Chamberlain S. Peterside, Ph.DTuesday, July 18, 2006
[email protected]
New York, NY, USA



…Rich Country, Poor People

igeria’s situation indeed presents a confusion that conjures all sorts of restless thoughts, and deep analysis within me. In a way, the conditions defy logic. Imagine that the country is known to possess rich natural/human resource-base, which includes solid minerals, motivated and talented people as well as fertile arable land mass. The mother of all natural resources, crude oil is also well in abundance and currently going at a significantly high price in the global market. None of these pre-requisites have guaranteed better life for the populace.

Just when you least expected – after the second invasion of Iraq in 2003, (experts forecasted that unleashing the second largest OPEC reserve in the market will pull down prices), the reverse became the case. Price of Bonny light, Nigeria’s benchmark crude oil hit all time high of $77 last week at the spot market. Over the last 18 months, the skyrocketing prices have helped the country amass a war chest in excess of $35 billion. In 1999 when this administration came to office the external reserve was less than $5 billion. Much of this reserve has been accumulated partly thanks to stringent fiscal regime instituted by the reform team in the last three years.

General living condition during that same 6-7 years period have not remarkably improved despite the exponential growth in external reserve or crude price. To the contrary, there remains a dearth of long-term investible assets in the domestic economy, as investment in infrastructure; power, housing and the likes have been quite dismal or not yielding ample dividends.

Yes, certain progress might have been registered during the last 3 years on a superficial scale; like the sovereign credit rating and Paris debt deal. To be fair, the economy actually grew by 6.5% and 6.3% in 2004/2005 respectively according to the Central Bank. What impact this has had on lives in the short-run can hardly be quantified. Prices of basic staples in the street has actually appreciated over the same period.


This experience could be a worthy theme for further investigation/case study in the IMF/World Bank or economics faculties around the world – that a country can actually be financially buoyant, yet that wouldn’t necessarily translate to improved life-standard for its citizens – why? Rightfully so, critics have questioned the rationale for accumulating such humongous amount of reserves abroad, if at the end of the day it is not put to good use, to change lives at home.

…Policy Rationale

The apex regulatory institution, Central Bank has proffered various reasons why it is impossible to immediately deploy the assets whole-heartedly. Some of the reasons are; to maintain sufficient reserve funds for supporting import bill/credit worthiness of the country as well as shoring-up the Naira exchange rate. The other reason is that unleashing excessive liquidity immediately could trigger inflationary tendency, thereby worsening an already bad situation in the economy. Not withstanding how plausible the reasons might sound, my believe is that accumulating money for the sake of it, is simply faulty economics. After all we know from classic economic concepts that “money is what money can buy”. Unless some of the foreign reserves can be efficiently applied within the domestic economy, whether to galvanize local production/investments, resuscitate ailing infrastructure, boost power supply, and create jobs and alleviate poverty, the whole idea has no meaning for the common man.

A perfect analogy will be Middle Eastern countries, where unlike past oil boom when windfall revenue was squandered. This time around countries in the region have wizened up and “putting their money where their mouth is” – quite literally. They are investing at home in diversifying their economy, creating new jobs for a teeming population and modernizing infrastructure. Over the last few years United Arab Emirate (UAE) has steadfastly been changing its skyline. The country has set an ambitious goal of becoming one of most acclaimed financial centers of the 21st-century.

According to Global Finance, a downtown development project which will include the world’s tallest building and the world’s largest entertainment and shopping mall is currently being developed in Dubai at the cost of $20 billion. Saudi Arabia has awarded a contract to build King Abdullah Economic city at the cost of $26,6 billion. Who would argue that these projects are not a sensible way of investing the crude oil windfall?

…Nigerian Peculiarities

Within the context of Nigeria, its peculiarities have been quite different to say the least. Embarking on lofty development projects that can stimulate the economy have been fraught with pitfalls and a tough call for the following reasons:

  1. Absence of consistent enabling framework/regulations on infrastructure finance, real estate development, funding of small and medium enterprises, manufacturing etc.

  2. Dilapidated infrastructure, especially transportation/rail network and power supply that could support any massive development effort and deliver multiplier effect on other sectors and outlying regions within the country

  3. Dearth of ample investment opportunities/funds domestically and insignificant number of credible economically active players vis-à-vis overall population. The economic terrain for the most part is still quite unfriendly, thrives on favoritism, cumbersome and expensive to operate in. Majority of functional organizations are unable to optimally organize “man and materials” cost-efficiently and deliver tangible results.

  4. Weak institutions/market infrastructure to regulate business activities and enforce contracts and commercial transactions or bring culprits to book. Issues relating to transparency and good corporate governance are still of major concern.

  5. Poor accountability and perennial misappropriation of public funds added to unpredictable political and social environment. As we speak, a new crop of political elites are jostling to assume authority in 2007 and help themselves to the spoils, which could be detrimental to the financial health of the nation.

The situation today is like a “Catch 22” conundrum; Nigeria has found itself awash with money simply by chance, thanks to high oil prices for which it had no role in bringing about. Without the right mix of factors, it is unconscionable to release unprecedented amount of funds into the local economy, even for the most altruistic of purposes - most of it could just disappear. Yet the population is yearning for/and deserves some reprieve/urgent improvement in life-quality or anarchy could be unleashed. Under the right condition Nigeria has sufficient financial resources to launch a multi-year, all-encompassing public works project - its own version of “Marshal Plan” that could transform the country over the next five years.

…Peak Oil

To illustrate the apparent changing fortune of Nigeria, consider this scenario - based on expert analysis and body of evidence dubbed “Peak Oil” (see charts below) - which espouses that the world has reached the peak in oil production versus consumption, which means consumption will likely continue to outpace production/discovery of new oil wells around the world. Against that background price of crude could reach and surpass the $100 a barrel mark or at least not fall below $50 within the foreseeable future.

What does this mean for Nigeria? Firstly, external reserve will most definitely keep rising as export earnings soar. Thus far, level of external reserve is sufficient to fund 30 months of import bill or equivalent to $3,6 billion in annual foreign direct investment (FDI) over the next 10 years. So if Nigeria were to earn 3 to 5% annual return on its $36 billion external reserve, that will result to over $1,5 billion annually, without lifting a finger. By comparison this is about the size of annual foreign direct investment, (including oil/gas) during the 1990s.

If you add the $1,5 billion debt-service payment saved from recent debt payoff, you would realize that Nigeria technically could generate $3,0 billion net (none export) capital flow over the next few years, simply through favorable circumstance and by taking the right steps. This scenario does not even include earnings from gas exports, solid minerals or exploiting new oil wells in the offshore zones. The down side is; if research/use of alternative energy sources – natural gas, ethanol, solar, and nuclear power takes off, then things could get awry for Nigeria.

On a per capita basis (earnings divided by population) the income is still quite meager, but you have to agree that Nigeria has never been in a better financial shape – ever. The big question now is how all this could be turned around to benefit the nation and its long suffering people. Pending legislations like the fiscal responsibility bill, public procurement bill, extractive industry transparency initiative bill, land-use act, law on property titling/secondary mortgage market as well as other key piece of legislation should be put on a fast track to build a platform for massive domestic investments. If/when these pillars are in place all that will be missing is the requisite expertise to structure transactions. Attracting foreign financial resources in such a circumstance could become a secondary concern.

Chamberlain is the Founder & President of New Era Capital Corp. and, a New York based financial services group. He was previously a Financial Advisor in the Global Private Client Group, of Merrill Lynch.