Yesterday, the President approved the sharing of $1.7b out of the $2b left in the Excess Crude Account. The President was also reported to have approved another sum of N713b as bailout as part of a three-pronged strategy as follows:

– N413b ($2.1b) from LNG proceeds
– N300b to be packaged as special intervention fund by the CBN
– DMO to assist in restructuring over N660b commercial loans taken by the states

The total amount which include the $1.7 ECA withdrawal, $2.1b LNG proceeds and N300b CBN intervention fund come to a sum total of N1.2 trillion.

I don’t have any issues with the restructuring of the commercial loans taken by the states. This is actually one of the strategies some of the states should have undertaken to free up their cash flows. Why no one thought of this earlier baffles me.

In his book “My Watch”, Obasanjo said Buhari will not be a good economic manager and this bailout just proved him right. Now, here are my thoughts:

1. No good manager of the economy will approve bailout of such magnitude without stringent conditions. If a company has been run aground and a financier wants to inject fresh funds, there are tough conditions that are attached. It could come in the way of cutting down certain costs of governance, selling off some assets, reducing public sector spending, raising of IGR via taxes or other means, etc.

When Greece was bailed out in 2012, there were 5 major conditions given by the EU. The conditions then were:
– 15,000 public-sector job cuts
– liberalisation of labour laws
– lowering the minimum wage by 20% from 751 euros per month to 600 euros
– negotiating a debt write-off with banks.

Last Sunday, the referendum by Greek voters was to determine if the country should accept the new conditions that have been set out. This time, the conditions relate to pensions reform, sales taxes and reduced military spending. Bailout should never be free.

2. With the withdrawal of $1.7b from the ECA, the balance is now a paltry $300m. With oil sales not nearing recovery, we can just kiss the ECA goodbye. In addition, with the foreign reserves hovering around $29b, the buffer provided by the ECA is now gone. The purpose of the ECA has been defeated with the sharing of this fund to the states.

3. Utilizing LNG proceeds of $2.1b to bail out states implies that we would rather spend on consumption rather than production. The opportunity cost of this move is the non-funding of another LNG train with its attendant revenue implication for the Nigerian economy. LNG Train 1&2 cost US$3.6 billion. The third train (expansion project), including additional storage, cost US$1.8 billion. The NLNGPlus project (Trains 4 & 5) cost US$2.2 billion. Train 6 (NLNGSix project) cost US$1.748 billion. With this spending, the train 7 will obviously have to wait. In the dire economic straits wherein we find ourselves, there should have been an attempt to boost the revenue profile of the country.

4. Injecting such a huge amount of N1.2 trillion in the economy will almost certainly lead to inflation. The Naira is going to undergo more pressure. The foreign exchange market will experience further volatility. The liquidity position will worsen as there will be excess liquidity in the system. Unfortunately, we don’t have a Minister of Finance in place who can implement fiscal policies to complement the monetary policies of the CBN. Essentially, Naira will fall further and the economy will be worse off. This will certainly lead to a poorer international rating of the economy and foreign investors will have to look elsewhere.

5. On the N300b special intervention fund by the CBN, it is my opinion that a country that would rather package a SIF to be spent on consumption rather than to be invested in manufacturing and other parts of the real sector should not be taken seriously. This is misplaced and misguided priority. How do you package N300b to spend on less than 10% of the population?

6. At the end of the day, the total amounts will be shared among the Federal Government, States and Local Governments. A State like Osun for instance will probably get less than N7b from these amounts to be shared at the end of the day. The civil service wage bill for Osun is about N3.6b monthly and the State has only being able to clear the backlog of salaries up to December. One begins to wonder how many months arrears will be cleared by the amount that would eventually get to Osun State. Won’t there be need for additional bailout as the 6 months outstanding cannot be settled with the amount to be released? Isn’t this bailout just postponing the evil day? For how long are we going to continue to bail out states?

7. Bailout of this magnitude and without due process in my reckoning promotes lack of accountability among our leaders. This bailout means you can mismanage your funds and then come cap-in-hand to beg for bailout- no questions asked. Constituting NEC which has these profligate governors as members and having them approve the release of these funds is like asking goats to supervise yams in the barn.

This action is not well thought out. This even shows the need to get a cabinet in place and most especially a Minister of Finance. Maybe there would have been a robust debate on this move at the Federal Executive Council level.