Nwodo: Nigeria’s Present Political System Constrains Economic Development, National Prosperity

The Founder of XL Africa Group Limited, Charles Nwodo Jnr, argues that there is need to restructure Nigeria’s present political system, which according to him prevents the attainment of any meaningful progress towards national transformation and socio-economic prosperity. He also proposes the setting up of what he called the Nigeria Force for Good, which will negotiate a reconfigured Nigeria’s political system with President Bola Tinubu, the leadership of the All Progressives Congress and the other two main parties that constitute the Nigeria political class, for the benefit of the growing army of young people across the country. Obinna Chima and Dike Onwuamaeze bring the excerpts:

What is your view about the current state of the Nigerian economy?

The Nigerian economy is clearly challenged more than ever before and I am sympathetic towards those charged with the management of the economy at this time, from the president and his economic management team to the teams at the subnational levels like the Governors and Local Government Chairmen. On the one hand there is huge public expectation which is understandable for several reasons but on the other hand there is the reality which is defined by multiple headwinds in the form of local and external problems with many beyond our control. Internally, we have problems in the areas of unsustainable debt service provisions, excessive and growing costs of governance, accumulated de-industrialisation leading to undue reliance on oil and gas export as main forex revenue source, high level and growing unemployment, and income inequality,  reduced forex inflows, huge infrastructure gaps, unattractively high rates of interest and inflation, unstable exchange rates and widespread insecurity and  sporadic cases of ethnic and regional agitations. The list goes on. Externally, but impacting our local environment are issues like the Russia-Ukraine war and the attendant supply chain, financial system and commodity challenges, the Middle East crisis, climate change issues including erosion, flooding, desertification, aqua-marine dislocation and the impacts on agriculture value chain, and displacement of households and communities. In the light of the foregoing, this is certainly not the best of times to be the Minister of Finance, or the Governor of CBN so both Wale Edun and Yemi Cardoso do have my sympathy. But then there is something called the Nigerian spirit that is typified by resilience, tenacity, never say never, hope in the face of hopelessness and an indomitable can-do spirit which offers me confidence that the future is bright for Nigeria and that the policies of the current administration will ultimately propel us away from the current despair to increased and sustainable socio economic development provided that the right things are done.

What do you think are the right things to be done?

First and foremost, we need to dispel the long-held notion that Nigeria is a rich country. Many of our countrymen and women and some in critical public sector positions are beholden to this view and therefore carry on without consideration for prudence and accountability in the management of delegated responsibilities and even in our private activities. Nigerians should know that we are not a rich country based upon all the acceptable indices of economic progress. Do we have resource endowments and potential for greatness? Yes, we do. But having resource endowment and a large population do not necessarily mean that we are a rich country. A Nigeria with a mono product economy that accounts for 80-85 percent of export earnings cannot be described as rich. A Nigeria without an industrial base , without adequate and stable power supply, with over 20 million out of school children , with 63 percent of the population mired in multi-dimensional poverty, with GDP per capita ranked at number 21 in Africa, with a Gini coefficient (measure of income inequality) of 35% or 11th in West Africa, is not a rich country and our citizens need to come to terms with this truth as a starting point to our redemption. Nigeria may host the richest persons in Africa, but Nigeria also hosts the poorest persons in Africa and perhaps the poorest persons in the world if we believe recent media reports to that effect. From the hard statistics about Nigeria, it is clear that to even support the current population level and fill existing gaps in national revenue and domestic productivity we must do much more than has been the case in our recent history but to position Nigeria as the economic powerhouse that our founding fathers envisioned, demands that we do the extraordinary and think outside the box in all respects. Our leaders need to familiarise themselves fully with the dire statistics on the state of our nation and I sincerely hope when they do so, the required sobriety, sanity, diligence and a sense of urgency and sacrificial disposition will be embraced by our leaders at all levels. Above all we must seek extraordinary and unorthodox solutions to dig ourselves out of the hole in which we have found ourselves. As an aside, the unflattering situation recommends that the government and people of Nigeria should celebrate with accolades all of us who set up and operate legitimate businesses in Nigeria, because believe me it is tough, very tough to operate here.  When I see our leaders, especially the current president, travelling to different countries to pitch for foreign investments, I am perplexed because I think the audience for such pitches should be fellow Nigerians who have invested in Nigeria. The government should do more to improve the ease of doing business environment urgently and significantly in the realisation that it is far easier to get already invested Nigerian entrepreneurs to expand or diversify their operations for the benefit of job creation and improved productivity than to persuade foreigners to come to Nigeria and establish. I mean this is not rocket science, is it? Nigerians are some of the most enterprising and resourceful people in the world, but over the years, and across different administrations, we have found the situation where it seems that our government officials and agencies of our governments operate with the mindset to frustrate local businesses and businessmen, and this is partly to blame for some of the problems we have in Nigeria today. In my view, it is important for us (the leaders and the led) to come to come to a consensus on what needs to be done for Nigeria to achieve the kind of destiny that we have the resources to achieve at least if not for our own generation but for future generations. We have a ticking time bomb in our hands, which is the growing population of educated and active young people that seek expression for their skills and academic qualifications but are roundly frustrated by lack of job opportunities and a near total absence of support structures for enterprise incubation and business operations in the country. The logical expectation from this situation if urgent remedial actions are not taken, is increased criminality, widespread hopelessness, drug abuse, banditry, kidnappings, increase in frauds and scams and other vices, all of which misrepresent the Nigerian spirit. Our young people need jobs. They need a Nigeria that works. They need a Nigeria where there is equality of opportunities and equality of access to justice and the resources of the country.

How do you think the country can extricate itself from the economic development quagmire it faces?

The present political system we operate in Nigeria is a constraint to economic development of Nigeria and will continue to prevent the attainment of any meaningful progress towards national transformation and socio-economic prosperity. Let me explain this. We have political appointees and elected officials at the local, state and federal levels who essentially remunerate themselves and apportion to themselves in the annual budgets monies from the commonwealth that are in disproportion to their usefulness or job content and in clear disregard to critical national development priorities. If you add up the resources associated with these political office holders across the 774 local governments, the 36 states and FCT and the Federal level and add the cost of servicing accumulated debts at all of these levels, it is nearly impossible to be able to fund infrastructural development, or fund it at the level and rate required to achieve our SDG objectives or even attain the basic standard of a 21st century economy in the areas of education, health, security, agriculture, water and sanitation, housing, defense and security etc. Actually some states are even borrowing to finance the upkeep of these political office holders. One does not need to be an economist to understand that this situation is unsustainable. There is an urgent need to resolve this political system problem quickly, amicably and for the benefit of the growing army of young people in the east, north, west and south of Nigeria who are increasingly giving up on the hope of a better country. My proposal is to float a “Nigeria Force for Good (NFG)” which will negotiate a reconfigured Nigeria political system with President Bola Tinubu and the leadership of the All Progressives Congress and the other two main parties that constitute the Nigeria political class. The NFG should comprise about 100 Nigerians from the six zones of Nigeria, who will commit between N100 million and N1 billion of their own funds to the project, and forswear interests in any government contracts, appointments or elective positions. I believe that such a group to which I volunteer membership upfront, can engage with the political class  of the present political dispensation to persuade them to accept a modified political system through a constitutional amendment to make all legislative positions part time and for the salaries and expenses related to office holders in every local government, states and the  federal government not to  exceed 5-10 per cent of the IGR of each local government, state government, and federal government. Furthermore, the structure at the federal level should incorporate six vice presidents (VPs) who should represent each geo-political zone and should be nominated by the assemblies of the respective zones and ratified by the part-time National Assembly. Such VPs should hold office for life and the Presidency of Nigeria should rotate among them in cycles of four or five years. Furthermore, monthly FAAC allocations should be abolished. In its place, every one of the six zones should receive a one off take off grant of between $500 million and $1 billion and after this all states shall retain 100 per cent of the revenues from their states and remit taxes to the federal government as shall be agreed. Most of the current federal bureaucracy should be devolved to the six geopolitical zones with the centre retaining only external affairs, defence, national security, finance/economy and any other functions to be agreed upon. In return for agreeing to legislate and enact these changes, the NFG shall commit to support President Tinubu and other current office holders who have not completed two terms to roll over their first terms unopposed, so that the proposed structure will kick in at the end of their respective current tenures. In fact, the NFG may work towards having no general elections in 2027, once it is agreed that the present office holders with second term aspirations and qualified for that should be re-elected unopposed. That will save the country over N300 billion that INEC spends to conduct elections every four years. I believe there is an urgent need for Nigerians to think our way out of the current crisis of arrested socio economic progress because if we don’t do so intentionally, uncontrollable and even hostile forces of change may compel us to transform into a country or political structure that is imposed on us for the benefit of outside interests.

You operate in the cash processing sub-sector. Since last year we have been seeing a new trend in Nigeria where cash is now scarce. What do you think is responsible for that and how can it be addressed?

There are two reasons I will suggest. The first is regulator induced through a poorly implemented regulatory intervention, and I am referring to the currency redesign exercise of the last CBN administration. Central banks implement such policies but there are proper ways to implement them and ideally such an exercise ought to be preceded by a detailed need assessment to determine if the exercise is justified, and then the exact scope and type of intervention in terms of volume requirements, denomination demands data across cities, across seasons across institutions etc. In the end the data sets gathered and accurately analysed feeds into the implementation of the exercise following due consultations with the industry stakeholders. In the case of the exercise in reference, none or most of the above steps were implemented and I can tell you that it was so bad that even some staff of the CBN were completely unaware of the redesign exercise and certainly ourselves as operators in the sub sector were not consulted at all and were specifically and intentionally excluded from playing our roles as entities licensed and regulated by the CBN during the implementation of the exercise. So, even if we assume without conceding that the motive for the redesign exercise was altruistic, the implementation was very poorly executed. That is partly why it created such a negative effect in the economy and in our everyday life and why those effects have endured to this time. The second reason is purely a case of strategic misfit, and I will explain this. At a point in time when it was in the interest of the government to expand productivity and increase the velocity of cash in the system, it was unwise for the then CBN administration as the monetary policy anchor of that government to decide to implement an exercise whose objective was the exact opposite of the advertised growth and expansionary targets of that administration. The timing at year’s end and in the middle of general elections couldn’t have been any worse for the Nigeria economy for clearly obvious reasons. I mean, Nigeria is basically a cash dominant economy to an extent that it can be said that in Nigeria, cash is king. I would suggest that in conceiving and in implementing the policy, the CBN misadvised itself about the entire currency operations value chain because a country’s currency serves two purposes. One of them is a means of exchange, and this purpose theoretically lends itself to regulatory manipulations through monetary policy tools, and sundry intervention mechanisms according to our laws and market practices. But the second purpose of a country’s currency is a store of value, and this characteristic does not lend itself to the same level of regulatory control or manipulation. Put differently, the CBN as regulator has little or no direct control over how citizens elect to store wealth in the type of liberal capitalist economy that we practice in Nigeria. For the most part, whether people choose cash, property, or other asset classes as store of value is the outcome of rational personal decisions and cannot be decreed by regulation without harmful consequences to economic development and national peace and tranquility. If I have to be blunt, what the then CBN administration did was essentially to confiscate peoples’ savings and investments in cash and then deny them the opportunity to retrieve these from the banks by rationing the amount of cash that people were allowed to withdraw from banks and ATMs. Note that the CBN implemented this scheme at a time it was launching financial inclusion campaigns aimed at encouraging the unbanked but bankable segment of the population to embrace banking services. With latest CBN data showing an unprecedented volume of currency circulating outside the banking system the currency redesign exercise succeeded in reducing confidence in the banking system, thus pushing a growing number of people to embrace cash as a preferred store of value. Another way to look at the situation is that people have a diminished trust in the central bank and commercial banks, and this should worry our economic management team. According to one research sponsored by one of the European Central Banks, there is a well-established correlation between perception of instability and uncertainty (as evidenced by wars, changes in government, political instability, economic unpredictability, etc and an increased desire to hold cash. This is a statistically validated hypothesis that should explain the growth in cash outside the banking system.

Even today cash is still scarce as the ATMs hardly dispense.

Again, I can suggest some reasons for this unfortunate development. The first reason is a carryover from the Naira redesign policy which I just explained to you while answering the previous question. In the aftermath of the Naira redesign exercise, the general elections and the instability generated by the controversies and legal disputations following the general elections you can clearly find justification for the scarcity of currency notes because of increased cash holdings by households outside the banking system. Ordinarily the CBN would have responded by releasing more currency notes into the system but the challenges of controlling inflation as well as interest and exchange rates must weigh heavily as a constraint to the CBN in this direction. So, this trend is likely to continue for as long as the citizens perceive that there is a general sense of uncertainty in the system. The other reason for the scarcity is that the natural circulation process that culminates in the feeding of ATMs with cash was interrupted as an unintended side effect of the referenced action. The circulation of cash in the economy operates within the context of what is called the cash value chain. This chain begins with the CBN as the overall manager of monetary policy and includes the Mint (NSP&M Plc), commercial banks, cash processing companies, cash distribution companies, ATM operators and other ancillary entities like security providers and vehicle providers etc. Under normal circumstances each of these entities plays a vital role in the chain starting from design and approval of currency notes, printing of the notes, release of the notes, circulation of the notes and finally return of the notes to the CBN for destruction. I do not wish to bother you with the fine details of the process but the point to note is that the efficient operation of this chain in any modern economy demands a high degree of professionalism, inter agency coordination, technological inputs and appropriate security and safety systems and above all, such a system demands the proactive and well-informed supportive oversight of the CBN. I regret to say that the last CBN administration did not live up to the above requirements, which is why some of the problems you have identified still linger. The CBN has tended to place too much reliance on the commercial banks as the main drivers of currency circulation and in this respect, there are guidelines and policies developed by the CBN to regulate the activities of the commercial banks in relation to currency circulation and interaction with the other stakeholders in the cash value chain. But because commercial banks do not consider it prudent to make the capital intensive investments in the cash value chain infrastructure, many Nigerian banks have resorted to operating in continuous breach of the operating policies and paying the stipulated penalties which are insignificant. Meanwhile the companies licensed by the CBN to  process cash and distribute cash for the industry have not been supported by the CBN to any meaningful extent or at least to the extent demanded by the fact that the Nigeria economy is cash dominant and therefore requires an efficient and robust currency operations stakeholder ecosystem to power the economy. So the result is that the cumulative actions of the CBN have combined to disintermediate the critical stakeholders in the cash value chain and the result of this disintermediation is on full display in the form of scarcity of currency notes at banks and at ATMs and the scarcity has in turn created a thriving black market for newly minted currency notes which desperate Nigerians snap up for spraying at parties and other public events. This is a sad and truly pathetic situation I must admit.

So, what is the way out?

The way out is regulatory rethink. My humble opinion is that the CBN needs to take more seriously its currency operation management function. I say this with a sense of responsibility as somebody who has worked in the banking industry before venturing into currency operations and I can tell you that there is need for greater awareness about the critical importance of cash as the lubricant of such an economy as we have in Nigeria, with our stated ambition to dominate Africa and position to attract resources from all over the world. Until we properly position cash in terms of efficient management of its release, circulation, integrity and availability across all channels and geographies of market exchange and capacitate the relevant offices and officers of the CBN to provide expert oversight of the entire value chain like other countries that share the same ambition as we do, then we are nonstarters.  An average central banker or commercial banker in Nigeria will tell you that we are pursuing a cashless policy and very soon cash will disappear, but such a conclusion is not supported by available statistics and projections on cash demand across the country. There is nothing like a cashless system in today’s world and certainly not in Nigeria of today or in our lifetime. There are individuals that have vested interest in the digital and electronic payment spaces that managed to sell to key figures in past CBN and federal government administrations the bogus scheme of so-called cashless Nigeria campaign which the regulator and many ordinary Nigerians embraced with enthusiasm and at huge costs from public resources. 

So, Nigerians were made to believe that the use of cash was the cause of all the bribery and corruption in Nigeria and that once a cashless destination was attained all the bribery, corruption, kidnapping, banditry and the likes will disappear from Nigeria. The political class not being conversant with the technical issues involved in currency operations bought into it. 

Even the Nigerian public bought into it. But what the drivers of the cashless Nigeria project  failed to tell Nigerians was that as they were launching this cashless policy, every year the volume of cash in circulation was increasing rather than reducing, and that banks in Nigeria were recording higher volumes and more frequent incidents of fraud and theft through the digital and electronic channels than the experience with cash transactions. Even a managing director of one of the biggest banks in Nigeria told me that cash was a disappearing commodity and there was no need for his bank to develop a bank wide cash management strategy. Yet in the books of this particular Nigeria bank, the cost of cash operation was between 30 and 35 per cent of the bank’s aggregate costs of operation. So, I believe that this unfounded view of the role and importance of cash in the economy is widely held and even so in the top echelons of decision making at major banks and the CBN. But in other more developed jurisdictions you find that banks like   HSBC, Bank of America, Standard Bank, JPMorgan Chase, other major Japanese, Chinese and European banks have well developed cash management strategies and operational frameworks and the officers managing the cash operations are very senior and highly experienced officers. These are the folks we interact with when we attend international conferences and trainings. Obviously even in these countries with far more advanced digital and electronic payment systems there is the full understanding of the importance of cash as a critical component in the functioning of the economy. We need to make amends in our country and we should do so quickly.

The CBN has indicated that it is going to recapitalise the banks, what advice do you have on this impending exercise?

In principle there is nothing wrong with the CBN identifying recapitalisation of Nigeria banks as a goal of the current administration. My humble piece of advice however is that such an action if indeed it will come to be, should be part of a broader comprehensive regulatory policy drive, in alignment with other macroeconomic goals of the government. We have experienced knee jerk and spontaneous regulatory actions here and the harm such actions have left in the system many years after, so it is important that we learn from past experiences. Furthermore, in approaching the issue other related issues should be carefully considered. For example for the CBN and other regulators, they must take steps to equip themselves adequately for the expected expansion in scope and complexity attendant on the industry in the short to medium term, and it should also be noted that some of the banks are able to achieve the projected level of capitalization easier than others because of organic growth and capital accretion other banks may find it more challenging to recapitalize while still other banks may consider it strategically beneficial to remain at current levels of capitalisation. So in effect the CBN should approach the issue with the full understanding that it is not the magic pill for the banking industry because while for some banks increased capital will lift their capability for others their requirement may be increased investment in ICT or technical tools to improve operational efficiency to power growth, for other banks it may be upskilling of key personnel or recruitments to fill critical areas of operation required for the scale of their business such as internal control, risk management, network security, business analytics etc. So it is recommended that a consultative approach be adopted by the CBN with the industry so that subsequent actions including mandatory recapitalisation will be undertaken in the context of each bank’s internal realities and strategic preferences. The era of prescriptive regulatory interventions are gone and the CBN should act with circumspection and in the interest of the market as well as the shareholders of the banks. Nigeria banking system is one of the most advanced not just in Africa but in the world and anyone familiar with banking services in America and Europe will attest to this fact. What is lacking, or is in short supply, is the institutional framework and support systems that will deepen the goal of financial inclusion and at the same time enable the CBN and other regulators greater lines of sight for proactive regulatory oversight of the banking system. Therefore in addition to the projected recapitalization mandate, there should also be efforts ( by the CBN, SEC,MOFI and others) to enhance collaboration between the money market and the capital market to achieve greater cohesion, increased efficiency and responsiveness as well as overall stability of the financial system to serve our national and regional growth and economic development aspirations. At the moment the money market and the capital market operate like two distinct and disconnected systems, which is not good for our nation. As a corollary,  the CBN ought to focus more effort and resources in the area of capacity enhancement of existing personnel, recruitment of suitable talents , acquisition of technology and systems and fine tuning of its processes to stay ahead of the banks and other financial institutions to future proof the regulatory environment and position itself better to deal with innovations like blockchain, machine learning, artificial intelligence, and the derived products and services like digital currencies, Bitcoins, mobile banking, crypto currencies, internet banking and all the criminal and malevolent byproducts that confront the industry as well as the increasing sophistication of bank customers and their demands on the banking industry. Equipping the CBN to cope with and even to steer the industry knowledgeably and effectively in the light of this rapidly changing financial services environment poses a huge challenge to the CBN and should be prioritised by the current CBN administration.

For your company and sub-sector, what kind of incentives and support do you want to see from the CBN?

I am greatly relieved that Governor Cardoso and his team have adopted a calm, assured, more consultative and highly professional disposition in their initial engagements with the regulated community, the markets and the wider public. As simple as these gestures appear, they in fact signal a gulf of difference for our CBN in view of our recent history and the huge challenges our country faces in reconstructing and repositioning our economy and economic management templates. Nigeria is in a fiscal crisis and the entire country needs to support the government wholeheartedly for our collective and long term benefit. Our sub-sector needs from the CBN enhanced supervisory capacity, better informed and proactive regulatory intervention, including greater firmness in enforcing existing policies and guidelines and closer cooperation with operators to update obsolete and ineffective currency operations regulations. Our subsector is of critical importance in the attainment of exchange rate stability, currency integrity, financial services access and economic management effectiveness, but above all, our role is indispensable in the effort to position Nigeria as the hub for financial services and the Naira as the dominant currency, in our sub region. This is why it surprises me that the last two CBN administrations almost completely relegated the currency operations sub sector to insignificance. The initial steps of the current CBN leadership, such as the caliber of director posted to the department and other related actions provide encouragement to us and we appeal that such positive steps be sustained and improved upon.