Devaluation hasn’t helped us in the past—Nwosu

Mr. Emma Nwosu, former Managing Director, ACB International, has had extensive work-experience in both the public and private sectors of the Nigerian economy. He was a field assistant in rural economic survey in the National Bureau of Statistics (formerly Federal Office of Statistics). He was also a senior lecturer for 10 years before spending 17 years working in virtually all departments of the banking sector. Mr. Nwosu who is presently a business, research and training consultant in this interview with FELIX OLOYEDE speaks extensively on the Nigerian economy and the financial sector. 

Excerpts:

The economy didn’t do well in 2015. What is your outlook for 2016?

When you enter into a recession you should battle to avoid a depression. But it would take a while. The slide has begun. It is like going down a valley. You have to manage it like a car that has lost its brake until it gets to a stop. It cannot be automatic because the brakes are not working. So, the economic outlook for 2016 would be rough, particularly for the first and second quarters. What has happened in the last two quarters would likely continue with the decline in crude oil price.  But if the government is astute and Nigerians wake up to the danger ahead, we can struggle to put a break to it by the second quarter and we will begin to stabilize by the third quarter. But generally, 2016 will be a tough year economically.

What is your assessment of the 2016 budget?         

For the first time we have seen a budget which has a significant component of capital expenditure. However, if you look at the recurrent expenditure for 2015 and the recurrent expenditure for 2016, the difference is not much. I expected a drastic cut of recurrent expenditure. The capital expenditure should be about 50 percent. There is not yet a significant reduction in recurrent expenditure. There are things that I expect the president ought to have done that he has not done. His domestic expenditure is still very high compared to that of former President Goodluck Jonathan in terms of running the State House, feeding and other entertainment expenditure. The presidency is maintaining a very large fleet. In some countries, the presidency does not even have an aircraft. The president travels by commercial airline. I have no problem with the president having a fleet, but not such a large fleet. The president ought to do more things that would assure the masses that he is with them. It is not just by words of mouth. The general quantum of recurrent expenditure has to be deflated down by 2017. The recurrent expenditure is still high; it has to be knocked down by another 20-50 percent, so that capital expenditure can go up to at least 50 percent.

President Buhari during his media chat reiterated that he has not seen the need to devalue the naira. Do you share his view on the continued defending of the currency? 

We have to take historical review of the devaluation of our currency in the past. Truly, it has never helped us. So, when the president said he has not seen reason for devaluation, I believe he was reflecting on what devaluation had done to us in the past. To a large extent, devaluation would help an economy that is diversified and has a significant number of products to export, because when you downgrade your currency, your products become cheaper to those who want to import them from other countries and the demand for your products would rise.

Devaluation may also help when demand is elastic. But it is not so in our own case. We are largely import dependent and the demand for these imported products is mostly inelastic. They do not respond significantly to change in price. So, when we devalue, we are seemingly cheating ourselves because our imports become very expensive, whereas we have no corresponding export. And largely I agree with the president on this.

There are a lot of cultural revolutions that need to take place in this country before devaluation or other measures can be effective. We have to change our worldview and way of life. We have to turn our raw materials to intermediate or finished products, so that we can earn significantly from them. We have to have the mind-set of independence. Everyone today is dependent on what he can get from oil proceeds. They all go to Abuja and share and return to their states to pay salaries and share the reminder. Nobody is talking about what we can do to be productive at individual, local and state levels. We can only talk of progress in this country if we decide to change our mind-set from that of dependence on oil proceeds to one that adds value to our natural resources. And part of the problems has to do with the structure of the federation. There is need for fiscal independence of the component states or region, so that each of them can look inwards for survival. If a state or region is internally independent and what it gets from the centre is just an addition, then we can then devalue our currency and make gains.

To a large extent I agree with the president that we should not be in a hurry to devalue our currency. This devaluation pressure is coming from external forces that have led us into one treaties or the other that have opened our borders and make us to follow their own system whereas the cultures are quite different. If you devalue the dollar, euro, pounds or franc, within a short while you will see the impact. They would sell more cars, electronics, drugs etc. in a short while. If you change interest by just one percent, you will see the impact. But in our case, there are a lot of obstacles that do not make response to monetary and fiscal policies not to be prompt as they would be in Europe or America. Until we change our culture and remove these obstacles, these policies these people hawk about may not be of much benefit to us. The naira came from 60 kobo to the dollar, now we are talking N200 to the dollar. Since 1986 that we started devaluation we have not gained anything in terms of economic wellbeing or prosperity.

Are you saying you disagree with the belief that Nigeria may be the next oil producing country to devalue her currency?

They are only telling us what they feel. We should look at our own situations and know what to do. To a large extent, I agree with the central bank’s measures so far to manage the demand for dollar. We should not easily succumb to the pressures from the advanced countries, because what benefit them may not necessarily benefit us, because it doesn’t work in our system the way it works automatically in their system. Because they have grown over the years in their economies, they think it would work like that in other economies. But it is not true. The circumstances are different, the cultures are different.

The implementation of the stoppage of COT has kicked off this January. How do you think this would impact on the bottom-line of banks? 

You know COT is a significant line of income for banks. If it goes, banks would lose that line of income. However, in many other countries, customers are not charged COT and they still do very well. Banks should now look into corporate finance activities where they would earn fee income. They should increase their lending where they would earn interest income. And they still have commissions here and there for transfers and other operational activities. For banks to retain their profitability profile, they have to also manage their operational cost, because they are frivolous as the government especially at the senior management level. There are several services they have to outsource, there are services they have to combine and there are several allowances they have to review if they want to maintain an acceptable profile of income for shareholders. Yes, COT is gone, but it would impact so much on their income if they become creative and manage their cost profile.

Do you think banks would be able to make as much profit as they used to declare?

Their profitability would be impaired initially, because they are adjusting to the changes that have been made. First of all, public sector funds would not stay long with them anymore, because of the Treasury Single Account. Any money that is lodged in any bank would have to go to the reservoir account within a particular time limit unlike before. Government would get more interested in the collection system of the banks to ensure that money is not sitting in the banks. So many will happen that would jolt the banks initially, so their profitability suffers in the short run, but they would recover and find ways of making up for the lost income. Generally, at the end of the year, we may see a shrink in both balance sheet and profitability. But with good management they are bound to recover within the year next.

What is your assessment of the visit of the IMF president, Christine Lagarde?

It is good that she visited. It shows a measure of solidarity and the importance of the country that the president of the IMF had to come down to Nigeria to discuss the economic condition of the country. And she made it clear that she did not come to offer or discuss a loan. And she was optimistic about our economy based on the discussion she had with the presidency and the economic team.

One of the advices she gave was that the government should increase VAT rate which is one of the lowest in the world. Do you share her view?

I do. It is one of the things we can do in the short term harmlessly. VAT is consumption tax. If you consume you pay, if I don’t consume I do not pay. So, it is very appropriate that VAT should be increased.

…But don’t you think this would worsen the situation of the masses, knowing that electricity tariff would soon be hiked and the government is planning to reintroduce tollgates?

Something has to give. Government is facing a very serious situation. We cannot tie government hands and legs and say don’t do this and that. How are they going to solve the problem? These are the less harmful ones. It will only make people to be more prudent. If you want to buy something you would be more careful. They would not place VAT on yam, beans or gari. They place VAT on things that are tending towards the luxury end. So, I will be prudent when I am going to buy things that are VATable. The same thing applies to tollgates and others. People are bound to be more prudent. Government has to raise revenue from somewhere to make up for the loss in oil revenue.

However, government should lay more emphasis on expanding the tax net, because I can tell you that so many taxable adults, taxable entities today are not paying tax. If government can put together the biometrics of the Bank Verification Number, National Identity Cards and driver’s licence and other electrically identifiable sources of taxable citizens, you will see a quantum jump in income tax revenue. And if you add that to increase in VAT revenue, we may be making progress. So, I am in support of the increment of VAT, but more desirous of government to get more entities and citizens to pay tax, no matter how little the amount they are paying. 40 percent of our population is taxable. If 70 million Nigerians pay N5000 averagely as tax, you know what it will come up to. So, government should look critically at the tax structure. But not in a way that it becomes a disincentive to businesses. I am not talking about multiple taxation or undue increase in income tax, but expanding and getting more people and entities to comply with tax.

Banks are insisting that customers who want to receive international money transfer must have a bank with them. Is this right?

I think this is in order. It helps in the international operations aspect of that transaction. It is a fair demand by the banks. If I am to receive money via Western Union or Moneygram, it should be through my home bank, because if the banks are to convert to naira before paying to me, the dollar will be in its own position. Banks are also trying to protect their own businesses. It would impact positively on the vehicle bank and it will also ease the international aspect of the remittance of the bank at which you are discounting you inflow.

The stock exchange has continued to head southward. Is there any likelihood it would pick up in the near future?

The stock exchange is a reflection of the real sector. Two of them go hand in hand. It is also the other side of the money market. The financial sector is a one long continuum, beginning with money market at the short end and the capital market at the other longer end. So, if you look at the volatility of the money market today, this is characterized by high risk with high exchange and interest rates. When rates are high, the capital market goes southward. When rates are low, the capital market goes up normally. Also, when the real sector is buoyant, the capital market goes up. When they are in recession, the capital goes down. And in time of economic hardship you should know that more people would be selling their shareholdings. So, it is not a matter of what do you expect, it is the matter of the direction of the economy. Since we are expecting a tough year, one cannot predict that the stock market will go up. It is inconsistent. One can predict that the capital market will stagnant in the present economic condition that we find ourselves. It is bound to pick up as soon as the economy reaches a level of stability.

Which side of the divide do you belong to: should fuel subsidy go or remain?

Government is in a very tough situation.  It is just trying to play safe with the subsidy issue by trying to avoid antagonising the masses and the same time release the burden of recurrent expenditure by adopting the modulation pricing system. Now, crude oil price is low, the final price of PMS and other petroleum import is bound to be low. By modulation the government is saying because of the condition we find ourselves, we can live with a lower price, but should things change tomorrow, we will adjust. It means that the price of fuel will be going up and down based on the delivering cost. It is a middle way between removal and retention of subsidy. It is the best the government can do now. I do not want to hear removal of subsidy, because it will affect everybody. Subsidy removal will increase inflation.

Lagarde warned the country against obtaining loans, but the Federal Government has stated that it will be financing part of the budget with loans. What is your take on this?

We have an expansionary budget, which is aimed at stimulating the economy. That is why you have a significant component of capital expenditure. In a typical expansionary budget there will be a significant loan portion. Expansionary budget means you are stretching yourself to get certain things accomplished that are very important for your future survival. I believe Lagarde was referring to loans from Britonhood institutions. Government did not tell us that it would be borrowing from IMF or World Bank. Lagarde cannot tell us not to borrow and remain small. If you don’t borrow to finance capital expenditure, you will remain small. But if you borrow to finance critical projects that have the potential of generating revenue, you are better off. I don’t think she is protesting the loan component of the budget; she may be looking at external borrowing.