Nigeria’s fortunes have been looking up for a while. Thanks to the heady price of oil, the state has amassed $28 billion in reserves; the economy is growing at 7%; the sovereign’s long-term foreign currency rating, BB-, is on a par with Turkey; and last month the government announced its first Eurobond issue, a $2 billion deal to redeem its London Club commercial debt.
Yet on August 3, the outward symbol of all this success, Ngozi Okonjo-Iweala, Nigeria’s reformist finance minister, abruptly resigned from government, just weeks after an unexpected decision by president Olusegun Obasanjo to move her to the foreign ministry. This was the woman widely seen as the architect of Nigeria’s $18 billion debt deal with the Paris Club, the fiscal turnaround, a crackdown on corruption in the energy sector and restructuring of state enterprises.
The fear now is that the tidy book-keeping and good fiscal habits encouraged by Okonjo-Iweala leave the reform push incomplete – especially as many of her landmark policies have yet to be passed by parliament, something the erstwhile minister was aiming to complete before the government’s term expires early next year. With presidential elections looming, the ex-World Banker’s much vaunted policies could yet become overwhelmed by Nigeria’s enduring corruption and social problems.
Another view
Charles Soludo, governor of Nigeria’s central bank – and widely seen as the other driver of Nigeria’s economic reform – sees things differently. “All the reforms contained in the president’s programme are his own. Everything that has been accomplished has been a collective effort,” he tells Emerging Markets in an interview.
The former academic is quick to quash concerns about future commitment to reform. “The first anti-corruption bill went before the National Assembly before any of us were in government,” he points out.
For investors, Soludo is now the most credible economic reformer left in the government. For a start, the central banker engineered an overhaul and clean-up of the banking sector. After raising capital requirements from 25 million naira ($15.6 million) to two billion naira, Nigeria’s 89 banks were forced to merge. Now there are 25, and total industry capitalization has more than doubled.
“In terms of outcome, this has been the least-cost restructuring of a banking sector anywhere in the world,” says Soludo. Even with private deposits guaranteed in full by the government, the consolidation “costs less than 1% of GDP”. A Nigerian bank could be in the world’s top 100 soon.
Indeed, investors are taking note. Investec Pan Africa Fund’s holdings in Nigeria rose 12% during the spring’s emerging markets sell-off, when Egypt and South Africa fell sharply, with FirstBank Nigeria returning 45% in US dollars.
According to portfolio manager Roelof Horne, banking consolidation has driven a “flight to quality” and underpinned strong earnings for the larger banks. A similar recapitalization is on the agenda for the insurance industry, another sector that Horne is watching. “The banking reforms have created the right environment to sell to clients the idea that Nigeria is an acceptable investment destination,” he says.
Soludo also fully liberalized the foreign exchange market this year, eliminating the parallel market that emerged because of the shortage of foreign currency, and charged a premium of nearly 20% on official rates. “The rates have converged,” he says, describing it as a “fundamental change” in Nigeria’s economic history.
Anti-corruption measures
The governor is also spearheading the government’s “zero tolerance” of corruption. Thanks to beefed up legislation against money laundering, in June the Financial Action Task Force removed Nigeria from its blacklist of countries that were failing to cooperate with it. He has also drafted a code of conduct for the finance industry.
But Soludo insists that eliminating corruption is not just a Nigerian problem, but a responsibility shared by the international community. He cites the UK fraud office probe into an alleged $170 million bribe offered by KBR to win a gas contract in Nigeria.
“I don’t know of any country in the world that has put in as much effort in recent years in fighting corruption. We have more than a thousand people in prison as a consequence. Name any country in the western world that has seized $500 million from civilians and returned it to foreigners,” he says.
Rather than asking what more Nigeria should do, he adds, “We should ask how much more the West can complement the efforts of Nigeria in fighting corruption.”
His efforts have won praise from global watchdogs. “For the first time as far as I can remember, they are trying to sanitize the financial sector, by tracing money that has been laundered, especially government funds,” says Lilian Ekeanyanwu, Civil Corruption Coalition Coordinator for Transparency International. The Economic and Financial Crimes Commission has investigated a number of banks and public officials, including one state governor.
Still, she says, corruption remains a “sacred cow” in Nigeria. “People are being punished here and there, but the whole effort is still sporadic.”
Reform optimism
As for the government’s commitment to reform, investors are fairly sanguine. “There’s a worry [the government] could pursue less responsible economic management for political reasons, but that doesn’t make sense. Why would he [President Obasanjo] want to derail what he’s started?” says Horne. In next year’s election, the ideal winner will command support from across the country, and therefore be less likely to derail reforms by distributing political largesse.
“There is still a lot to be done,” Horne says, the top priority being Nigeria’s woeful basic infrastructure that prevents business from thriving. “They shouldn’t start wasting money in the states.”
Spending on infrastructure is a real prospect now that Nigeria’s inflation is heading down towards single digits, thanks to the central bank’s tight monetary policy, says Soludo. “Infrastructure is the top priority. We will be more expansionary before the end of the year,” he says.