Is Nigeria’s Economy Overrated?

Here is Izabella Kaminska of the FT:

Source: Financial Times

Source: Financial Times

On the surface, Nigeria’s oil sector has dropped in significance to a mere 13% of real GDP, while the services sector has climbed to 40% in real terms. Yet, the reality is that it is the country’s oil revenues that have supported growth and, to a large extent, maintained social order. Without oil, both would fall apart; government spending would be much smaller, interest rates much higher, and the currency’s valuation much lower.

….. the country’s domestic savings rate, at a measly 20 per cent of GDP, is extremely low for a developing economy at this stage. A key reason being the government’s inability to tame chronically high inflation, meaning bank deposits have earned negative real interest rates for most of the past decade.

More on this here (HT Tyler Cowen).

And by the way, on this score Nigeria is not alone.

In an instance of the triumph of hope over experience The Economist recently pronounced the end of the resource curse in Africa. I do not completely buy their argument. Yes, growth and investment across the Continent may no longer be tightly coupled with natural resource cycles. But from Ghana, to Zambia, macro-economic stability (and important aspects of social spending) are still very tightly tied to movements in the global commodity markets.

Furthermore, many of these countries have recently re-entered the global debt markets partly backed by primary commodities as surety. The same applies to debts owed to Beijing. Last year alone foreign debt issues in the region exceeded $6.5b. As I argued in June of 2013, we might be entering another pre-1980s debt bubble.

Tanking crude prices have put Angola on the ropes. The country recently slashed $14b of previously planned spending. The Cedi and Kwacha took a nosedive (26% and 13%, respectively) last year because of sagging commodity prices (gold and copper) and government deficits (fueled by the expectation of future commodity bonanzas, especially in the case of Ghana whose debt to GDP ratio is now a staggering 65%). Even well-balanced Kenya (also a recent eurobond issuer) has had to go to the IMF for a precautionary loan against currency-related shocks in the near future. The current situation has prompted ODI to warn that:

The exchange-rate risk of sovereign bonds sold by sub-Saharan African governments between 2013 and 2014 threatens losses of $10.8 billion, equivalent to 1.1 percent of the region’s gross domestic product, the ODI said. While Eurobonds are typically issued and repaid in dollars, the depreciation of local currencies in 2014 makes it harder for governments to repay them.

All this brings to the fore SSA’s biggest challenge over the next two decades: How to carry out massive investments in infrastructure and human capital, while at the same time maintaining a sustainably balanced macro environment that is conducive to long-term saving.

On the upcoming Nigerian elections

On February 14 Nigerians will go to the polls in what is arguably the most important election in the world this year. Here is a (small) collection of things you need to read before then:

1. Alex Thurston has a great backgrounder for CSIS on the upcoming Nigerian elections. Want to know about the coalitions angling for power in Abuja and state capitals all over Nigeria and how ongoing political maneuvers will impact the outcome of the presidential election? Then click here.

2. Earlier this month Nigerian journalist Tolu Ogunlesi wrote an excellent piece for FT that emphasized the fact that this will be Nigeria’s closest and most unpredictable election yet (a point echoed by Zainab Usman, a Nigerian DPhil Candidate at Oxford, over at African Arguments). The level of competition will no doubt put pressure on INEC, and the losing candidate, to ensure that the legitimacy of the process is not tarnished, regardless of the outcome.

3. Brookings has a nice summary of some of the key political and policy issues at stake in this year’s election.

4. In the only detailed forecast that I have seen ahead of the election, DaMina Advisors project that APC’s Rt. Gen. Muhammadu Buhari will win with 51% of the vote (and get 25% in at least 27 states). There have not been any reliable polling data coming out of Nigeria in this election cycle, so take DaMina’s projections with a Naija size grain of salt.

5. And lastly, here is an op-ed from the former Governor of the Central Bank of Nigeria, Charles Soludo, on the economic dimension of this year’s election, as well as incumbent Goodluck Jonathan’s many failures.

If you have suggestions on interesting analyses ahead of the election please do share in the comments section.

Africa’s First City

National Geographic has a fascinating take on Lagos. And since we are just under two months to the next Nigerian elections, here is my favorite paragraph:

When I asked Kola Karim if the federal government’s sorry reputation made Western investors wary of doing business in Lagos, the worldly CEO elaborately dismissed it as a nonissue. Companies partnered with companies, not with bureaucrats, he maintained. “What does government do for you anyway, apart from charging you more taxes?” he said. “Look, it’s not about who rules anymore. Lagos is a train that has left the station. And you can only slow it down—you can’t stop it. So it doesn’t matter who comes next. This is the fun of democracy! It’s not about [President] Goodluck Jonathan! It’s about progress! Forget politics!” [More here]

From a political economy standpoint, one of the most fascinating things to happen in Africa over the last decade or so has been the quiet property rights revolution. In Nigeria, and a few other African countries, millionaires and billionaires have come out of the woodwork, willing to have their estimated net worth published in Forbes and other similar magazines for all to see. Very few of them have been politicians. Yes, many made their money in no small measure because of their political connections. But the fact that they no longer feel the need to hide their wealth from the ever changing political class means a lot.

It means that entrepreneurship and politics are getting decoupled in Africa’s biggest and most important economies. This transition is important because it will allow the magic of specialization to flourish. For instance, Dangote must be a savvy entrepreneur. But I doubt that he would have created as many jobs across the Continent if he also had to worry about running Abuja.

Also, it matters that Forbes’ Africa list is increasingly dominated by politically relevant high net worth individuals, as opposed to “apolitical” migrant businesspeople. Dangote is Nigerian “through and through.” When the going gets tough, he is more likely to voice his concerns than simply exit. The chaps in Abuja can’t simply revoke his visa or work permit. His political views therefore matter a lot.

One hopes that at some point Nigeria’s Dangotes will start investing in higher quality political talent to ease the cost of doing business and improve human welfare through greater investment in public goods.  But of course there is another possible equilibrium path in which they decide that low quality political talent is what’s best for their business prospects.

Either way I hope to visit Lagos soon.

Working With the Grain in Development

I finally got to reading Brian Levy’s Working With the Grain. It is easily the most underestimated development book of 2014, and should be read alongside William Easterly’s Tyranny of Experts (which it both complements and pushes back against). Like Easterly, Levy worked at the Bank and has insightful case studies and anecdotes from South Korea, to Ethiopia, to Bangladesh, among other countries. The book’s main thrust is that approaches to interventionist development policy ought to internalize the fact that:

… Successful reforms need to be aligned with a country’s political and institutional realities. For any specific reform, an incentive compatible approach begins by asking, who might be the critical mass of actors who both have standing and a stake in the proposed arrangements – and so are in a position to support and protect them in the face of opposition? [p. 142-3]

From a policy perspective, Levy tackles the relationship between governance, regime types, and development head on. How do you deal with the Biyas, Kagames or Zenawis of this world if you deeply care about [both] the material aspects of human welfare – roads, hospitals, schools, electricity, etc., [and] political freedoms and inclusive institutions?

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Levy’s answer is that development experts should work with the grain, focusing on incrementally solidifying past gains in specific agencies and issue areas, instead of engaging in epic battles against ill-defined and equally poorly understood “bad institutions” and evils like “corruption.” He aptly points out that you do not need the full set of the “good governance” bundle in order to continue chugging along on the path to economic prosperity.

In other words, we don’t have to put everything else on pause until we get the institutions right (or topple the bad guys). It is not an all or nothing game. His argument is persuasive (“good governance” has failed as a prescriptive remedy for underdevelopment), albeit at the cost of casting the immense toll of living under autocratic regimes as somewhat ineluctable on the road to economic prosperity. But at least he dares to challenge conventional approaches to governance reform that have at best failed, and at worst distracted governing elites from initiatives that could have worked to improve human welfare in developing countries.

As I read the book I wondered what Levy might think of the current state of development research. We are lucky to live in an age of increasing appreciation for evidence-based policy development, implementation, and evaluation. However, the resulting aura of “objectivity” in development research often leaves little room for politics, and its inefficiencies and contextual nuances. Sometimes the quest for generalizability makes us get too much into the weeds and forget that what is good for journal reviewers seldom passes the politicians’ (or other influential actors’) incentive compatibility test, rendering our findings useless from their perspective.

It is obvious, but worth reiterating, that the outcomes we can quantify, and therefore study, do not always overlap with the most pressing issues in development or policies that are politically feasible.

Perhaps this is a call for greater investment in public policy schools (not two-day capacity building workshops) in the developing world that will train experts to bridge the gap between academic development research and actual policy formulation and implementation (talking to policymakers makes your realize that this gap is wider than you think). Linking research findings to actual policy may sound easy, but you only need to see a “policy recommendations” section of a report written by those of us in the academy to know that it is not.

The disappearing Lake Chad, 1963-2001

 

I have been looking at the African Development Bank’s long term strategy (available here) and one of the figures that caught my eye was the extent to which Lake Chad has shrunk over the last 50 years. Wow.

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Africa’s newfound love with creditors: Bond bubble in the making?

I know it is increasingly becoming not kosher to put a damper on the Africa Rising narrative (these guys missed the memo, H/T Vanessa) but here is a much needed caution from Joe Stiglitz and Hamid Rashid, over at Project Syndicate, on SSA’s emerging appetite for private market debt (Africa needs US $90b for infrastructure; it can only raise $60 through taxes, FDI and concessional loans):

To the extent that this new lending is based on Africa’s strengthening economic fundamentals, the recent spate of sovereign-bond issues is a welcome sign. But here, as elsewhere, the record of private-sector credit assessments should leave one wary. So, are shortsighted financial markets, working with shortsighted governments, laying the groundwork for the world’s next debt crisis?

…….Evidence of either irrational exuberance or market expectations of a bailout is already mounting. How else can one explain Zambia’s ability to lock in a rate that was lower than the yield on a Spanish bond issue, even though Spain’s [which is not Uganda…] credit rating is four grades higher? Indeed, except for Namibia, all of these Sub-Saharan sovereign-bond issuers have “speculative” credit ratings, putting their issues in the “junk bond” category and signaling significant default risk.

The risks are real, especially when you consider the exposure to global commodity prices among the ten African countries that have floated bonds so far – Ghana, Gabon, the Democratic Republic of the Congo, Côte d’Ivoire, Senegal, Angola, Nigeria, Namibia, Zambia, and Tanzania.

In order to justify the exposure to the relatively higher risk and lending rates on the bond market (average debt period 11.2 years at 6.2% compared to 28.7 years at 1.6% for concessional loans) African governments must ensure prudent investment in sectors that will yield the biggest bang for the buck. And that also means having elaborate plans for specific projects with adequate consideration of the risks involved.

Here in Zambia (which is heavily dependent on Copper prices), the Finance Minister recently had to come out to defend how the country is using the $750 million it raised last year on the bond market (2013-14 budget here). Apparently there was no comprehensive plan for the cash so some of the money is still in the bank awaiting allocation to projects (It better be earning net positive real interest).

“They are fighting each other. By the time they have projects to finance, they will have earned quite a lot of interest from the Eurobond money they deposited. So, all the money is being used properly,” he [Finance Minister] said.

Following the initial success the country’s public sector plans to absorb another $4.5b in debt that will raise debt/GDP ratio from current ~25% to 30%. One hopes that there will be better (prior) planning this time round.

Indeed, last month FT had a story on growing fears over an Emerging (and Frontier) Markets bond bubble which had the following opening paragraph:

As far as financial follies go, tulip mania takes some beating. But future economic historians may look back at the time when investors financed a convention centre in Rwanda as the moment that the rush into emerging market bonds became frothy.

The piece also highlights the fact that the new rush to lend to African governments is not entirely driven by fundamentals – It is also a result of excess liquidity occasioned by ongoing quantitative easing in the wake of the Great Recession.

I remain optimistic about the incentive system that private borrowing will create for African governments (profit motive of creditors demands for sound macro management) and the potential for this to result in a nice virtuous cycle (if there is one thing I learned in Prof. Shiller’s class, it is the power of positive feedback in the markets).

But I also hope that when the big three “global” central banks start mopping up the cash they have been throwing around we won’t have a repeat of the 1980s, or worse, a cross between the 1980s (largely sovereign defaults) and the 1990s (largely private sector defaults) if the African private sector manages to get in on the action.

African governments, please proceed with caution.

The politics of reforming Nigeria’s oil sector

Nigerian legislators are attempting the impossible – to reform the management of their nation’s biggest cash cow – and failing. Decades of mismanagement and grand corruption have left Nigeria’s oil sector with entrenched and convoluted interests that are almost impossible to untangle and dislodge.

Africa Confidential reports:

Efforts towards comprehensive reform of Nigeria’s oil and gas industry are in tatters some five years after the first version of the Petroleum Industry Bill was presented to Parliament. After several redrafts, the PIB is still on the floor of the National Assembly and at the centre of partisan disputes, as parliamentarians pick over clauses which they claim favour one region of the country over another.Meanwhile, well connected companies and officials continue to benefit from an opaque system of management and operation that has allowed as much as US$100 billion to be siphoned off from state oil and gas revenue over the past decade, according to a report drawn up by the former anti-corruption czar, Nuhu Ribadu (AC Vol 53 No 9).

The failure to pass the reforms mooted in the PIB, which was intended to boost accountability and state revenue from exports, has developmental as well as financial costs. Nigeria has been unable to conduct a licensing round to award new blocks since 2007 because of uncertainties about new regulations and fiscal terms. This has limited new investment, raising the possibility that production capacity, which has been fixed at around 2.5 million barrels per day for a decade, could start to fall in the next few years.

More on this here.

Georgetown MSFS Launches New Africa Scholarship

The application deadline is January 15, 2014. Spread the word.

Starting in fall 2014, the Master of Science in Foreign Service (MSFS) at Georgetown University is offering a full- tuition scholarship for a talented graduate student from sub-Saharan Africa.

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MSFS is a two-year, full-time graduate degree program in international affairs. Students will take courses in international relations, international trade, international finance, statistics and analytical tools and history. In addition, students choose an area of concentration such as International Relations and Security, International Development or International Business.

Reason for African Petro-Rulers to be Worried

Africa’s petrorulers (heads of state of Angola, Cameroon, Chad, Congo-Brazzaville, Equatorial Guinea, Gabon, Ghana, Nigeria, South Sudan, and Sudan) may be headed for tough times later this year. According to a piece by (Steve Levine) over at FP, Saudi Arabia – the world’s leading oil producer – is considering flooding the global oil markets with the aim of sticking it to the Russians and Iranians. Saudi action of this nature could lower prices to as low as US $40 a barrel from the current $83.27.

With the exception of Ghana and Cameroon, such a drop in oil prices would almost certainly lead to political unrest in the rest of Africa’s oil producers. Sudan and South Sudan are already facing huge revenue shortfalls due to a dispute over the sharing of oil revenue.

More on “The Coming Oil Crash” here.

Links I liked

I just discovered Chri’s Blog on Madagascar and other Africa-related issues.

For those with a flavor of finance and capital markets and the political economy of development be sure to read Frontier Markets.

Germany is on the hunt for the UN security council seat in Africa.

And lastly, Justice – Uganda style:

Vice president upsets the president during tenure, president fires vice after election. Former vice gets accused of corruption. President declares former vice innocent, but leaves the matter up to the “independent” Inspectorate of Government. Here’s a quote from the president:

“What I know is that there was a power struggle between Bukenya and some businessmen but I found no merit in the case. But since the Inspectorate of Government is an independent body, let them investigate thoroughly.”

Yeah right.