Transcript Business Plan

Nigeria
The Search for a New Growth Model
Meetings of the Joint Planning Board (JPB) & National Council on Development
Planning (NCDP)
His Highness Muhammad Sanusi II, Emir of Kano
August 2016
The Golden Decade: Africa Rising
1st pillar of Africa Rising – terms of trade
350
"Africa
Rising"
"Hopeless
Continent"
300
Angola
Nigeria
Rwanda
Zambia
Ghana
Egypt
Ethiopia
Côte d'Ivoire
Morocco
Uganda
Kenya
Botswana
Mauritius
250
v
200
150
100
50
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
0
1984
 Yet this process did not
benefit all economies
evenly. Many of the East
African economies saw no
material change in their
terms of trade but still
grew strongly.
Rebased 2000 = 100
1982
 In 2002, it would have
taken 19 barrels of oil to
import a single Sanyo flip
phone, at that time a midrange phone. By 2008, a
phone from the same
range could be imported
with less than one barrel
of oil.
Terms of Trade Index
400
1980
 The terms of trade – in
other words, the
purchasing power of
commodity exports – were
a big part of the Africa
Rising narrative, and the
lost decades before it.
Source: World Bank Development Indicators
Muhammad Sanusi II
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August 2016
The Golden Decade: Africa Rising
2nd pillar of Africa Rising – debt
200
Gross Debt/GDP, %
2008
2002
The Great De-levering
150
100
50
Nigeria
Cameroon
Angola
Gabon
Uganda
Rwanda
Tanzania
Senegal
Mali
Burkina Faso
Ethiopia
Madagascar
Ghana
Mozambique
Kenya
Sierra Leone
Comoros
CAR
The Gambia
Rep Congo
Côte d'Ivoire
DR Congo
Togo
Guinea
Burundi
Seychelles
0
140
120
100
80
60
40
20
0
v
Gross Debt/GDP, %
2008
2015
The Quiet Re-levering
Nigeria
Cameroon
Angola
Gabon
Uganda
Rwanda
Tanzania
Senegal
Mali
Burkina Faso
Ethiopia
Madagascar
Ghana
Mozambique
Kenya
Sierra Leone
Comoros
CAR
The Gambia
Rep Congo
Côte d'Ivoire
DR Congo
Togo
Guinea
Burundi
Seychelles
250
Source: IMF World Economic Outlook (WEO)
 Heading into the Global
Financial Crisis (GFC)
Sovereign balance sheets
had been cleaned up by
Paris Club and HIPC debt
relief initiatives
 When the crisis hit, there
was scope for new
borrowing much of it
raised on their growing
local currency markets.
 This maintained growth at
artificially high levels and
contributed to a belief that
Africa had “decoupled”.
Muhammad Sanusi II
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August 2016
The Golden Decade: Africa Rising
Where did all this debt go?
 New borrowings were
recycled into higher
recurrent expenditure,
helping to sustain and
prolong the consumption
boom which had been
started by rising
commodity prices.
 For many countries, the
growth in public wage bills
accelerated precisely as
the commodity revenues
were getting hit by the
crisis.
 In Nigeria, the public
sector wage bill went up
from N443bn in 2005 to
N1,659bn in 2012 , driven
by a 53% increase in civil
servants’ wages in 2010.
Real* Public Sector Wage Bills
(2005 = 100) *adjusted for inflation
1,200
Ghana
Nigeria
Ethiopia
Kenya
1,000
800
v
600
400
200
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Haver, National central banks
Muhammad Sanusi II
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August 2016
The Golden Decade: Africa Rising
GDP growth and sovereign debt
GDP & Public Debt
2005-2015, per capita basis
5,000
Δ GDP/capita, US$
Δ Public Debt/Capita, US$
 However, in the context of
the “Africa Rising”
narrative this was
interpreted as a sign that
the continent had
decoupled, and could
grow independently of the
commodity cycle.
4,000
 This was true – but only to
the extent that
governments could keep
taking on more debts.
Today, balance sheets are
much more stretched, with
the result that growth rates
are falling.
1,000
3,000
2,000
v
0
Mauritius
Angola
Egypt
Nigeria
Morocco
Kenya
Botswana
Zambia
Ethiopia
Ghana
Tanzania
Uganda
-1,000
Côte d'Ivoire
 Rising debt levels allowed
African government s to
deliver abnormally high
levels of growth.
Source: IMF WEO
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August 2016
The New Normal: 2-Speed Africa
No longer one tide lifting all boats
 With the two major pillars
of “Africa Rising” no
longer in play, what will
drive growth going
forward?
 Instead of one “Africa
Rising” we will most likely
see a 2-speed continent
where some economies
growth at twice the
regional average, and
others are basically
stagnant.
 In fact, the non-commodity
group of African countries
is expected to be the
fastest growing in the
world, even ahead of Asia.
 What are the features of
these economies, and
what are they doing so
differently?
Real GDP Growth
% Change y/y
10.0
8.0
Non-Commodity Africa
Emerging Asia
Commodity Africa
MENA
Emerging Europe
LatAm & Caribbean
Developed World
6.0
v
4.0
2.0
0.0
-2.0
2010
2012
2014
2016
2018
2020
Source: IMF WEO
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August 2016
The New Normal: 2-Speed Africa
In an era of lower commodity prices, what still works?
 The common
characteristics of the fastgrowing group are:
̶ Investment-driven
instead of commoditydependent;
̶ Capital recipients rather
than capital exporters
̶ State-planned (to some
degree) rather than
free-for-all capitalist.
 The experience of East
Africa shows that the
investment-drive model
can deliver high, relatively
inclusive growth.
Total Investment/GDP, %
(public + private)
40.0
Ethiopia
Uganda
30.0
Rwanda
Ghana
v
Kenya
Egypt
20.0
Angola
Nigeria
10.0
 This kind of growth
requires neither
commodity revenues nor
unsustainable levels of
public debt.
0.0
2000
2002
2004
2006
2008
2010
2012
Source: World Development Indicators
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August 2016
The Road Ahead: What Are Nigeria’s Options?
Is the investment-driven model open to Nigeria?
 The government has
consistently prioritised
recurrent expenditure over
investment – all the more
so in times of economic
difficulty and leading up to
elections.
 The economy has
quadrupled in nominal
terms since 2005, and the
population has grown by
over 40 million, but capex
has barely changed
 In these circumstances,
how can Nigeria hope to
develop a growth-driven
model along the lines of
Kenya or Ethiopia?
GDP vs FGN Public Spending
500
400
Rebased 2005 = 100
Recurrent Expenditure
Capital Expenditure
Nominal GDP
300
v
200
100
0
Q405 Q406 Q407 Q408 Q409 Q410 Q411 Q412 Q413 Q414 Q415
Source: World Development Indicators
Muhammad Sanusi II
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August 2016
The Road Ahead: What Are Nigeria’s Options?
Why are the FGN’s financial resources so modest?
 For a long time, the
government’s focus has
been a re-allocation of
existing resources
towards capex, but this
can only make a limited
difference.
 The major problem for
Nigeria is revenue. Across
all 3 levels of government,
it collected just US$117
per person in 2015, and
invested US$17. Kenya,
with half of Nigeria’s level
of wealth on paper,
collected almost twice as
much in taxes.
Angola
Botswana
Côte d'Ivoire
Egypt
Ethiopia
Ghana
Kenya
Mauritius
Morocco
Nigeria
Tanzania
Uganda
Zambia
GDP/Capita
US$ (nominal)
4,100
6,041
1,315
3,740
687
1,340
1,388
9,218
3,079
2,743
942
620
1,350
v
Tax Revenues/Capita
US$ (nominal)
1,012
2,702
211
438
101
239
232
1,738
559
117
119
85
172
Development Spending/Capita
US$ (nominal)
276
684
89
89
82
58
129
194
169
17
49
43
79
Source: IMF WEO, National central banks, Haver
 If Nigeria is going to adopt
an investment-driven
model, it cannot rely on
the public sector alone.
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August 2016
The Road Ahead: What Are Nigeria’s Options?
But it’s not all about oil (or the FGN)
PV of oil reserves
GDP/capita (US$)
Upper middle
income threshold
4,000
3,500
3,000
v
2,500
2,000
1,500
1,000
500
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
0
2003
 A better way to think
about the influence of oil
is as the country’s working
capital. If it can be
replaced with capital from
another source, growth
can be re-started.
4,500
2002
 For Nigeria, oil wealth was
never the difference
between rich and poor. At
best, it would take the
country to middle income
status.
US$ nominal terms
5,000
2001
 On a per capita basis,
Nigeria is a marginal
producer. If the entirety of
its oil reserves were sold
tomorrow, the proceeds
would only add about
US$1,164 per head
compared to GDP/capita
of US$2,929 for FY2016f.
GDP/Capita & Oil Reserves*/Capita
2000
 The good news for Nigeria
is that it’s not all about
the public sector – or even
about oil.
Source: IMF WEO, Exotix calculations. *NPV of Nigeria’s oil reserves estimated using total reserves of
37.2bn barrels, price of US$60/bbl, production horizon of 40 years, discount rate of 12%.
Muhammad Sanusi II
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August 2016
The Road Ahead: What Are Nigeria’s Options?
The difference between capital inflows and capital flight
Kenya External Acounts (US$mn)
Nigeria External Accounts (US$mn)
Flight capital
45,000
Current Account
Other Investment Assets
Net Errors & Omissions
30,000
8,000
6,000
“Refugee” Capital
Current Account
Other Investment Liabilities
Net Errors & Omissions
4,000
15,000
2,000
0
0
-2,000
-15,000
v-4,000
-30,000
-6,000
-45,000
-8,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: IMF WEO
 What are the structural
differences between
Nigeria today, and the
investment driven
economies that are still
delivering strong growth?
 Historically, Nigeria has
not been able to translate
trade surpluses into
domestic investment.
Instead, the money has
leaked off-shore.
 Kenya has the opposite
problem: capital arrives in
spite of large deficits.
What makes Kenya
different and what does
this tell us about the
transition facing Nigeria?
Muhammad Sanusi II
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August 2016
Catalysing the Private Sector: What’s Required?
Attracting capital, Part I: the FX regime
 On a trade and inflation
weighted basis, the naira
has gone from one of the
most over-valued
currencies in the world to
one that is now under
valued.
 A major barrier to bringing
capital in from abroad has
been removed; a major
incentive to take capital
out has also been
removed.
REER-Implied Over/Under Valuation
75
Adjustment Required to Bring REER = 100
60
45
30
Under-valued
Over-valued
15
v
0
-15
-30
-45
Mozamb.
Ghana
Mexico
Turkey
Canada
Ukraine
UK
South Africa
Sweden
Tunisia
Nigeria
Korea
Denmark
Brazil
Gabon
Chile
Bulgaria
Côte d'Ivoire
Zambia
Uganda
Thailand
New Zealand
DR Congo
Japan
Philippines
Sri Lanka
Mongolia
Seychelles
Cambodia
Kenya
Angola
Vietnam
Uruguay
Lao P.D.R.
 Nigeria has made
dramatic changes to its
FX regime, moving from a
hard peg to a free float.
These bold steps have
gone a long way to
restoring its credibility.
Source: Bruegel, Bloomberg
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August 2016
Catalysing the Private Sector: What’s Required?
Attracting capital, Part II: interest rates
 In tandem with its
currency reforms, the
CBN has restored positive
real interest rates.
 This will help draw in
capital from abroad, and
will incentivise locals with
savings to keep their
money onshore.
10
v
0
-10
Argentina
Kazakhstan
Bahrain
Kuwait
Vietnam
Lithuania
Slovenia
Oman
Estonia
Mauritius
Bangladesh
Morocco
Bulgaria
Tunisia
Romania
Pakistan
Egypt
Serbia
Croatia
Jordan
Sri Lanka
Kenya
Nigeria
Lebanon
Ukraine
 However, local currency
returns are now among
the most attractive in
Africa, as well as the
wider frontier universe.
Frontier Markets
Africa
Mozambique
Mauritius
Botswana
Zambia
South Africa
Egypt
Kenya
Nigeria
Ghana
Tanzania
Uganda
 The changes have been
dramatic: as recently as
January, real interest
rates were deeply
negative in Nigeria.
Real Interest Rates, %
(measured against 364-day T-bill or closest euqivalent)
Source: Haver, Bloomberg, Central banks
Muhammad Sanusi II
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August 2016
Catalysing the Private Sector: What’s Required?
Eliminating wasteful subsidies
 The Buhari administration
has already made great
progress in stopping the
fraud associated with the
subsidy regime.
 PMS import volumes have
fallen from an average of
57 million litres/day in
2011 to 35 million
litres/day in 2016. This is
an achievement.
Nigeria PMS Import Volumes
80.0
Litres/month (millions)
70.0
Pres.Buhari
takes office
60.0
50.0
v
 The next step should be a
full and unequivocal
elimination of subsidy
regime.
40.0
 State governments should
petition for this outcome –
first line deductions
reduce the pool of
resources available to
them, too.
20.0
30.0
10.0
0.0
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Source: National Bureau of Statistics
Muhammad Sanusi II
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August 2016
Catalysing the Private Sector: What’s Required?
Addressing structural bottlenecks: start with the power sector
 Nigeria’s power sector
reforms have stalled, and
the sector is in danger of
collapse unless urgent
action is taken. What can
the Federal and State
governments do?
 (i) Petition for a specific
debt raising programme to
address unpaid arrears.
Until this happens no new
investment can take
place.
 (ii) Raise public
awareness about the
necessity of cost-reflective
tariffs, including the hike in
2016.
 (iii) Ensure that DISCO
owners make the
stipulated investment in
metering.
Total Power Generation
MegaWatts '000
5,000
4,000
3,000
v
2,000
1,000
Daily Generation
30-day Moving Average
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Source: National Bureau of Statistics
Muhammad Sanusi II
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August 2016
Catalysing the Private Sector: What’s Required?
Setting the business environment right: developing nation-wide land registry
 Property title is the
cornerstone of a well
functioning market
economy, and a requisite
for the next phase of
financial development and
capital formation.
 Yet Nigeria remains one
of the most difficult
countries in which to
register property. State
governments can do
something about this.
Procedures (number)
Time (days)
Cost (% of property value)
Quality of land admin. indexv(0-30)
Lagos
13.0
77.0
10.1
7.0
Kano
9.0
45.0
11.8
4.0
SSA Avg
6.2
57.5
8.3
8.4
OECD
4.7
21.8
4.2
22.7
Source: World Bank Doing Business Report 2016
 In fact, Lagos State has
already taken great strides
towards simplifying the
procedure of registering
land by merging all
relevant laws into a single
piece of legislation.
 Better tracking and
management of land
resources is also a key to
boosting state revenue.
Muhammad Sanusi II
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August 2016
Catalysing the Private Sector: What’s Required?
Investing in human capital
 Over the past ten years,
the FGN has spent more
than twice as much
servicing its debt as it has
on education.
 During this period,
education spending
accounted for 6.1% of
total spending, compared
to the average of 15% in
Sub-Saharan Africa.
 The result is that
productivity growth is
stagnating at a low level,.
Labour Productivity Growth
8.00
% y/y per person employed, 2012-2016 average
6.00
4.00
v
2.00
0.00
-2.00
South Africa
Sudan
Uganda
Madagascar
Tunisia
Egypt
Nigeria
Malawi
Senegal
Algeria
Mali
Angola
Zimbabwe
Burkina Faso
Cameroon
Morocco
Kenya
Zambia
Ghana
Niger
Tanzania
Mozambique
Ethiopia
DR Congo
Côte d'Ivoire
 As discussed, Nigeria
remains one of the most
under-invested economies
on the continent. And
much of the existing
investment is targeted at
resource extraction.
Source: Total Economy Database
Muhammad Sanusi II
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August 2016
Catalysing the Private Sector: What’s Required?
Protecting infant industry
Imports (% of GDP)
Exports (% of GDP)
30.0
20.0
10.0
v
0.0
-10.0
Zambia
Uganda
Tanzania
Seychelles
Senegal
Rwanda
Rep of Congo
Nigeria
Mozambique
Mauritius
Kenya
Ivory Coast
Ghana
-20.0
Gabon
 Successful policies in
cement and auto
assembly should be
replicated for petrochemicals and agroprocessing.
40.0
Ethiopia
 But the relationship has
become imbalanced.
Without manufacturing
capacity of its own, Africa
can never provide
meaningful employment
for its youth.
Exports & Imports/GDP, 2014 data
Egypt
 Large surplus countries
like China have been
using the promise of
investment and cheap
debt to gain unfettered
access to Africa’s local
markets.
African Countries Trade With China
Angola
 Beyond fixing the basic
supply side issues,
Nigeria also needs to take
measures to protect its
infant industries.
Source: IMF WEO, DOTS
Muhammad Sanusi II
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August 2016
Summary Points & Conclusion
What lessons can we take away?
 The years of “Africa Rising” where one tide could lift all boats are behind us: the
commodity cycle has turned, and government balance sheets are stretched.
 Sustainable, inclusive growth now depends on investment – and in Nigeria’s case,
this will require the private sector.
 The role that government can play in this process is defined by: (a) getting the
appropriate macro policies in place; (b) creating a supportive business environment.
 More specifically, it can:







v
Set the FX rate to incentivise capital inflows, catalyse FDI & DFI funding 
Set interest rates at levels that deter capital flight, dollarization 
Eliminate wasteful and abuse-prone subsidies 
Address failures in the power sector value chain, starting with DISCOs
Digitise State land registries, streamline relevant legislation
Re-prioritise public spending towards investment in human capital
Protect infant industry, specifically labour-intensive manufacturing
Muhammad Sanusi II
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August 2016
Thank You
Q &A
v
Muhammad Sanusi II
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August 2016