A
stock trader put his finger to his head as the realization of the 2008
financial crisis, spurred by the meltdown of toxic subprime mortgages,
took hold | Spencer Platt/Getty Images
If you learned anything from The Big Short,
hopefully, it was that there were a whole lot of people responsible for
the financial crisis and subprime mortgage calamity in 2007 and 2008.
Yes, the banks and ratings agencies played an integral role and managed
to profit handsomely for a while, but those organizations couldn’t have
done so without people — you, your neighbors, families, and friends —
agreeing to take on home loans and mortgages they couldn’t afford.
It’s obviously a bit more complicated than that, but that’s the gist
of it. The government wanted more people to be able to afford homes, so
they made it easier for people to qualify for mortgages. People, unaware
or uncaring about their ability to pay, signed up. Then, everything
fell apart and caused a global recession.
It was a nightmarish time, and we’re still feeling the lasting
effects, in some respects. But it’s not something we’d want to do again.
Clearly, we’ve learned from our mistakes.
Right?
It doesn’t seem that way. Many of the underlying structural issues
that led to the past crises are still in place, and given that hardly
anyone was punished for their roles in the subprime mortgage meltdown,
there’s little incentive for anyone to change their behavior. And it
seems we might be heading right back down the road to where it all
started.
That’s because Freddie Mac is going to start experimenting with looser mortgage standards,
making it easier to qualify for a home loan. In short, the program
involves reducing the income and documentation requirements. Home buyers
will also be able to count income from people living in the house, and
not necessarily on the mortgage. Some borrowers also won’t have to
provide bank statements to prove how they saved for a down payment. What
could go wrong, right?
The financial crisis fueled by bad mortgages
House for sale | iStock.com
The government has good intentions here, so
allowing for looser income and documentation requirements for mortgage
applicants, via this new Freddie Mac pilot program, isn’t meant to do
harm. But this is more or less how we ended up in a very bad situation
the last time around. People who shouldn’t have gotten mortgages did,
they couldn’t make their payments, and the whole overly-leveraged system
fell apart.
Again, here’s the dilemma from the government’s perspective — we want
more people to be able to afford their own homes. So, we incentivize
homeownership by making it easier to get a mortgage. The problem is that
we end up lowering the standards to get a mortgage, and then end up
giving loans to people who wouldn’t have otherwise qualified for them.
Before you know it, these people — who failed to recognize, or
overestimated their ability to make their mortgage payments — miss
payments or stop paying altogether. These loans are now categorized as
“subprime,” but in the mid-2000s, were purposely mis-rated and sold to
investors as parts of securities. It’s all very complicated and intricate, but the thing you should know is that it all started at an individual level.
The banks responded to incentives, people who wanted a house
(regardless of their ability to afford it) bought one, and the whole
system crashed.
Just because you can, doesn’t mean you should
Signing paperwork | iStock.com
The new Freddie Mac program probably shouldn’t send us all into panic
mode, but it is something to keep an eye on. Other lenders have already
loosened their standards, including Wells Fargo,
which did so in 2015. With the economy on relatively solid footing, it
can be easy to become overly optimistic or miscalculate what you, as a
prospective homebuyer, can afford.
It all comes down to this: We can avoid societal meltdown if we start
at the individual level. The subprime mortgage crisis wouldn’t have
been as severe, or may not have happened at all, had individuals made
better choices or had a clearer picture of their own finances. There
were some shady tactics utilized by lenders to convince people they
could afford more than they could, but if you have a good grasp on your
financial picture, it simply requires the ability to say “no” to
something you can’t afford — no matter how tempting it may be.
That’s not to let the banks, rating agencies, and regulators — all of
which dropped the ball in order to further their own interests during
the last crisis — off the hook. But if you’re wondering how you yourself
can stay out of trouble? Know what you can and can’t afford, and be
aware that the economy is a cyclical thing. Just because you’re doing
well now, or think your job is secure, doesn’t mean that things will be
the same a year from now.
Take stock of your situation, and learn from the mistakes of others.
It’s going to get easier to get a mortgage, but that doesn’t necessarily
mean you should sign up.
The Senate wednesday kick-started its
debate on the economic turmoil in the country, with some senators
blaming the recession on the incompetence of some ministers in President
Muhammadu Buhari’s cabinet.
Senators, who did not mince words during
plenary in the upper chamber, said that the president had put round
pegs in square holes, observing that the incompetence of such ministers
had largely contributed to the festering crisis.
They called on the president to
immediately reshuffle his cabinet by redeploying competent hands to
handle sensitive economic matters.
Leading the debate on the recession
wednesday, the Senate Leader, Ali Ndume, laid the premise for Nigeria’s
current predicament, disclosing that no fewer than 15 countries in
different parts of the world, including Brazil, Russia, Japan, Ukraine,
Greece, Venezuela, Switzerland and Finland, were currently in recession.
According to him, most countries which
were dependent mainly on oil for survival had been hit economically,
explaining that the Nigerian situation was however peculiar because all
the economic sectors were reeling, except agriculture.
He pointed out that the situation was
aggravated by the depletion of Nigeria’s foreign reserves by the past
administration and recalled how former President Olusegun Obasanjo built
foreign reserves to the tune of $62 billion but lamented that as of
2015, the reserves had been plundered to as low as $30 billion.
While the Deputy Senate President Ike
Ekweremadu called for a cabinet reshuffle, Senator Dino Melaye (Kogi
West) argued that putting incompetent hands in charge of the economy
would continue to aggravate the situation.
Ekweremadu was of the view that the
situation had continued to deteriorate because of the bottlenecks caused
by the failure of the federal government to release funds into the
economy as appropriated in the 2016 budget.
He also observed that if the claims by
the government that it had accumulated N3 trillion in the Treasury
Single Account (TSA) and recovered $20 million from the former Minister
of Petroluem Resources, Mrs. Diezani Alison-Madueke, along with several
millions of dollars said to have been recovered were true, the situation
ought to have been different.
On the other hand, he said if the claims
were untrue, the federal government needed to tender an unreserved
apology to Nigerians for feeding them with falsehood and blamed the
recession on the non-release of funds into the system.
Ekweremadu named two of the ministers
whom he said needed to be redeployed to include the Minister of Finance,
Mrs. Kemi Adeosun and Minister of Budget and Planning, Senator Udoma
Udo Udoma, insisting that both ministers would perform better if
assigned other portfolios.
“In the first place, distinguished
colleagues, we passed a budget for 2016 and we envisaged the situation
we’ve found ourselves and we believed that the best thing to do was to
increase the budget for 2016 so as to reflate the economy, but we are
almost in the final quarter and yet no releases are being made.
“I think the best thing to do at this
point, Your Excellency, distinguished colleagues, is for the government
to consciously release as much money as possible into the economy.
“Yes, we are saying there is no money; the oil price has dropped but we
were also told that through the TSA, we have about N3 trillion
somewhere. We were also told that the former Minister of Petroleum
returned $20 million.
“We were also told that politicians have
returned several billions of naira, dollars and pounds. It is either
that this is not true or that the money is somewhere and if it is not
true, someone needs to apologise to us and state the correct thing and
if it is true, this money has to be released to contractors so that
contractors can go to work and those in the construction industry will
be paid and then they will pay the school fees of their children and
money will circulate.
“If we have money in the economy, I am sure that shortly, we will also find some relief.
“Secondly, the president needs to look at his cabinet. He has to put
square pegs in square holes. Your Excellency, distinguished colleagues,
Udo Udoma is my friend, an accomplished lawyer for that matter but in
fairness to him, I believe he can do better in another ministry
especially like trade and investment, certainly not budget and planning.
“The Minister of Finance could do much
better in another ministry also. At this critical time, we need somebody
who is more experienced to man the Ministry of Finance so that we are
able to coordinate the strategies for this recovery.
“I also believe that we need to have all
hands on deck right now. It does not matter their religion, it does not
matter their party. We need to go all out and look for the best brains
to come and help us to come out of this recession.
“America was in a recession in the
1930s. They recovered within three years. What did they do? All
Americans came together, irrespective of your political persuasion, and
they were able to work on solutions.
“At this point, it does not matter to us
whether you are APC or PDP or you are non-aligned. The important thing
is that the president has to look for the best people to come together,
to proffer solutions. It does not matter which party you belong to,”
Ekweremadu said.
Ekweremadu also called for fresh
negotiations between the federal government and oil companies, saying
such negotiations would enable the government to free enough money,
adding that the government needs to boost investors’ confidence by
ceasing to label all Nigerians as corrupt persons.
He, however, differed on calls for the
sale of the nation’s oil sector assets, noting that only non-performing
assets should be sold, stressing the need for restructuring of the
system by unbundling the federal government.
He also advocated the amendment of
Section 162 (3,4,5,6) of the constitution with a view to stopping the
monthly sharing of federal revenue between the federal, states and local
governments.
“We need restructuring. We need to
unbundle this federal government from the security sector, to power, to
agriculture and to the social sectors.
A situation where the federal government
is in charge of everything is not helpful. We need to unbundle this
country if you like, call it restructuring.
“It might be a long-term strategy and it might be in phases, but it is something that we need to do quickly.
“I have heard about the issue of selling
off our assets. I need to caution that other countries are not doing
the same. The United Arab Emirates (UAE) does not even allow you to buy
oil wells, much less selling them. And of course, a country like Saudi
Arabia, their budget each year is run by investments from their oil
revenue, while other countries are investing and with all the
investments we have and besides, I’m sure we will not be fair to the
next generation.
“So, if we must sell, we have to sell
the non-performing assets so that people can turn them around and create
employment. We need to amend Section 162 especially from subsections
3,4,5,6 where each money in the Federation Account is enjoined to be
shared among the other levels of government,” he said.
Melaye said the degree of poverty and
starvation ravaging the land clearly showed that the nation was sitting
on a keg of gun powder, pointing out that in no distant future when the
poor have no food to eat, they would be forced to “eat the rich”.
Melaye echoed Ekweremadu that the
managers of the economy were incompetent, submitting that only
experienced and competent persons should be handling the onerous task of
managing the economy.
“Anyone who wants to manage an economy must have experience in strategic
economics and development economics… The president must rejig his
cabinet. We need people with experience and expertise to manage the
economy.
“At a time the United Kingdom hired economists from other countries to manage its economy,” Melaye said.
He also called for the immediate ban on
importation of items such as wheat, refined sugar, milk and powdered
milk, frozen meat and chicken, clothing and textiles, stationery,
perfume and insecticide.
Melaye also solicited for the immediate
constitution of the Board of the Central Bank of Nigerian (CBN), saying a
situation where it operates without a board would create bureaucratic
bottlenecks.
In his submission, Senator George Akume
(Benue North-east) also criticised the call for the sale of the
government’s oil and gas assets, alleging that those making the call are
those with the money to buy them.
Akume also recalled how two former
governors of the CBN, Prof. Chukwuma Soludo and Muhammadu Sanusi II, had
once alleged that several billions of dollars were missing.
He said if such funds were recovered by the federal government, the
advocacy for the sale of oil assets would be unnecessary, arguing that
selling them when oil prices are soft would amount to a great loss.
“From these and from monies going
through other sources, at least, we should be able to recoup over $50
billion. If we succeed in doing this, do we still have to sell our
assets as is being canvassed? The thing is very straight forward – there
is a buyers’ market and there is a sellers’ market. If you want to
dispose of your oil assets at this time when the price of oil has
crashed, precisely how much are you going to realise?
“We are making a mistake here – what we
are advocating is very unpatriotic and will ensure that those who have
stolen from us will still come to buy them up. I believe that this is
not the time to strip the country of these assets.
“Fortunately, the CBN governor made a
very powerful statement that the worst days of the recession are over
and therefore, we have to look elsewhere and not sell our assets. We
should focus on industrialisation and agriculture and try to revamp this
economy. I am worried because people who are telling us to sell these
assets are people who have huge pockets.
“Our assets must remain for us: even Saudi Arabia didn’t sell part of their national assets as alleged,” Akume submitted.
In his submission, Senator Barnabas
Gemade (Benue North-west) called for the immediate release of funds into
the system, explaining that monies kept in the Sovereign Wealth Fund
(SWF) account as well as pension funds should be released to stimulate
growth.
According to him, monies are usually
saved for the rainy day and since Nigeria was witnessing its rainy day,
the ideal thing now is to release such funds to stimulate the gross
domestic product (GDP) growth and spur investment in viable sectors such
as agriculture and mining.
In his contribution, Senator Shehu Sani (Kaduna Central) said the
current recession should not be seen as a moment of despair but rather
serve as a turning point for the re-direction of the nation’s economy.
Sani, who lamented Nigeria’s
overdependence on oil, said unfortunately, the poor in Nigeria had
always taken the brunt, noting that the only difference was that the
current recession was compounding their hardship.
But Senator Bassey Akpan (Akwa Ibom
North-east) reminded his colleagues of how U.S. President Barrack Obama
took over the reins of the American economy in 2009 during the financial
crisis and immediately pumped $800 billion into the economy after
securing the nod of the U.S. Congress.
The move, he said, fostered the quick
recovery of the nation’s economy. He traced the root of Nigeria’s
recession to government’s decision to mop up its funds in commercial
banks into the TSA, arguing that if the nation must recover from this
crisis, the federal government was left without an option than to return
the funds in the TSA.
Also speaking, Senator Rabiu Kwankwaso
(Kano Central) listed steps to be taken by the federal government to get
out of the recession. He said the country would have to strike a
balance between local and foreign consumption, avoid policy somersaults,
stop multiple taxation, focus on agriculture and construction, and
communicate its policies to the public.
Address Legislature, Dogara Tells Buhari
In the House of Representatives, the
Speaker, Hon. Yakubu Dogara, also urged President Muhammadu Buhari to
address a joint emergency session of the National Assembly and outline
his plans to pull Nigeria out of the current economic recession.
At the plenary of the House wednesday,
he also called on the government to consult economic experts at home and
abroad to fashion out short, medium and long-term measures for dealing
with the present crisis.
Some issues that Dogara identified as
deserving of a “second look” included the impact of the TSA on the
economy, the pace of budget execution, the spiraling rise of the dollar
against the naira and the multiple exchange rate regime, investment in
infrastructure, and unemployment.
These, Dogara said, would set the nation on the path of recovery and
sustained economic growth, “as it would ensure that all stakeholders are
on the same page”.
The speaker also called on the
government to take full responsibility for the present economic
situation, pointing out that it was not time for blame game.
In his welcome address to lawmakers who
just resumed from an eight-week summer recess, the speaker said all
hands must be on deck to tackle the nation’s challenges and rescue her
from the shackles of poverty, social and economic underdevelopment.
“As leaders, we must take responsibility
for the present economic situation, although we are not directly
responsible for it. We must admit that this is a difficult thing to do
in the present generation that spurns responsibility.
“Everyone wants to blame someone for
something that goes wrong. Unfortunately, history teaches us that no
one, no nation has ever achieved greatness except on account of the
creative hunger that comes with accepting responsibility.
“This is not the time for partisanship.
This is not the time to score political points. This is not the time for
grandstanding. This is not the time for the blame game. The situation
and the times call for bold, courageous, enlightened and purposeful
leadership. This is a patriotic call to action from all stakeholders and
indeed all Nigerians,” Dogara added.
The speaker harped on the need for the
legislature to continue to provide support for the executive’s solutions
to the nation’s economic problems, and to consolidate on existing
consultations between both arms of government on the way forward.
“We must never miss the opportunity the
present travails offers us to launch Nigeria into its rightful destiny
and place it among the comity of prosperous nations.
“As representatives of the people we are
well acquainted with the alarming state of the citizens’ penury. We
will therefore collaborate with the executive in fine tuning any
observed limitations in policy formulation and implementation to ensure
speedy delivery of services to our people,” the speaker said.
Vote of Confidence from Obama
But as the National Assembly debated
Nigeria’s economic woes and proffered solutions that the executive could
adopt, the Buhari administration got a vote of confidence from an
unlikely quarter on Tuesday.
During a bilateral meeting on the
sidelines of the 71st session of the United Nations General Assembly
holding in New York, the President of the United States Barack Obama
expressed confidence in the Buhari administration.
Buhari’s media aide, Mr Femi Adesina, in
a statement, said the U.S. president described his Nigerian counterpart
as a man of “integrity and honesty”, adding: “We have confidence in
your leadership. There are some difficulties you face, but this
administration is willing to assist in the short time we have left.
“You have made real progress in
defeating the brutal organisation called Boko Haram, and that was
achieved because of your leadership.”
Obama also offered a hand of fellowship
to Nigeria “in the final and comprehensive defeat of Boko Haram and
resolution of the Niger Delta crisis, which would help ramp up oil
production and increase revenue, resolving the humanitarian crisis in
the North-east, recovering stolen money, and revamping the economy”.
Describing Nigeria as a big and
important country in sub-Saharan Africa, Obama said his country looked
forward to a framework for sustained partnership between the two
nations.
Earlier, Buhari had assured the Obama
that Nigeria was making steady progress towards resolving the problem in
the Niger Delta region, which had led to economic sabotage on a grand
scale.
Buhari said: “We are making definite progress on how many factions of
the militant groups exist, their leadership and operational basis, and
we have equally sought the cooperation of the oil majors. In a short
while, I believe the issues would be resolved.”
While thanking the U.S. for the
assistance rendered in the area of security through provision of
armaments, training for Nigerian troops, and sharing of intelligence,
leading to the degradation of Boko Haram in the North-east, Buhari said
the country was open to support in combating the humanitarian crisis
currently ravaging the region.
The Nigerian president said the farming
season was good this year, with the prospect of good harvest, adding
that “Nigeria is on the road to food self-sufficiency soon”.
“We shall be able to feed ourselves and
utilise the billions of dollars spent on importing food on other
productive areas,” he informed Obama.
He reiterated that his administration
came to power on the tripod of security, battle against corruption, and
the economy, stressing that there would be no let-up in fulfilling those
electoral promises.
He wished Obama happy retirement, as his tenure in office winds down.
The Securities and Exchange Commission
and the National Pension Commission have approved “a new instrument that
will allow pension funds to invest in infrastructure bonds,” the
Minister of Finance, Mrs. Kemi Adeosun, said at a meeting of business
leaders in Abuja on Monday.
“That’s what will drive, for example, our social housing and our roads programme outside the budget,” she added.
Adeosun also called on the Central Bank
of Nigeria to lower interest rate so that the government could borrow
domestically to boost the economy.
Renowned economist and Chief Executive
Officer, Financial Derivatives Limited, Mr. Bismarck Rewane, said in a
telephone interview with one of our correspondents that he and other
experts had before now stressed the need to reduce the interest rate.
He said, “There is no other way but to
reduce the interest rate. During recession, Britain brought down
interest rate; and in the US during the recession, what did they do?
They brought down interest rate as well. So, we need to bring down the
interest rate.”
The Director-General, West African
Institute for Financial and Economic Management, Prof. Akpan Ekpo, who
lent his voice to the call for a cut in interest rate.
He said, “That is the only way to
fast-track the recovery of the economy. The interest rate must be
reduced to close to single digit, if not single digit, in order to
stimulate the real sector. Now, it is an average of 25 per cent and that
is too high.
“The real sector is dead now; when you are in a recession and the real sector is dead, then the recession will last for long.”
Ekpo said the Monetary Policy Rate,
which is the benchmark interest rate, should be reduced to 10 per cent
from the current 14 per cent so that the lending rate would be around 13
to 14 per cent.
The Monetary Policy Committee of the CBN had at the end of its meeting in July raised the MPR to 14 per cent from 12 per cent.
Adeosun Seeks Interest Rate Reduction to Boost Growth
Iyobosa Uwugiaren, James Emejo in Abuja and Obinna Chima in Lagos with agency report
The federal government plans to raise $2
billion through the concession of the existing
Lagos-Kano/Port-Harcourt-Maiduguri rail line, the Minister of Budget and
National Planning, Senator Udoma Udo Udoma, has said.
He spoke in Abuja just as the Minister
of Finance, Mrs Kemi Adeosun, called for the lowering of interest rate
to boost economic growth.
Udoma, who also explained that the
federal government had released N400 billion out of the budgeted N1.8
trillion capital vote for the year, said discussions were on with
General Electric (GE) to take over the rail line as part of the efforts
to multiply revenue sources to fund the budget.
“We are working on all fronts at the
same time. One is to get oil production back – it is very important.
Two, is the asset sales, concession and all that. We are discussing with
General Electric, and I will give that as a practical example,” Udoma
said in a document released to THISDAY monday, adding that the firm had
already committed to bring in $2 billion into the concession
arrangement.
He said that the concessionaire would
take over the rail lines, revamp them and build coaches in the country,
explaining that the process of getting the thing through would however
take some time.
“We have to wait for the various
government agencies because there are certain procedures we have to go
through. This is why we met and said, is there a way we can fast track
some of these things? Because we need the money today, not in three or
four months’ time,’’ Udoma explained.
The minister said the recurrent budget, as contained in the 2016 Appropriation Act, had been “virtually fully’’ implemented.
“As far as the recurrent is concerned,
the 2016 budget has been virtually fully implemented. The emoluments
have been paid in full. We’ve released all the money. At the federal
level, all salaries have been released. We have met that in full,’’
Udoma stated.
He added: “We have also met all debt
service in full. With regards to overheads, we have not met that in full
but we are almost there. The problem has been capital. In the capital
budget, we planned to spend about N1.8 trillion, but we’ve only spent
about N400 billion.
“So, we have not been able to meet up
with the level of capital releases. The reason for that is that if you
look at the first six months of the year, the revenue performance was N1
trillion less than we projected.’’
The minister added that given that rate,
it meant that at the end of the year, there would be N2 trillion less
revenue than the country expected, saying there is no economy and person
that could manage that without being where the country is tuesday.
On how soon Nigerians are likely to see
some activities against the background that many analysts at the
Economic (Ministerial) Retreat said recently that the federal government
should pump a lot of money into the economy and see some busy
activities happening, Udoma said the federal government completely
agreed with that, stating that the Economic Management Team had been
meeting for the last months over the fiscal stimulus to see how it could
raise additional revenues.
He added: “We need to raise additional
revenues. To release more money, you need to get the money first. So, we
have a fiscal stimulus plan, which we have been developing over the
last months. We intend to do a number of things. We are looking at
assets sales, concession, and getting advance payments from licensing
rounds and all that.
“We are targeting to raise between $10
billion to $15 billion and we have started that process. Why are we
looking for dollars? It is because what we need to charge this economy
is actually foreign currency. It is foreign currency shortage that is
really responsible for where we are today. So, we have to look for
foreign currency. We have a plan already.
“We have prepared a bill because we want
to fast track some of these processes in order to be able to get the
money from concession and all that. There are two sources of getting
these additional funds. One is getting more crude oil production. At
that time, we still thought we will be able get more oil production and
get back to 2.2mbpd.’’
The minister further stated that the
federal government was also looking at a strategy to contain the
militant activities, adding that the government didn’t expect it to be
as prolonged as it has been.
He said that the federal government,
with the help of all stakeholders in the region, is still working to
reduce the militant activity through dialogue and other strategy.
“If we can reduce them, we can take oil production immediately to
2.2mbpd. If we do that, we will be able to pump this additional money
into the economy,’’ he stated.
On whether Nigeria is still producing
around 1.1m barrel per day, the minister said it is now moving up
because Qua Iboe Terminal had started operating.
Udoma also made some clarifications on
the monies recovered and lodged in the Treasury Single Account (TSA) and
looted funds recovered by the Economic and Financial Crimes Commission
(EFCC).
“On the TSA, what we talk about is a flow. It is not that the TSA has
recovered a surplus. The TSA is a mechanism for making sure that all
payments go through a central point so they can be tracked, but those
funds belong to various agencies and they end up being paid into the
national treasury,’’ he stated.
“So, the issue of maybe N3 trillion
lying idle in TSA is not correct. The money that has been flowing
through, the cumulative amount is what is being spoken about. That money
is not lying there idle for us to take. This has been clarified so many
times. The Minister of Finance has said so on several occasions and I
can’t understand why the issue isn’t still clear,’’ he said.
On the funds recovered by the EFCC, he said that until the legal
processes were completed, the federal government could not spend them.
Adeosun seeks interest rate reduction
Meanwhile, as the Central Bank of
Nigeria’s (CBN) monetary policy committee (MPC) members are set to
announce the outcome of their two-day meeting today, the Minister of
Finance, Adeosun, has expressed her preference for a reduction of the
benchmark Monetary Policy Rate (MPR).
The minister, who said this while
speaking on CNBC Africa, argued that the focus of policy makers in the
country at this time should be on stimulating growth.
The Nigerian economy is in recession.
The NBS recently revealed that the country’s gross domestic product
(GDP) contracted by 2.06 per cent in the second quarter of 2016,
compared to the negative growth of 0.36 per cent recorded in the first
quarter of 2016.
“I would rather seek growth, we can manage inflation – let’s stimulate the economy, we need lower interest rates,” she said.
The finance minister wants the central
bank to lower interest rates so that the government could borrow
domestically to boost the economy, which is stuck in recession, without
increasing its debt-servicing costs.
Adeosun said she was working with the
Debt Management Office (DMO), Nigeria Sovereign Investment Authority
(NSIA) and the pension industry to issue an infrastructure bond to raise
money for road and housing projects, although she did not elaborate.
She said she wanted the central bank to
reconsider its July interest rate hike, which it implemented to help
support the naira and attract foreign investment inflows.
“We need lower interest rates because when we are borrowing and interest
rates go up, it increases our cost of debt service and it reduces the
amount of money that is available to spend on capital projects,” she
told CNBC Africa.
“The attempt was to manage inflation and
the trade off for the economy right now is what a bigger problem is: Is
it growth or inflation? For me it is growth. I would rather seek
growth. We can manage inflation. I think for us at the moment in the
Nigerian economy, growth is the most important thing,” she said.
Adeosun said the government was working
with the parliament to cut procurement timelines to get contractors back
to work and inject money into the economy.
Nigeria has said before that it plans to set up a $25 billion infrastructure fund to invest in the transport and energy sectors.
She said some adjustment was needed to
narrow the spread between the official and black market currency rates,
which is running at 25 per cent after the central bank floated the
naira.
“We still need to make some necessary adjustment to ensure that the
spread is narrowed so that we have true price discovery,” she said.
At the last MPC meeting held in July,
the Monetary Policy Rate (MPR) was raised to 14 per cent from 12 per
cent, and the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) were
both retained at 22.50 per cent and 30 per cent respectively.
The spot rate of the naira appreciated
marginally to N307.25 to the dollar on the interbank forex market
yesterday, up from the N308.69 to the dollar it closed last Friday. But
on the parallel market, the naira remained unchanged at N425 to the
dollar monday.
NBS Updates Capital Import Figures
Nigeria’s total value of capital
imported into the country was estimated at $1.04 billion in the second
quarter of the year (Q2 2016), representing an increase of 46.58 per
cent compared to $710 million in the previous quarter, according to
updated figures by the National Bureau of Statistics (NBS), which were
released monday.
However, the new figures represented a
decline of 60.91 per cent relative to the corresponding quarter of 2015,
and contrasted with the preliminary estimate which was based on the
first two months of the quarter, which indicated a quarter-on-quarter
decrease of 8.98 per cent.
The release by the NBS came just as the Minister of Finance, Mrs Kemi
Adeosun, called for reduction in interest rate to boost growth.
The updated version supersedes the
preliminary report published in which capital importation for June 2016
was only an estimation as figures were not readily available then.
Nevertheless, the NBS said it deemed it necessary to provide an update
having laid hands on the real figures for June, which appeared to reset
the calculations that earlier put total capital importation at about
$647.1 million for Q2.
The NBS said a sharp increase in June
outweighed the low values recorded in April and May as the level of
capital imported in June was the highest monthly value in 2016.
It added that the value of capital
importation rose to $610.77 million in June, more than the previous
three months combined due to a surge in loans, and helped by a
significant change in exchange rate policy as the Central Bank of
Nigeria (CBN) opted to move to a more flexible regime.
Specifically, the NBS said analysis showed that “the sharp rise in June
in particular and Q2 2016 over Q1 2016 in general was due to a 115.12%
quarter-on-quarter and 239.48% year-on-year rise in loans predominantly
to the oil and gas (862.02% quarter-on-quarter rise and 4,023.25% rise
year on year) and telecoms sectors (783.25% quarter on quarter and
14.22% rise year on year)”.
In May, the value of capital imported was the lowest since August 2009, it added.
According to the statistical agency,
quarter on quarter, the foreign direct investment (FDI), portfolio
investment and other investments all recorded increases, with other
investments recording an increase of 96.09 per cent and accounting for
$520.57 million, or 49.95 per cent of the total share of capital
imported relative to the previous quarter.
Portfolio investment, which was the
second largest component recorded an increase of 24.45 per cent and
accounted for 337.31 million, or 32.37 per cent of total capital
imported.
Furthermore, portfolio investment was dominated by equity, which
accounted for 82.95 per cent, a slightly lower share than a year
previously when the share was 84.56 per cent but higher than in the
previous quarter when it accounted for 74.41 per cent.
On the other hand, FDI recorded an
increase of 5.64 per cent in the period under review and accounted for a
total of $184.29 million, representing 17.68 per cent of the total
figure. Equity accounted for the vast majority of FDI, leaving only
$0.08 million as capital imported in the form of other capital.
Providing a sectoral breakdown of
capital imported in Q2, the NBS stated that the value of share capital
imported into the country was $347.99 million, a significant increase
relative to the first quarter of 42.89 per cent. Year on year, while
share capital declined by 72.83 per cent.
It said: “Despite the large quarterly increase, the proportion of total
imported capital that shares accounted for in the second quarter was
33.39%, slightly lower than the proportion of 34.25% recorded in the
first quarter. It is also less than half the proportion it accounted for
in the same quarter of 2015, which is 70.41%. Nevertheless, share
capital still accounts for a larger proportion of total imported capital
than any individual sector.
“For the first time on record, the
sector to import the largest amount of capital was Oil and Gas, which
accounted for $200.39 million, or 19.23% of the total. In all previous
quarters, the sector to import the most capital had been either Banking,
Financing, Production or Telecommunications. The Oil and Gas sector is
characterised by occasional high levels of capital importation,
interspersed with periods in which very little capital is imported. This
sector imported $20.83 million in the previous quarter, and only $4.86
million a year previously.”
Continuing, it said: “The sector to
import the second largest amount of capital was Servicing, which
imported capital worth $119.75 million in the second quarter, or 11.49%
of the total. This represents a large increase relative to both the same
quarter the previous year when capital worth $12.83 million was
imported, and the previous quarter in which the value was $55.05
million.
“There were five sectors to record no
capital importation in the second quarter of 2016 (Marketing, Hotels,
Tanning, Transport and Weaving), one more than in the previous quarter.
In addition, half of the 20 sectors recorded either a decline in the
amount of capital imported relative to the previous quarter, or no
change.
“The largest fall was in the Electrical
sector, which recorded $57.31 million less. By contrast, Oil and Gas
recorded the largest increase, and imported $179.56 million more than in
the previous quarter, but Telecommunications also recorded a notable
increase of $105.27 million, from $13.44 million in the first quarter,
to $118.71 million in the second quarter of 2016.”
Rather
than lying fallow, experts have urged the Federal Government to channel
some of the Pension Fund into providing adequate social infrastructure
in the country.
They argued that the insurance industry can assist
the government to fund the infrastructure deficits in the country,
noting that the decaying infrastructure and the need to repair and
provide new ones may overwhelm government in view of the current
economic recession.
Roads, railways, airports, seaports, water
system, electricity, and a host of other infrastructure, have been
begging for serious attention for years. But the huge capital outlay for
these projects makes them too heavy to fix from government-generated
revenue.
The experts suggested that government could tap into the
N5.6 trillion pension assets through floating of infrastructure bonds.
But there are however indications that government cannot meet the
guidelines stipulated in the pension fund investment guidelines in the
2014 Pension Reforms Act (PRA), and the National Pension Commission
(PenCom) is not ready to shift ground in a bid to safeguard the savings
of workers.
They also implored insurance companies to invest in infrastructure development through Annuity, since it’s a long-term fund.
As
at July 2015, PenCom said the total number of annuity retirees had
reached 21,211, with the Pension Fund Administrators, (PFAs) so far
transferred a total premium of N104.52 billion to the insurance
companies, which have risen in the last one-year.
According to the
Partner & Head, Advisory Services, KPMG Nigeria, Kunle Elebute,
inadequate infrastructure have remained a major impediment to growth in
Nigeria.
He argued that infrastructure such as electricity; roads,
airports, water systems and telecommunications are the foundations of
modern economies, noting that investment in infrastructure not only
generates direct employment in construction and operation of the various
projects but also improves efficiency and productivity levels, thereby,
and increasing competitive advantage.
Elebute, noted that
infrastructure projects are long-term and require substantial amounts of
funding, adding that the requirements are trillions of Naira and far
beyond the capacity of the government, which is why other economic
players, such as the underwriters, must support government with funding.
He
argued that life insurers seek investment options that offer high
yields and long maturities to back long-duration life insurance
obligations. One of such options, he said, involves investments in
infrastructure, such as transportation, communication, water, and the
generation and distribution of electric power.
Using the United
States (U.S.) as an example, he said the main funding vehicle for
infrastructure projects in the country has been the traditional
municipal bond market.
Collectively, the insurance industry has
been a meaningful institutional investor in the U.S municipal bond
market for many years, and many of its investments in the market are
project finance bonds, he pointed out.
At the end of 2014, he said
the Federal Reserve Board estimated the total U.S. municipal finance
market to be $3.7 trillion, of which the insurance industry held
approximately $500 billion, representing 14 per cent of the market.
Elebute
therefore urged Nigerian insurers to borrow a leaf from the U.S. and
collectively establish an Infrastructure Investment Fund with
contributions from industry players over the next 10 years. Thereafter,
they will appoint Infrastructure Fund Manager, who will determine
infrastructure assets to invest in either directly or via project
finance bonds, adding that a Fund investment committee will ultimately
be responsible for making final investment decisions.
He
identified the advantages underwriters would derive from investing in
infrastructure, to include stable returns, reliable cash flow and low
volatility, portfolio diversification, hedging against inflation
(concession agreement linked to changes in inflation rate) as well as
long-term duration to match long-term liabilities.
The
Minister of Finance, Kemi Adeosun, had stressed the imperative for the
insurance sector to key into the drive of the present administration
towards rebuilding a virile national economy through diversification and
expansion of national infrastructural resources.
The Commissioner
for Insurance, Alhaji Mohammed Kari, on his part, said: “insurance
companies facilitates investment in infrastructure and high-risk return
activities, by generating sources of long-term finance, manage high-risk
exposures as well as help stimulates the growth of debt and equity
markets.”
The Minister of Power, Works and Housing, Babatunde
Fashola, also urged insurance practitioners to be more innovative,
entrepreneurial and embracing the diverse needs of the country’s big and
promising economy.
According to him, the role of insurance
practitioners goes beyond providing performance bonds given to ensure
that contractors discharged their responsibility; to embracing health
insurance that guarantees access to the healthcare facility.
He
also said that housing programmes would provide ‘a potential market of
opportunities by way of performance bonds and mortgage insurance
policies.
On how the insurance industry could act as a change
agent in the current efforts to rebuild the economy, Fashola reminded
the practitioners that insurance is a component and important part of
the finance subsector.
He however expressed regrets that the
sector “has probably played a second role to banking, and without
intending to be judgmental has not optimised the opportunities for
growth, expansion and inclusion.”
Fashola, who cited some
instances of how insurance was deployed innovatively to accomplish
several initiatives and programmes during his tenure as the Lagos State
Governor, expressed joy that today a lot of changes were being
introduced to address the anomalies that brought about infrastructure
decay.
Speaking at the weekend, the new Managing Director, FBN
General Insurance Limited, Bode Opadokun, said the Life arm of the
industry is better suited for infrastructure because it has long term
funds unlike the General Insurance business that deals with short-term
funds.
“For me, nothing is impossible. What is just required is
for us to have a clear understanding on what we really want to do. It is
good they are talking about annuity, but for General Business, we might
not be able to do so, because our fund is a short term. The risk that
we manage is not a long term risk.
“So, the level of commitment of
insurance companies like ours in the general insurance business cannot
be as much as that of a life office, but that does not mean we cannot
play, but only that the percentage of the fund we can commit into such
projects cannot be compared to a life office that have a long term fund
with it,” he said.
Nigeria’s National Integrated Infrastructure
Master Plan, said about $3.1 trillion investment is required over the
next 30 years to achieve the desired infrastructure stock in the
country.
About N1.7 trillion is needed to deliver 206 federal
roads covering over 6,000 kilometres with contract value at over N2
trillion, while there are about 17.37 million housing deficit for a
population estimated at 182.2 million with fertility rate of 6.1 per
cent.
The implication of this is that the country needs trillions
of Naira to address its infrastructural deficits at a time when the
economy is financially challenged, while the Federal Government had
struggled for years to secure domestic and foreign funds to fix them.
Many
questions are begging for answers – Are underwriters ready for this?
Will government be sincere and transparent under the terms of the
funding, if insurers are ready? What are the benefits for the insurance
industry? Are the sources of funding be revolving?
