Beyond Oil Talking Business

Beyond Oil

Lerato Mbele hears from an oil magnate, investor and entrepreneur in Lagos about the country's challenge to look beyond oil to a more sustainable pattern for economic growth.

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These are the bustling streets of Lagos, Nigeria, the heartbeat of


West Africa and a strategic financial hub.


But Nigeria is in the throes of a recession and young


On this week's Talking Business, we ask


what does Nigeria need to do to resuscitate its economy?


Nigeria is one of Africa's top two economies,


the largest producer of oil in Africa.


It has a huge consumer market of 117 million people. But it seems as


though right now none of that really matters because Nigeria find itself


in the throes of an economic recession. It is not the first time


Nigeria is in crisis. The question is, why does this African giant,


that has the potential to rise and lead, find itself tripping and


falling? And what is it going to take to make Nigeria thrive? Here to


answer some of these questions, the chief executive officer of the


Nigerian sovereign investment agency, effectively the country's


sovereign wealth fund, and next to him, the chief executive of the West


Africa vocational education and then we also have the chairman of the


Nigeria mortgage refinance company. Thank you for joining us. It started


with the ball in the international oil price and quickly thereafter,


Nigeria found itself in recession. Why did those two things reinforce


each other? Sure, first of all, I think the oil price recession came


at the end of what was a stretch of eight years of oil price rally. It


is a cyclical product. The last 30 years, we have seen nine major


recessions, cyclical downturn in oil price. We were due for one because


along the line of the rising oil price, the rising oil price, it


brought in new suppliers, so fracking, you know, the United


States went from an importer to an exporter. We also had alternative


energy, electric cars. Quite a few things came together at the same


time to lead to what was a significant decline. Also, if you


looked at the important economies of China and Brazil, these economies


also went through their own downturn at the same time. All of this came


to a head and the oil price came from $100 down to as low as $27 at


one point and so that lead to that and it also happened at a time in a


new government was coming in. All of that put together was what led to


the situation we find ourselves in. But oil is 13% of GDP and my sense


is that it is important to the extent in that it is 70% of the


government's overall revenue but there's enough resilience in the


economy that we have start to come out of it and the oil price has


picked up. Is the economy resilient? Ordeal being a small proportion of


GDP but almost everything in Nigeria depends on it. Yes, it is to the


extent that Nigerians are the resilient ones that make Nigeria


resilient. We survive despite and in despite of government and in spite


and despite of the economy. So Nigerians will keep going until they


can't any more. I think that is what we need to put our bets on, what are


Nigerians doing and how do we best in their productivity because that


is the only asset we have and it's not going anywhere any time soon.


How has Nigerian business responded to this? It is not just the


recession. It is also the currency. Yes, we need to sort out the


exchange rate. There is a problem there. We need to supply


infrastructure and find a way to improve basic infrastructure, to


enhance productivity. Those are the two key problems facing business in


Nigeria right now. Explain the relationship between the economy and


the currency right now. Most of the international investors are buckling


under the pressure of this, should the currency be devalued or not? I


think the problem with the currency is that it has been fixed and


because it is not gloating, then people are uncomfortable about the


ability to invest and then get their money is out because it is at a


fixed price. That is a real concern. That relates them to the real


economy because if it is fixed, then it is very difficult, unless you are


able to get your dollars at the fixed price, to be able to


repatriate your profits if you have any. And if there is a differential,


if there is a difference between the official rate and the market rate of


40%, you would have to make a return, an equity return in excess


of 40% to enable yourself to be sure that you are making a positive gain


on your investment. OK, so it opens the system up to what they call


arbitrageur but this also impacts the ordinary man of woman. Almost


70% of everything Nigerians use and consume, from food to petrol, is


imported, so how are people really affected by what is going on? We


work with a lot of small and growing businesses and they are affected


because the cost of all the input has gone up but what is really


disheartening and worrying is that the only thing that they can sit on


his wages. So all my employer partners tell me they can't increase


salaries because everything else has gone up. But remember, for the


common man, coming to work every day, is transportation went up in


March, doubled overnight and so people are really struggling because


wages over the last three years have stayed the same if not the Clyde.


The minimum wage is not a living wage. It never has been. -- is not


declined. It is a challenge for the everyday man and for the small and


growing businesses which are the backbone of the economy. I knew you


don't represent the government body led up a government agency. What do


you say to people who say there is too many inefficiencies in the


Nigerian system and nobody is seriously trying to tackle them? I


have seen significant efforts to make changes recently, also from the


agency that I'm part. I will give you an example. Yesterday, we signed


an agreement to invest in a exchange. Now, it may sound not very


interesting to the ordinary person but the effect eventually, when we


are up and running and we want to be up and running in six months' time,


is we will bring transferrin to commodity pricing because there is


so much inefficiency on commodity pricing. Others are able to price is


much cheaper than small people can. We don't have enough transparency


there. We are also investing in logistics, so ER looking to improve


the movement of goods and agricultural commodities. We have an


agriculture fund. There's a lot being done there. We have also made


investment in creating an agency to help ease the cost of credit and


bring in funds. We could go on and on, there are so many things going


on which I think will eventually come to the surface. Let me symbol


fight, simple question, here is Africa's largest oil exporter and


it's probably Africa's largest importer of petrol. We should be


refining it, not importing it. That is an inefficiency. I agree and that


strikes and because I'm a chemical engineer by training and I worked on


some of those refineries many years ago. It's unfortunate, the state of


those refineries. What you may also have not noticed is that there was


an announcement made last year and a request that went out for refineries


and we are looking at some of these projects. It is not impossible to


build a refinery, for goodness sake. We used to have four functioning


refineries in Nigeria that could refine up to 2000 barrels a day. We


can bring those things back. I think it goes to the heart of what you


were talking about. 30% of African exchange usage is in finished


products. You need to solve that very quickly by refining domestic E


and that solves two things at the same time. What incentive is there


to solve some of these inefficiencies because those who


just look at the situation said, for as long as there is corruption, and


as long as people thrive in the face of corruption, there is no incentive


to address the problem for Nigeria? Absolutely right and there is a lot


of corruption but I think this administration is working on that.


On the corruption aspect, that is not where I think the biggest


challenge for Nigeria is right now. The big challenge for Nigeria is to


create market systems and transparency that would reduce the


ability to hide corruption. This is a process which needs to be done and


can only be done if you free up the market and you have an appropriate


management system. Everywhere I get interviewed, the first and second


question is about corruption. It is real. It is not unique to Nigeria,


by the way, and I say that because I've done business in places that it


is more sophisticated. But I think one way to solve corruption, number


one, is to minimise intervention by government that creates arbitrage.


That is number one. And to see that happen. Obviously there are still


issues with the exchange rate which was talked about but there are


things being done to solve that. But I can also speak to this from the


perspective of the organisation I run. You know, I hear of the


transparency index which is interesting but there's also another


index that measures the transparency and governance of sovereign wealth


funds and the Nigerian sovereign wealth authority is in the first


quarter, the top quarter, as of 82 sovereign wealth funds in the world.


There are three ways we go about that. The first way is


accountability. Accounts are published every quarter. The second


wave governance will stop there is a process which drives to the heart of


the organisation. The third way is the reinvestment, bringing


foreigners into investments. The point I'm making is that, and that's


just one, there are many other aspects to how this will be solved.


It can only be solved through minimally dimension, do not create


arbitrageurs and processes to solve it. Hold that thought because I'd


like us to talk about solutions in a second. We will continue discussing


what Nigeria needs to do to improve on its economic situation and get


itself out of crisis. Right now, let's get a thought from Colm O


Regan on this week's talking point. How difficult is it to rebalance the


nation's economic model, to shift from being in thrall to or oil, to


something more sustainable? Too much dependence on one area in an economy


can leave the whole model skewed in that direction and vulnerable if


something goes wrong. The Nigerian economy last year, in 2016, in the


second and third quarters, we were seeing double-digit contractions in


the oil sector, meaning that now, it only contributes around 8% of GDP.


It is what happens in the rest of the Nigerian economy that is much


more important. The difficulty, of course, is that oil still plays a


disproportionately important role in terms of generating foreign exchange


receipts for Nigeria. Roughly 95% of its foreign exchange income comes


from oil. So while it may not be the big driver of GDP, that foreign


exchange, that oil generates is still quite crucial for allowing for


activity in the rest of the economy. Bit of rebalancing or moving on is


required. To vaguely reinforce the metaphor, I'm going to move on from


this wonderful example of brutalist architecture... To this brand-new,


swanky, 21st-century building. Central-bank aficionados among you


will have spotted that the previous location was the old headquarters of


Ireland's Central bank. They are moving to the soon-to-be opened


building behind me. I like to see the move of Ireland's Central bank


down to their brand-new headquarters as sort of a metaphor for the way


Ireland's economy has tried to move on from it over dependence on the


property bubble of the previous decade. But rebalancing an entire


economy is not as simple as that. It's a bit more than a few grains


and some energy efficient glazing. As a small, open economy, you are


always vulnerable to market swings. Small, open economies tend to well


when the business cycle is growing, on the upside but they are also much


more vulnerable on the downside. Small, open economies like Ireland,


heavily reliant on the inflow of capital in finance, particularly


vulnerable. If your growth model is dependent on evangelisation, then by


definition, to a certain extent, you're much more vulnerable to


changes in capital flows. So if that is the outlook for small traders


like Ireland, what about a big oil like Nigeria? Governments always get


used to easy revenue and with the recent Opec agreement on production


cuts that has created some support to the oil price, the fear is that


this might weaken the reform process in Nigeria. If there were no choice,


if governments had to move quickly, try to mobilise revenue from the


rest of the economy, we would probably see a whole slew of


enabling reforms taking place very rapidly. But for as long as there is


the promise of perhaps more sizeable fiscal receipts from that


conventional source, from oil, it slows the reform process. It slows


the diversification process. There's always the temptation to borrow big


because you'll be able to pay it off with future oil receipts. So as I


suspected, rebalancing an economy easier said than done.


That is, Regan and for more of his videos, log onto the website. --


Colm O Regan. What is it that Nigeria should do to find solutions,


not just for the economy but for entrepreneurs and also for the


business community? You have got us talking about some of those


solutions, better financial reporting standards, more


transparency. What else can be done that will have an impact on ordinary


people? Quite a few other things. I think the one area that I think we


haven't truly addressed in the country is what it takes to


strengthen the manufacturing, so we can actually produce what we


consume. A country of this size and scale does not have a fairly


functional fizzy chemical sector, for example, or metals sector, that


is really functional. For the size of infrastructure needs that we


have, we need to be manufacturing ourselves. There has to be a way to


encourage entrepreneurs in this area so we can start to produce what we


need. The other thing that I think needs to happen in the economy also


is that while the economy itself, in my opinion, is diversify from oil


gets all the attention but it's less than 15% of GDP, government revenue


is not diversify. Tax as a ratio of GDP is under 5%. Most other


countries in the world is between 10%, or 14 or 15% in some cases.


There has to be accountability by the citizenship. People need to pay


their taxes when they have to do. 90% of Nigerian adults surveyed


believe that they have what it takes to run the red business. It


reinforces this idea that Nigerians are self-starters, enterprising


people. How can the country tap into that? That is always an interesting


statistic. We are very entrepreneurial but at the heart of


a lot of that is a lack of trust. Nigerians don't want to place their


future in someone else's hands. So they work for themselves, as soon as


they get in any classroom I walk -- Robidoux, and any of you want to be


owning your own business in five years? 99 of ?100 will go up. To


that end, productivity is going to be so important in this economy and


getting us out of the recession. There's a lot of talk in investing


in hard infrastructure. With a soft infrastructure, the education


system, it's going to be critical. As small business struggles to get


financing, but the only thing that gets harder across the world for any


business as you progress is people. Its talent. You can raise your


financing in year three or four but if you can't find good stuff, you


will be running your own business by yourself or the rest of your life.


Until we start to invest in people, increase our productivity, small


businesses will continue to struggle. Lead's talk about


solutions here. What could be done to incentivise the Nigerian private


sector and indeed small and medium enterprise to take more of a leading


role, to be part of the growth and the strategic direction of the


country? They are trying but when all the inputs are, you know, import


lead, it is hard for them. But I think what can be done, at least


after government level, is looking at what people need right now. You


are investing in hard infrastructure but in parallel, not waiting for


another ten years to fix the education problem or the health care


issues. A healthy populace and an educated populace is a productive


populace. I think one thing that sometimes gets left out as well is


if in the major megacities like Lagos and Abuja, people are spending


four hours on average per day in traffic, you will be even less


productive. There is some very low hanging fruit that we can put into


place to start to help people become more productive and that is really


what small businesses need. It is, give me access to the people, the


capital and the markets so I can do my thing. Sort out infrastructure is


what she is saying and it is not just the roads. It's the electricity


supply, for instance. On the infrastructure side, yes,


electricity wants to be realistic, we privatised it and it has not


worked. The collections are very poor, the companies are not well


capitalised, which I think major issue, to be honest. They need to be


recapitalised. A lot needs to be done on the electricity front. In my


opinion, I think it is the single biggest challenge we have in the


country today. Small businesses, you look at a typical small business,


the cost of production will be 20% higher than its peers just because


of electricity costs. We need to solve that. There are programmes in


place and this is not the forum to outline on this programme but I'm


hoping that in the next couple of years, there should be some


solutions there. Nigeria aspires to be edgy 20 economy. Yes. In the near


future. Nigeria says it is a natural leader in Africa. Economically and


on the peace and security front. For Nigeria to assume what it believes


is its rightful place in Africa and in the world, what does it need to


do? I think it is quite simplistic approach, to say so, but if we


improve the productivity the average Nigerian to $5,000 per head, for


example, that is when you get a dividend in this large country that


we have and we will catapult us into a G20 country. Does that mean the


life of the average individual is higher? Maybe not. A lot needs to be


done, health care, education and all that needs to be dealt with. But at


the moment, I think the most important thing we need to do in the


country today, and if I can add maybe one or two things, the


electricity infrastructure needs to be solved. The production and the


manufacturing sector needs to be fixed. You cannot build a strong,


sustainable economy if you don't manufacture enough to be


self-sustaining. What do you think? Whilst we still have this position,


which crowds out, really keeps out investment, whilst business is


unsure about whether the currency will be 500 this week or a thousand


at the end of the, I'll give you an example, if you invested in Nigeria


in 2008, the Nyro was 120 to the dollar at that time. If you had made


an investment then, even if you had made a 10% return every year, you


have still made a loss in dollar terms. It is against this backdrop


that they needs to be clarity. The differentiation of the currency is


not necessarily a bad thing if it is going to lead to an improvement in


the terms of trade. If it is going to lead to an improvement in the


level of growth if it means that domestic business is going to


actually benefit from that differentiation. But the absence of


good and construction, electricity done a proper education system, all


of these make the current position that we have and the monetary policy


framework ineffective. No nation can rise above the education level. I


was working with a 25-year-old yesterday, trying to assess his


basic arithmetic skills. This is someone who says he wants to earn


50,000. It could not do 696 divided by 12. We worked on it together and


he still couldn't do it and this is a 25-year-old who had been


short-changed by the education system. If you don't have the


competencies, you will not get the productivity. You can build all the


roads in the world and fix all the electricity, but if we show up at


the office and we don't know how to divide 696 by 12. So, you know,


everyone, all of us, not just the president, everyone needs to get


back to the basics which is skills. I'd like to thank you all for taking


time to help us understand the complexity of Nigerian economy. The


chairman of the Nigerian mortgage refinance company, the CEO of the


West Africa location and education and the chief executive of the


Nigerian sovereign wealth authority, or sovereign investment authority in


the country. Some of the problems we have discussed here are not unique


to Nigeria. They are African problems. They are problems that


affect oil producing nations. But the solutions need decisive


leadership on the part of the Nigerian government, innovation on


the part of business, and consideration for the potential of


the youth. You have been watching this edition of Talking Business


from Lagos, Nigeria. Tune in next week when the programme will come to


you from Washington, DC, brought to you by Michelle Fleury, as she


discusses the industry of fake news. From myself and the team, thank you


for watching and goodbye. I have got some hit and miss showers


out there