Selling Nigeria’s assets

As the debate on whether Nigeria should sell her assets or not rages on in the country, Atedo Peterside, the Chairman of Stanbic IBTC Holdings and former Chairman of the Technical committee on the National council of Privatisation believes that sale of government stake in all the oil and gas joint venture operations is one of the best ways to prevent an economic meltdown. He spoke to CNBC Africa’s Wole Famurewa about why these asset sales may be vital to the Nigerian Economy’s recovery.

Before we get on to the point about the sale of assets can we hear your thoughts on this whole currency conundrum? What is the best way forward? Because we’ve been at it for the greater part of two years and our policies do not seem to be working. The Naira continues to weaken. What tough decisions do we need to make now in your view?
PETERSIDE: In all honesty, I don’t even want to claim ownership of the belief that the sale of our assets is one of the best ways we have to prevent economic meltdown. Various people have spoken in the same vein. The Emir of Kano has spoken about it, and I spoke earlier this year in February. Several seasoned economists have said as much both locally and overseas, so I can’t take ownership of the thought. We keep saying that it is not about devaluation. It is about transparency, and having a credible mechanism which lets everybody know that they can access foreign exchange at the same price as their next door neighbour.

What we have is a convoluted system where some people access foreign exchange at 310 naira to the dollar and 320 naira to the dollar. Others are not allowed to access the market at that rate because of various impediments. This has created confusion and spooked all investors both local and foreign. So it’s about correcting that and that’s something that we still haven’t done. We never moved properly to a market determined exchange rate system. That is the issue. If we’d done that, I do not believe that the parallel market would be at 480 naira.

A related issue here is the conversation around the sale of assets because as it has been put out there, if we sell some assets that can bring much needed dollars, it will help boost reserves and help strengthen the economy. How should we go forward from this conversation around the sale of assets?
PETERSIDE: First of all there is a need to ask about why we are talking about asset sales. Ideally if the Federal government had savings, and lots of reserves, we would just draw on our savings and reserves and there would be no problem. The problem has arisen because after an oil price shock, Nigeria, Angola and a few other countries witnessed a terms of trade shock. Our import bills have remained high, and our earnings from exports have collapsed. When this happens you can either pretend that there’s no imbalance and continue with the old exchange rate, or you can quickly come to terms with that fact and then have some sort of devaluation and allow the market mechanism to bring the market to equilibrium. This will lead to an exchange rate that reflects a sharp devaluation.

One at which we can all do business in a predictable fashion. Whilst you have that forex shortage and scarcity you also probably need to have high interest rates to help to also curb inflation and to encourage foreign investors to come in to buy bonds and bring in foreign exchange. Sadly, high inflation makes it more difficult for the borrowers while helping depositors but the net impact of all those changes is that GDP growth will start sliding, and we watched it slide until it got negative. Now we are trapped with high inflation and negative growth which is even worse than stagflation because stagflation implies zero growth and we are in negative growth. So therefore as we have no savings, the thing that is crippling the economy is the forex shortage.

To add to that point, I spoke to a member of the house of assembly recently, and he is suggesting that we should bite the bullet and resolve everything locally. Is that a reasonable solution?
PETERSIDE: Let’s leave all of these extreme ideas that will bring about the complete breakdown and meltdown of the Nigerian economy. What I’m saying is the thing that is holding down the private sector in Nigeria is the absence of foreign exchange. Let us not be confused. It has nothing to do with the share of oil and gas in GDP, or that Oil and gas is essential for government revenue. What we need to remember is that a lack of government revenue does not strangulate the local manufacturer what strangulates him is the lack of forex. Let’s also be clear that the split in our economy in terms of the Aggregate Demand share of the private sector and public sector – the last time I checked, is 92 percent for the former and eight percent for the latter. So the issue is that the lack of forex is crippling 92 percent of the economy because the private sector is rather reliant on the availability of forex. This is where the chokehold is coming from.

Since we have no savings, even if we put in place all the right economic measures to adjust our economy there is still the short term lack of forex liquidity. And that can only be breached in one or two broad ways. You can either go borrowing from external parties, or sell your assets. The reason why some of us favour asset sales in structured manner is that Nigeria has some assets that earn us nothing, but cost us every single day that we hold on to them. Today, one of the headline stories was that the presidential fleet is selling aircrafts. That is a very good example of an asset sale. Once you own an aircraft, whether you fly it or not, you have to maintain it. When you’re maintaining it, it costs forex.

Now, the people who say they don’t want asset sales, let me hear them come out now and say, “Please don’t sell these two aircrafts, because we want to go on maintaining them.” I commend the government for taking this first action. There should be a three way test when deciding which assets to sell. The first one is ideally; if you’re selling because of a lack of forex you should sell those assets that bring in forex. I imagine that the aim is to sell the aircrafts in US dollars to bring in dollars. Secondly, you should sell the assets that when sold improve e efficiency. Third you should be sell assets that when sold reduce your maintenance bills dramatically. The aircrafts qualify for all three. There are many other assets like that. Earlier you mentioned oil and gas. It is interesting that everybody including the governors get excited when they queue up to receive dividends from Liquefied Natural Gas (LNG). But the question to as is, “Why is LNG successful?” It is successful because Federal Government equity is capped at 49 per cent and it is run strictly as a business.

Federal government is a minority and the states all stretch their hands out to receive dividends. The point I’m making is that it’s a successful model so why don’t we replicate this same successful model for the oil and gas joint ventures? In some of them the Federal Government owns 60 per cent, 55 per cent. We could incorporate those joint ventures and bring federal government share down to 49%. That involves Federal Government selling some of its stake. In the first instance some of it can be sold to the joint venture partners and that will be a quick transaction. They’ll pay in forex. At the macroeconomic level we need to break the forex trap as we restructure our economy. The point therefore is that, that kind of sale improves efficiency. The incorporated joint ventures will now be like LNG. When LNG wants to do a project they don’t come to the treasury and start looking to draw from the budget, they raise it on their own. If you incorporate a company like that and it’s viable – Federal Government equity is 49%, the whole problem of cash calls and so on will disappear. The cash calls are a major burden on our annual budgeting. The point I’m making is that if we have a successful model, let’s replicate it and this is as good a time as any to explore that.