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Dangote Refinery as a Metaphor 09 Feb 2016

Developments around the January 2016 meeting of Monetary Policy Committee of Central Bank of Nigeria (CBN) were quite intriguing. The Nigerian financial community, usually echoing the views of the foreign banks these days, wanted the meeting to help provide policy direction, especially with regard to the foreign exchange market. Some of the financial analysts believed it was time for the CBN to revitalise the Autonomous Foreign Exchange Market. Others insisted the naira should be devalued to help remove the constriction in the currency market. One or all of these measures are supposed to open the floodgates for (portfolio) investments in the country.
    
But the MPC meeting took no such decisions. And at the end of the announcement of the decisions taken, CBN Governor Godwin Emefiele told Nigerian banks to be patriotic by supporting government's policy and the monetary stance of the Central Bank.

A panel of financial experts was following the MPC decisions on television and was going to debate it after the briefing, and I was following the proceedings. The panellists, felt somewhat embarrassed for the CBN Governor, for telling bankers to be patriotic. That was supposed to be a wrong call from a central bank governor. He or she ought to know that the mandate of banks is to make profit.

It was embarrassing watching the panellists who did not know that bankers were supposed to be driven by patriotism in running their for-profit, private sector financial institutions. Just six years ago, the CBN had to save Nigeria's private sector banks by injecting about N4 trillion into the banking system in direct bailouts, and in purchasing non-performing loans of the banks. Here we are today having some bankers taking the CBN to task for imploring them to be patriotic.

The U.S. financial system was in a panic in 1907. Depositors in New York City engaged in a devastating run on the banks. A large financial institution – Knickerbocker Trust – failed in the process. This precipitated a sharp decline in stock prices, and the economy tailspinned into a recession. At that time, the U.S. had yet to setup a central bank.

Seeing the institutional void in saving the financial system and the economy, a U.S. private sector consortium, led by J. Pierpont Morgan – a successful banker, stepped in. It provided liquidity to banks experiencing runs, assured the public on an effective intervention, and thus helped resolve the crisis. The impression one gets is that, should such a crisis happen in Nigeria today, our 'private sector' bankers would watch on, and wait for government's action.

Apart from not taking any decision on the foreign exchange market, the January MPC meeting also retained its November 2015 decisions, which included reduction of the Cash Reserve Ratio from 25% to 20%. But the CBN had said the approximately N1 trillion liquidity this decision would inject must be channelled into real sector and SME funding. But MPC members correctly adjudged the banking system to need some time to develop products and risk management tools to be able to finance the sectors.

In actual fact, the wait for Nigerian banks to develop capacity to finance real sector growth has been decades-long. When the CBN had created funds or funding frameworks for these sectors and for agriculture, Nigerian banks had refused to lend. The banks simply lack the appetite for the risks involved. Although we know from the data provided by National Bureau of Statistics that SMEs constitute 90% of businesses in the country, the banks have yet to know how to help unlock the potentials in this sector.

The main gripe in the Nigerian foreign exchange market currently is the pledge of support by the CBN in sourcing foreign exchange for building the Dangote refinery. This is said to be preferential treatment; and, indeed, it is. But is it justifiable? Yes, it is.

Aliko Dangote said his refinery “is generally about saving foreign exchange and earning more for our nation through the diversification of the economy.” In this short statement, Dangote expressed his patriotic fervour. He also reiterated the policy direction of the government, which some bankers still insist does not exist. In-between the short lines is his investment strategy: invest in projects that would help realise government's policy objectives. In the past six years, the objectives have been domestic production, import curbs and export diversification.

While entrepreneurs invest in people's needs and wants, at some point, Aliko Dangote reinvented himself as an investor along the lines of government's policy priorities. When government thought the country should be producing locally its cement needs, Dangote invested in cement manufacturing. We can only imagine how further squeezed the foreign exchange market would have been today, had we continued the dependency on imported cement. Dangote has once again made a big move in the petroleum refining and allied production space, to alleviate the national challenge of inadequate capacity of local refineries in meeting domestic consumption.
    
There is just a niggling issue with Dangote's strategy. When he invests, he invests big time. And so his refinery is being built to process 650,000 barrels of crude oil per day. That is more than enough for the current level of Nigeria's domestic consumption. Indeed, Dangote plans to export part of the products from his refinery.

By the implication of the capacity of his refinery, he would be able to single-handedly supply local demands for petroleum products, with eyes set on supranational markets. This raises a monopolistic threat. But this threat is not addressed by repressing his entrepreneurial genius. Anti-trust measures are not supposed to stifle innovation and ambition. They are supposed to promote competition.

One way to immediately tackle the anti-competition risk of the Dangote refinery is for government to ensure that its own refineries – which have combined capacity to refine 450,000 barrels a day – are turned around to perform optimally between now and 2018 when Dangote refinery comes on stream. This could be pursued by privatisation of the refineries or through effective turnaround maintenance. Also, other Nigerian billionaire entrepreneurs should step forward and seize the prevailing favourable policy and positive outlook of refined petroleum products to build sizeable refineries.

But the Dangote's dictum should not be lost on us: patriotic motivation for investing pays. It has propelled Aliko Dangote to the top of the richest Africans. His refinery is a fitting metaphor for Nigerian banks. It should encourage them to waste no further time in developing the know-how to invest in the real sector and the SMEs. Nigerian banks should start investing along the lines of government's policies and be patriotic. That is how successful and powerful nations are built, and the institutions that buy-in this strategy are rewarded.