The former Chairman of the Nigerian Garment Manufacturers Association (NGMA), Mr. Ibrahim Igomu understands the technicalities in the economy. In this interview, he says that restructuring of the petroleum downstream should be done holistically. According to him, the economy is experiencing shock as a result of the sudden change. The former banker bares his thought on other issues. Happy reading!
What are your views on the economy?
The economy is going through a recession. We are having very serious infrastructure challenges especially Small and Medium Enterprises that depend heavily on electricity and transportation in terms of fuel supply. These are all challenges that affect the smooth running of small business like my own. Then access to foreign exchange is a major challenge and difficulty in predicting the economic direction of the country.
Talking of fuel scarcity and power, how can this twin challenge be tackled?
I think basically, starting with the issue of supply of petroleum product, government needs to improve the restructuring of the downstream sector holistically. If you are introducing change into a sector, you should be able to carry the entire stakeholders along. And in carrying these stakeholders along there are a group in human resources we refers to as “resistors”. They are used to the status quo and they will either consciously or unconsciously resist the change you are bringing into the sector.
By the time you engage all stakeholder and also look at holistically supply chain issues you can then bring in your restructuring and change systematically so that there will be no major effect on the industry. But basically what has happened has been a knee-jerk approach. You have withdrawn subsidy, you did not even consider whether you have enough stock in the event that some key players might back out of the system in the event of the absence of subsidy. That is why the change is affecting the industry negatively.
Are the issues around fuel subsidy and importation of fuel not a fallout of the country’s inability to maintain its refineries ?
We have said it over and over again that the government has not been efficient in turning around the refineries. Maintenance of a refinery is a profit-oriented venture and except you approach it with that mentality – private sector mentality- you will be difficult to do a proper TAM. Choosing who should handle the TAM must not be a decision that should be either patronizing, emotional or out of nepotism.
You have to take objective decisions. Who built the refineries? Who has the competence to turn it around? Who is able to do it and give you a guarantee. It is like a vehicle! Whoever works on your vehicle should be able to tell you “ Oga, in the next 6 month if there is a challenge with this engine, I undertake to rework whatever I have done. But the problem we are having is that government is approaching a purely business matter in a government manner. Allowing people to bid for it; civil servants with vested interest.
At the end of the day you do not come out with the best set of people. But if it is an individual, if it is purely run like a business, you will see that they will bring in people that will give guarantees. If I give you $200 million or $400 million, can you give me a performance guarantee from an international bank that in the next 6 months this refinery will not breakdown. That is the approach that is lacking in the Turn Around Maintenance of the refineries.
Do you allude to the argument that non – passage of the PIB is responsible for the challenge in the energy sector?
I do not believe that a policy document that has not even been implemented can have such an enormous power. The only way I can accept that is that people are forecasting based on the context of the Bill if it eventually becomes law. But having said that, it is our usual culture in putting the blame on a particular issue. There are petroleum industries in the world – Venezuala, in Saudi Arabia that are even more regulated than the provisions in the PIB. Why are they still running efficiently? They are known and the companies run profitably.
Look at Gazprom in Russia for instance, this is a company that is coming out of a state run economy. Everybody knows that it is the most regulated petroleum industry, but today it controls 85% of gas supply in Europe. So it still boils down to the issue of corruption and our approach to restructuring. If you are bringing change into the system; there is what you call change management.
You have to identify key stakeholders, identity those that are likely to resist the change and make sure you carry everybody along and change has to be systematic. You can not change overnight, there will be too much shock to the system. A country of about 170 million people can not afford the kind of shock we are experiencing.
As I speak to you, we are not going to meet our GDP target for 2016. It is affecting our inter-regional trade. Goods that should flown freely between Nigeria – Chad; Nigeria – Cameroun; Nigeria – Benin is being affected due to lack of fuel. Within the economy itself, it is affecting all the indices because prices of everything have gone up due to high cost of fuel. Purchasing power is low because government is not injecting funds into the system. Funds that are supposed to stimulate the economy are not available.
It is when you inject funds into a system, into infrastructure that you create jobs that is what makes the economy boom as everybody benefits within the value chain. Government is not paying contractors, it is not releasing funds, the budget is yet to be signed by the President. There is liquidity crunch in the system! Then to worsen matters, the exchange rate issue and inadequate fuel supply has given rise to speculations, inflation.
Over the years liquidity has not been a issue in the country as it is at the moment?
The reason why the private sector is also suffering this faith is the imbalance in our monetary system. Most Nigerian banks instead of leveraging on the large economy we have by lending to other key sectors like agriculture, manufacturing; prefer to lend to the trading sectors where they make fast returns. They prefer to hold government deposits where they make huge interest by lending it upstream. In some cases joining other consortium to even lend outside the economy.
But with the introduction of the Treasury Single Account (TSA) government mopped up all those easy funds and most of these banks that do not have a traditional banking base – which is a current account – are negatively affected. And its becoming very expensive sourcing funds from such banks.
And they continue to over lend to trading to the detriment of the real sector where Nigeria has comparative advantage. So, that in itself have starved the economy of funds. The banks are the biggest culprits The banks are not bullish in lending to economic activities and even when they do lend it is too expensive.
Would you blame the banks when the banking tradition in Nigeria is mostly short term?
You know there are banks that have leveraged on their robust current account base. Banks like First Bank, Union Banks, and to a large extent GTBank have a very sound current account base. What is a current account base? You make sure you have much retail customers. As much as possible giving them flexible interventions like Temporary Overdraft (TOD), temporary loans with very favourable interest rates.
By the time you have about 2 – 3 million people in your current account base that have access to these loans it will spur lending but when you starve majority of your customers of access to credit and you concentrate credit in the hands of a few people because you feel it is safe and they are not likely to default. It will affect the economy! Economic growth is quite different from economic development.
There can be growth in the economy without the economic institutions actually developing. What we are witnessing in Nigeria in the last five years is basically economic growth. Our economic institutions are still not fully developed. Regulatory agencies policies are not intervening properly in the market. We do not have accurate data of unemployment, we do not have accurate data on small scale farmers, petty traders. CBN is supposed to use its monetary policy to encourage all these activities.
Then there is the Sovereign Wealth Fund (SWF) which is supposed to cushion the effect of the sudden drop in crude oil price. The state government cried out they wanted their share of the money and the moment crude oil price crashed the government had nothing to fall back to. Countries around the world save for their future generation when there is bumper inflow. But in the last six years, we have been squandering these funds not on productive activities and our recklessness is effecting the economy.
From the perspective of a businessman, do you think the budget as it is will spur growth in the real sector?
Looking at the Federal budget it should ordinarily should kickstart the economy that is slowing down, but the challenge we have today is that the only part of our economy that is being managed efficiently is the federal aspect of the economy. In most of the states there is a disconnect. Most of the state are heavily indebted. If it were a business concern most of them should be on receivership.
They cannot no longer pay salaries. Most of their allocations are already pledged against loans. One of the most interesting aspect of the budget is the decision by the government to inject funds into development of federal infrastructures. These are meant to put money into the economy if the country is run efficiently as a federal system. Key states that are going to have most of these value chain domiciled in their own state received are going to receive favourable economic incentives.
Take for instance, the Lagos – Ibadan federal highway, if your state falls within that area and major contracts are being given your people that are into construction are most likely to get subletting jobs. You can tell them as a state we are ready to support you but in return you must be ready to guarantee local content. So you are now partnering with a federal policy and taking advantage of it but that is not the case. Most of these states do not even encourage economic activities. Very few of them can be called viable states like Kano, Kaduna, Lagos, Rivers, Delta. Most of the eastern state are viable. A state like Osun can not even pay salaries.
They are heavily indebted and they are still borrowing from banks. There are states today if they give you a contract and you approach any bank having knowledge of their debt portfolio will not be ready to finance it. These are the challenge. There is a disconnect between the federal budget and the state budget.
The budget is an excellent one especially with the discipline and zeal with which they are going to implement it. Most of the states might be unable to key into the benefits because they have not addressed over employment; they have not addressed the heavy debt profile, the heavy load of political appointees that is just sucking the financial life line out of the states. And they are not taking advantage out of their comparative advantage.
Everybody is still running to the centre cap in band. Why can’t other states emulate Lagos and Kano who can do very well without federal allocation? The moment you are not economically viable it is expected that you will trim your workforce, you will cut down expenditure; your government will be low profile; there will be little or no political appointee but what do you see today; basically everybody is trying to outdo each other in spending money.
There is a disconnection between the federal budgetary intentions and the state budgetary intentions and of course the local government which are more or less controlled by the state. Nobody sees any document of what they want to do.