Olayinka Agbetuyi

Richard Akinjide and the Political Economy of External Reserves

Chief Richard Akinjide's timely intervention on the best modalities for a strategic utilization of the proceeds of the increased oil revenue is one that should engage the attention of the most erudite minds in the nation, if only because it underlines the fact that the country is being given a historic economic second chance by the international forces of demand and supply to put its house in order. Few nations are this fortunate.

    For me, the eminent jurist's analysis is only a rider to another he gave to Newswatch Communications in the 1990s, that was a scholars delight.  In that piece, Chief Akinjide traced the genealogy of the Bretton Woods institutions and highlighted the selfish mitivations which former officials of the bodies like  Joseph Stiglitz have since confirmed.

    I will at once agree with the erudite jurist's call for the maintenance of reserves both in Euros as well as in dollars.  It conforms to the traditional wisdom of not putting one's eggs all in one basket (of currency).  What is more, a sizeable number of Nigeria's creditors are in the Euro-zone.  But I disagree with the basis of his criticism of the Nigerian government's maintenance of an external reserve at the level in which it is now held.     I was one of the first to critize President Obasanjo's tour of Western capitals to solicit investment fundingin 2002, in a presentation I made in Indiana University (incidentally a few months later the President came calling at nearby Notre Dame University as part of that tour).

    My logic then allies with the probable guiding principle of the current reserve policies of the federal governmenrt- investors (local or foreign) are investment shy in areas where they do not see the feasibility of returns on investments, no matter the amount of bowl-begging (investors are not known to be charitable).  Herein lies the public relations of external reserves.

    Apart from constituting the reservoir to fund the foreign exhange demands of nationals, as Chief Akinjide rightly maintained, a nation's external reserve ratio to debt profile is also an indication to foreign investors of the country's sound economy and the ability to pay its bill as and when demanded.  This is how it works:     If Nigeria's certified debt profile is $30 billion, foreign investors are more willing to engage in bilateral and multilateral projects (inward investments) when they see that the country has a foreign reserve of $30 billion or more, or that it can pay its way. (It does not necessarily have to actually pay off that bill).     The matter can be demonstrated further by an analogy of a recent immigrant to a Western country who has no credit history.  He is asked to deposit funds in a credit account and borrow money against the deposit.  It is the same logic that is applied to international trade.

    Chief Akinjide's model of a local investor sourcing $10,000 presupposes a self-sufficient economy, in which the industrial base is controlled solely by local entrepreneurs.  This is not normally the model in international economics, and this is counterproductive to the goal of inward investment.  In fact it is this model which led to the eminent jurist's pessimism regarding the notion of "Nigeria not becoming substantial non-oil exporter before long."  I ask, why not?  The inward investment model is the logic behind the Yoruba aphorism "A ti owo olowo, ati owo eni, ki oluwa ma fikan won wa" (be it others resources, be it our own, may we never be lacking in (investment) resources).  A bouyant  external reserve is thus an attraction to the number crunching foreign investor, who taps in with the flick of a wrist into his computer to assess a nation's credit worthiness - no one wants to invest in a bankrupt or near-bankrupt economy.  It is against the picture of a rosy external reserve that the would be investors would be clambering over one another to be the first to invest in Nigeria (A cordon of armoured tanks encircling Nigeria will not be sufficient to keep them out -it has happened before!).

    But as the external reserves build up (and this the big but) how does the average Nigerian keep body and soul together?  As the eminent jurist rightly observes, Nigeria has no state sponsored welfare system (and I will add, the rich countries are unwilling to organise a "Marshall" to inaugurate one to cushion the pains of waiting.)  We are now back to "giving SAP a human face."

    A middle course which the Obasanjo administration might steer is to pay off at least one third of the nation's current debt, and split the remaining two thirds to promoting indigenous enterprises (along the 1970s indigenisation decree) while maintaining the last third to accrue further reserves, while the domestic economy is stimulated, and domestic entrepreneurs source for foreign partners. Following Chief Akinjide's percentile logic, paying off a chunk of one third of the national debt will reduce interest payments substantially, since the larger the debt, the larger the interests to be paid on it (not minding the deception that the larger the amount that is owed the lower the comparative interest).

The other alternative that I would suggest has been mentioned by one of the former officials of these Bretton Woods institution on this forum earlier this year, who said corruption was not the reason for Africa's economic woes and counseled unilateral debt repudiation by African debtor countries if their is no debt forgiveness.  I will discuss the implications, of this solution, if only because Chief Akinjide mentioned a similar scenario in his 1990s articles but was jeered by one Father Matthew Kukah in a rejoinder.  I will again discuss the analogy to this option in relation to a Western country domestic debtor:

    Supposing the foreigner in my earlier analogy succeeds in establishing his credit and maxes out his credit line to say $98,000 out of a possible $100,000.00 credit line and suffer a decline in personal income from $60,000.00 to $16, 000.00.  He is faced with either declaring bankruptcy (unilateral debt repudiation or debt structuring and elongation)  The latter might involving repaying the debt virtually throughout his lifetime, without the possibility of any one granting him further credit until the debt stock is reduced, and at a prohibitive rate.  The earlier would involve the debtor enjoying a more comfortable life with the new realities of lower income, because he does not service any debt from it.  However financial institutions will have nothing to do with him for a stipulated period, (until the bankruptcy is discharged).  This is the implication of debt repudiation by heavily indebted countries, and this seems to me to be the logic behind Chief Akinjide's 1990s call for Nigeria to turn to Asia for trading partners, since without forgiveness, African countries would remain "debt slaves" to creditor countries for a long time, with the attendant social dislocations and instability.  Debt then becomes a tool of perpetual political control.  But Nigeria's case, following the fortunes of the international oil market, seems on the road to amelioration from the other African basket case debtor nations.

    Finally, I will briefly touch on another issue mentioned by the eminent jurist.  There seems to be a confusion over the issue of trading agains the dollar, or pegging a currency against the dollar. The United States, about two weeks ago, remonstrated with China for pegging the Chinese currency against the dollar.  The protest is based on the premise that the peg did not allow the seemingly deliberate policy of te Bush administration to allow the dollar to slide against the Chinese currency to produce the desired result of making US  exports cheaper to compete with Chinese goods.  The Naira is not known to have been pegged to any currency.  Love or hate the country, the United States currency is one with which any economically serious nation will have to contend in view of the size of the US  economy relative to the strength and worldwide circulation of its currency.

  To conclude, Chief Akinjide has flagged off an important debate on how far Western models can go before they bow to local realities and adaptations.  For me, the real test of the success Obasanjo administration this time around is not how much reserves he is able to leave behind for the incoming administration, (he did that commendably in his first outing) but the institution of fool-proof accounting measures that will survive him and ensure that it is not all frittered away, as happened in his earlier coming.