By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE)- Johnson Chukwu, managing director (MD) of Cowry Asset Management Limited on Thursday said not only devaluation; but a cocktail of policies amongst others are some of the alternative options to solving Nigeria’s economic crises.
Chukwu says these include exchange rate adjustment, creating windows of investment for long-term funds through concessioning of commercially viable infrastructure, full deregulation of the downstream petroleum industry and stimulating investment in sectors where Nigeria has comparative advantage, as well as investing heavily in social infrastructure such as health, education and security.
He said these at a bi-monthly forum organised by Finance Correspondents of Nigeria (FICAN) with theme “Policy Options for Nigeria’s Economic Crises”
According to Chukwu, a flexible exchange rate is like a silver bullet that can be effective for both demand management and supply expansion. “When the price of a currency is adjusted to reflect the earnings capacity, the citizens’ capacity to consume imported goods is automatically reset at a lower level as they can no longer afford many of the non essential imported items. Irrespective of the so called inelastic demand of Nigerians for imported goods, once the currency is devalued and their naira income is not adjusted in the same ratio, citizens will reorder their priorities and eliminate items that they can no longer afford,” he affirmed.
Chukwu noted in many instances, citizens will look for local alternatives to the imported items and shift their patronage to such local substitutes. “The increase in demand for the local substitute will spur increase in production and possible improvement in quality. With improved quality and lower export cost, Traders may consider exporting such improved local products to neighboring African countries and may be from there to Europe, Asia, America and other parts of the World,” he added.
He says for emphasis, we have a proof of concept of this model in the 1980s during the Structural Adjustment Program (SAP) when made in Aba shoes, bags and other leatherwears became export commodities to Ivory Coast, Ghana, Togo, Gabon, Cameron Congo Democratic Republic and others.
On concessioning of infrastructure, he noted the indication of the Federal Government to borrow about $4.5 billion from the international market to fund the budget deficit, which is basically going into infrastructure development.
Nigerian authorities had said that they have already started exploratory talks with African Development Bank (AfDB) and World Bank for concessionary budget loans of $3.5 billion. “While we support these efforts, we are convinced that the government does not and will not have the financial resources to fund the infrastructure gap in the country,” Chukuwu noted.
He says without efficient infrastructure, the country would never become a competitive market for manufacturing. “We therefore believe that the way to go is to concession some of the critical infrastructure that are commercially viable such as transport infrastructure – Rail lines, Highways, Seaports, Airports, etc. and invite private sector capital to build these infrastructure under Build Operate and Transfer (BOT),” the CEO at Cowry Asset added.
He noted that concessioning of Infrastructure will create a veritable channel for inflow of long-term capital into the country, citing the 1,342 KM standard gauge rail line from Lagos to Kano which was awarded to a Chinese company by the former President Olusegun Obasanjo government in 2006 at a cost of $8.3 billion but canceled by the late President Umaru Yar’ Adua’s government in 2007.
“At present, the Federal Government obviously does not have money to fund such ambitious project, which is critical to the economic development of the country. Should this rail corridor be concessioned, the country will receive foreign direct investment of about $8.3 billion (assuming that the cost is still the same) and still enjoy the catalytic benefit of the infrastructure to economic development,” he said.
Another policy option he discussed is the deregulation of the downstream of the petroleum sector of the Nigerian economy which according to him, if done properly will trigger investment into that sector.
“The current modulated pricing system has clearly not attracted investors and would not likely attract investors. A shift from a finished products importing nation to local refining will reduce Nigeria’s monthly import bills from $4 billion to $2.4 billion based on CBN statement that refined petroleum products importation account for 40 percent of the total demand at the official foreign exchange market,” Chukwu said.
He said beyond this, the domestication of our downstream petroleum industry will create employment and possible earn the country foreign exchange from export.
Another option he mentioned is the use of trade policy to stimulate specific sectors; advising the government to adopt policies similar to the Cement industry policy to stimulate investment in specific sectors of the economy where Nigeria has comparative advantage.
Also, Chukwu noted that the policies should be such that will encourage value addition instead of production of raw materials. “For instance, the government should renew the previous government’s drive towards the implementation of the Cassava policy, Sugar policy and Automobile policy,” he added.
He advised Nigerian authorities to enact similar policies for petroleum refining, palm oil/produce and vegetable oil refining, Sesame seeds, Cocoa, Cotton, Granite, furniture, leatherwears and others. “Should we grow these sectors to the point of producing globally competitive final products from the abundantly available raw materials, we would have succeeded in achieving the much desired import substitution, conserve our foreign reserve and possibly earn some foreign exchange,” Chukwu affirmed.
