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Confidence, not liquidity, is urgently needed to re-inflate Nigeria’s economy

July 30, 2009

“By comparison with any developmental model of state and market, [Nigeria’s] commercial economy became a do-it-yourself affair, abandoned to its own devices. The distinction was no longer as between “formal” and “informal” sectors; it was between mineral capital and everything else. Rather, there is an entire popular economy comprising livelihood, employment, and capital asset creation that has precipitated out as oil and the state retreated into their own fortress, literally off-limits to citizens. Certainly the popular economy invests in [the heydays of the booming stockmarket], takes resources from, and generally runs up against regulated institutions, but the latter are too unstable and contradictory to inspire confidence.”

This six-year old excerpt is from an introduction to a book: Money Struggles and City Life: Devaluation in Ibadan and Other Urban Centres in Southern Nigeria 1986-1996, is as perceptive as it gets. The introduction was written by Prof Jane Guyer, economic anthropologist at John Hopkins University.

I read a column today (BusinessDay, p. 21) and couldn’t repress myself from saying “bin it”. The column: Economics & Markets is penned by Victor Ogiemwonyi, the boss of Partnership Investment Company Limited. He rattles on about Nigeria’s economy contracting, dislocating and rife with uncertainty. And the cure all? Direct intervention by government a.k.a. bail-out/stimulus package. But our wahala didn’t start today and to think we could do with the same dose of medicine as Western banks is to miss the point.

True, liquidity and confidence are close relatives. But confidence is built on trust. Nigerian banks, stock brokers and regulators violated that trust. Mr Ogiemwonyi is so gung-ho about a bail-out, it seems the idea was the next best thing since sliced bread.

You see, a bail-out won’t teach our banks a fundamental lesson of capitalism: win some, loose some. A lesson better learnt now as Nigeria’s capital market matures – a clear signal to the market that will prevent moral hazard in the future. That is, an unbridled splash into the deep end because government (as the life guard) will always come to the rescue.

On other points, I resonate with his thinking. In a previous article he had mentioned that Nigerian stock broking firms are bereft of skills. Likewise, risk management is a novelty in most Nigerian banks. Interestingly, the US had a similar problem in the 80s. When mortgage-backed securities were deregulated, banks like Saloman Brothers almost crashed. Michael Lewis, the author of Liar’s Poker argues that the success of the Saloman’s traders was based on luck not skill. Professionalism in Nigerian stock broking is way over due. As Mr Ogiemwonyi rightly mentioned in that article this means acquiring requisite skills; a continuous learning process.

To be sure, Nigeria’s capital market is no way near the Western markets in terms of breadth, depth and sophistication. Americans: workers, pensioners, individual and institutional investors, staked their entire lives on their houses and stockmarket. In that sense they deserved a bail-out. However laudable, the bailout has its snags. Prof Joe Stiglitz, Nobel laureate for Economics, picked a couple of holes:

1. Confidence is important, but it must rest on sound fundamentals. Policies must not be based on the fiction that good loans were made, and that the business acumen of financial-market leaders and regulators will be validated once confidence is restored.

2. Bankers can be expected to act in their self-interest on the basis of incentives. Perverse incentives fueled excessive risk-taking, and banks that are near collapse but are too big to fail will engage in even more of it. Knowing that the government will pick up the pieces if necessary, they will postpone resolving mortgages and pay out billions in bonuses and dividends.

Besides, Nigerian banks dominate the stockmarket. In turn these banks are alleged to be owned by bank executives and their cronies. Therefore Nigeria’s capital market isn’t deserving of a bail-out. What it needs is detoxification. The CBN and SEC are seeing to that. A move that the IMF recently approved of.

Let’s admit it, the margin loan binge splurged into a buying frenzy. Share prices, especially those of banks, soared and inflated a bubble. The bubble has burst. Suggesting that Nigerians bail them out is asking for too much. Much so, when they do not benefit from the services of banks – 75% of Nigerians do not have a bank account. There are more pending matters our dwindling petrodollars must attend to.

There’s unrest up north and down south some semblance of peace. A consequence of low income and slow growth, all tied to the usual suspect: oil. Roads are in utter disrepair, ASUU is on an indefinite strike, black-outs are a constant and so on – matters that our government is having problems grappling with. A bailout for banks is therefore an unwelcome distraction and I dare say a misallocation of resources. Once the banks are cleansed and made to adopt corporate governance, they’ll be able to play their roles as intermediaries.

When properly geared to fulfill their lending roles, sectors like agriculture, ICT, infrastructure etc will get due attention and investment. Let’s not misread history, the Great Crash isn’t a one-story-fits-all; even though it shares nuances with what is happening right now in our country.

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