to the private sector now we are waiting for them to pay off and take possession of all the privatised distribution companies and the assets and the generation. We are working hard on transmission as you are aware, we have to invest a lot in the transmission sector to keep up with the evacuation of power, so we are looking $1.9billion emergency transmission programme so that that will not be the let down in the system. I think combining these, the problem you have now is very obsolete equipment that we have in place in many of these places. As we repair one, one is down again but I think the quicker the private sector takes possession some of these key assets the better.

Roads and rail, we need ports, all of these are being worked on. We have mentioned what has specifically been delivered in the rail sector, some of the long lines at Itakpe, people like Dangote are very happy about Lagos to Kano and people are even willing to invest to make sure we have more lines, the rail. I think getting power and infrastructure move in the right direction and trying to accelerate solution to those will be key.

Now, government has not also just waited for the sectors to take hold, There are a lot of specific programmes. So under SURE-P, which we are using as part of the safety nets, we have created the community service programme. As of now 120,000 jobs have been created under these community services. The graduate intensive programme, 96,000 graduates have applied through the internet although we were targeting 50,000. It’s just at the beginning, we have placed 1,500 so far and we have to accelerate the pace. From now over to next year, we hope to place the 50,000. Placing them as interns at private companies so that they can have access to training and skills. We have an instrument that goes from entrepreneurs, the YOUWIN, which has now created 15,000 jobs in the first survey and we are going to have another survey soon.

We have the programme to support young entrepreneurs and the unskilled, the community services and the graduates, which are the graduate internship, those three are working in parallel that is in addition to what we are trying to do. We did a survey on young entrepreneurs through the World Bank and 53 of them said power, others were access to finance and the third was corruption in that order.

In order for this economy to develop and grow, we must find a way for companies to have access to long-term finance. We are not talking about one to two-year money, if you get even three-year money you will be so happy, sometimes the interest rates are outrageous. We need 10 to 15 years money but we don’t have it at affordable rates. We have to solve that. Our commercial banking system has not been able to lend to the real sector at the rate, at the extent and at the scope at which they are needed. You cannot borrow on short-term money when you are making long-term investments.

You cannot do business when the interest rates are so high. If inflation in this country is 8.4 percent, if the monetary policy rate is 12 percent, why is the interest rate 20 percent to an entrepreneur who wants to borrow? It means the real rate of interest in this economy is up to 11 percent. In most economies, no rate of interest must exceed 2-3 percent, even 5 percent. Look at our inflation rate, the inflation rate is 8 percent or even call it 9 and the nominal interest rate is at 20 percent, that means the real interest rate is almost 11 percent, not doable. That’s what’s wrong with this economy. That’s why SMEs cannot develop. Even when they complain that the monetary policy rate is 12 percent and people just called me that they got loans for two years at 20 percent per annum, why is that? We have to strengthen and clean up our banking sector so that they can give loans at affordable rates, we haven’t done that. We wanted to create a Development Bank of Nigeria that will support 10 to 15 years money, we don’t have it.

What about the Bank of Industry?
No, this will be a wholesale institution that will retail, so we are restructuring DFIs, Bank of Industry will become more retail, reaching out to companies and SMEs. The Bank of Agriculture will also be restructured and privatised at least Bank of Industry has been positioned for privatisation. This wholesale bank will make money available to them so that they can have liquidity at reasonable rates which they will use for on-lending to microfinance institutions directly themselves to borrowers and so on and so forth. So that is what we are trying to build but instead of them giving money for one year, they will be able to lend it for five years and 10 years, which is not available in this economy.

In fact, people are so interested in it that African Development Bank and the World Bank are working with us on it, because now everybody recognises that what are missing in this economy are some key institutions. And when you realise there is no finance institution for mortgage, the question is where does liquidity comes from. When you sit down and realise we have been living for years, without any institution that gives longer term funds, where will long term money come from? And then we continue with the same story. The commercial banks are never going to do it, so that is the realisation now that these key institutions are missing but they are available in other countries like South Africa. So we must wake up and this is what I’m focusing on. From managing the macroeconomic and create jobs, it’s not by sitting down and talk, we need to find out what is missing, why are these things not working. So if we put these institutions in place that can give people loans, for five years, seven years, 10 years at reasonable rates, this is going to change the entrepreneurial landscape. So we are hoping within the next 18 months we shall build these institutions.

But don’t you think 18 months is pretty too long considering the fact that we will be having an election at that time?
Well, I don’t care about elections; it can be going on while we will be building the institutions that the country needs. Once you get started and there is momentum, those institutions will be there.

You talked about the President’s commitment to frontally resolving the issues surrounding the drop in oil production and the new task force set up to address oil theft and we know there were pipelines protection contract awarded to some ex-militants, so what has happened to the contracts? If they were not working, have they been cancelled?
To be honest I can’t really answer you well on pipeline contracts because I understand that they were there, but are not there anymore and whether it is being renewed or not, I do not know. The Director-General NIMASA can tell you a bit about that, but I think they are no longer in operation. I think there is a move to see whether these contracts, at least get to the communities. What they were talking about was getting the communities involved. That was what we discussed in the committee because the Delta State governor said when he had the communities involved in his state, it worked really well because they helped in monitoring. So I don’t know about the ex-militants, but bring the communities back into the picture is very much part of it.

What about the issue of metering?
The metering is not a finance function. You know I have put out what my functions are and finance cannot go and start metering oil. It is not our function! But it is a good idea, but I am just at the revenue end of it. I have no expertise and nobody in my ministry has expertise on metering wells. But we would like to have all the technology that can bring to bear for all these problems to be solved. And we must solve it as Nigerians; we have to. So if metering can solve it, let’s bring metering.

There were some confusion on pension last week where it was misunderstood to mean that the Sovereign Wealth Fund (SWF) would manage the pension funds and that went round. Can you clarify this issue?
You see, what can we do to ensure that reporting by the media is accurate? Sometimes I don’t know whether it is deliberate. What was said was that in most countries pension funds invest in infrastructure, but they need some protection to make sure that peoples’ pensions are not lost.

Then what we said was that the SWF is working on a mechanism – a mono-line insurance agency is what other countries have. All it does is that it insures the risks of pension funds investing in infrastructure. So they buy a bit of a premium from this agency and are protected from any losses. This is a beautiful thing. I had not thought about it at all and then the SWF came and said peoples’ pension has to be protected. It is a very good thing. Let us create what they have in other countries, like Indonesia; they have this mono-line agency. So pension funds, its rules are very strict as to what they can invest in. But we can help them do more and earn more returns by creating this agency that helps to sell their risks. That was all that was said. That the SWF is working with the IFC, the Securities and Exchange Commission (SEC) and others, to create this agency to enable pension funds to invest in infrastructure in this country at a reduced risk, and then it was reported that the SWF would take over the pension funds.

What is the capitalisation of the Mortgage Refinance Company and when will it start?
In September we are going to launch it. The recruitment of the chief executive officer is on at the moment and the capitalisation is being worked out. But right now have gotten a solid $300 million of tier 2 capital from the World Bank at 40 years term, 10 years of grace at no interest rate with 0.75 per cent commitment charge. But we are looking towards having this institution and we are working out what the capital base would be. Already we know we’ve gotten $300 million. We are also looking at the size and what the government and other companies would put in and we would announce that very soon. I don’t want to jump the gun. But this institution is going to float bonds on top of whatever it gets. So the capital we would put in would be just to kick-off because it is going to float about N50 billion of corporate bonds in addition to the $300 million and the other amount that would be put in. So, it would be very well liquid and well capitalised to be able to do its job.

You are an apostle of fiscal discipline, and with the advent of 2015, how are you getting ready to tackle the issue of big spending by politicians for the election?
We have a medium term expenditure framework where the theme is fiscal consolidation and we are not backing out on that. The 2014 budget would be quite tight because our production volumes are down as I said earlier. Of course in every country, there are pressures, but we would hold the line as best as we can.

What has been government’s response to the increasing Shale gas discoveries?
Let me say that is a very real issue and it adds to our vulnerability. It is a very important problem. The government’s response is that we must diversify the economy and work on agriculture and housing. That is why we have been trying to accelerate it. This economy must move away from this heavy dependence on oil, into other sectors.

The second is that we must look at our own oil and gas and we must use it to develop a petro-chemical industry here in the country. Gas can go into fertliser, it can go into plastics and if you notice, there are lots of investments going into petro-chemicals. The Indorama Company, Aliko Dangote, Jim Ovia and others. Indorama has set the pace by putting in 1.2 billion with the International Finance Corporation (IFC), and some other investors into fertilizer, Notore has done that too. So we have an emerging petro-chemical complex. That is why we must use our own gas and we also need to domesticate the gas so that instead of using kerosene, we use gas, which in the long run would be cheaper. The infrastructure to do it is a big bottleneck. So we have to build the pipelines to build the gas. That is why the $1 billion Eurobond that we just did is critical because half of it is going to complete the gas pipeline that takes gas from the rich eastern fields to places where the power plants are. Also, some of it can be used for the petro-chemical industry. But we need to build these pipelines if we want to use our gas domestically. But this is a good question because it is a huge issue for this country.

I would have thought that the refineries would be a key element of that in the light of the Shale gas discoveries. You were supposed to have approved the three Chinese refineries, what happened to it and what are we doing?
Let me just say something about the Chinese refineries. Some people came to me and said that the Chinese were willing to build refineries, but it turned out that what they wanted was for us to take a loan of about $12 billion to build the refineries. So, if they are willing to invest, fine. The message that the President gave to the Chinese was that it is not about loans, we are willing to take some, but we want them to invest their money as a sign of confidence in the economy and it was very well received. Many more companies are coming and we want them to invest and not for us to take any $12 billion loans. Look at the few loans we have taken, it has been followed with so much criticisms, even though our external debt to GDP is low. So when I heard they were coming to invest, I got so excited and when we sat and I found out that it was for us to take $12 billion loans, we told them that we are looking for people to invest. But I understand that some of our domestic investors are going to invest in the refineries.

The next issue is that of interest rates. With the economy today, the central bank has sterilised 50 per cent of public sector funds in banks and that shot up lending rate and everybody is concerned that it may affect your economic growth agenda. How are you responding from the fiscal side?
The first thing I have to say is that we have a central bank that is autonomous and it is the best practice to make these decisions. We may not be happy about it and I am bold to say we are not happy about high interest rates. As I said before, it is tough for our entrepreneurs to function. However, I just want to say that it is very easy now to blame the central bank for withdrawing this liquidity, have you looked at our banking sector? Even before the withdrawal of this liquidity, they were already charging over 20 per cent interest rates and I think that is alarming.

They were already charging very high interest rates and we need to interrogate why. Structurally, what is the issue? And we are not willing to ask our banks that question. So as the minister of finance, I have been very concerned about that. Even if the monetary policy rate (MPR) is 12 per cent, inflation is coming and there is no reason why the spread. It is too high! Why are real interest rates in the Nigerian economy so high? Deposit rates are extremely low and Nigerian savers are earning as low as five per cent and three per cent. But they are giving certain segments high deposit rates. So those segments that have high liquidity are made to enjoy higher deposit rates. This is also why we are looking at government’s accounts in banks. If you notice recently, we took several strong steps, because we wanted our IGR to go up. We had estimated that by second quarter we would make N58 billion from IGR sources and it was not coming. We asked the agencies to remit and they were not forthcoming. So we got permission from the president to take very strong stance, which was to make sure that they don’t open an account without the authorisation of the Accountant General of the Federation (AGF). We went and we were able to recover N34 billion. We had to go that far and we are still going to get the N58 billion that we estimated.

But I will be the last to say that government should interfere in monetary policy decisions. We have passed those days where you sit down and ask government to interfere in interest rates fixing and charges by banks. Those were the antiquated policies that we used to do. But by the fact that we are leaving the banks and we are running a free market system, which does not mean that you have to have this kind of behaviour. Private sector credit has gone down. I plan to have a meeting with the banking sector operators to really understand what is going on.

That is why we are really going to set up the development bank. I am not trying to bash them, but I am puzzled as to why. I think there is a structural problem within the banks and our banking system and their pricing. They will tell you that they have to buy power and they have to buy generators and diesel, but even when you factor all that in, in my mind, it should not be as high as it is. Then you find that some favoured people get loans at 12 per cent, whereas the ordinary person on the street will not be talked to.

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110 comments on “Okonjo-Iweala: Our Economy is Strong, But with Vulnerabilities
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