Why intervention funds don’t work – Ex-AMCON boss

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Mr. Mustafa Chike-Obi

The immediate past Managing Director of Asset Management Corporation of Nigeria (AMCON), Mustapha Chike-Obi, has given insight into the reasons behind failure of the various intervention funds, especially  those floated by the Central Bank of  Nigeria (CBN) , to meet their targets.

According to him, these funds, as a means of boosting access to finance, are not as efficient as reducing interest  Rates, lamenting that even their default rates are as high as those of non-intervention funds.

“So, they don’t work,” he said. Why? “If you give a man in agriculture an interest rate at  five per cent, you think you are helping him. But everything around him is at 26 per cent. So, he gets a little bit of relief on his financing, but he doesn’t get reliefs on his supplies, diesel, food, employees etc. So at the end of the day, those things he gets at 26 per cent invades his five per cent,” he stated.

Then what is the way out?

“There must be access to capital at a reasonable price. With 26 per cent interest rate, you cannot do a business successfully. So, we must find a way to provide interest rate to everybody at a reasonable rate.

We must have an interest rate that will support our economy. And it cannot be much higher to the borrower at 12 per cent to 15 per cent. Every Nigerian should be able to borrow money at between 1215 per cent to 15  per cent, so, we must have capital available,” he said.

At a forum organised by Finance Correspondence Association of Nigeria, (FICAN) in Lagos recently, Chike-Obi, who is now the Executive Vice Chairman of Alpha African Advisory, shared his thoughts on the best route to reposition the economy for sustainable growth.

Excerpts:

Infrastructure ministry

We need policies and the way to get policies is to get everyone in the room. We have a man in Nigeria, his name is Bayo Ogunlesi. BayoOgunlesi runs Global Infrastructure Partners. He owns Gatwick and he owns a pipeline in Italy, and he is there building infrastructure all over the world. Why can’t we get Bayo Ogunlesi to come and be Minister of Infrastructure? We should have a Ministry of Infrastructure. We should also have a Ministry of Revenue Generation. And if they (ministries) are too many, we can combine ministries of sports, Women Affairs etc, into Health, Education and Welfare into one ministry. But revenue generation and infrastructure are our biggest problems and we must deal with them immediately.

Intervention funds

Intervention funds as a means of boosting access to finance isn’t as efficient as reducing interest  rates. All these intervention funds, they don’t work. And let me tell you why they don’t work. If you give a man in agriculture an interest rate at five per cent, you think you are helping him, but everything around him is at 26 per cent. So, he gets a little bit of relief on his financing, but he doesn’t get reliefs on his supplies, diesel, food, employees, etc. So at the end of the day, those things he gets at 26 per cent invades his five per cent. Intervention funds also don’t work because the default rates are as high as default rates of non-intervention funds. So, they don’t work. They are not very efficient. What the economic managers need to do instead, is to provide capital at a reasonable interest rates that work for everyone.

There must be access to capital at a reasonable price. With 26 per cent interest rate, you cannot do a business successfully. So, we must find a way to provide interest rate to everybody at a reasonable rate.

We must have an interest rate that will support our economy. And it cannot be much higher to the borrower at 12 per cent to 15 per cent Every Nigerian should be able to borrow money at between 12 per cent to 15 per  cent so, we must have capital available.

Power sector

For the Nigerian economy to achieve double digit growth, the Federal Government must  do away with certain  subsidies and pay greater attention to security and infrastructure. The liberalisation of the power sector  will make it profitable, enable Nigerians have cheap electricity  on the long run and attract over $30 billion of investment in the next three years in that sector.

The three subsidies are fuel, foreign exchange and electricity subsidies.

Since it is believed that everyone deserves electricity much as everyone deserves to have telephone or nice car, the only way to lift the society to that point is to charge the people who need electricity the most at the market  price.

If the power business is made profitable, whereby tariff on electricity is removed and power companies allowed to sell to any person they wish at market determined price, we will get a $30 billion worth of power sector investment in three years.In some places in Ikoyi Lagos, residents get about 90 per cent of power  supply and they are paying roughly N50 or N60 per kilowatt hour, for instance. A power generating set costs about N160 per kilowatt hour with its attendant inconveniences.

Most people who have generating set will be happier to pay N160 per kilowatt hour of electricity, but  government said no. We can only charge Nigerians N60 per kilowatt hour, yet nobody has it.

Nobody is looking for it and nobody is interested in more investment into it to create more power.

But if you allow these power companies to sell at N160 per kilowatt hour, they will make so much money from the rich people at the beginning that they will start creating more power.

Look at what happened with the telephone. At the beginning, SIM card was N70, 000 and only a few rich people could afford it and the companies made so much money. Today, almost everyone has two phones because SIM cards are free.

When every area of the power sector is losing money because government which owns them wants power to be supplied at N60 per kilowatt hour, it is not a good business.

All the companies involved in power supply owe money and will remain insolvent, even as power supply remains below expectation. So, you won’t get power until you realise that power is a capital good and should be priced accordingly.

The major problem Nigeria  has are the three subsidy regimes that are killing the economy. They are:

Foreign exchange subsidy, fuel subsidy and electricity subsidy. Those who believed that the fuel subsidy is for the benefit of the poor are wrong because the poor man who pays transport to work gets little or no subsidy.

The nation economy is losing N1.2 trillion per year. There is hidden figure in that fuel subsidy they do not allow you to see. They allow to buy foreign exchange at N325/dollar. Who gets the fuel subsidy? The rich people with six cars are those benefitting from fuel subsidy. The average rich person in Ikoyi is getting approximately 100 times a year fuel subsidy than person in Shomolu in Lagos.

Eerybody deserves to have electricity but you charge electricity based on those who needed it the most in the market price. Most people that uses generator pay N160/Kwh and pays comfortably.

“If you tell these power company that they can sell power at N160/kwh, they will make sure much money that more power will be generated.

Debt burden

I have concern about the rising debt service ratio,  which could be about 70 per cent. It is almost a guarantee that Nigeria is going to be talking about debt rescheduling soon and we need to start putting our house in order  ahead of that. There is a  need for coherent and forward-looking policies to address the myriad of problems confronting Nigeria. “We are badly in need of good leadership; we need  a leader that would map out the strategy and roadmap for economic growth in this country.There is need for coherent monetary and fiscal policies.  For me, the position of a CBN Governor should be a cabinet position and the CBN Governor should always  be meeting with the Minister of Finance and the Minister of Budget and Planning every two weeks.

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