I am afraid of Nigeria’s debt profile – Dr. Alex Otti

Dr. Alex Otti is a fire brand economist and a first-class graduate who has traversed the economic and political spectrum at domestic and international levels. As a former Managing Director of one of the bigger banks in Nigeria and now a politician, his well reasoned comments have often times generated deep debates among intellectuals and government functionaries. In this interview with Teslim Shitta -Bey (Managing Director, Business Hallmark) and Okey Onyenweaku, (Editor, Business Hallmark), Otti expresses his views on what he sees as the way forward for the national economy.

The Central Bank has engaged in a number of policies, one of which is tight monetary policy in a period of recession, that seems to buck what economists think should be the right approach. Are we moving in the right direction?

Some people describe Economics as a dismal science. But it is not, it is a social science. A whole lot has to do with behaviouralism. I think in a period of recession (I think the right word is stagflation), we should not be raising increase rates. Because if you understand what makes recession, recession is simply when you have two or more quarters consecutively of negative economic growth or GDP growth. This is the four quarters that we’ve had stagflation. Economists prior to 1970 believed recession and inflation do not go in the same direction. They believed when you have slowdown in economic growth, then inflation should be going down. It was until 1970 that they found that it was actually possible that recession, inflation and even unemployment could go in the same direction. They saw that this was more critical than recession, they then coined a new word for it: stagflation. We have been with it for the past four consecutive quarters. If the right policies were put in place, I think we should have gone away from this. And fortunately, recession can go way very easily.

It is important that you look at what caused the recession. And what caused it was that we had oil prices going down, because we are a mono-product economy. It is quite interesting that oil and gas which accounts for about 9 percent of our GDP, also accounts for 95 percent of our foreign exchange. It does not add up. That is the kind of what would happen when you have this kind of disconnect. So, we are all relying on oil and the price fell from over $100 per barrel to less than $30 per barrel. It means you have lost your share, because oil accounts for 95 percent of your foreign exchange and you did not reduce your thirst for imported products. You did not reduce your expenditure. You did not in fact change your style. It means you were still spending money with a mindset of $100 per barrel. And you are actually dealing with $30 per barrel. Now it has gone to $56, which is still about half what it used to be. So, something must give. The first we should have done was to drastically reduce import. How do you reduce import? It is very difficult to reduce import. One of the things that CBN did was to take a list of 41 items and technically ban them. They did not ban them out rightly. They said we are not going to use official foreign exchange to fund the importation of these items. They believed we can produce them locally. Fantastic idea! But I think what went wrong was the decision to take them off the official market, because somehow, these products would find their ways into the country. If you say you are not going to fund them from the official market, they would go to the parallel market. And anytime we are talking, we don’t talk so much about the official market like we do about the parallel market.  So, today if somebody is asking you about the price of dollar, you won’t be talking about N306, because you can’t walk into your bank and get dollar. But you can call a ‘Mallam’ (unofficial currency trader) and he would bring dollar to you without asking questions. That is the real market. It was N410 per dollar the last time I checked, which was better than the N520/$ we were coming from. But is it sustainable? I don’t know.

On interest rate, the Central Bank was worried. First, they have yanked off 41 items from accessing forex from the official market and they felt if there is so much naira in circulation, and if you and I can borrow money at relatively low interest rate, we can use that naira to launch more speculative attack on the dollar. So, the logic of raising interest rate was to stop people from borrowing and launch attack on the dollar. That is a sound logic theoretically. But you need to go beyond that. In practice, most speculators do not go to banks. At least somebody had $43 million dollars packed somewhere. So, he doesn’t need the banks. He doesn’t even keep his money in the bank. So, what you wanted to achieve by increasing interest rate, you are unable to do it. No matter how high you raise interest rate;speculators would always borrow once they can see that there is a margin between the interest they would pay to the bank and the degree of depreciation of the currency.  Let me explain this, let’s say interest rate is 20 percent per annum. That means in a year if you borrow N1 million, you would pay N200,000 as interest. So If you divide over 10 months, it means you would pay less than N20,000 per month. So, if I used it to buy dollar and it was N100 per dollar, it means I would get $10,000. If in one month, exchange rate moved from N100 to N130 per dollar, it makes sense for me to borrow because in one month I have made N30, 000 as gain. So, I can use N20,000 to pay for the loan and still have N1,000 left with me. So, what you want to address by increasing interest rate becomes difficult by virtue of the fact that most speculators don’t go to bank to borrow and the difference between exchange rate and the interest rate leaves them in a positive balance to borrow.

Another argument that the CBN made was that inflation was heading towards 18 percent, so if you remove interest rate below that, it means real interest rate is negative. But, in reality when interest rate goes up, inflation will continue to increase. So, you now need to go beyond the theory and ask how this economy is organized. Another important point is that when interest is in that direction, you notice that banks do not lend, if I can get 20 percent from government securities, which are risk free, don’t forget the Monetary Policy Rate is 14 percent and Treasury bill rate is about 18 percent going to 20 percent, that is actually the risk- free rate. So, as a banker you ask yourself, if I can get 20 percent risk free, why should I lend to you at 25 percent and risk losing the entire money? So, it makes more sense to dump all by deposits in Treasury bills, even if I pay my customers 15 percent I can have a margin of 5 percent and sleep well. So, my opinion is that you cannot be increasing interest rate in an era of recession. Having said that, there are still a lot of other arguments you can make. Back to the items that were banned,given that they were banned and we have not stopped liking them, particularly the imported ones, people will keep importing them. So, how do we stop the importation of things we do not need? Is it by banning them or can we do other things that would stop rational beings from importing them?

There was a time that Treasury bills were not valid tools for fiscal policy, but suddenly there is this appetite by government to borrow relentlessly at double digit rates. From the fiscal perspective, is it the best way to manage our finances? 

The government is faced with stagflation. So, there are two options. One, government can say we are going to tighten our belts, we are going to stop spending, but it is going to be very painful and long. We can get out of recession by doing that, but it would be very painful and last for a very long time. Secondly, the government can say just spend money, which is actually my preferred option. And it has been practiced elsewhere even in the USA, when Obama was president. They called it quantitative easing, that is fiscal stimulus. When you put money into the system, theoretically, it is supposed to jumpstart consumption. It is said that because consumption is low, productivity goes down. When demand is low, unemployment sets in and then, GDP decline now happens. If you want to reverse that old trend, you then say how do we improve consumption? It is by spending money. If there is improved consumption, more goods and services would be required and you put more businesses back to business. Those businesses are able to produce more and because they are producing more, they are able to employ more people. So, you generate more employment in the system and as you do that, the economy grows. That is what fiscal stimulus is supposed to do. But there is a caveat. What are you spending the money on? If you are spending the money on less than a million people who are in the National Assembly, the presidency, governors, and all that, there are still about 182 million people, who can only share from the 30 percent of the budget, because 70 percent of the budget is for recurrent expenditure. 30 percent is for capital expenditure that is what the rest of us share. So, no matter how much you spend, it is not going to affect the lives of these 182 million people unless you spend on productivity. If you are spending money on building roads, giving us power, seaport, airport, this economy will jumpstart. But if you are spending on paying salaries of civil servants, the 2570 aides of the National Assembly members, this economy would go nowhere. That is where the problem is.

Strictly speaking, I am not against borrowing. But I want to know what you are borrowing for. I am worried because I understand at the moment that we spend about 35 percent of our revenue in servicing debts. That is a huge number. I think is time the government thinks of investment rather than borrowing. What can we do to encourage investment, both foreign and local? Somebody could rent a shop and lock up money there. He could have done something better with it? Even if it came into the banking system, it could have created jobs. If it is possible to encourage such monies to come into the system, then, the government could use its own ways and means. Somebody argued that we still have room to borrow, but you need to look beyond your borrowing and focus on your ability to pay back.

The plan of government could be since people are complaining about the domestic debts, we are going to reduce the size of domestic debts and increase the size foreign debts. Is that the right approach to using debts to fund our developmental needs?

I agree with government on that to reduce domestic debts. When government is borrowing locally, there is a limit to which a bank can lend. There are regulatory limits. If you switch to the extent that you don’t have currency mismatch, if you think you would be able to earn enough dollar to be able to pay back at the appropriate time, then, no problem. Foreign currency debts are also cheaper, to the extent that you have foreign currency receivables. Assuming you borrowed in 2014 with an exchange rate on N165/$, and bought an asset, for the purpose of this discussion, for N10 per unit. Now, he has to pay back in dollars. He now needs N410 to pay back, not the N165 with which he borrowed. So, you can see the gap. In terms of earnings, he has actually gone down. The asset he bought can only produce Naira. So, there is a mismatch. Once you are earning enough foreign currency and you have to pay back in foreign currency that is fine. But if you borrow in foreign currency and use local currency to buy foreign currency to pay back, then, something is wrong with the logic. I don’t know how they have done their numbers, but it is neither here or there. What concerns me most is the quantum of the debt and the ability and capacity to service those debts.

What does it take to be a first class material, earn a doctorate degree, successfully run a bank, win an election that was denied and remain focus?

Anybody can make first class. All you need to do is work hard, be focused and have a firm belief in God. This is critical, because sometimes you see people who are successful saying there is no God. They are just fools, because your life can just terminate. I always like to improve on whatever I do. Do it in a focused manner, I like to organize myself. And I am always telling my children that once you are organized, you are more likely to be successful in whatever you are doing, over and above people who are not organized.

I will go straight to the election you talked about. I am happy that you know I won that election, but it was stolen, because of the imperfection in the system. I think things like that could be addressed, I saw that the Senate has already approved electronic voting, electronic transmission of results and eliminating the manual voters’ register. You remember the Supreme Court said the only way you can prove over voting is by comparing the voter’s register with the results, even though I disagree with them. I believe when they go back and think about it at night; they would know they were wrong. Those registers are updated frequently. Somebody may have died last night and the election is tomorrow. His name is in the voters’ register, but he would never show up. If the Supreme Court wants to do the right thing, they should be more concerned with the number of people who showed up at the polling units.  But they just told us that once you write the results, you should just ensure that it is not more than the voters’ register, that it is ok.

There was a purpose. There was something I wanted to achieve. And that was much bigger than just winning the election. If I had won the election I would have done it. That I didn’t in the election I would still do it. I am very positive that this vision cannot die. Even if I am unable to do it, somebody else would do it. That is to make life better for our people. That is to do things that people who have been in leadership of our state have been unable to do. Abia State is a state that is blessed with material and human resources. You can’t talk about entrepreneurship, industrialization and commerce without mentioning Aba. And you and I know how Aba is today. And I have found out that if you fix Aba, you have fixed Abia State. Probably you would have fixed a large chunk of South-East. Unfortunately, that is not the way it is. It was a big risk that PDP took in that election. I didn’t believe anybody would accept those numbers they wrote, I beat them so much that they had to concentrate on two to three local government areas to high the numbers. It was a desperate action. I expected them to have been vacated in the court, and it actually was, because the Court of Appeal agreed with me and declared me winner of the election, but the Supreme Court reversed it. But the people are still very hopeful their lots would not remain like this. One thing I am very happy about is that I have shown some of our people who know what to do but who stay away that it is possible. I know a lot of people who have said if you can do it, I can also do it. There are a lot of people who have things to offer, but they are scared or discouraged. You don’t really need that much money to start. And if people believe you have what it takes, they will support you. It was Plato that said when smart and intelligent people keep away from politics, then, they take away their rights to complain when fools rule them. If you know what to do and you keep away, you are encouraging people who don’t know what to do to be there. They are your leaders! If you say somebody does not have a degree or he has a third class or a pass degree or he forged his certificate, and he is governor, a senator, whatever he is, he is our leader! The 469 members of the National Assembly are our leaders. The 36 governors are our leaders. The president, vice president are our leaders. You can go into the recess of your room and criticize them, but at the end of the day, they are the ones who determine what happens to you. They pass your budget. They are the one who determine if they would build roads to your village or not. They determine if you would have electricity for 24 hours or you would have it for two minutes. Their actions somehow affect your life. They spend your money, be it in form of taxpayers’ money. Somebody said politics is too important to be left in the hands of politicians.

Even though 2019 is still far off, how are you preparing for the next election?

We are not preparing. 2019, as you pointed out, is still far away. And we are still in court, because a fellow contestant from PDP has taken him (Abia State Governor) to court that he falsified documents. And he got judgment from a Federal Court and I made an attempt to join, because the Federal High Court said he should be sworn in, but my contention was that he did not run in the election. There is a section in the Electoral Act that says anybody that didn’t participate in all the stages of the election cannot be declared winner. I have made attempt at the Court of Appeal to join, but the Court of Appeal denied me the appeal, so, I proceeded to the Supreme Court. And on January 27 this year, the Supreme Court granted it and joined me in the matter. The judgment is in May. So, this one is not over. If this is over, then you can now talk about 2019.