Sunday, January 5, 2014

Who is qualified to succeed Sanusi Lamido Sanusi as CBN Governor?

As the current governor of the Central Bank of Nigeria (CBN) prepares to take his exit by May (2014) ending, various names have come up as potential replacement.  It is important to state that the position of a CBN governor is not a ceremonial position. It is a position of huge significance to the wellbeing of every Nigerian.

The CBN governor holds the economy of the nation in his/her hands. The President of the country is often blamed when the economy is bad, but the man or woman that should get a good chunk of the stick for a bad economy is the governor of the Central Bank. His or her actions and inactions have a life and death hold on the Nigerian economy. By manipulating the cost of money in the economy, he or she can create wealth or destroy wealth.

In Nigeria, the governor is often (over) identified with bank regulation than his or her core function of price stability. So it is not surprising, that often when the position of the Central Bank governor comes up, practicing or retired bankers are touted as the likely candidates to pick up the position. Charles/Chukwuma Soludo seems to have been the obvious exception.

So as President Jonathan prepares to make a decision on who should head the CBN starting June 2014, the BIG question is what should be the ideal qualifications of the CBN Governor? In answering this question, I have decided to examine the profiles of the people that some countries selected recently to lead their Central Banks in  key economies around the world.  

United States of America (USA)
Last year, President Obama nominated Janet Yellen to head its Federal Reserve Bank, which is the equivalent of Nigeria’s Central Bank. Yellen, has a PHD in Economics. Her brief profile reads like this. 

 Born in Brooklyn, New York, in 1946, Janet Yellen earned a bachelor's degree from Brown University in 1967. She then went to Yale University, where she received her Ph.D. in 1971. After completing her Ph.D., she spent several years as an assistant professor at Harvard University, moving from there to work at the Federal Reserve from 1977 to 1978, and then became a professor at the University of California, Berkeley. From 1997 to 1999, she served on the White House Council of Economic Advisers, and in 2004, she became President and CEO of the Federal Reserve Bank of San Francisco. In 2010, Yellen was selected to serve as vice chair of the Federal Reserve Board of Governors.

Over her lengthy career, Yellen has penned numerous papers and publications, including some co-authored with her husband, Nobel Prize-winning economist and UC Berkeley professor George Akerlof. She has also received numerous accolades for her contributions to the field of economics. She served as a Guggenheim Fellow in the mid-1980s, and received the Wilbur Lucius Cross Medal from Yale University in 1997.

October 2013, Israel also appointed a woman, Dr. Karnit Flug to head Bank of Israel which is also the equivalent of Nigeria’s Central Bank. Flug has her doctorate at Columbia University and served as an IMF economist before joining the Bank of Israel in the 1980's.

Flug completed her doctorate at New York's Columbia University and worked at the International Monetary Fund as an economist and later as a senior research economist at the Inter-American Development Bank. She was appointed director of the research department at the Bank of Israel in 2001.

United Kingdom
In 2013, the British government tapped a Canadian, Mark Carney, to head the Bank of England, which is also the equivalent of Nigeria’s Central Bank. He was actually the Governor of the Bank of Canada where he served five years of seven term tenure before emerging the governor the of Bank of England.

Mark Carney has a Barchelors Degree in economics from Harvard University and crowned it with a Masters Degree and Doctorate in Economics from Oxford University. He is largely credited for protecting the Canadian economy from the 2007 global financial crisis.

Carney has served as Chairman of the Financial Stability Board (FSB) and as a member of the Board of Directors of the Bank for International Settlements (BIS). He has been instrumental in leading economies to introduce and coordinate a raft of new financial regulations. Carney is also a member of the Group of Thirty, and of the Foundation Board of the World Economic Forum.

In 2013, the Ghanaian government confirmed Dr. Henry Kofi Wampah as head of the Central Bank, Bank of Ghana.

Prior to his appointment at the bank, Dr. Wampah was the Director of the Research and Statistics Department at the West African Monetary Institute. He also worked as the Head of the Research Department of Bank of Ghana from February 1996 to February 2001, as well as working with the International Monetary Fund. Dr Wampah holds a Masters Degree and a Ph.D in Economics from McGill University, Montreal CANADA.

Common in these profiles is the strong academic qualification in economics of all the appointees. But it is not just the qualification, but also the extensive experience in the field of economics in and outside academics. My take is that it is important a Central Bank Governor has a deep understanding of economics because his or her primary duty is the economy. A Nigerian Central Bank Governor should not be less qualified both academically and in practical experience if we want to compete in a global world. 

Sunday, February 24, 2013

Where do Nigeria’s “drop out” students go?

Every year about 600,000 Nigerians are born who never get the chance to step into a classroom.  These Nigerians represent about 10% of the six million that get into the world through the Nigerian birth route.
Of the remaining that steps into the classroom many never get the chance to walk into the four walls of a tertiary institution. The story of these missing students in the school ladder is one of the interesting findings in the report “Nigeria’s Human Capital Challenges: Insights from HR Professionals” recently published by BusinessDay Research.
Ruqayyatu Ahmed Rufa'i-Minister of Education 
Data obtained from the National Bureau of Statistics (NBS) shows that an average of 20 million students are enrolled in public primary schools in any school year in Nigeria. This comes to an average of 3.3 million students per level, knowing that we have a six year school ladder at the primary school level.

At the secondary school level however, this figure drops dramatically to an average of five million students enrolled or about 833,000 per level since we also have a six year school ladder at the secondary school level. This means of the 3.3 million that enrolled at the Primary School level in any particular year, just an average 833,000 eventually made it to the secondary school level in any particular year implying an average drop-out rate of about 2.47 million per annum or 75% between primary schools and secondary schools in Nigeria. Over a six year cycle, this could translate to about 15 million students out of the school system, assuming this figures remain unchanged.

The figures from the NBS shows that on the average only about 700,000 students get enrolled in all Nigerian universities in any year. Giving an average of four years study period in Nigerian universities, this implies an average of 175,000 students at any level.  Another 600,000 are enrolled in polytechnics and colleges of education in any year. There is also an average of four year study period in our polytechnics, so this translates to an average 150,000 students at any level implying that of the average of 833,000 ready for tertiary education in any year, only about 39 percent actually enrol in any tertiary institution in any particular year.  

The question then arise what happens to the about the three million students every year that got some taste of primary and secondary school education but never crown it with a passage through any of Nigeria’s tertiary institutions. The first obvious choice would be for these students who drop out of the educational system to join the vocational education system.

The challenge however is that, though the vocational education institutions exist in Nigeria, they are poorly equipped and lack well trained manpower. The report shows that Nigeria currently has 132 technical colleges and 70 vocational enterprises, but most are understaffed with obsolete facilities.

Perhaps, the strongest evidence that Nigeria’s vocational institutions are not worth much is the fact their graduates experience the highest unemployment rate among any group of graduates in Nigeria. The unemployment rate for those who have attended any form of vocational school in Nigeria stood at 28.9% in 2011, according to NBS data. This is higher than the unemployment rate for those who never attended any form school, which stood at 22.4% and higher than those who attended primary school, which is put at a low 21.5%. This seem to indicate Nigerians who never  attended any form of school or completed just primary school, has a better chance of being employed than the Nigerian who obtained a vocational education.

The national impact of the weak vocational education option for Nigerians who drop out of the educational system is the low quality of vocational and technical skills in the country. This is the reason we have auto mechanics without mechanical skills, brick layers that cannot lay bricks, painters that cannot paint, and many more basic skills that are lacking in the country.

It is the reason behind why most Nigerians would prefer artisans from Ghana, Togo and Benin republic than artisans from Nigeria. As the report notes, most artisans in Nigeria do not learn their trade in any formal environment. They learn from other artisans who have also learnt from other artisans. There is no science in the learning. It is learning by the “rule of the thumb.” The implication is that false concepts are passed on from one generation of artisans to another to the detriment of the consumers or customers.

Nigeria’s “Okada” phenomenon is also largely a symptom of these high numbers of missing students with little options. With no skill or poor marketable skills, many of these Nigerians have had to turn to Okada (commercial bikes) to make a living.

What emerges clearly is the need for an urgent reform of the vocational education system in the country. Nigeria cannot continue to have this number of its citizens just roaming the streets without the required skills to survive in a modern world.  It has critical implication for the security situation in the country and most importantly for economic growth.

Global trends show that increasingly, a country’s competitive advantage does not lie in its natural resource endowment but in the quality of its manpower. Quality manpower is able to innovate, improve efficiency and therefore hasten economic growth.

Where the quality of a country’s manpower is low, the country is forced to either import manpower from other countries or suffer low productivity or even zero productivity in the sectors where it lacks manpower. Low quality manpower also leads to high levels of unemployment due to the general low productivity and lack of innovation that takes place in such an economy.

Sadly, there is no evidence that the Nigerian government realizes the sense of urgency or the magnitude of the manpower challenge it faces. Until it realizes and makes the urgent reforms in the educational system, manpower will remain the biggest challenge to realizing Nigeria’s economic potential. That essentially is what the BusinessDay Research report shows. 

This article was first published in BusinessDay. 

Sunday, November 4, 2012

The political intrigues in Nigeria’s oil sector probes

Ribadu's choice to head the Presidential Task force on Petroleum Revenue was controversial as some members of the civil society felt an unpopular President was trying to win popular support on the credibility of the well-respected former anti-corruption fighter.  Ribadu has lived up to his  profile with the controversy his report has generated, first with the way to report was leaked to the media ahead of its release and the open disagreement among his  committee members on Friday when the report was submitted to the President.
President Goodluck Jonathan. 

The leakage of the Ribadu report was actually what forced President Goodluck Jonathan to personally request that the Ribadu committee report and two other committees that have had their report ready but have been unable to submit to the Minister of Petroleum Resources who set up the committees, hand in their reports to him personally.

The three different committees besides The Ribadu Special Task Force on Petroleum Revenue are the Dotun Sulaiman Committee on good governance and global best practices in the NNPC and the Kalu Idika Kalu committee on the nation’s refineries.

The report of the three committees have been hanging in the Minister’s office for several  months after the committees finished their reports without any clear idea of when they will be able to submit to her officially.
The Minister was apparently reluctant to receive the reports of the three different committees set up to probe and make recommendations on various aspects of the Nigerian petroleum industry.

But the leakage of the Ribadu Task Force report to the media triggered the President into damage control mode forcing him to accept the report of the committees which high level intrigues were in process to undermine their recommendations.
Diezani Allison Madueke, Nigeria's Minister of Petroleum Resources

The expectation is that the recommendations of the committees if implemented by the President will significantly change the current power structure in the oil and gas industry forcing out entrenched interests that have fed fat on the current anomalies in the sector. It is these entrenched interests in the Ministry and the Nigerian National Petroleum Corporation (NNPC) that are doing everything in their powers to ensure that the committees report do not see the light of the day or are discredited.

Though the current uncertainty in the oil and gas sector is holding back billions of dollars of new investments, entrenched interests in the sector are basically not bothered since the uncertainty favours their continuous rape of the sector.

  The current challenges in the sector revolve mainly around the desire of the Petroleum Minister and top executives of the NNPC to remain the power brokers in the sector despite clear signals that the best way to go for the oil sector is less of government interference, proper regulation of the oil sector and a clear business plan for running the Nigerian National Petroleum Corporation (NNPC) and its various subsidiaries.

The power play has not only  stalled the outcome of the various committees set up by the President and Minister in response to last January’s protest and call of the reform of the Nigerian oil sector but also the Petroleum Industry Bill (PIB) currently before the National Assembly may have fallen victim of these intrigues. The current PIB before the National Assembly is not the same as that prepared by the Udo Udoma committee set up by the President to draft PIB, sources familiar with the original recommendations of the committee say. The final report got to the national assembly without the knowledge of the committee, sources say.

Critical recommendations of the committee, like a more independent Department of Petroleum Resources (DPR), which would have seen the emergence of a strong autonomous regulatory body for the oil industry was watered down resulting in the recommendation of two weak regulatory bodies, one for upstream and another for the downstream and stronger control by the Minister of Petroleum Resources in the draft bill before the National Assembly.

“The boards of the two regulatory bodies have just been reduced to that of budget proposal and implementation. They have no real powers” said an oil industry source.

Also recommendations that removed most of the discretionary powers of the Minister in the Oil and Gas sector were ignored for more discretionary powers by the Minister.  The implication is the PIB which would have seen the emergence of a more business oriented NNPC has not materialized in the current PIB.
The second committee, the Kalu  Idika Kalu committee has also seen the Minister acting contrary to its recommendations concerning the refineries. The committee had recommended that the way forward was for the nation’s refineries to be sold and that if any Turnaround Maintenance (TAM) were to be done at all before the sale, it should not cost more than $500 million, sources say. The Minister of Petroleum Resources has however moved to repair the refineries at a cost of $1.6 billion well above the committee’s recommendation. It is also understood that the Minister may have delayed receiving the report of the committee.

Sources also say the Ribadu Committee was leaked to the media after several efforts to officially present the report to the Minister failed. Even after the report was leaked in the media, the Minister came out questioning sections of the report stating that the government is still studying the report.

A look through the Ribadu report however shows that the NNPC and the Ministry were actively contacted throughout the process of preparing the reports and their reaction to all the issues raised incorporated into the report.

A third committee, the Dotun Sulaiman Committee charged with designing a new corporate governance codes for ensuring full transparency, good governance and global best practices in the NNPC and other oil industry agencies  was completed months ago but the committee was unable to officially present it to the Minister. The committee’s recommendation will essentially see a more independent NNPC with less control from the Minister’s office; say sources that have seen a copy of the report.

A common thread running through the reports of all the committees’  set up to probe the power sector is the needed for transparency and less government interference in the sector, say sources that have seen the reports. This will significantly reduce the influence of the Minister and ensure a more properly regulated oil industry.

“What we envisaged with the current reform in the oil industry is a more independent regulatory role for the DPR like the National Communication Commission (NCC) in the Telecoms sector and the Nigeria Electricity Regulation Commission (NERC) in the electricity sector. Unfortunately, that is not what we are getting” a second source in the oil industry said.

The challenge with the current oil industry reforms is that NNPC and the Ministry has been left to lead the reforms. It is like asking the Power Holding Company of Nigeria (PHCN) to lead the reforms in the electricity sector or asking NITEL to lead the reforms of the telecommunications sector. They would have just used the process to entrench themselves in the sector rather than pursuing meaningful reforms that will lead to growth of the sector. That is what the NNPC is doing, said an operator in the oil industry.

Apparently, the reports were meant to die in the process flow but that has failed. Now that the recommendations are in the public, hopefully the President will be bold enough to implement the recommendations. 

 A slightly different version of this article was published in BusinessDay

Tuesday, October 9, 2012

Nigeria: the debate should not be about an oil benchmark but fading oil power

Nigeria still remains the dominant crude oil producer in the West African region, but the country has clearly lost its monopolistic claim of being the sole producer in the region. All around West Africa, new crude oil reserves are being discovered almost on a monthly basis. Ghana, Ivory Coast, Chad, Mauritania are among the few West African neighbours where crude oil in commercial quantities have been discovered in the last few years. In 2010 and 2011, commercial quantities of crude oil were discovered in Sierra Leone, Ghana, Niger, Cameroon, Gabon, and Angola. 

Diezani Allison Madueke-Nigeria's Minister of Petroleum Resources 

Discoveries have already been confirmed in Liberia, while explorations are on-going in Togo, Mauritania and even Benin republic. The West African Coast has become a crude oil coast with significant discoveries and more expected. Outside West Africa, East Africa, especially Kenya and Uganda are all positioned to become major producers of crude oil within the next one to two years.

With proven crude oil reserves of about 36 billion barrels, Nigeria is like a giant compared to its neighbours in the crude oil store but then Nigeria also has the largest mouths to feed compared to its African neighbours. Angola has a population of about 18 million but with proven crude oil reserves of about 13 billion barrels, an average of 722 barrels per head. Nigeria on the other hand has a population of about 160 million with proven reserves of 36 billion, an average reserve of 225 barrels per head. 

So Nigeria has more reserves but it has more mouths to feed and therefore should be prudent in managing the revenues that come from those reserves. That, however, seem not to be the case with the constant bickering between the National Assembly and the Presidency over an appropriate benchmark price for crude oil revenues rather than an appropriate beyond oil strategy.

With the increasing discovery of crude oil reserves all over Africa, Nigeria’s proven reserves buried underground are becoming less valuable. Simple economics teaches us that the more the quantity of any commodity, the less the price. With increasing number of countries joining the crude oil producing club, and most of these countries having more crude oil than they actually need, not only does it reduce the number of countries that Nigeria can sell crude oil to, but also increases the number of countries in the market to sell crude oil.

The oil outlook looks even bleaker when the fact that the US is increasingly becoming less dependent on external crude oil is thrown in. The Energy Information Administration (EIA), the US agency which provides data on US energy consumption notes that only 45% of petroleum consumed in the United States were imported in 2011, the lowest since 1995.

The EIA gives different reasons for the decline in US consumption of foreign crude oil. The reasons include, the economic downturn after the financial crisis of 2008, improvements in efficiency, changes in consumer behaviour and patterns of economic growth, increased use of domestic biofuels (ethanol and biodiesel), and strong gains in domestic production of crude oil and natural gas plant liquids, expanded domestic supplies and reduced the need for imports.

Efficiency, changes in consumer behaviour, substitution of petroleum products with biofuel and increased crude oil production in the US are permanent changes that will likely see the world’s largest consumer of crude continue reducing its consumption of the product. There are analysts who expect the US to eventually become a net exporter of crude oil soon maybe as early as 2013.

In 2011, Nigeria supplied just 10% of US crude oil needs compared to an average of 20% a few years ago. China and other Asian countries have moved in to fill the drop in demand from the US, however, with potential supplies coming from many other sources, the natural trajectory for future crude oil prices is a downward spiral. Many agree that tensions in the Middle East accounts largely for current price levels.
But while the dynamics of the crude oil environment is changing fast, Nigerian leaders seem stuck in lethargic past unable to take the necessary steps to take maximum advantage of its current crude oil resources or diversify its economy from over dependence on a volatile product.

Nigerian leaders seem not to be reading the writing on the wall. Current crude oil prices, which bring in 80% of government revenues, are not sustainable in the very short term. There are analysts estimating that a steep fall is likely very soon with projections that it may fall as low as US$ 30. True. There are alternative forecasts that even see crude oil prices rising, fuelled by demand from China and India assuming both countries sustains their current economic growth rates.

But the uncertainty over the future direction of crude oil prices certainly makes it a slippery platform for Nigeria to continually benchmark its economic future. There is an urgent need for a post oil boom strategy. Any sustained drop in crude prices, as it happened in 2008, when prices dropped to as low as US$ 40 per barrel, would certainly plunge the country into a financial crisis with current external at US$41 billion reserves able to cover export for just eight months and portfolio investments in Nigerian bonds reaching significant levels.

The debate that Nigerian leaders should be having should not be about an appropriate crude oil benchmark but a debate about the best strategy to diversify the Nigerian economy from its over dependence on oil revenues and what incentives should be in place to maximize our current crude oil and gas reserves before they become less valuable commodities in international trade. 

first published in BusinessDay of October 09, 2012

Saturday, September 15, 2012

The lost memo on banning foreign medical trips for Nigerian public officers

In April, Nigeria’s Minister of Health, Professor Onyebuchi Chukwu made a bold announcement  that he is considering sending a memo to the Federal Executive Council (FEC) meeting to ban public officers going abroad for medical treatment.
President Goodluck Jonathan 

It is not clear if this memo was ever sent to the FEC.  Perhaps, next time the media meets with the honourable Minister, they have to remind him of his lost memo. Hopefully, he will not be embarrassed answering the question considering the President’s wife is currently said to be on a medical trip abroad.

Obviously, despite billions spent, the health facilities in Aso Rock are still not comparable to health facilities in Germany, Saudi Arabia and all the other places staff and residents of Aso Rock fly to at the slightest sign of head or belly ache.

In the last five years, from 2008 to 2012, a total of N4.15 billion has been spent by the Presidency to provide healthcare facilities in Aso Rock.  Going by the nature and amount of expenditure, the State House Medical Centre (SHMC) should be one of the best equipped hospitals in the world.

Drugs and medical supplies bought for the SHMC in Aso Rock consumed N1.69 billion in the last five years. In this year’s budget, the Presidency made a provision of N314 million for drugs and medical supplies. This was just 21% below the N402 million spent in 2011.

The presidency also spent N901 million purchasing different medical equipment in the last five years. The SHMC should be one of the best equipped medical centres for dialysis, considering the items bought in the last five years.

In 2008, for example, the Presidency spent about N6.8 million on the provision of a dialysis centre. It also spent N127 million on procurement of equipment for a medical laboratory, dental laboratory, physiotherapy, pharmacy, surgical, O&G, paediatrics, and ophthalmology.

The 2012 budget shows that the presidency spent about N93 million on a Dialog+Haemodialysis machine with an option for automatic blood pressure measurement. It also bought a Diapact CRRT (whatever that means), an acute dialysis machine, a modular one water reverse osmosis system (for up to 10 dialysis machine with pre-treatment) a comfort therapy dialysis chair, and a bedside table for dialysis chair

The Presidency also spent some money on a central sterilizing building for the State House Medical Centre and also bought a magnetic resonance imaging machine, and converted an existing mortuary(?) into an MRI room, offices, conveniences, medical records and common room for its medical officers.

But while the State House Medical Centre has been equipped with the state of the art medical facilities, which unfortunately fail to meet the medical needs of its exotic occupants, the non-exotic Nigerian on the street is faced daily with poorly equipped hospitals plagued by strikes from frustrated medical personal and lack of drugs.

While  rich  Nigerians can afford a trip abroad to take care of their headaches and other medical issues, the many poor die daily from commonly preventable diseases. Life expectancy in Nigeria at 48 years ranks among the lowest in the world, comparable only to war torn countries. The chance of a child born in Nigeria celebrating his fifth birthday is one of the lowest in the world. The Nigerian child is seven times more likely to die before the age of five than an Egyptian Child and twice more likely to die than a Ghanaian Child. 

Nigerians, who can afford it, spend an average of $200 million yearly travelling abroad to seek medical treatment. Basically, they are spending this money to escape death. 

However, it should be unacceptable that a public officer, spends public money, that should have gone into providing medical facilities locally, to go abroad for medical treatment for common ailments. This is double jeopardy for the ordinary Nigerian.

This is why the Minister’s memo to ban public officers spending public funds for foreign medical treatment is important. Unfortunately, that memo will remain lost in transit if the President, who is to approve the memo, has his wife abroad undergoing treatment for “belly ache” despite the state of the art medical facilities in Aso Rock. 

For an interesting piece on why Nigerians seek medical treatment abroad  read Outbound Medical Tourism

Saturday, September 1, 2012

On Barth Nnaji’s resignation

I must say I am one of those who feel highly disappointed by the forced resignation of Nigeria’s former minister of power, Barth Nnaji.  I am not alone. His resignation has been a subject on social media with a good number of people expressing disappointment at his resignation. 

Barth Nnaji-Nigeria's former Minister of Power 

The disappointment has mainly been because most Nigerians have for the first time seen a dedicated commitment by a minister to make an impact in the perennially underperforming power sector. The clear evidence that he was making progress was not just the fact that most Nigerians were beginning to experience improved power supply in their homes but the powerful labour unions in the power sector were beginning to feel uncomfortable.

The entrenched interests in the Nigerian power sector in collaboration with some compromised staff of PHCN who have made their fortunes from the misfortune of Nigeria’s power situation suddenly realized that their days were numbered with the progress Nnaji was making in the power sector. Power was not only improving but the various timelines set for selling the successor companies to the dissolved PHCN was being adhered to strictly. Unlike before, it was obvious that the status quo in the power sector was about to change permanently.

His sudden resignation has however put the whole process under jeopardy, no matter what the government may want to say about it not affecting the whole exercise. Personally, I think the reason given for his forced resignation was lame. I see nothing wrong with what has been made to look like a wrong doing in some media.

I have had the privilege of going through some of the best codes of ethics and best practices from highly respected professional bodies and in all  conflict of interest situations, what is required is disclosure first and avoidance second.

From media reports, It was Nnaji that informed the committee that a company that undertook a contract for his company in the past was involved with the bid for some of the power assets and that also Geometric, which we all know was run by Nnaji before he became power minister was part of a  Eastern Nigeria Electric Company consortium bidding for the Eastern Nigeria Distribution Company.

Global best practice in this situation is disclosure of this potential conflict of interest, which Nnaji did. There is absolutely nothing wrong with those companies bidding for the power assets. A company that is technically qualified and financially capable to bid for power assets does not stand disqualified because it worked for the power minister in the past. Also, disclosing that Geometric was part of a consortium bidding for a  stake in Enugu Electricity Distribution Company was the right thing to do. The other action was ensuring that he abstained from the selection process of the successful bidders for Eastern Nigeria Electricity Distribution Company which from media reports, he did. 

 What was expected of the minister was not to be part of the decision making process in the bid evaluation involving the companies that could generate potential conflict of interest. From media reports, he also did that when he informed the technical committee evaluating the bids that two companies that were distantly related to him are taking part in the process and excused himself from the process.  As far as I can see from media reports, Nnaji met all the requirements of transparency and fairness that are supposed to be met in a process like this.

Wrong doing can only be ascribed in this situation if it can be proven that he may have passed information to any of these companies that are related to him that was not passed to other bidders and the companies have emerged without submitting the best bids.  From my reading of media, reports, I have not seen any such accusation.  In the US, Dick Cheney was the Managing Director of Halliburton before becoming Vice President of the US, and that did not stop Halliburton from winning contracts from the US government while he was the Vice President.

It is important that we do not hold public officers to impossible standards if we want to get credible people in the private sector to go into governance. Nnaji was not expected to close his private company down just because he wants to work for government. He took all the right actions he was supposed to do in such a situation by placing his shares in Geometric in a blind trust. This could explain why he found out only at the evaluation stage that his company was also involved in the bid. With a blind trust, he is not supposed to know what his company was doing while he is a minister.

It is really sad that, one of the acknowledged good hands in the current administration has been forced to resign. I sincerely hope, his resignation does not open the loophole for those who do not desire the success of the whole power reform programme to   compromise the process for their selfish end. There are still critical challenges ahead for the power reform process.  The greatest challenge is continuity. Bankers who are going to ultimately provide the finance to successful bidders are already concerned about the sustainability of the whole power reform process if it is not concluded within the lifespan of the current administration. Most bankers would definitely be reluctant to open their books to successful bidders if the whole process is not concluded before the 2015 elections.

The last time Obasanjo left and Yar Adua took over, the NIPP projects were all suspended, resulting in bad loans which created one of the excuses the Central Bank of Nigeria (CBN) needed to take over some banks. Nigerian banks may not want to take that risk again and the sudden resignation of Nnaji only shows that the risks associated with Nigeria’s power reforms are very real.

It would really be sad if the power reforms are derailed again. Succeeding with the power reforms may be Nigeria’s best chance to redeem its economy and remain as a nation. 

Monday, August 27, 2012

Does Nigeria need a N5000 note?

The announcement by the Central Bank of Nigeria (CBN) to introduce N5, 000.00 notes and coin the lower denominations of N5, N10, and N20 has received a lot of criticism from the Nigerian public already.  The criticism has mainly revolved around the fear that the higher note will cause inflation.
Cartoon by Asukwo: Source BusinessDay 

The CBN has however argued that there is no evidence that higher denomination can cause inflation, arguing that inflation is caused by increase in the volume of money in circulation rather than by the denomination of the money in circulation.

What I am going to do in this opinion piece is to look critically at the CBN argument. Would the new CBN denomination policy cause price increase in commodities and services in Nigeria?

First, as argued by the CBN, Nigeria would not be the first to coin  lower currency denominations. The CBN is proposing to coin the N5, N10 and N20 and introduce N5000.00 notes. Denmark has coins in the same range as being proposed by the CBN, while Japan and South Korea have coins in the range of 50, 100 and 500. Japan and South Korea also have a 5000 and 10,000 note. So it could be argued that the CBN is not doing something that has not been done in some other part of the world. The difference however is that these countries also have very advanced cashless payment systems so these notes are hardly ever seen physically.

So are Nigerians right in being apprehensive about the introduction of N5, N10 and N20 coins? If the characteristics of a good payment system are taken into consideration, then Nigerians have every reason to fear that the coinage of the lower denominations would be inflationary. A good payment system is expected to be efficient, convenient and low cost for the users of that payment system.

Would coining N5, N10 and N20 be efficient, convenient and low cost for Nigerians? The answer is most likely no. As the CBN admitted during the introduction of its cashless policy, 90% of banking transactions are below N150, 000.00 and that Nigeria is largely cash oriented society unlike Denmark and Japan or South Korea.

This is largely true as most transactions in Nigeria are carried out in the informal market, where a good proportion of individual transactions are done under N1000.00 in the open market. Most market women hold huge amount of money in porches tied around their waist, from where they dish out money for items or as “change” for purchased items. Coining the N5, N10, N20 notes would mean that these women would no longer find it convenient to hold these monies in the way they are used to holding it for ages.  This will affect the millions of informal market women who will suddenly find that holding this amount of money is no longer convenient.

These informal market participants would be forced to adopt the next higher currency note, N50 in order to restore the convenience that has been denied them with the lower coins. This would lead to price increases.  No amount of education as planned by the CBN would make Nigerians adopt the massive use of these coins because it is inconvenient, the informal market is huge and significant amount of transactions still take place with these lower end currencies. Coins are meant for low value transactions so where higher currency values are forced into this bracket, the most likely result will be avoidance of transactions that would create the inconvenience of using coins.

At the other end of introducing N5, 000.00 notes, there is a chance that pricing of commodities and services would be adopted to suit the higher denomination. This may be done by merchants to encourage convenience in paying for goods and services and to avoid the issue of having to give change for the higher denomination.  The most likely pricing strategy would be to migrate all prices that are closer to N5000.00 say within the N3000 to N4500 range to N5000.00 to avoid the inconvenience of having to give “change.”

There is also the strong argument of the higher denomination being against the cashless policy of the CBN. Higher denominations would encourage users to demand it for higher value transactions. It is however possible that the high cost of transactions for cash withdrawal by the CBN may discourage this trend. So the question is, why is the CBN introducing a higher denomination currency if there are already policies in place to discourage its use?

The argument that it would lower cash processing cost by banks is also lame since the cost of printing and processing coins is far higher than that of notes. The implication is that the CBN will spend more to introduce a set of currency with low demand. That would amount to waste of funds and increase cost and inconvenience for banks.

Perhaps, the most important issue that the CBN would have to deal with when it introduces the N5, 000.00 notes will be counterfeiting. In a largely informal economy like Nigeria, it would not be surprising if the N5, 000.00 note becomes the counterfeiters gold. There is a real possibility that the N5, 000.00 notes are counterfeited and circulated widely in the informal economy since the cost of counterfeiting would be less than the value that would be derived from circulating the fake currency.

The whole idea of the CBN currency restructuring exercise is against its own cashless policy which it has pursued vigorously since the beginning of the year. It would have made more sense if the CBN had continued to fine tune the cashless policy, make it more acceptable and workable, as that is the global trend, than derail its own policy with its latest initiative.