Saturday, June 14, 2008

SOLUDO – A Reaction

By Olu Omoyele
10 June 2008

It seems an ominous storm is gathering up around the governor of the Central Bank of Nigeria (CBN), Professor Chukwuma Soludo CFR. Allegations levied against him range from lack of respect for the law and impropriety to intellectual arrogance. This paper comments on this matter but in a somewhat broader context, that is, beyond the sole subject of Professor Soludo’s continuing position as CBN governor.

One is not in the school of sacred personalities or only one person can do it mentality that seems to be prevalent in our dear country. One is certainly not down with hero-worshipping of powerful people. One, however, respects accomplished intellectuals and those with the audacity to dream. As such, one was very much opposed to former President Olusegun Obasanjo’s third term bid when many feared reform would stop if he was not permitted to perpetuate his reign, and so on. Of course, some of them may be looking back now and thinking that reform has indeed stopped in the first year of President Musa Yar'Adua's reign. Nonetheless, Nigerians are undoubtedly glad that OBJ is gone because the country is on a road-trip of nation-building and this requires many things. This includes, at times, OBJ's hands-off approach to issues he did not have much of a clue about, such as the economy and the type of banking sector required to power it. So, many are grateful that he allowed people like Professors Soludo and Akunyili (and to a lesser extent, Dr Ngozi Okonjo-Iweala and Mrs Oby Ezekwesili) get on with their respective jobs in various sectors. In addition to that, though, Nigeria also needs respect for the law and an educated leader and so Yar'Adua's insistence on the rule of law (as long he proves it by actions) is laudable. He would appear to be smarter, cooler and less dictatorial compared to OBJ. But the main problem many have with him is that the business of rapid growth (and the pace of reform) does not have to be stopped in order to instil the rule of law. This is because in the absence of reform and the resultant benefit to the populace, one question will loom large, and that is: Who needs the rule of law when daily survival is the main chore of a large proportion of a population of 140million souls?

Some have said that sustaining reform is the key goal for the Federal Republic of Nigeria as opposed to carrying on with the reform agenda that was started under the previous administration. It is true that while reform is good, sustainability is the real issue. But first there must be reform, otherwise there is nothing to sustain. So, why worry about sustaining it when reform seems to have come to a halt? Sustaining nothing is nothing. In Nigeria, Africa’s most populous nation, we are possibly on the threshold of great things. This is because it is the first time since the early 1970s after the civil war that Nigerians feel that they can achieve something tangible; something worthwhile; something befitting of our long-vaunted significance on the continent and in the world at large. However, “almost” is nothing, so we must actually do it this time around. Like Jose Mourinho said recently (in the aftermath of Chelsea FC’s defeat at the hands of fellow English football club, Manchester United, in the European Champions League Final), almost winning the Cup is nothing!

Nigeria needs to get to a stage where economic progress is set like a rolling stone tumbling down a hill, and so self-perpetuating. Take the People’s Republic of China, for instance, where growth is on an automated footing to the point that the government has to regularly instigate measures aimed at cooling growth so as not to overheat the system. Nigeria’s growth is far from automated, as much of the developments of the last few years have been the result of dedicated, prescriptive action as opposed to automatic nuances. Pausing or reconsidering reform now is rather analogous to a sprinter stopping half-way through a race to rest, soak in the applause and then possibly continue running or perhaps start to walk backwards. Therefore, a concerted effort is required on the part of government to create the conditions which encourage, not hinder, innovation in the private sector. After all, the private sector is the key to growth and development and, ultimately, wealth-creation. It is in this context that a solid and consistent economic policy must be adhered to so that we can get to that stage when Nigeria’s upward mobility becomes automatic, and quickly so.

It is difficult to disagree with the President on the need for the enforcement of the supremacy of the constitution, in order to ensure the rule of law, but first, we need a societal constitution and a country worth defending. There has never been a time since 1914 when the amalgamation of the North and South took place (a marriage designed by Lugard largely to benefit UK and to divert wealth from the South to fund development in the North) up until now that people have unanimously felt that they belonged to the same country called Nigeria. Even Obafemi Awolowo referred to it as merely a geographical expression. There is no sense of nationhood. The reasons for this are many but two are rampant poverty and gross inequality. Now, if economic reform can help redress some of these, then maybe we will soon have a country and a constitution to defend. However, there is nothing sacred about the current constitution anyway, merely being the latest version in a long line of constitutions with which incompetent rogues, posing as leaders, have purported to govern us. This constitution which affords immunity to political leaders from prosecution is arguably not a reflection of the people’s will.

Back to the issue at hand – CBN governor, Professor Soludo – our view is that he has done a fantastic job and should not only be applauded, but should also be empowered to continue in the same vein. Continuing in the vein of football analogy, why stop an in-form striker from scoring yet another goal. The view that Soludo has done a good job so far is not because he's the only one who can do it or the only one with the intelligence to be able to do it, but simply because when faced with the reality of an easy life, entrenched interests and powerful people on the one hand versus painful but rapid growth and taking a chance on how to progress the sector on the other, he had the courage and fortitude to choose the latter. It is easy now to look back and not fully appreciate the impact of Soludo because it has already happened, but we should note that in 2004, one bank in South Africa (ABSA) had an asset base that was larger than all of Nigerian commercial banks put together. Further, the combined share capital of the 89 banks in Nigeria was equivalent to that of the fourth largest bank in South Africa. Nigerian banks were heavily engaged in buying and selling US Dollars as opposed to intermediating; banks were turning down small cash depositors and were wholly unable to fund businesses or even individual entrepreneurs for that matter. The successful banks relied heavily on government deposits and some supposedly big banks were owned in their entirety by individuals and families. Banking reform in Nigeria under Soludo has been lauded across the world as one of the most successful in recent decades and certainly the cheapest.

Of course, raising the minimum share capital required for a Nigerian bank did not automatically require issues of equity securities on the stock market - but this was identified as one of the easiest way to do it (in addition to numerous mergers between banks) and we have seen the dividends also spill beyond banking with many other sectors coming to the suddenly-booming market to raise fresh capital. All of these can be traced directly to the banking regulatory policy of Soludo, whether or not capital market stimulation was indeed his intention. Therefore, this recognition of Soludo’s achievements is not because he is the only one who can do it, but because he is only one who has in fact done it. Action speaks louder than words and the sounds coming out of the CBN under the stewardship of Soludo has been deafening. In addition, in January 2006, he was awarded the Central Banker of the Year and African Central Banker of the Year accolades by The Banker magazine (published by the Financial Times of London) for his efforts. Inflation that was rampant before is now single-digit.

While some academic commentators have criticised Soludo’s policy making as per the banking sector (namely, the process by which the minimum share capital level was raised) and the particular policy choice of de facto forced consolidation, the positive impact of the reforms instigated by the CBN governor, under the Obasanjo administration, cannot be overemphasised. In a speech entitled: “Strategic Agenda for the Naira”, Soludo summed up succinctly the improvements in the banking sector during his tenure in office:

“The banking system is the safest and soundest it has ever been in history. Deposits and credits have more than doubled, and non-performing loans as percentage
of total loans have gone down from about 23% before consolidation to about 7%
currently. Individual banks now finance big projects valued at hundreds of millions of dollars and also operate in the oil and gas sector - a feat they never could do before now. Interest rates are gradually coming down (with average lending rate at about 16.9%, down from 25%). Currently, commercial bank branches have gone up from about 3,200 before reforms to over 4,100, and total employment in the sector has gone up from about 55,000 before reforms to over 61,000 currently. The world is
celebrating Nigeria’s success, and over $1.5 billion of foreign investment has gone into the sector since 2005. By end 2007, there will be about 7 or more banks with
shareholders fund in excess of $1 billion and over 10 banks with market capitalization of over $2 billion each (there was none in 2004). In 2004, there was no Nigerian bank in the top 1000 banks in the world. As at the end of 2006, there were 12 banks in the top 1000, with one ranked 355th (top 500 in the world).”

While Soludo is hardly likely to be considered objective in the task of self-assessment, the above quote contains numerous measurable metrics that are easily verifiable by any doubters. In addition to being the fastest growing banking system in Africa and one of the fastest in the world, the Nigerian banking system is evidently powering the Nigerian Stock Exchange (NSE). The NSE has been around since the early 1960s but we have seen the difference in the sheer volume of activity on it and the interest in it, in the last three years purely as a result of the knock-on effect of the consolidation stage of banking reform.

Now, despite all these, if a person has spent a particular amount of time in a high-pressure job, they might run out of steam and a refreshing of ideas may be required (an exception is Manchester United FC manager, Sir Alex Ferguson who, after decades of managing at the top and dozens of trophies, remains insatiable). Therefore, if Soludo has run out of steam and needs to be replaced, then so be it. Let us find somebody capable to continue the business of reform. But can anyone truly tell me that Professor Chukwuma Soludo has run out of steam? I think not. He is still brimming with bright ideas (yes bright, there is no reason for one, or him, to apologise for his intellectual capacity – given that he did finish top of his class at BSc, MSc and PhD levels).

There is a Master Plan (e.g. Vision 2020) in place largely because of the theoretical prowess of smart people including Soludo himself. Also, Soludo coordinated the drafting and consultation process for the NEEDS agenda while he was Economic Adviser to former President Obasanjo. That is not to say that no one else can execute a plan designed by Soludo et all, but what exactly is wrong with Soludo at the moment that is telling us to drive him out and gamble on someone else? The CBN reform programme has many parts of which banking consolidation was only one. Consolidation was part of what the CBN termed “Phase One” (which has a 13-point agenda). He should be allowed to carry on and to do so with the full public backing of the Presidency. This includes backing on the issues of Africa Finance Corporation and Naira redenomination.

Africa Finance Corporation (AFC)

The AFC is an African solution to serious developmental needs across the continent. It was conceived by Soludo to help facilitate private-sector driven solutions to capital-raising for infrastructural purposes. Although participation is currently dominated by Nigerian institutions, it is intended to be a pan-African solution. He has invested some money from Nigeria’s foreign reserves into it merely to kick-start it. In addition, investments have been sought from the private sector, especially banks, as well as African governments. If this idea takes off, it will help remove the reliance on condition-laden agreements that we have with supranational organisations like the IFC, World Bank and the IMF. One hopes that most people agree that we must break the slavery-like bonds that we have with these organisations and that even if we deal with them in future, it must be on an equal footing. But, first, we should attempt to do it without them, because they are undoubtedly agents of foreign government who do not have our interests at heart at all –and since we have our interests at heart, we must work hard to protect them, which is where initiatives such as the AFC come into play.

Yet, controversy over the AFC has been raging in Nigeria recently especially on the Nigerian government’s investment in it. It has been alleged that Soludo did not obtain authorisation from the President even though he already had such authorisation from the previous President.

Soludo testified before the House of Representatives Committee on Banking and Currency, where he explained that the process for setting up the AFC started in January 2006 and the final agreement was signed about 17 months later, after following all the legal processes. He further mentioned some of the projects to be carried out in Nigeria via the AFC: a $4 billion power project to add 3,600 mega watts of electricity to the national grid; construction of Ring Roads in Port Harcourt to the tune of about N700 million; construction of fourth Mainland Bridge in Lagos; and a coal fired plant in Kogi State.

While some have suggested that investing in the AFC is beyond Soludo’s remit as CBN governor, others have affirmed that the new CBN Act actually endowed him with such powers. Further, one commentator opined that there be no slavish attachment to specialisations and even called for Soludo’s intervention in the nation’s decaying University sector.

Naira redenomination

On 14 August 2007, the CBN governor announced his intention to redenominate the Naira. He explained that he intended to restructure the entire currency by dropping two zeroes (i.e. moving two decimal points to the left) from the currency, and issuing more coin denominations. He said that the plan would entail a total currency exchange and phasing-out of all the existing denominations from 1 August 2008. At the exchange rate of the time, the policy, if implemented, would have meant that the Naira/US dollar exchange rate would be around N1.25 to US$1 then.

Some fear that redenomination would result in higher inflation, as a result of vendors deciding to increase prices before consumers have the opportunity to adjust to the new rates. However, redenomination recently took place in Ghana, where there does not appear to have been any great impact on prices.

In any event, the current state of the Naira was initiated initially with the devaluation of the currency as part of the Structural Adjustment Programe (SAP) under the regime of General Ibrahim Babangida. Given the woeful failure of SAP as a developmental tool (or its incredible success as a destabilising and poverty-creating tool), there can be no objective no policy aim to be served by not redenominating the Naira.

Consistency in economic management

Another issue is the need for stability when it comes to issues such as economic management and banking sector policy. Therefore, Nigeria ought not to be replacing Central Bankers every time a new President is in office. We cannot be radically changing the agenda and the reform plan so flimsily, every time. The United States of America, the largest and the most successful economy in world had Alan Greenspan in place for 20 years or so!

In any case, Nigeria's strategic goal of becoming a global economy (and amongst the world’s twenty strongest economies) by 2020 may suffer if the Presidency is perceived to be trying to force the CBN governor from office. One notes that a similarly pressured exit of former finance minister Dr Ngozi Okonjo-Iweala, was seen by some as damaging to the Obasanjo-led administration.

Given the finiteness of all things, if it is to be the case that the time is up for Professor Soludo in his post at the helm of the CBN, it is hoped that the Presidency will do justice to the position of CBN governor by appointing an economist of at least an equivalent calibre, intelligence and drive, as abundantly possessed by Soludo, to continue the very important task of rebuilding the country’s economy. That person would need to be free of political interests and free from political interference; and will need to combine a rigorous grasp of academic theory with a sound understanding of the practical realities of the Nigerian landscape. Such persons exist, of course, but in view of the shabby manner in which the incumbent governor may yet be forced from office, and the associated political manoeuvrings underpinning it, one would not hold one’s breath.

Soludo is resilient of course and may yet survive the current furore. If so, he will hopefully receive the support of the President and continue in his important task of economic management as Nigeria continues to aim for rapid economic growth.

Finally, as the storm around Soludo gathers pace, and one is filled with a somewhat acute sense of foreboding, it may be worthwhile for us all to take a moment and consider the progress of the last few years and what we would be risking if the CBN governor is unnecessarily removed from office, and unceremoniously so. As for the allegation of arrogance, one will gladly suffer justifiable intellectual arrogance, over any other, especially in a land where stupid people prance around, armed with crude power, destroying all before them for personal gain - to applause from an army of sycophants, of course!

Copyright Olu Omoyele 2008