Reading through Standard & Poor’s recent justification for its decision to raise the economy’s foreign- and local-currency sovereign credit ratings, I could not help but wonder whether the policy choices that we made progressing down this path were part of a conscious process of rebuilding our room “for policy manoeuvring or were the unanticipated result of a collocation of providential circumstances. True, the rating agency adverted attention to improving economic indices in its most recent report on the country, including the fact that (1) against what has become the trend since this administration came into office, the fiscal assets in the excess crude account went up for the first time to US$8.4 billion in October; (2) external reserves closed October, 30% up on the same period last year; and (3) in its words, “government has sustained reform momentum in several key areas”.
Take a closer look at these numbers, however, and the sense is that the Nigerian economy may not be in as fine fettle as they suggest. Hard to celebrate the decision to cut fuel subsidies in January, for instance, if all it has achieved is expose the full (long-suspected) extent of rot in the oil and gas sector. Nor can one describe as (attempts at?) reform, the pathetic examples of government’s effort at appraising goings-on in the industry that are on the table. And what about the power sector? Plenty of motion, and no movement, there! Or is it hot air, and no light? Whatever the difficulties with the sector may be, it is self-evident that even the remarkable improvement in power supply that we have witnessed in the last three months is in reverse, as the sector struggles to come to terms with its recent change(s) of helms person.
Conversely, the new fiscal buffers (rising external reserves and the balance on the excess crude account) speak to a different possibility. On one hand, we readily acknowledge that domestic policy has limited feedback on global oil prices. On the other hand, we are grateful that in spite of a softening global economy, oil prices have refused to drop below US$100 per barrel. So, whereas no amount of domestic reform can improve the oil price outlook, radical changes to how we manage public expenditure is central to what we make of the excess revenue from selling our crude oil resources. Two paths are recommended down this road. First, is the challenge of obtaining the loudest bang for each naira spent, especially by boosting (public and private) investment in fixed assets. Second, is the need to recognise the inter-generational challenge posed by total fiscal dependence on revenue from a wasting asset. It is often contended that these aspects are but different sides of the same coin. For instance, we rise up to our responsibilities to succeeding generations only when we build, today, the infrastructure that helps them drive capacity increases tomorrow.
Fortunately, both these challenges are readily met by a change in the mix of public sector spend. Currently, we are living from hand to mouth. Indeed, we have started borrowing in order to better live this way. So, not much reform here either. At least not going by the avowals of spokespersons for the government at the centre. Depressing, though, these are, we are invited to consider a further dimension to our problems: the trade-offs that government has had to make to get this far.
At this point, the focus is on the rise in reserves. It is irresponsible for cheerleaders of improvements in this index to overlook the concessions we have had to make in our bid to attract capital inflows from outside the country. Understandably, the removal of capital controls at the short-end of the market has had the desired effect of attracting new funds. Beyond that, though, I am not sure whether we are the beneficiaries of a push from the tepid economic circumstances of most other markets, or from the pull of better risk- and inflation-adjusted returns locally. I would wager, however, that the truth lies somewhere in between these two extremes. None of which then matters much, anyway, if 80% of transactions on the floor of the Nigerian Stock Exchange in the last 9 months have been driven by non-resident players.
Much of the investment in short-term gilts and treasury bills have had similar provenance. Essentially, then, the rise in fiscal buffers has occurred on the back of short-term capital inflows. One immediately available conclusion is that even as we celebrate these “improvements” in some economic indices, we may still have to deal with longer-term vulnerabilities to the economy, most of which are not being attended to currently. Then there is the worry over how an economy that not too long ago imposed controls on the inflow of short-term capital (out of legitimate worry over its fickleness) now rejoices over the prospects of being flooded by portfolio funds.