By Omoh Gabriel just back from Washington
Introduction
At this year’s annual meetings of the IMF/World Bank Professor Chukwuma Soludo, CBN Governor who took up the leadership of the Nigerian delegation to Bank meeting in the absence of the minister of Finance and the economic management team arranged for a press briefing at the end of each meeting day to enable Nigerian journalist inform the nation of what was happening within the multilateral institution in the face of the current financial crisis. Soludo whose eyes were always red for lack of sleep having to move from one meeting to the other, in what the World Bank described as a back to back meetin finds out time to hold briefing session. Here is the full briefing of the first meeting day in Washington
Professor Soludo: This is still pre meeting and several meetings were held today, we held the African constituency 1 meeting, and as you could see unfortunately the Honourable Minister of Finance is not here but here I am, the Deputy Governor of the Central Bank Dr. Mrs Alade is here and you have Mr. Alao, a director in International Economic Relation at the Ministry of Finance and you Professor Monye , who is the secretary to the National Planning Commission. We will put in every thing to represent Nigeria as effectively as it can possibly be. We have several meetings pre meetings, the first was a set of meetings on Africa in trying to put our house in order as to how we run our thing, we had the Africa constituency 1, which we belong to that is the first meeting held at 8 o clock this morning, from there we had the G 24 meeting, after that we had the Africa consultative group meeting before launch. Then all the African Central Bank Governors had launch with the Director African region as well as the 1st Deputy Managing Director. Then we had a meeting with the Vice President of the World Bank African Region Oby Ezekwuesili and her team on Nigeria, and we have just finished the African caucus meeting where all the governors from Africa had a meeting. If I may just put it succinctly, the key messages of these meetings are the major concern as to what has happened to the international community the current global financial crisis, the energy crisis, food crisis, you know before this financial crisis we had two interrelated crises; the energy crisis in terms of the galloping oil prices as well as the food price crisis. These have not gone away and in addition to those, added the financial crisis. And in several of these meetings these are the issues as to how the global economy is being affected by all of these. How developing countries are being affected, Africa in particular where are we and what are the mitigating factors , how are we responding, and how could things work better.
Major issues at discussion at the meeting
These are the major issues that have come up. I think when it pertains to the nature of the crisis there is no question that there is broad implication that people recognise as of historical proportion so to speak. Most industrial countries are terribly affected and that tells you the extent to which the global economy has become integrated and as you may have heard a lot of the markets have been affected and about 13 markets today had to close.
A lot of the market in developing countries are hail and hearty, except the contagious effect, there is what Kaynes called the animal spirit that might cause people to behave in ways that might tend to be irrational but makes sense to them as individuals or the so called head instinct when every body is running you just start running is n’t, if you walk down the street and everybody just start running in your direction and no body has time to explain to you why they are running you first of all join in the race and when you people stop you start asking why were we running.
How it affects Nigeria
This is a major thing in the Nigeria case. When the meltdown started most people never understood what was going on, people were looking for excuses may be they stop margin trading, may be it is common year end etc. What happened was that institutional investors who were facing credit crunch in their home markets divested from the market and prices fell. That was the first shock. And once prices fell every body began to sell. The remaining investors panicked and started selling and banks panicked and started recalling existing facilities they had given to people to buy stocks and stopped lending to people to buy new stocks and people started speculating that CBN has stopped them from lending for margin trading, no there was northing like that. They were simply managing their risk. This is what is now going on in the rest of the world. That is of serious concern, globally industrial countries are likely to go into recession as a result of the consequence not only financial crisis but economic crisis because when people can not get credit, what is going to happen it doff tails into so many other things, domestic consumption will come down, the credit limit that people are going to get on their credit card is going to fall and people will consume less and that is going to plunge the economy into recession
Impact of financial crisis on Africa and developing world
There is that concern; on Africa and the developing world the impact will vary depending to the extent these markets are integrated with the rest of the world. But more fundamentally, almost every body will be affected one way or the other. So far as you have trade links; commodity prices are going to fall because of declining demand in the major markets, commodity prices will fall and with the fall in commodity prices; we have already seen a 40 per cent fall in crude oil prices. It is almost at $80 per barrel and if you will recall prices of crude oil went above $147. Other commodity prices copper, cocoa and all of the others are going to be affected as the global demand falters.
Then also capital flows into developing countries will also be affected and these will have consequences generally for investment and growth in most places. The good news from my own point of view for Nigeria is that what the world is doing today is as if we saw the crisis some three four years ago and what the world is doing today is what we did three four years ago, they are now consolidating banks, recapitalising banks, mergers and acquisition are taking place, even what we proposed during consolidation that we should set up an asset management company to take up the bad asset that is what they are setting up hundred of billion dollars to do. Luckily we took pre-empty move in the case of Nigeria, we did not wait for banks to fail before “liquidyfing” the system.
I doubt if there is anybody in Nigeria who is fearful of his money in the banks. How things change. If we had not done what we did then you know the non performing loans as a percentage of total loans of our banking sector then was in the region of 23 per cent almost near to 25 per cent that was a trigger off at a level you say there is a systemic crisis. If we had not done that and all of a sudden the credit line of these banks dried up and they face a liquidity crunch as it where and the stock market melt down, then the portfolio of these banks, their provisions, for bad loans will be such that with little capital many of them would have gone bankrupt by now.
African consultative meeting
At the African consultative group meeting, the major issue was on inflation. Inflation is beginning to inch up in Africa averaging 14 per cent, and I think we spent much of the time discussing how we are managing the inflationary challenges in monetary practice in Africa and we did make it clear that it will differ from country to country and it will depend on specific circumstances. In the case of Nigeria for example financial system stability now is the first order of priority. Inflation is of second order especially in the context that core inflation, as at the end of August was about 3.9 per cent that is non food inflation, that is comfortable range, that is why we have provided liquidity for the banking system.
On Africa generally, at the caucus meeting, we raise representation and Africa is likely to get a third Executive Director at the World Bank instead of the two now we are likely to get the third executive director, that is a positive development, but more than that African governors called on the Bank to be a lot much more proactive in terms of scaling up resources concessional loans that goes to these countries in terms of lending especially the IDA component and also ensuring that it gets to them in record time. In terms of financing agriculture the point was also made that it is a major priority area and that we need to take this sector very seriously in much of Africa because it play a leading role in poverty reduction. On the issue of voice and quota we generally agreed on the reforms at the IMF that would give increased voice and quota to Africa.
Nigerian delegation meets World Bank Vice President
Here at the World Bank we met with the Vice President of the Africa region Mrs Oby Ezekwesili and her team and we reviewed the Word Bank portfolio with Nigeria and the implementation so far. There is a disbursement of about 60 per cent. On the rate of performance it was agreed that more could be done and the bank also reiterated very importantly its readiness to assist Nigeria with technical assistance in crafting strategy for the power sector, and that they have worked closely with us even in the multi year tariff order
and the issue of getting gas to power plant that they have and they stand ready to offer much assistance that we may require in terms of the power sector and we generally requested for a lot of technical assistance. I think over all it has been a good day for us as a country, and for Africa generally. For me the litmus test far all these meetings is what is in it for Nigeria. For me if I walk into any meeting what is in my mind is what is in it for Nigeria other wise it is a jamboree if there is nothing for the country.
You said one striking thing, the issue of inflation. The CBN was planning inflation targeting policy as is done by most Central Bank. What has become of the plan
That is on cause, it is not a dream, we are working very hard on that. The CBN will commence that sometime next year. But it is challenge we working very hard on the inflation targeting framework.
The asset management company you mentioned what made the CBN to give up the idea?
No we did not give up the idea, the only thing was that at the point in time if you recall it was a war situation and for you to set it up you needed a law of the National Assembly for that to happen and already you had a senate that had even passed a law to scuttle the consolidation to start with and you are going to ask it to pass a law that will help the consolidation. It just go without saying that there was no way, or no chance of passing through the National Assembly. So it was like a waste of time pursuing that as at the point in time. But I think in the future it will become important.
Two things, you said what the world is doing now is what Nigeria has done some two three year back, reports in the international media suggests that what they are doing is nationalisation of banks would you say that is consolidation? Secondly there seem to be similarity between what is happening in global banks and Nigeria banks when though you do not agree. There are some unjustifiable charges being made by Nigerian banks and loans are not being given what do you think about these
I think on those count you are
Cut in, are you thinking of rate cuts as is the case now globally?
We did that before they did.
With the situation not abating and the likely spill over, you can not say Nigeria is immunised from the global meltdown
How will it be spilled over?
I do not know some of these countries did not expect they will be ambushed by the credit crunch
How will it happen, you are not living in the moon but here.
Are we then expecting more or stricter regulations?
You see often time it is difficult to appreciate what you have. I can tell you that about 11 countries are consulting us on how to handle their own crisis. When you say if we are going to have stricter regulation, you think the banks are standing because they are standing. They are standing because of the regulatory regime in place. It could be better but it is there. What do you mean by stricter regulation? In what area, and in what aspect? Is it when you here regulation you say lets do more regulation, how? You got to ask yourself what is it that is not happening now that could happen. That is where you start from.
The problem with the banks is that of classification of assets, like some of these troubled banks a year ago Fitch and co gave them triple As now they are triple-less. In terms of assets classification (Soludo cuts in, which assets and which bank?) In what ever form they are held? For CBN are sure these banks asset are what they say they are?
Well I guess you got to go back again when you start by saying how sure are we, I do not know what you mean, I can only say to you yes we are sure that what they say they have is what they have okey you can go home and sleep.
We are waiting for your usual shock treatment Heh!
We are waiting for one of these days when you will call bank executives together and give another bomb shell, we know that you too are not too comfortable unlike the impression you are giving us. However we are waiting for your announcement. And these banks foray to offshore banking is scaring
You know when you say these things you make me nervous, why you make me nervous and please do not write like this. You have to first of all be better informed. You can even comment. You can not comment on things you do not know. Banks do not take your money to London to go and lend. That is not what it means. They are given a licence just as we give licence to Citi Bank in Nigeria. They are going to collect deposit there and lend and they are under a supervision of FSA there. When you begin to say they collect our money and go there and give them loans when they are not giving loans to Nigerians as if they are collecting naira and converting it to dollars to transfer to London and start lending.
What about the initial money they take their?
No that is capital to you need to pay for infrastructure to start operation. Is not for them to lend. You lend, there is an asset and liability side of it. The liability have your deposit and assets happen to be you loans. You do not lend capital, it what you require to set up your office, information technology, your initial running cost etc. The capital is not the one you lend. The banks keep it that is what they use to make provision if they have bad loans and so on and so forth. I think you start by understanding what they do when they go off shore and what if a foreign bank is coming into Nigeria we are giving it a licence what is it coming to do, it is not coming to Nigeria to go and bring deposit in the US into Nigeria to lend to Nigerians no that is what.
Citi bank with all that it has probably N160billion is its deposit that is what it lends in Nigeria. So I think you need to understand what they do off shore and that they are also regulated effectively there. Now having said that I come back to the issue of Nationalisation. You take over when a bank fails. When before the consolidation the NDIC/CBN took over the bank of the North that is literally what happened, it became like a government owned institution. When a bank fails and you take it over there is no more stake the investor has in the bank so you take it over. What they have done here by taking over the popunderance of the assets depending on the degree of the assets of these companies they have taken over, when they take them over how does it crystalize, if you have given out all these credit that have become unserviceable when you have bad loans you make provisions for them and the provision is out of capital, but if you do not have enough capital to make the provision, then the bank becomes insolvent.
You are making loses and the money you gave out happens to be depositors money and some of them you can not realise which then means that some of the depositors money you have actually eating into it. So if all the depositors show up you can not give them back their money. Then the bank begins to have problems.
Now this is the kind of thing we were in prior to the consolidation. This is the kind iof thing we saw with the majority of Nigerian bank, that was why you could then wake yup and go to your bank on Friday and on Monday you go back there and you are told it is out of clearing, have you forgotten so soon those days when you used to her that bank has gone out of clearing, my money is trapped in so ans so bank. Since consolidation no bank has gone out of clearing. And so you got to see the logic, that is why JP Morgan has taken over quite a couple of them and other banks are acquiring other banks.
They are merging, they are being acquired and so on. When the market fails, and there is no bank ready to take over some of the ailing banks the government has to come in to provide the require capital. In lieu of the capital it takes over some of the banks’ assets then injecting fresh money into it, that is the only it can now be liquid again. That is precisely what we did we saw our own system heading to the brinks of a crisis and we required them to inject new capital . Rather than waiting for them to collapse and then call on government to bail them out they were then compelled to go out by themselves and look for private sector money to inject in them. If we had waited may up till now the government would probably have put in a few trillion naira to do the same thing. That is basically the logic that is why we say much of what they are doing resembles what we did.
When you say bank are making outrageous charges let me point out that as at the end of August 2008, aggregate bank credit to the private sector the point they making is the excessive lending to the private sector. At the end of August the annualised lending to the private sector was about 71 per cent the target was 30 per cent. This is coming from the World Bank . Their credit is expanding massively to the private sector and as at the end of August they have already exceeded, far exceeded the target for the year that even at the end of August if they did not lend one kobo they have already exceeded the target for the year.
So credit to the private sector in Nigeria is growing very rapidly.
The concern of Nigerians is our foreign reserves, it in dollars when the dollar falls it loses value, are we thinking of moving it from dollar and how safe are they in foreign bank.
The dollar is appreciating against other major currencies, for those of you who are of the opinion when you see the currency move you say why don’t we move it to that currency, we can not be playing kalukalu with the foreign reserves, we can not get into a gambling hall of currency gamble most of your exports receipts are denominated in dollars, if tomorrow you move and the currency you move into start depreciating and you move and then you move back then on a yearly basis you lose billion, the country will not forgive you for doing that. The first point is that the dollar is getting strength and if indeed we had earlier moved we would have lost a lot of money and that is a lesson and when you are managing this kind of resources you take a longer term view you do not react on daily basis that is no one.
Two if you talk about the safety as the institution so far so good. They are safe. We are watching the reserve on daily basis and if we see reasons to take action we will do so.
