Abuja — In his latest book, Emerging Africa: How the Global Economy's 'Last Frontier' Can Prosper and Matter, Kingsley Chiedu Moghalu declines to echo the breathless prose of conferences, publications and documentaries celebrating the 'rise' of Africa - although the continent boasts seven of the world's 10 fastest-growing economies. Instead, Moghalu warns against the sort of irrational exuberance displayed by bankers and markets, which led to global financial crisis and recession.
If you believe, he writes, "that the end of poverty and underdevelopment in Africa is imminent and that the continent is on the verge of an immediate breakthrough as a major global economic player, Emerging Africa will rain on your parade."
And yet, Moghalu believes that Africa is making progress and that it can achieve real prosperity. And he has put that confidence to the test in his personal life. After a career built in world capitals, including 17 years with the United Nations, he returned to Africa with his wife Maryann and their children to become a deputy governor of the Central Bank of Nigeria (CBN).The invitation, he says, has given him "an opportunity to contribute my effort as part of a group of men and women working for change and transformation on the ground in Africa - where it matters most. I had been on the outside looking in. Now I am inside, looking out."
The 414-page book - part intellectual interrogation of philosophical, political and economic models, part analysis and part storytelling - is conceptually ambitious and gracefully expressed. Largely written in the early hours before beginning long days on Bank work, the book examines Nigeria as a case study of Africa's problems and potential. [The book is currently available for order from Bookcraft in Nigeria, publisher of the first edition.]
With an estimated population of 170 million, Nigeria has vast oil wealth, an entrepreneurial energy and a booming economy, growing at 6.6 percent in the first quarter this year. It also has among the world's highest burden of health problems, including malaria, undernutrition and mother and child death rates. Despite ample uncultivated land, it imports over U.S.$11 billion worth of food. Clearly, it is a country of potential in search of solutions.
But 'Emerging Africa' moves beyond country-specific examples to look at Africa in the global economy. Moghalu concludes with the premise that the continent's rise is not "inexorable" - but doesn't rule out the possibility of "an African century".
Earlier this year, at his office in Abuja, Nigeria's capital, he talked to AllAfrica about the Bank's work for Nigerian transformation. Part I of the conversation deals with reforms of the banking sector. Excerpts:
You have said that the team at the Central Bank of Nigeria (CBN) has played a key role in improving Nigeria's financial system and standing. Are there lessons learned that can be replicated elsewhere?
The way we've done it offers lessons to many countries around the world, including countries with much more advanced financial systems such as America, Europe and so on.
Before enumerating those lessons, why don't you situate Nigeria within the global financial system for us? How have financial challenges elsewhere affected your work?
Most of the financial systems around the world were very negatively affected by the global financial crisis, the drying out of credit and the collapse of banks. What we call the second-round effects of the global financial crisis affected Nigerian banks in two ways.
The first was when the demand for commodities declined and oil prices began to collapse - from about $148 a barrel to a low of about $40 a barrel, somewhere in that region.
Nigeria relies on oil for over 80 percent of its revenues. When the price of oil crashed, it affected the banks negatively. The banking system relies heavily on the liquidity that comes from those oil sales. And we found that a lot of banks were heavily exposed to oil marketing countries. As the whole oil business went down, a lot of the loans that oil businesses took from the banks became bad loans.
The second way the global financial crisis affected Nigeria was through the capital markets. Over 60 percent of investments in the Nigerian Stock Exchange are owned by foreign institutional investors. One of the reactions they had to the global financial crisis was a flight to safety. They pulled their investments out of the market, and the Nigerian stock market crashed. It lost about 70 percent of its value and went from being known as the best performing stock market in the world to the worst performing stock market in the world.
That's a pretty bad fall. What happened afterwards?
In June 2009, Lamido Sanusi was appointed governor of the Central Bank and launched a series of reforms to stabilize the financial system and to reposition Nigeria's banking system. It's in those actions that a lot of lessons lie.
The first thing the Central Bank of Nigeria did was to commission an audit of all the banks to find out exactly what the problems were. These audits showed that out of Nigeria's 24 banks at that time, about eight were very wobbly and probably would have collapsed if no intervention was undertaken
Those fragile banks were systemically important. If they had collapsed, the Nigerian economy would have been fundamentally threatened.
The second thing, based on that outcome, was a massive intervention of about $4 billion dollars - 620 billion naira - offering loan capital to these banks to keep them as going concerns, while more long-term reforms were being worked out. With that intervention, the system was stabilized.
The Central Bank guaranteed all depositors' funds in the Nigerian banking system [and also protected creditors]. These were strong and decisive measures. They had the effect of restoring confidence and making people realize that the regulators are very serious; the Central Bank is very serious; we'll do all it takes to prevent a collapse of Nigeria's banking system.
Decisively Different from Europe
This was very important. And I want to compare it with the response to the banking crisis in Europe.
As Europe's banks grew shakier from the global crisis and the recessions in Europe, there were some stress tests on the banks. But a lot of critics said that those stress tests were stressless, which is to say that they did not fully reveal the true state of European banks.
When Christine LaGarde, the managing director of IMF, the International Monetary Fund, made statements that European banks were shaky, some people were furious that she should have said such a thing about European banks. The point here is that there are two philosophies to handling a crisis, a banking crisis.
You can try to make confidence by pretending that all is well, or that all is better than it actually is. Or you can say that the system is shaky, show the warts and all - but at the same time, take measures that result in confidence.
It's the second option that Nigeria took. And I think that option in hindsight has been shown to be a better option. So the very first quality of Nigeria's interventions in the banking crisis and reforms thereafter is that it was decisive.
The second quality of those reforms was the high degree of innovation that went into those reforms. We practically wrote the book about interventions in banking systems. We were very original the way we did things. But after that intervention, which stabilized the banking system, the reforms programme came.
Four pillars of reform
Those reforms rest on four pillars.
The first pillar was to make sure that corporate governance and risk management became the norm in banking. It wasn't, before the Central Bank's intervention. The audits of the banks, the stress tests of the banks, found out that there were a lot of corporate governance malpractices. Some of these banks' risk-management culture had sophisticated and fashionable risk models, as did a lot of the banks on Wall Street.
So we decided to clean up the banking system and make sure that the quality of Nigeria's banking improved. We began something called risk-based supervision - supervising the banks by looking at the risk factors to which they are exposed, the directions of those risks and helping the banks to manage their own risks. Then we manage how they're managing their risks. When you do it that way, I think the risk-management culture improves.
We improved transparency and disclosures in the banks and made sure that all the banks report their earnings at the same time, not at different times, which is what used to happen before and allowed some banks to play footsie with figures. Now, all banks report at the end of the year. We introduced new international financial reporting standards and many other measures to enhance the quality of the banks.
The second pillar of the banking sector reforms is to establish financial stability, first by the intervention that I talked about. But looking forward, you have to devise a system of ensuring financial stability to the best ability - because you cannot always, permanently, ensure stability cycles on booms and busts.
In creating the Asset Management Cooperation of Nigeria - what is called a "bad bank" - we gave it wider powers than was the case in any other country we know of to buy off toxic assets in order to clean up the balance sheets of the country's banks. The classic function of a bad bank - they suck out the risk from the banking system, and banks can now begin to lend. Then they manage those toxic assets over a long period of time.
That was just one part of the mandate of our bad bank. A second role was recapitalization of the banks, since capital had been wiped out. Audits showed that those eight banks' negative asset values were well below zero in almost every instance - and well below zero by the hundreds of billions.
Now, this is a very serious situation. We wanted to do a merger and an acquisition process in which new investors would re-capitalize these banks.
But all the investors that were interested said: we will not restore the negative asset value by hundreds of billions of dollars, on top of taking that asset value to minimum capital-adequacy ratios. So we got the bad bank to re-capitalize those banks down from beneath the ground up to the ground floor!
Then the investors were able to come in and take it from there onwards. If this role had not been played, the mergers and acquisitions - and the stabilization of the banking system that resulted from it - would not have happened.
The third role of the bad bank is restructuring those bad loans - something that goes on for many years hereafter.
A combination of those three roles has enabled a decisive impact in the Nigerian banking system. Nigeria's banks are now safe and sound, overall. We've had reviews by the International Monetary Fund. They found Nigeria's banking sector to be pretty much restored by the Central Bank of Nigeria's banking reforms.
The third pillar of reform is to facilitate the evolution of a healthy financial system. It's still a work in progress. We've tried to do it in two major ways.
We've restructured Nigeria's banking model and created a system where the risks inside the previous universal banking model have been totally largely disaggregated. Under the universal banking model, banks in Nigeria could resemble financial supermarkets in which you can buy anything. You can buy insurance, you could have pension funds, you could have asset management, stock brokering funds.
But the Central Bank of Nigeria can only regulate commercial banks. We don't regulate insurance. We don't regulate pensions. So this allowed for regulatory arbitrage in the system.
Some of these banks were moving funds in a very unscrupulous manner through some of these subsidiaries. We were not able to find it because we didn't have the power to go and look at those subsidiaries. And sometimes the regulatory agencies that were in charge of those subsidiaries were not yet strong enough.
So, we've now created a new banking model, and we have encouraged coop banking.
There are three types of banks: commercial banks, merchant banks and specialized banks. If you are a commercial bank, you cannot use and deposit funds for speculative trade, which is what used to happen before. That's what just happened on Wall Street.
We're a bit ahead of the Dodd-Frank Act in the United States and of course the Vickers Commission has started to do the same thing in the United Kingdom, but they did not go as far as we have gotten here. Basically, ring-fencing those funds from speculation is a major outcome of the new banking model that we have established in Nigeria.
After restructuring and risk management, the second way we've been able to facilitate a healthy financial system is to introduce a reform in the payment system and move towards electronic platforms. The banking system was very cash oriented, and of course that costs all the banks and the Central Bank a lot of money. Between the banks and the Central Bank, we spend about a billion dollars every year in managing cash, transportation, safety. So it's a very expensive system.
Now of course we're talking about cash-light - not a totally cash-less system. We try to improve payment systems using electronic platforms, electronic banking, and more efficient technologies.There are 100 million mobile phone subscribers in this country, and that's higher than most places in the world. Out of the 600 million mobile phones in the whole of the African continent, 100 million are in Nigeria.
Kenya pioneered this model of mobile phone banking, and we're trying to replicate it in Nigeria - adapting to our circumstances.
So, those are three pillars of reform: system reforms, a new banking model and payment systems.
The fourth and final pillar of our banking sector reforms is to make sure that Nigerian banks lend to the real economy. There have been many criticisms of Nigerian banking - that it developed a Wall Street culture, casino [or poorly regulated] banking and a lot of emphasis on financialization. But the financial system's contribution to the growth of the real economy was seen to be minimal.
We felt that you cannot have a real and deep economic transformation in this country if the financial system does not play a part. That means getting credit into the real economy, not just trading, or financing oil deals or financing speculation in the stock market.
We've done that in a number of ways, especially trying to encourage banks to lend more to agriculture. We've began to see signs of success, but it's a long road ahead.
What in CBN's role in transforming agriculture?
Agriculture is more than 40% of Nigeria's GDP and employs more than 60% of all people employed in this country. So, clearly it's seen as a sector that has a lot of potential in this country. We have a lot of arable land. Banks have seen agriculture as too risky to lend to because there is not much industrial agriculture and there's no weather insurance.
The Central Bank has joined with Nigeria’s commercial banks in the Nigerian Incentive-Based Risk-Sharing Agricultural Lending System (NIRSAL), which we designed working with the Federal Ministry of Agriculture. The whole point of NIRSAL is to change the program of agri-finance in this country by creating an increase in funding to agriculture, which was less than 2% as of 2011. We want to move that to about 7% of total bank lending over the next 10 years.
There are two important components of NIRSAL. The first is the value-chain approach. There are agricultural value chains and there are financial value chains. In the agricultural value chain, you have to look at the farmers. You have to look at the agro-dealers , and you have to look at the transportation of and exports of agricultural produce.
The fund that we set up is to help to de-risk lending to agriculture. So there are five components of that whole fund. One of them is the risk-sharing facility. The second component is the Agricultural Insurance Company, where we have to diversify sources of agricultural insurance for the farmers. The third is a technical capacity program where we try to improve the technical capacity of farming communities and farming businessmen and the technical capacities of banks to understand the agricultural space as a lending opportunity. And then we have a bank rating mechanism that rates the banks based on their performance in lending to agriculture and then we have a bank incentive mechanism.
Regarding the overall economy, how does CBM strike a balance between growth and stability?.
We have challenges in terms of balancing growth with stability. Our core function is to maintain price stability and financial stability. We will of course reduce the monetary policy rates as the inflation rates goes down, but we can't say we will reduce the monetary policy rate to make popular opinion with the Central Bank.
Of course it's an independent Central Bank and we arrive at our decisions based on rationale economic judgment and data and statistics. And we hope that by fighting inflation, and reducing the inflation rate of cost then the lending rates and the monetary policy rates will eventually come down. We’re expecting inflation to come down to 9.5% or 10% by the end of 2013. Of course, we're looking at ultimately achieving inflation rates of 6% to 7%. That’s realistic for a developing economy.
What reforms are needed to achieve the economic growth Nigeria needs?
The long-term success and sustainability of most of the economic reform in this country will rest on to success of the power sector reforms. Power sector reforms are important even in the financial world because banks need to manage their risks. Banks don’t just lend money to make people happy. If they lend money, the money must come back. Therefore, they have to be somewhat risk averse to make sure they stay in business. If the power sector reforms happen as we expect in the next two or three years, you will see a much improved business climate that encourages banks to lend a lot more to the real economy. Power sector reforms are really critical.
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How would you describe Nigeria's prospects - over the short and medium term and more long term as well?
Nigeria has promising prospects from growth, but we must take some fundamental actions. Nigeria's economy is a one-product economy. That must change. We've talked about it long enough. We must do it over the next five years. If we are slow, there are some strategic external forces that I am hoping will impose the discipline on us to do what we must do. The discovery of shale gas in the United States over the next few years will shift the balance of supply and demand in the world oil market. Also many African countries are finding oil. So there is the possibility that shifts in demand and supply will affect the price of oil.
We are growing but we don’t have the jobs. We must create the jobs. We are growing but we have not transformed. Growth is not transformation. The only thing that grows for the sake of growth is a cancer cell. That should not be the basis for our forecast of the Nigerian economy. We must become a productive economy far more than we are import-driven the economy.
If we develop our manufacturing capabilities, our small and medium enterprises capabilities, and our agriculture sector, that will create jobs. There are promising prospects because of what we see happening in China and all over the world. Wages are rising in China, so a lot of foreign investors may prefer to move to other parts of the world to established light manufacturing industries. If we're able to develop our human capital, our skilled workforce, we should be able to offer Nigeria as a place where foreign investors can see yield in light industrial manufacturing industries.
Is Nigeria as part of the widely discussed 'Africa Rising' narrative?
There’s been a lot of talk about Africa rising, but I question that optimism. You have to base optimism on credible evidence. For me, the growth of Nigeria and of African economies over the past decade has been based largely on a commodity boom. What we need is transformative growth. So I don’t think Africa has risen. I think Africa has an opportunity to reposition itself and to restructure its economies in order to truly rise.
To do that, Nigeria must become a productive economy and to do that you must have a science and technology innovation component to that economy. Innovation is what drives any modern economy. This is an area that Nigeria must pay particular emphasis on to make itself productive and competitive.
I am not a great believer in foreign aid, but I would make an exception for the area of science and technology. Whatever support African countries can bring in from other countries, along with the development of the local capacity through effective public policy formulation and implementation, that's where we need to be going.
Let me remind you that Africa has been the seat of scientific innovation for thousands of years. Somehow, that knowledge and that culture died especially due to colonial era, but don’t forget that the Pyramid of Giza in Egypt was the tallest building in the world for 3,800 years, well before the Empire State Building, well before the Petronas Towers in Malaysia, and well before the Burj Khalifa in Dubai.
After spending much of your career outside Nigeria are you glad you came back to become deputy governor and participate in working for reforms?
Absolutely, I mean it's been very, very exciting as a Deputy Governor of the Central Bank of Nigeria. I'm, very proud and satisfied to have had the opportunity to contribute to the economic development of this country and the stability and the growth of its banking system. So, I'm glad that I responded positively to the invitation of Nigeria's President to return to Nigeria.
- conversation with AllAfrica's Bunmi Oloruntoba, Reed Kramer and Tami Hultman
