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Why unification of exchange rates will lead to further devaluation of the Naira-Sanusi

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At the AZA  Webinar hosted by AZA Africa’s biggest non-bank currency broker some of the most critical aspects of Africa’s debt relief implementation was discussed.

Here is closing remarks by former Central Bank of Nigeria Governor and the 14th Emir of Kano Mohammad Sanusi II, said.

He also kicked against spending cut and raising taxes.

In most African countries, you’ve got a fiscal deficit problem. You also have balance of payments problems. But this is not the time to look at how you can reduce the deficit, this is not the time for consolidation.  Any attempt at cutting spending is going to throw many households into deeper poverty. You can’t increase taxes on the private sector heavily at this point because that is going to affect private investment and you’ll go into a self-fulfilling cycle of economic regress.

What is also clear is that we must do something about the level of debt service obligations. We must provide relief to the countries’ balance sheets to free up cash flow and maintain the momentum to go through this period. I think this is something that’s well understood. That’s what the IMF and World Bank have done, that’s what the DSSI is about, and private creditors also need to look at this. I don’t think the countries are going to ask for a moratorium on private debt but I know the African Union is looking at some instruments that will provide liquidity to the countries, while making sure that debt obligations have been met with private creditors.

How did we get to this point? I spent most of my life in banking as a risk manager and I must say I am absolutely appalled by the kind of risk management that is shown by international creditors when lending to African countries. It seems very easy to just invest in a bond if it’s giving a return of 10 or 11% because you’ve got all these negative yielding instruments in the international markets and you’re relying on the fact that countries cannot afford to default. You’re not looking at where the money is going; you’re not looking at the financial condition of these countries. I hear these numbers about debt-to-GDP ratios. As a credit officer, a debt-to-GDP ratio means nothing. A debt-to-GDP ratio of 30% for a country where tax revenues are only 6% of GDP is not the same as 30% debt-to-GDP for a country that has 60% tax-to-GDP ratios. All these signals and alarm bells have been going on for a long time: countries spending a high percentage of their revenue on debt service and then piling on more debt. Now, if I was sitting as a risk manager in lending, I would look at these numbers.

The second point is that COVID is a black swan event, and we all understand what it has done. But the reality is, I don’t think there is anything that Africa is facing now that was not known or predicted. After HIPC we had this story of ‘Africa Rising,’ and the Africa Rising story was driven by two things. In the first phase, it was driven by rapidly rising commodity prices, basically on the back of China and India growth.  After that, African growth was fueled by debt. As far back as 2015/ 2016, most African countries had gone back to debt-to-GDP ratios and debt service-to-revenue ratios that were much worse than they were pre-HIPC. So, with or without COVID, something was going to happen. Questions that were supposed to be asked were not being asked. Countries were just piling on debt.  Some of that debt is domestic, which means that, at least for now, those countries don’t have a risk of insolvency because they are the issuers of their currency. However, there is the risk of inflation, risk of devaluation, and they have got to be careful with printing too much money.

What we see today is that, yes, COVID is a wake up call, but for the last five or six years, if you were looking at the balance sheets of African countries, you would have seen that we were already back to where we were before 2000, and somebody should have been asking these questions, and these questions were not being asked. When I was governor of the central bank in 2012, I wrote an op-ed for the Financial Times where I raised an alarm about the nature of the relationship between China and Africa. It was very controversial. But, again, I’m not surprised that we are at this point now. It is something that everybody could see. There was too much debt going into projects that had no connection to economic growth and development.  We were in this world where, as long as you had GDP growth of five or six percent, nobody looked at where the growth was coming from. Was it coming from just debt that was going into revenue expenditure, overheads and consumer spending, or was it going into real productive capacity?

I think we’re not looking at the right levers for growth. If you’re looking at development long term, you don’t need 7% growth. If your economy grows at 2.5% year after year, the law of cumulative growth says you’ll double your GDP in 30 years. In a hundred years, you’ll have multiplied GDP by 11.8 times. Now, that is enough to transform nations radically. But we get carried away by these 5-6 percent growth rates over 2 to 3 years, and you have these boom-bust cycles, and you’re back to where you started, rather than looking at what you’re actually doing to improve the productivity of your human capital, which should be important, and the productivity of your economy. If you take Nigeria, if we just focused on increasing the supply of electricity per capita, looked at bandwidth, and invested more in education and healthcare, you would have stable growth of three  to four percent every year, and that is more than enough to transform the economy over a 10 to 20 year period. But if you continue relying on government spending that’s fueled by debt, and commodity prices that are unpredictable, you’ll be going up and down. Nigeria is just one example but there are many across Africa.

The situation as I see it today is that the DSSI being worked out by the AU is a great thing. I think the idea of setting up some mechanism where you can pay private creditors while keeping governments afloat by giving them money is also excellent. But we must also ask what we need to do going forward, and how we should attack the balance of payments deficit. I think that would be a very good signal for reducing the current account deficit because the reality is that if you have a weaker currency today – if you look at the tradables, look at rice imports, how much is spent importing food, for example, which is also produced locally; how much we spend in the tradables sector importing textile products, we import shoes, we import bags from China, and we are a big leather producing country – there’s no reason why Nigeria should not be producing its own shoes, its own bags, textiles, garments, food, and that is going to bring a major improvement to the balance of payments situation. That is the route, I think, to also reducing the fiscal deficit, rather than hitting the household and private sector balance sheets. We also have to look at some of the more inelastic areas of demand – take petroleum products for example. The Dangote Refinery would be good news, I don’t know how long it would take for it to come on stream. But we do have four refineries. What does it take to get those refineries producing and reduce dependence on petroleum imports? Now, with a flexible exchange rate regime to improve the tradables sector, if you can reduce dependence on imported petroleum products then, hopefully, with stable oil prices, you should move back to a balance of payments surplus, and that should then be the route towards redressing the weakness in the government balance sheet.

The final point I’d like to make – and Von and Elizabeth made this point – is that we lend money and we don’t know where this money is going to. From a risk management perspective, if I were a bondholder going to put in $1 billion in an African country, I’d be interested in knowing where that money is going. And if I understood that there was an execution risk, I would ask what structures I needed to put in place to follow up and make sure there is actually execution and completion of this particular project. You don’t just simply put in the money and wait. We all understand that when you’re dealing with a counter party, you look at the risks you are running with that counter party.

For some counter-parties, if you’re a bank and you lend to Shell or MTN, you don’t necessarily need to follow up, but if you’re lending to a middle market or SME, you know you have to put in extra effort to ensure that your loan does not turn bad. That is why you’re entitled to charge a higher rate of interest. So, given the rates of return creditors are making on Africa, a little bit less laziness, a little more effort in following up the money, making sure it goes into the sectors, helping see that these projects are actually executed, would be very helpful to avert a reoccurrence of this situation.

Certainly, for anyone at this point to say you won’t do a debt standstill or won’t give any debt relief, you’re basically sentencing many of these countries to death.

 It’s simply not possible. They will default anyway. Plus, with the levels of poverty, with the amount of people thrown out of work, with SMEs suffering already, if you hit the governments’ balance sheets today, without looking at the external balance sheet, what you are going to do is impose all that cost on the household and private sector, and that would throw us into a recession that we cannot come out of. I think that this is a great opportunity for us in Africa to look at how we got here. Subsidies that we have been paying that we should not have been paying – not going into cost-reflective tariffs, for example, in the electricity sector, borrowing long term and not following up on infrastructure projects. What have we learned from the mistakes of the past so that we do not repeat them going forward? Also for the creditors themselves to step back and say, did they ask the right questions? The relationship between China and Africa is one that is filled with great opportunity, but also fraught with risk. At the end of the day, we Africans have to decide what we want from China. We ask the Chinese to give us loans to build roads from nowhere to nowhere. The Chinese loans are commercial but not in the sense of other loans.

The Chinese will give you a loan to build a road, and it will be done by Chinese construction companies, it will be done by Chinese labour, so even if they have a loss on the loan, they probably have made a lot of money on the construction and supply of equipment side. They probably have made more money in profits than they’re going to lose on the loan. So they’re very smart in that sense. For a typical bank, if you lose the money, you lose the money. Which is why I think the Chinese need to be far more flexible and accommodating than they have been so far, and they need to sign up to the DSSI.

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