Home Finance Nigeria and other oil exporting countries must diversify or face dwindling revenue

Nigeria and other oil exporting countries must diversify or face dwindling revenue

by Business News Report

By Omoh Gabriel
Getting to meet Dr. Ngozi Okonjo-Iweala in Washington during the IMF/World Bank meeting was an herculean task. Even though the Editor Editor had spoken with her right from Lagos and she gave us her office phone number to contact her Personal assistant to book an appointment to see her in respect of the forth coming Vanguard Annual Banking Awards during the annual meeting it was almost like a mission impossible. Each time I attempted to go to her office, the US stern security officers would politely tell you, please can not enter this building without a staff of the World Bank accompany you in side. The waiting game kept me running from H 1818 building to the press centre, writing stories, attending press conferences and looking out to see her at least in any of the open scheduled event.
In some of the events we saw and spoke with Oby Ezekwesili, Vice President World Bank. I was almost worried that meeting with her will not be possible when I called her office and her assistant said you know how hard it is for her, she attends meeting back to back, her scheduled is tight, I will make out time for you to see her for five minutes. Great nothing more. So on Sunday at the appointed time one of the staff came, we went with her to her office, there she was in the Bank studio doing an interview. Can we talk here, it was simply not convenient as her staff were signalling to her that it was time for her to go for a scheduled meeting with some minister of finance from South America region. She simply said come and know my office. In her office after checking are scheduled meeting she Okey lets meet 1.15 pm Monday in my office. At about 11 pm Monday her personal assistant called to say the meeting with her will now hold by 3.30pm. At 3 pm Monday representatives of the Nigeria media, Sierra Leone and Kenya went into her office for an interactive session.
Here are the excerpts

At the board of the World bank there is going to be an extra seat for Africa countries which means that Africa voice will be heard even more than before since we now have a third chair
on the board. I think this is a major positive piece of progress by the world bank and it has received the blessing of the development committee which gives Africa countries more say and I think we should commend the work that has been done by Africa board of governors, Board of the World Bank and Mr. Zoellick President of the Bank in trying to get this through. You know it has been a long time that Africa has been looking for this and now we got it. I think it is a good thing. I just wanted to mention this as a positive development.
Global financial crisis its implication for Africa
In terms of the Present Financial crisis, the key question is how will this impact on Africa, what sort of impact is it going to have? The first thing to say is of course the effect of the crises are still working themselves out here in the US, in Europe and elsewhere and so it will take sometime before we see the full impact of that even within the countries that are the epic centre of the crisis and then to see what will happen to Africa countries.
But one can look at one or two channels where African countries might be impacted. I think the first thing is to also remember that before this financial crisis there have been the food, fuel and fertilizer crises. Now we have the financial crisis. I call them the four Fs. So there are four Fs; food, fuel, fertilizer and finance that are impacting countries right now. If you overlay all of these crises on each other it could result in some considerable impact. First in terms of the food and fuel crises you know that many countries have been suffering from the high commodity prices, even though the World Bank is forecasting that prices are beginning to come down but still they are at a level that is much higher than what they were in 2005. Even though prices are on the downward trend they are still at a level that is higher than they were two years ago and so the world economy is not out of the wood yet. So this is going to continue to be a problem. In Togo and Liberia for instance food inflation is still about 25 per cent, in Ethiopia food inflation is up to 92 per cent at the moment. In several countries, this is quite a problem. You take that and you take fuel pressure particularly for countries in land locked situations and you have this financial crises.
Channels of crisis manifestation
This financial crisis might manifest through the following channels, first a drying up in liquidity and in capital flows, you know one of the big thing that has happened is that interbank lending has been frozen, money is not circulating and banks are not lending to people, those of our countries in the continent that were hoping to go to the international finance market for funds, they will have to hold back this might tinker with their plans, inward flow of capital I think might also be impacted, so that certainly is one channel.
Another channel is through export. If the developed countries go into recession and emerging markets like India and China also experience the same thing then you will begin to see some impact on African exports because commodities export that we have, their prices will begin to go down and demand will be falling though, that means that Africa countries will be getting fewer revenue than they use to get.
What is the extent of this is difficult to tell right now. That is one possible channel. The World Bank is forecasting for 2009 that commodity prices will go down between 20-25 per cent compared to the previous forecast. This is one possible way that Africa countries might be impacted. Luckily for many countries the banking system are not as tightly linked to the banking systems abroad that are currently facing the crisis.
Crisis not yet in Africa banking system
The crisis is not being seen in Africa banking system and countries for now. Those countries that have high micro economic inbalances, those with high current and capital account deficient are the ones that are going to be very careful to take adequate measures because if anything happens they are the ones that will experience greater volatility.
So these are the different channels you might see things occurring. But for now it is still a bit too early to tell.
Another is the volume of assistance, and as you saw from the communique of the development committee and from the discussion, there have been a lot said about developing countries maintaining their commitment in Greaniggles to make sure that their pledge does not diminish. As of now they are falling behind I think their pledge is that by 2010 $50 billion going to Africa but how do they meet up with the commitment. I think we are at about $38billion there is the need for them to keep the pressure on to make sure those aid commitment are met.
This may be a bit difficult since they themselves are experiencing a squiz due to this crisis. Certainly there is has been great effort to urge them to keep their eye on the board there. Africa countries need to do their own bit. You know we also need to make our own effort to continue the reforms they started. You know that one of the good thing, the reason why Africa countries might not suffer much from this crisis as they could have is because they have been reforming.
These reforms have led to growth that we have seen so there is need to continue the reform on this part not to go back and say we are not going to continue the reforms we are going to nationalise our banks, no. Africa has to continue because it has been delivering growth and will enable government to deliver better services to Africa people. So Africa has to continue the effort ans also see how we can use our resources better and improve tax effort and savings mobilisation.
What is the World Bank doing in this regard?
How is the World Bank preparing in case any of these countries have issues, first on the food, I know you have heard about the $1.2billion facility, that is there and quite a bit of the money is being committed to Africa countries and has been targeting the most vulnerable countries with grants, out of the $1.2billion, $200million is a pure grant and out of that about $54million has been disbursed mostly to African countries and this is grant money. The Bank is very much geared toward helping out and it is also now doing programmes for the longer time, it has the rapid response facility, the bank is doing longer time agricultural programme and the commitment is to increase agricultural lending about $450million to $800million within the next year that is a substantial amount of assistance on the agriculture side. Now on the fuel side the Bank is preparing a fuel initiative for the poor, energy for the poor initiative, that is still underway that will be another facility.
On the Financial crisis, Bank is also gearing up, we have an international SWOT team, that can be sent to any country that is having problem to go and access if their financial system is under stress it can call on the Bank which will send this team to go and access. The Bank is gearing up to be in a position to support countries with additional resources if needed most those resources will come from the IBRD, that is not the soft loan of the bank but the regular lending arm of the bank. It is mostly emerging markets ie the more developing countries that are requesting the resources right now.
Now for Africa it is okey. I think Africa has a lot of resources at its disposal to be able to manage most of the requirement.

You said the bank is forecasting that in 2009, prices of commodity will fall by 20-25 per cent do you mean all commodities including oil, if it includes oil, how do you think the Nigerian government should respond since that is the major commodity it sells?
I am not sure that this commodity price forecast include oil. Oil forecast is different. Oil is a very difficult thing to forecast you see the volatility, the movement of oil prices, the trend is down and oil is about $82 a barrel if I am not mistaking this is a far cry from the $147 that we are talking about not so long ago. What does this mean, there is so much volatility in the oil market we do not know where the price is going to, if these developed countries go into recession the demand for oil will fall and that will have an impact on the price unless OPEC decides to restrict supply even more. If you are in that position it means you have to be much more prudent with your budgeting. As you know in Nigeria there is fiscal rule, where the budget is based at an oil price below the prevailing price in the market. The oil price being used for next year is $62 per barrel, if oil is coming down at $82 you can make your own deduction.
Nigeria has to be very prudent because if oil price goes below the budget bench mark then Nigeria will have budget constrains.
When you were the finance minister you introduced the excess crude account for the rainy day, can we say the rainy day here now?
I am not sure I will go that far now, you know Nigeria has a very healthy reserves, as a result of that fiscal rule Nigeria was able to save so much, Nigeria reserves are at about $64billion right now, unprecedented. I think Nigeria has a healthy situation but Nigeria should not be complacent
I would not say the rainy day has come then Nigeria should pull out all the excess crude revenue saved and start using it not yet, I think the money Nigeria is earning now should be used in a much more broader and efficient fashion. The government from what I hear is trying to look at the roads, electricity, put more in the electricity sector the , what Nigeria is doing is sound but it has to look at the technical side, more often this is ignored. When considering electricity, you need money but you also need good technical solution, transporting the gas from source to places where it is needed. To get the tariff regime in place
price the gas properly so that people can buy and use to generate electricity, encourage the private sector in all these things have to be done.
You spoke about rapid response, can you explain this further and you also spoke about oil prices going down, why does the bak want to set up oil assistance to the poor at this time?
On the rapid response facility I mention that we set it up you know that the President of the World, Mr. Robert B Zoellick called for a global new deal on food and part of doing that deal is let us get some thing that will help developing countries grow rapidly we said we will make sure that $1.2 billion is made available processed on a rapid basis, that is instead of the normal we take to process loans we will pass the thing through in a matter of weeks so that countries will get the money quickly and the board gave the authorisation for that fast processing. As of now at the $1.2 billion, this is the money that ordinarily the bank would have lent through its normal procedures but we have been given permission to fast track it. Inside that $1.2 billion, $200 million are for grants that is additional and different. We are already processing 800million. I told you before we have disbursed $54 million to various poor country especially the fragile one the post conflict ones like Liberia, Serra Leone, Togo, Haiti countries like that most of the countries are in Africa.
On the fuel for the poor, the World Bank started thinking about this before the crisis, and oil prices started coming down, because oil prices are so volatile, you do not know for sure which way prices are heading, although the trend looks as if it is going down now, because of the recession that is coming but the Bank thought let us put something in place. Saudi Arabia has expressed interest in supporting and initiating a programme to help poor country and people with energy. When the Bank President spoke of the need to help the poor with energy they came forward and said they will be interested provided other donors also come up. The initiative is to now get other donors involved. The facility is for vulnerable countries, especially those that are land locked for which the cost of importing is so difficult. The initiative is also looking at alternative sources of energy, not just the traditional one in helping countries develop solar micro hydro projects. I saw a micro hydro project in Afghanistan it was beautiful, if we could have that in some of Africa villages, I saw one in a small village with 84 families and they set it up and they are operating it by themselves, they trained one of their young ones how to operate it, and it is providing light for the entire village, they told me that out of the 84 families about 60 have bought television for the first time in that part of Afghanistan, you can imagine the children can now read because their winter is very difficult and it gets dark around 4 pm. Previously before electricity in the village when it is 4 every body sits around because it is cold. Now the children can study because they have electricity.
They were really very happy, now they can watch television and some of them now have satellite dish and can receive other channels you see elsewhere and it is from a small hydro project where they annex power from a stream in the village. If this initiative will also help other countries to have this kind of project why not . Africa could use this kind of project ion some of its villages as not every body will get on the national power grid why not develop this kind of projects for the rural areas.
What are the likely effects of the current financial crisis on the Nigeria banks?
From what we could see and I know you all talked to the Central of Nigeria Governor , did you not, I just met with him a short while ago, it looks like the Nigerian banks are relatively in good condition and the ownership of Nigerian banking system is internal, there is not that much foreign ownership, the banking system in Nigeria is not much tied to what is happening abroad to that extent it okey now. I think they have to watch the amount of foreign borrowing, you know if you borrow in foreign currency to finance domestic project you are exposed to foreign currency risk. So the amount of foreign financing that Nigerian banks undertake, should be watched. There are other internal issues that does not have anything to do with the current crisis but they need to watch their exposure. I here there are many states floating bonds, a lot of internal borrowing going on but sub national entities, I am sure that they have requirement that restrain them a bit they need to watch the risk to which they expose themselves. But it looks as far as this financial crisis is concerned the link to the toxic commodities here that are undermining banks is relatively limited. We should be okey.
One of the issue that dominated discussions at this year annual meetings is that of alternative source of energy which you said again here earlier, with developed countries putting billions on research, what are the likely implication of this to oil exporting countries in the near future in the event of discovery of a price competitive source of energy?
The search for alternative source of energy is nothing new, I think each time that oil prices go high every body start looking for alternative source, remember when there was the oil shock of the 1970s you know countries then started looking for alternative, then all of a sudden you find that sources of energy that used to be very expensive becomes competitive. When oil prices are high, people start looking at bio-fuel, fuel from ethanol, is it not how fuel from ethanol started in Brazil because of the oil shock of the 1970s and they kept developing it now it is a fairly competitive commodity, so I think that the point you are making is a very important one, oil exporting countries have to be mindful that alternative sources of energy could be generated and have to themselves diversify their economic base, that is what it means that if you focus only on one commodity and something hit that commodity you will have a lot of difficulty. They have to focus on: diversifying, that is what Nigeria and other oil exporting countries should be doing, Nigeria has goog agriculture, it has to build up the good value chain, it has a strong financial services chain, Nigeria has so many other things such as other minerals, we have not even developed them there is goal I do not know what has become of that. So diversification and prudent management of the resources being generated now and in the past years of oil boom because you are dealing with a wasting asset that could have a competitive alternative. These are things I would suggest that those countries need to do now.
Do you see the present crisis leading to capital flight from Africa
Emerging markets are experiencing that because portfolio flows, capital that comes into a country is made up of two flows, in fact three, you are seeing what you portfolio flows that goes into stock exchange and buy shares, there is FDI, foreign direct investment, that goes into investing in real sector, enterprises and manufacturing, this the best type of flow which creates job, the third type is home remittances which is what people in despora do. Starting with remittances I think we might see an impact because if people in despora are working in sectors that are being negatively impacted by the crisis such as losing their jobs they will no longer be able to send money home the way they use to. You can see that in Mexico they have been hit already, remittances are going down because they send a lot of temporary labourers to the United States. For African countries most Africa who migrates to this part of the world tend to be more permanent, may be Africa may not see much of the drop. I think that there may be some fall out, Africa is getting $12billion in remittances of which $3billion flows to Nigeria alone, which is quite an improvement over what it used to be. There might be some falling out here
FDI, to the extent that business here are down and people are risk averse, there might be some impact on that, remember what I said liquidity is frozen, money is no longer circulating here, just this morning, Monday 13th the stock markets are beginning to move up again, since governments on Sunday, guaranteed interbank lending, things are beginning to unfreeze but prior to that things were down, in fact they have not completely unfrozen. Some of those who are going to invest borrow also.
Portfolio flows I am not sure which way they will move because three or four of Africa stock markets have been falling recently which also indicate that some people might be pulling their money out, Nigeria, Kenya, South Africa and Egypt, I think there is a little bit of that going on not to a massive extent yet.
What benefit is the South -South Fund you launched during the annual meeting is to Africa?
On the South-South initiative, I was expecting questions on it, I am so excited about it this is an initiative that will allow policy makers, practitioners in the South-South region even ordinary people who are trying to get their project done if they want to know is there a better way of doing this, policy makers ministers who are trying to make reforms you want to know whether or how it has been done before in another country the way they succeeded instead of sitting down scratching your head wasting time this facility will enable you contact the World Bank and found out which other developing country has done the kind of thing you are about to do. Why is it South-South because we think well some time if another developing country has done it they are closer to your situation. It is not as sophiscated as those of the developed countries. When Nigeria was doing its pension reforms we went to Chile, which is not as complicated as you have in Europe or America, we could relate to it. If another South-South country has already done it before you can learn from them and not go too far. When I was a minister we traded a lot of information with Ghana, they will ask me I will ask them there were things they were doing that were good there some we were doing that were good, so we exchange lots of information. So that is the idea, if you contact the bank they can help you locate or link you to another country Africa or non Africa to where the problem you grappling with has already been solved or being solved you can learn from their experience, you can send people there, you staff to see how they are doing it and you yourself can meet with the minister that is doing what you want done and learn from them. That is a faster way of getting some thing done sometimes. That is the whole idea of the South-South initiative, once that experience takes place it is documented. There is a library so next time some oneelse has a problem and log into the internet he can access the information.

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