The original report was published in The Financial Times Deutschland on Monday, July 30, 2012
The great financial fightback
Reforms to the country's banking system have already increased accountability and transparency, and promise to fuel further growth in one of Africa's largest economies
Nigeria has been under no illusions about the need to get its economy and financial system back on track, following the domestic crises of 2004-5, and the more recent worldwide downturn. Much progress has already been made since President Goodluck Jonathan embarked on a series of reforms aimed at the modernisation of the banking sector, the diversification of the economy and the redistribution of the country’s oil revenues. If implemented successfully, these changes could help the country join the ranks of the world’s largest economies.
Enthused by President Jonathan’s commitment to reform, last year Ngozi Okonjo-Iweala left her position as Managing Director of the World Bank to become Nigeria’s Coordinating Minister for the Economy and Minister of Finance. Bringing valuable experience from one of the world’s most important development institutions, she recently said that in transforming Nigeria, “We have to show policy consistency in all kinds of ways. It builds trust in the economy, it builds a resilience, and that helps enormously.”
She then added: “Nigeria has to make some fundamental changes, it has to really diversify its economy. The time is now because investors are interested in the country.”
While GDP growth has been buoyant for the last decade – averaging 5.4% between 2000 and 2010 and rising to more than 7% in 2011 – higher rates are needed to further reduce poverty levels. Moreover, two financial crises in the past decade as well as corruption, poor transport infrastructure and unreliable supply of electricity had tarnished Nigeria’s reputation abroad. Despite this, Nigeria remains Africa’s third-most popular destination for foreign direct investment, as its arsenal of natural resources, including abundant oil reserves, invariably serves as a magnet for investors.
A FRESH START
Despite the recessions and stock market crash, Nigeria’s financial sector has been one of the largest benefactors to the economy. As such, the state has aimed to strengthen it, and more importantly, make it more transparent.
Since the first crisis of 2004, the sector’s landscape has undergone massive changes: from 89 banks in 2004, the number plummeted to just 24 by 2005, after the Central Bank (CBN) raised the minimum capital requirements twelvefold. This led to the banks zealously raising capital on the Nigerian Stock Exchange (NSE), which in turn led to oversubscribed sales and a spiralling trend in margin lending.
This situation came to a head in 2008, when the index plunged nearly 46%, driving Nigeria into its second crisis, which was then compounded by the global financial downturn. The Central Bank responded by appointing a new Governor – the noted economist and Islamic scholar Lamido Sanusi – who immediately cracked down on fraud, share price manipulation and other crimes against corporate governance. He also put a cap at 10% on margin lending, created a new regime for bank licenses and established an asset management corporation, AMCON, to buy non-performing loans from banks.
“Of the lessons we learned during the recession, a core issue was corporate governance and the failure of risk management practices,” says Godwin Emefiele, Managing Director of Zenith Bank, one of the largest banks on the NSE.
STRONGER THAN EVER
The two-year long reform programme came to a close on September 30, 2011, which was the deadline for all previously rescued banks to recapitalise (often in the form of mergers) or face nationalisation. The result is a reconsolidated, transparent and stronger-than-ever banking sector that will ultimately benefit Nigeria’s overall socio-economic health. As Nigerian Ambassador to Germany Abdu Usman Abubakar says, “If you look at the financial sector reform, it requires us to translate the numbers into sustainable wealth and job creation. We are not just talking about figures. We are talking about how it all translates into the real economy, and how it improves people’s lives by offering them more opportunities for revenue and employment.”
Jibril Aku, Managing Director of Ecobank (the second-largest bank by branch network, since its acquisition of Oceanic Bank last year) praises the CBN and the creation of AMCOM, highlighting that the latter immediately helps “resolve the portfolio challenges of the banks so they can resume their business and lend to the sector.” He adds that the banking system itself is footing the bill of the rescue efforts – rather than the state – and that “this is one of the first industry resolutions; we crafted our own resolutions. This helped restore confidence and even in the challenged banks, there was no erosion of customer base.”
The Jonathan administration reforms go beyond banking and into countrywide project financing through the newly created Sovereign Wealth Fund. Initially created with $1 billion from the country’s Excess Crude Account, the fund is a three-pronged state-owned investment tool that will be stocked with the oil revenues accrued at prices higher than a pre-established benchmark oil price. The largest portion of the fund will be put towards the development of much-needed infrastructure, while the other two parts are savings for future generations, and an economic stabilisation fund to defend the economy against commodity price shocks and economic recessions.
Yet another infusion of money to fix ailing infrastructure will come from subsidies that heretofore went towards fuel. The removal of petroleum subsidies frees up billions of nairas that can now be spent on rail and road projects, hydro stations, water, IT and refineries. Nevertheless, Finance Minister Okonjo-Iweala, a strong proponent of tight fiscal policy, is pushing for prudent use of these and other monies to avoid the corruption and economic imbalances that have marred previous infrastructure projects.
Juan Carlos Jover, Irama Vega, Fabricio Domínguez
REAL GDP AT FACTOR COST GROWTH
GDP PER CAPITA (PPP)
GDP COMPOSITION BY SECTOR
CURRENT ACCOUNT BALANCE
TOTAL INTERNATIONAL RESERVES
GINI INDEX (distribution of family income)
CENTRAL BANK DISCOUNT RATE
COMERCIAL BANK PRIME LENDING RATE
MARKET VALUE OF PUBLICLY TRADED SHARES