Dr. Boniface Chizea is the Chief Executive Officer, BIC Consultancy Services. A top notch Economist, former banker and financial analyst, he believes the Central Bank of Nigeria (CBN) has responded well to the economic exigencies of the times in Nigeria based on the environmental challenges.
In this interview with Okey Onyenweaku of Business Hallmark, he said the country certainly has a long, tedious and rugged road ahead of us in tackling the economic challenges.
Crypto-currency has been officially banned in the financial system by the CBN, when China, the future leader of global economy, is making it a legal tender; are we going in the right direction?
This is not a case of whether or not we are going in the right direction. The Central Bank simply responded to the exigencies of the moment; exigencies of now in its reaction. We have a situation which is known by all of us that the monetary authorities are losing the battle against inflation as it has been on a rising trend for the past several months no thanks to the add on by food inflation due to the recent ill-advised border closure. There is also the fact of flight from the land by farmers due to the worrisome activities of the herders, kidnappers and general insecurity to life of the average farmer.
Inflation at above 15% is inimical to the good prospects of the Nigerian economy and this is against a target rate of inflation of six to nine per cent set by the monetary authorities. Also, the exchange rate of the Naira is on a free fall, due to demand pressure enabled by excess liquidity in the system and pent-up demand. But the fact of the excess liquidity is not in itself surprising since because of the pandemic and consequent lockdown economic activities have ground to a halt, unemployment has risen, worsening the misery index in the land.
There has therefore been resort to the adoption of palliative measures which to a large extent has simply meant ways and means finance; injection of raw cash into the economy. It is therefore, saying the obvious to observe that the Central Bank as it were has had its job cut out for it. And then for an alarm to be raised to the effect that between 200 to 300 million dollars per week is entering into the economy through the instrumentality of the digital currencies; the Central Bank did not have any options but to take the drastic measures it has reeled out.
Remember also that we were told that this information was passed on to us by no other body but the Federal Bureau of Investigation. But the jury is still out regarding the prospects of the digital currency as a viable medium of exchange as could be gleaned by the mix fortune and varying degrees of reception and acceptance it has been accorded even in developed economies. At the best, the most generous thing to say about the currency is that its future remains uncertain mainly due to the extent of speculation that has defined its operations so far, the lack of centrality in its operations and lack of an ascertainable central regulatory authority to take responsibility.
The CBN seems to be in a dilemma over the right policy mix to save the economy; for instance, interest rate, inflation, forex conflict. How will it be resolved?
Managing the Nigerian economy has been a veritable nightmare. The operations of the economy to a large extent defy textbook prescriptions. We and also all knowledgeable stakeholders must empathize and show some understanding for this dilemma which the Central Bank has to perennially grapple with. For instance, we were informed that the troika of interest rates, inflation rate and exchange rates are never to be tackled at one and the same breath. But what do we have in Nigeria?
We inject liquidity into the system as we monetize oil proceeds and then have resort to also having to regulate this liquidity as we are pressured to regulate demand. And the instruments for the regulation of liquidity in the system are hard to come by as the Open Market Operations have all but collapsed as a result of negative interest rates on fixed income securities particularly in this pandemic environment. But as is becoming obvious the authorities might as well concentrate on managing the exchange rates as that would appear to be the most impactful on our economic fortunes as a country.
And it is, of course, difficult to manage the exchange rate against the background of pent-up demand due to backlog of remittance trapped within the system, the mixed fortune of the oil market and general lack of autonomous inflow from alternative sources. The fiscal authorities are in a quagmire as they grapple with the problems of fiscal sustainability. We have just been told that the Federal Executive Council has given approval for the Central Bank to increase funding to the government; ways and means that the ratio of debt to GDP should be increased to 40% rising from the hitherto 25% which we are told is still within the prescribed ceiling for countries like Nigeria that are permitted to go up to 60%.
The bigger challenge is debt to revenue ratio which presents existential challenges as we try to manage the economy. Therefore, the Central Bank is challenged as it attempts to maintain financial stability. The fiscal authorities are confronted with the challenge of fiscal sustainability and until we begin to get things right it will unfortunately remain like that in the foreseeable future. Therefore, the apparent lack of consistency is due to the challenge of confronting existential threats to survivability.
The continuing direct intervention by the CBN is disrupting price mechanism and efficient allocation of resources. Why is it an option?
The intervention by the Central Bank is due primarily to the nonexistence of market mechanism for managing the economy. In most cases there is hardly any market and yet economists talk glibly of allowing market forces! Take the foreign exchange market as a case in point and you will appreciate the extent of this dilemma. The Central Bank remains the dominant sole supplier of foreign exchange to the market despite all attempts that have been made to develop alternative sources.
What market is that operates based on supply from one dominant source? The Central Bank often, we do not remember, also has development function attached to its mandate due the particular characteristic of the Nigerian economy. Therefore, when we see the Central Bank extending target funds to sectors of the economy such as agriculture, power and aviation; this is in keeping with what its enabling Act allows the Bank to do. Central banks in developed economies for obvious reasons do not have to worry with this aspect of operations. They are concerned and concentrate on monetary issues.
Banks are still hedging in their lending policy in spite of regulatory penalty. What are the challenges?
Banks in the economy have no choice but to hedge in extending credit. What most people don’t often keep in their consciousness when discussing bank lending is to bear in mind always that the banks have no money of their own to lend. The money they lend to us belongs to depositors which is payable on demand. And because banks not being Ponzi scheme operators must be risk averse. We must also remember that banks make sustainable profit to the extent that they extend good credit.
So yes, regulatory guidelines often prudential are there to contend with but the challenge which banks confront is finding viable credit propositions. Often in view of the risk inherent in lending banks prefer to pay the penalty of not being able to meet regulatory guidelines than go into a credit relationship which it is clear ab initio is going to be a bad credit.
The expectation is that more viable proposal would be thrown up as we achieve an overall improvement in our economic fortunes. Banks would be lining up in their numbers to lend to Dangote and others like him, for instance, because he represent a good credit risk any day.
The forex rate has defied solution. Why is it so? Would you support redenomination as a solution like Ghana did a few years ago?
I am not aware that the Ghanaians used redenomination to fight deteriorating rate of exchange. Redenomination is a strategy to reduce the quantum of units of your currency as they exchange with that of third parties. It does not have any direct impact on either the exchange rate or the rate of inflation in any economy. The solution to the problems of the Nigerian economy are known to everyone and will be found as we boost productivity within the economy, begin to consume what we produce as a nation as well as attain an overall diversification of the economic base.
So simply, I do not think that redenomination has any role to play as we search for appropriate mix of policies to enable us come to terms with the existential dilemma of currently managing the Nigerian economy. The management of the rate of exchange has defied solutions simply because we do not have autonomous sources of foreign exchange inflows; we have been challenged with sustaining macroeconomic stability and we have not been able to re-orientate our consumption pattern to align with our natural endowments. We most certainly have a long, tedious and rugged road ahead of us in this regard.