Nigeria and the Credit Crunch

I just read a disturbing report from Bloomberg. The All Share Index of the Nigerian Stock Exchange fell by 37% in the first quarter of 2009, the steepest drop of any of the 89 benchmark indexes tracked by Bloomberg.

At some point in the future I will talk in more detail about what has been going on in our stock market and financial sector these last several years, the bubble and the bust, as well as the regulatory issues and unethical practices. It needs not just detailed discussion, but careful discussion.

The thing I want to say right now is the issue of "toxic assets" on the books of Nigerian banks is manageable. The Bloomberg article estimates these bad assets to be about $10 billion, which is the number I have seen in other sources that I do not have the time to quote right now.

The Federal Republic of Nigeria is not "rich" by any sensible statistical measure, but we are definitely rich enough to deal with a $10 billion problem. We wouldn't even have to dip into the reserves (and I would rather we didn't). Indeed, we have the credit-worthiness to raise the funds from the World Bank or IMF; I am not saying we should, just that we can. More to the point, we do not have to come up with $10 billion outright, in a lump sum; I can think of a number of ways to amortize any toxic-asset-related commitment.

It need not be a burden on the current budget revenue streams.

Nigeria's tax system is still a mess. Reform faces two major difficulties. The first is the federal and state governments' ability to use oil revenues to cover up for it. The second is the continuing lack of substantive democracy. No one wants to pay taxes when they feel they have no influence over the spending decisions of the government, that the government does not serve them, that the government is uninterested in their needs; the willingness to pay drops even further the poorer those people are and/or the more businesses have to struggle with infrastructural and systemic obstacles. Our corporations must provide their own "public services" and infrastructure, and (like the average citizens) do not benefit from any rule of law, any law enforcement, or any other public good of note. Why pay?

Still, we need reform in taxation .... and massive reform in financial and equity markets.

Like I said earlier, these are vast topics require much careful, detailed commentary. What bothers me is every once in a while the federal government and/or the Central Bank and/or the NSE have made decisions ostensibly designed to shore up the stock market like suspending trading of a particular stock or ordering buy-backs or talking about selecting certain banks to be "market makers" (I have yet to see a full description of this "plan", but I am guessing this would involve certain banks using injections of federal funds to reflate the markets) .... and of a $20 billion "shock absorber" or stimulus to be funded from the federal governments reserves.

I am concerned because we the people (as usual) have no say in what they are going to use our money to do ... and the relationships between the politicians who run government, the plutocrats who run business, and the "technocrats" who run the regulatory agencies (CBN and SEC) and the markets (NSE) are far too cosy for my liking. A late-2008 editorial from The Guardian briefly discusses the lax regulation before the start of the stock market slump, and "slapdash" and "laughable" (their words) reactions of the NSE, CBN and Ministry of Finance after it began.

The system is unethical. Infact the banks knowingly and deliberately created the bubble; basically XYZ Bank would loan money to individuals, brokers and firms for the purpose of buying XYZ bank stock, in order to raise the share price of XYZ Bank -- in May 2008, a JPMorgan report said our top 7 banks might have been over-valued by 56%. Austin Avuru analyzes the workings of the Nigerian Stock Exchange in this essay,, and concludes the stock market was rigged like our elections.

Bank shares represent a huge chunk of the NSE, and the fall in bank share prices over the last five quarters is a driving force in the drop of the All Share Index. This is a failure of regulation, and I am almost tempted to say that bankers (and investors who want to chop voodoo money rather than creating wealth) should be left to learn a bitter lesson that would force all of us to adopt safer, more sensible practices in the future.

Still, the equity and financial market are massively important to the health of the Nigerian economy, and to our future prospects of growth and development. We have to fix the mess. We just have to. Luckily (if you can call it that), the toxic assets are $10 billion, which is a manageable magnitude -- provided we know what we are doing, and do it well.

But we should not spend a kobo of public money, directly or indirectly, on fixing the mess without TRANSFORMATIONAL REFORM AND RESTRUCTURING of the finance/equity/insurance/real-estate sectors. Anything else, and we are just wasting our money, funding the lavish lifestyle of rent-seekers and market distorters who misallocate scarce investment capital.

I doubt our political system is capable of the sort of reforms we need. The only thing they are good at is accepting money from crude oil sales, and spending that money on whatever catches their fancy. If they do bailout the banks, they will do it with oil money, without reforms, and without input from we the people.

And yet I hope we move quickly to assure the markets, and foreign trade partners that we can handle a $10 billion toxic assets problem without trouble. It is $10 billion. Surely we can convince national and global markets that we can handle it .... without paying out a kobo .... not until we get some reform. I daresay a credible promise of reform would even do more for confidence than merely showing we have $10 billion available for a bailout.