Home Economy Expert warns Nigeria govt not to sacrifice economic growth plan for politics

Expert warns Nigeria govt not to sacrifice economic growth plan for politics



Nigeria’s first Professor of Capital market, Professor Uche Uwaleke, is the head, banking and finance department, Nassarawa State University, Keffi. In this interview with ABDULWHAB ISA, he speaks on various issues affecting the economy and how to return Nigerian economy to the path of sustainable growth. Excerpts



As a financial analyst conversant with recent economic developments, what is you take on the state of Nigeria’s economy bearing in mind the National Bureau of Statistics’ 2018 first and second quarters’ Gross Domestic Product (GDP) reports?
The 2018 Q1 and Q2 GDP (Gross Domestic Product (GDP) reports by the NBS give cause for concern in the sense that economic output resumed a downward trajectory not long after the economy exited a recession. According to the latest NBS report, GDP growth fell again to 1.5 per cent compared to 2.11 per cent in Q4 of 2017. Recall that it was 1.95 per cent in Q1 2018. So, this trend is worrisome.
What the NBS report has shown is that we still have a long way to go regarding the diversification of the export base of the economy. This is because if you look at the numbers critically, it becomes clear that the growth in GDP was dragged down primarily due to a fall in the average daily oil production recorded at 1.84 million barrels per day from about 2.0 mbpd recorded in the first quarter of 2018. This was despite the fact that crude oil price in the international oil market maintained a steady rise over the period. What this means is that the economy is still highly vulnerable to external shocks.
Other key NBS reports such as the capital importation report leaves little to cheer. We have been told that capital inflows fell to a mere $5 billion in the second quarter of 2018 and it was dominated by the highly volatile portfolio investments. The proportion of Foreign Direct Investment (FDI), which really drives growth and employment opportunities has remained insignificant over time. It is therefore not surprising that unemployment rate has remained high. So, with respect to rebuilding the economy, there is much work to be done.

There is anxiety by some experts that Nigeria’s economy risks relapsing into recession should the tempo of contraction continue? If you were to advise the authorities, what steps should be taken to get the economy on a sustainable growth path?
I am sure you are aware that South Africa’s economy has just entered a recession, having experienced two consecutive quarters of contraction in GDP. After going through about five quarters of negative growth in GDP, another economic recession in Nigeria would have a devastating effect on socio cultural lives of the people. Honestly, I shudder at the thought of another recession closely on the heels of the last one in Nigeria. So, I do not want to be pessimistic regarding the future of our economy in the near term. It is important to point out that the economic recession we went through was largely on account of the drastic fall in oil revenue. I do not see this happening soon given where crude oil price is now and the level of our foreign reserves.
Regarding what to do to put the economy on a sustainable growth path, the government needs look no further than the blueprint, which it already has, that is talking about the Economic Recovery and Growth Plan (ERGP). In a recent article I wrote following the release of the Q2 GDP report for 2018, I talked about key lessons from that report. One key lesson is to recognize that time is running out in the light of the current slow pace of economic growth, which is a far cry from the set target of 7 per cent by the year 2020, only a few months away. Therefore, a sense of urgency is required in the implementation of the various strategies set out in the ERGP to address the five execution priorities of stabilizing the macroeconomic environment, achieving Agriculture and Food Security, ensuring energy sufficiency in power and petroleum products, improving transport infrastructure as well as driving industrialization through Small and Medium Enterprises (SMEs). Therefore, in order to restore confidence in the Nigerian economy and set it on a sustainable growth trajectory, the government must hit the ground running with regard to the implementation of the ERGP.

Agriculture is one area the current administration made strong commitment to leverage on its untapped potential to diversify the economy. The Anchor Borrower’s Programme of the Central Bank of Nigeria (CBN) is an integral part of this commitment. Given the escalation in farmers/herders attacks, what should government do?
There is no gain saying the fact that the incessant attacks by herdsmen on farming communities, especially in the North East and North Central regions of the country, have impacted negatively on food output. The GDP numbers I referred to earlier corroborate this fact. The agric sector in the second quarter of 2018 recorded disappointing performance, growing by just 1.19 per cent (year-on-year) in real terms. This is not a good commentary for a sector that used to be the star of the Nigerian economy even during the recent recession when virtually every other sector was in the negative territory.
To change this narrative therefore, the incessant farmers/herdsmen clashes must be tackled squarely including through disarming criminals who masquerade as herdsmen. The Anchor Borrower Programme you mentioned is one laudable intervention measure by CBN, which has helped the growth of the agric sector. What CBN needs to do now is to upscale it to cover not just rice, but other imported products that consume a large chunk of our scarce foreign exchange. A roadmap already exists for ramping up food production. Government should therefore be seen to be walking the plan spelt out in the ERGP to achieve self-sufficiency in food production.

Nigeria’s debt stock has grown phenomenally in the last few years and currently stands at about N22 trillion (or $73 billion) with the Federal Government having the largest chunk. This huge size, with its associated debt service burden, has attracted varied comments. Given the poor state of infrastructure in the country, do you think the mounting public debt is healthy for the economy?
I quite agree with you that the country’s growing debt stock is generating concerns both within and outside Nigeria. Only recently, Amina Mohammed, the Deputy Secretary-General of the United Nations (UN) was reported to have decried the country’s rising debt burden only a few years after the country negotiated debt forgiveness with some external creditors especially the Paris Club.
Be that as it may, it is important to mention that the idea of borrowing in itself is not bad as long as the loan is put to fruitful use. In my opinion, the country’s huge infrastructural deficit can best be addressed through concessional loans until the economy becomes a lot more diversified to be powered by export revenue. To be sure, other alternatives exist but in the face of shrinking revenue to finance the capital budget, uptake in loans lends itself is the most viable option. Of course, printing of money is a no-go area in view of the high rate of inflation. You will also agree with me that the current attempts at diversifying the export base, reducing wastes in the public sector, recovering stolen funds and widening the tax base through the Voluntary Asset and Income Declaration Scheme (VAIDS) are other viable options but these measures will take some time to yield any significant result. So, as a low hanging fruit, securing loans for infrastructure development stands to reason.
The debt burden manifests more in the debt service to revenue ratio, which is becoming unsustainable. So, the present strategy of substituting domestic debts with relatively cheaper and long-term external debt should lead to a significant decrease in debt service cost. It would equally create more borrowing space in the domestic market for the private sector. Also, if government borrows less from the domestic market, it could lead to lower interest rates with positive effect on inflationary pressure and stock market activity. The answer to your question therefore is that borrowing to improve the poor state of infrastructure in the country will generate a multiplier effects for the economy by stimulating growth, creating employment, increasing income, generating more tax revenue and eventually repaying the debt in the future. So, it is healthy for the economy.
Let me emphasize at this juncture that to deal with the public debt challenge fiscal discipline is required at all levels of government. Alternative funding sources should be explored including privatisation through the Nigerian Stock Exchange (NSE) to engender inclusive growth as well as through Public-Private Partnership (PPP) arrangements. State governments should be made to implement the 22-Point Fiscal Sustainability Plan (FSP) aimed in part at managing debt sustainably at the sub-national level. Sticking to the “golden rule” of debt management that requires governments to borrow only to fund investments that produce high returns is the right path to sustainable debt levels.

What advice do you have for DMO in managing the debt portfolio?
I think the DMO has done fairly well in its primary task of managing the country’s debt portfolio. Recognizing the fact that the increased financing requirements needed to fast- track economic recovery and address the huge infrastructural deficit would entail enormous funding resources including borrowing, it has developed a strategy that seeks to rebalance the debt portfolio in favour of foreign loans.
Nevertheless, the preponderance of fragilities in the Nigerian economy warrants a cautious approach to new external borrowing that is already making the debt portfolio overweight in Eurobonds. In this regard, my advice to the DMO is to prioritize concessional external loans over commercial debts, which carry considerable risks. The DMO should realize that commercial loans such as Eurobonds issuances come with little or no conditions attached, allowing governments more control over where they channel the funds. This discretionary power can be abused thereby turning the loans to a curse instead of a cure. This is why I welcome recent efforts by the government at securing soft loans from China and Japan. Emphasis on external loans should be more on Multilateral and Bilateral sources rather than the international capital market.
I also think that linking borrowing plans more to debt service ceilings than other debt indicators will enhance debt management. Debt-service indicators, which are typically expressed relative to fiscal revenues and exports, measure the extent to which debt service crowds out alternative uses of resources and are arguably more suitable measures to capture a country’s effective constraints. Therefore, it is vital not to crowd out priority spending by establishing tight limits on debt service relative to revenues as opposed to limits based on GDP, which is a less suitable metric. So, my advice to the DMO here is to refocus its notion of debt sustainability away from GDP to revenue for optimal outcomes. That said, the DMO should be empowered to monitor the use of loan proceeds. As mentioned earlier, the key challenge remains to ensure that loans to the government are put to very good use and in ways that enable the needed traction to the country’s economy.

How soon do you expect the Central Bank of Nigeria (CBN) to begin easing its tightening in the lending rate (MPR) that was left unchanged at 14 per cent for over a year given that high cost of lending by commercial banks is tied to CBN’s lending rate?
I am afraid monetary policy easing is not in sight especially on the back of the halt in disinflation trend, which was noticed in the August Consumer Price Index figure that rose to 11.23 per cent from 11.14 per cent the previous month. If the Monetary Policy Committee (MPC) could not reduce the policy rate during the downward trajectory of headline inflation, it is unlikely to do so now in the light of this uptick in the general price level.
The CBN has always taken the view that although headline inflation might be trending downwards; the level is still in breach of the upper reference band of 9 per cent. Besides, the food index component remains elevated. Another argument by the bank is that a rate cut at this time can only be at the expense of the progress already made in the area of exchange rate stability – which is itself a prerequisite for achieving lower inflation rate. Inflation has partly been driven upwards by the rising cost of imports on account of high exchange rate. So a lower MPR would put pressure on the exchange rate and exacerbate inflationary pressures. I think these arguments make a lot of sense.
So, it is not difficult to see why the present tight monetary policy stance will remain for quite some time. Many of the reasons adduced by a majority of the MPC members for not relaxing policy have not changed notable among, which are the liquidity impact of the 2018 expansionary fiscal budget, increasing FAAC distribution due to the rising prices of crude oil, the build-up in election related spending ahead of the 2019 general elections, the effects of the sustained monetary policy normalization in the United States with implications for capital flow reversals as well as the threat to disinflation posed by incessant herdsmen-farmers crisis in some major food producing states. These, including the recent upward inflationary pressure, will continue to provide the MPC with compelling reasons not to lower the MPR in order not to jeopardize the primary mandate of the CBN, which is the maintenance of monetary and price stability

How do you fell about the recent CBN lending policy strategically designed to lift the manufacturing and agriculture sectors of the economy?
I am sure you must be referring to one of the fallouts of the July MPC meeting. It is what I call an “outside the box’’ measure taken in recognition of the need to strengthen the country’s weak economic recovery given limited monetary policy tools. So, it is quite commendable. CBN is saying it is ready to give incentives deposit money banks to increase lending to the manufacturing and agriculture sectors through an innovative approach that directs cheap long-term bank credit to employment elastic sectors of the Nigerian economy. There is also the corporate bond funding facility, which allows CBN to invest, alongside the public, in corporate bonds issued by large companies.
You will also recall that the CBN not too long ago activated the N500 billion non-oil export stimulation facility managed by the Nigerian Export Import Bank in a move to reverse the declining trend in the flow of credit to the non-oil export sector, lower costs for Nigerian exporters and make their products competitive in the global market as well as boost the level of non-oil export earnings.
Through these initiatives, CBN has demonstrated a willingness to be flexible and responsive to the growth needs of the economy, while at the same time keeping a handle on its primary mandate of maintaining price stability. The Real Sector Support Facility comes at a maximum interest rate of 9 per cent with a minimum tenor of seven years and two years moratorium. Barring other exogenous factors such as high exchange rate and inflation, these should help to lower the cost of operations in addition to addressing the problem of mismatch whereby long-term assets are funded with short-term facilities. Just like the highly rated Anchor Borrower programme, it is crucial to recognize critical success factors early in the implementation stage. CBN should ensure that the participating financial institutions put in place adequate risk management framework given the high level of Non-Performing Loans in the banking industry. I am optimistic that a successful implementation of the intervention programmes will be positive for the faster recovery of the economy.

Inflation has trended downwards for quite some time. Ironically, the ordinary Nigerian appears not to feel the impact, as prices of basic food items and services have remained high. How do you explain this seeming contradiction to the layman on the street?
You are very correct. Except for the month of August when the figure stood at 11.23 per cent, the inflation rate since January 2017 has been trending downwards from about 18.7 per cent to 11.14 per cent in July 2018. To the ordinary Nigerian, nothing has changed significantly in the price of garri, bread, footwear, clothing or cost of transportation. If anything, the prices of basic commodities have increased over the period.
The reason is because the Consumer Price Index, which is used to measure inflation, is applied to not just a few commodities but over 700 different types of goods and services. While the prices of some are increasing, others are decreasing. The CPI only shows the average increase. Let me also mention that headline inflation has two components namely the core and food components. Most of the time, the food index, which matters more to the ordinary Nigerian is usually higher than the headline inflation reported in the media.
There is no gain saying the fact that high inflation rate erodes purchasing power of the naira, increases poverty rate and impacts negatively on the economy. It must therefore be put in check especially if driven by cost-push factors. The high cost of fuel, road transport, electricity and food will go down if the government spends right in fixing the refineries, roads, rail, housing and power infrastructure as well as committing huge funds to agriculture. Going forward, the panacea for taming the inflation monster in the medium-to-long term remains the diversification of the productive base of the Nigerian economy. Once again, the solution lies in not sacrificing the ERGP on the altar of politics.

We are already in the third quarter of 2018 and no tranche of capital release has been done in respect of the 2018 budget. What would you propose as a solution to poor budget implementation in Nigeria?
Your observation is disheartening to say the least especially considering the fact that this is one fiscal document that has given some attention to capital projects. The breakdown of the capital spending shows that it has been prioritised in favour of critical on-going infrastructural projects such as power, roads, rail and agriculture. It goes without saying that large-scale infrastructure development is a potent stimulus in driving economic recovery and growth.
As you rightly pointed out, the 2018 federal budget is already running behind schedule like virtually all the ones before it. The negative impact of non-implementation of the capital component cannot be overstressed especially on an economy that has just exited a recession. This is not unconnected with the undue delay it suffered in the first instance and the current sour relationship between the Executive and the Legislature. This has created fiscal uncertainties, dampened investors’ confidence and presented a drag on the current tempo of economic recovery. My answer to this question is that the government (particularly the Executive and the Legislature) should work together to ensure that the country returns to a predictable budget calendar as quickly as possible.

The stock market has remained bearish for a long time now with retail investors’ apathy growing by the day. As a professor of capital market, what do you think should be done to change this narrative?
The bearish trend in the stock market is not unconnected with developments in the country’s economic and political space. Earlier, I spoke about the downward trend in GDP growth rate. So, all over the world, stock market performance is tied to the fortunes of the domestic economy. Essentially, the weak investor sentiments in the Nigerian stock market can be attributed to increasing country risk on account of increasing political tension and non-implementation of the capital component of the 2018 budget. There is also the fact that many foreigners are taking their investments to the US and other developed economies where returns are higher on a risk-adjusted basis.
To boost investors’ confidence in the stock market, we need to attach premium on the economy and defuse political tension, continue to improve on the ease of doing business and invest in infrastructure. The government should use fiscal incentives to attract companies to list on the stock exchange as well as reward already listed firms through government patronage and preferential business access. This is because more listings will help the stock market better play its role of wealth creation in the economy. It is my expectation that the recent issues MTN Nigeria is having with the authorities do not put a stop to the company’s plans to be listed on the Nigerian Stock Exchange. Undoubtedly, widening the retail investor base would help to de-risk the market and detach it from the apron-string of foreign investors. This will require a great deal of education efforts including developing financial markets courses in secondary and tertiary educational institutions. Finally, the government should intensify efforts at implementing the 2018 budget particularly directing capital spending at the growth-stimulating sectors of the economy in line with the Economic Recovery and Growth Plan.



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