Johnson Chukwu, Managing Director, Cowry Asset Management Ltd

The Nigerian economy has been struggling with many headwinds this year, which have stunted growth, as the government tries different measures to stimulate growth. Mr. Johnson Chukwu, Managing Director, Cowry Asset Management Limited in this interview with FELIX OLOYEDE, x-rays some of the efforts of the President Buhari administration to prevent the economy from slipping into another recession. He also looks at the state of the economy before the coronavirus pandemic. Excerpt:

The IMF predicted that Nigerian economy may contrast 5.4 per cent this year. Do you share this view?
It is almost a certainty that the economy will contrast this year. The magnitude is at the point of conjunction. The IMF had earlier said it will contrast by 3.4 per cent and it has escalated it to 5.4. The basic thing is that we know most economies will contrast this year. The second quarter has been lost in most countries and we are almost approaching the third quarter of this year, still the economy has not normalised. In a country like Nigeria we have not actually plateaued when it comes to the coronavirus infection. We are actually seeing more community infections.
So you could actually see a further slowdown in economic activities as a result of the health impact of COVID-19, which we have not really seen much. Other factors that may work against Nigeria are the expected contraction in the oil and gas sector, because the oil and gas revenue helps to lubricate the entire economy. Today Nigeria has committed to 1.4 million barrels per day oil output based on the OPEC+ cut. Compare that with that of last year when we produced about 2 million barrels per day and oil price was about $64, this year we are looking at about $40-$42. And we are not sure that price range will be sustained throughout the year. If there is a shortfall in earnings, then it will have a direct impact on lubricating the entire economy- on financing trade, raw materials and equipment and several sectors of the economy.
I want to believe that their projection is based on some of these assumptions. Like I said, these are still conjectures. Nigeria has some economic dynamism that one must recognise. And coming from the fact that about 23 per cent of our total GDP comes from the agricultural sector and the agricultural sector grew by about 2.2 per in the first quarter of this year. If we have a favourable climatic condition, we could see further growth in the agricultural sector. Remember that the agricultural sector in Nigeria is not mechanized – it is subsistent; so it is largely dependent on weather conditions.
The other side of it is that we have actually seen a growing telecommunication sector. Telecommunication has actually grown to account for about 14 per cent of the GDP. In the first quarter it grew by about 7.65 per cent. We should expect a faster growth in the telecommunication sector. Between telecommunication and agricultural sectors, we already have about 37 per cent of the GDP. If both sectors show a strong growth, they will moderate the contraction in other sectors.

How far do you think the N2.3 trillion stimulus plan of the government would go in reflating the economy?
If you look at the size of the economy and consider the fact that of the N2.3 trillion, N1.1 trillion is coming from the Central Bank intervention fund – unstructured funding. We know that only N50 billion is going to small and medium enterprises and households, N180 billion is supposed to go to the health sector, and about N1 trillion to other critical sectors of the economy. So what I think is that if you consider the fact that the small and medium enterprises account for about 50 per cent of the country’s economic activities, I do not think the N2.2 trillion will have so much impact in reflating the economy.
But anything is better than nothing. I want to believe that it is a better way of having something to stimulate the economy. I think given the size of the economy, given the severity of those sectors that are badly affected, the economy may need much higher than the N2.3 trillion to stimulate it. Then, of course, the economic sustainability report recommended that, that was why they said they said if they have the wherewithal they will put in N3.6 trillion and the economy will contrast by 0.4 per cent, which unfortunately we don’t have the wherewithal to do that.

Some people believe that the Nigerian economy was already heading for the rock with, or without a COVID-19, because they believe spending about 60 per cent of government revenue to service debt was going to impact the economy negatively. What is your take on this?
Well, we know our growth has been precarious. We saw only 2.27 per cent in 2019, and as for our inflation, we have reversed the decline we had in 2019. So, with the GDP at 2.27 per cent, we know that you can slip to a negative. And we also know that apart from a few sectors of the economy, the rest were growing at a very weak rate. Apart from the financial services sectors which grew by 24 per cent, the telecommunication sector that grew by 7.6 per cent and the oil and gas sector that grew in the first quarter of this year; most all other sectors like trade contrasted, the manufacturing sector only grew by 0.12 per cent which was also precarious. We have always known that ours is very precarious one. Anybody who understands economic issues, will know that should there be a major shift that the economy tips back to a negative. So it wasn’t a surprising thing to us.

Do African countries need debt forgiveness going by the fact that not long ago, during former President Obasanjo’s tenure, the Paris Club forgave us some of our debt? Now, we are back in the trenches.
Well, what I want to say is that today a lot of African countries need support in the form of debt forbearance. It may not be debt forgiveness. I doubt if anybody is going to give any African country debt forgiveness. What they are offering is to give African countries a moratorium on interest payments on these loans for some time. What they are planning to do is to suspend it for this year. In some instances, they are suspending it for 2020 and 2021. The key thing is that when you talk about debt forgiveness, they often come with some conditions. These conditions are to ensure that you don’t go back into the same situation. So, I don’t know if any country is offering to forgive Africa its debt.

The CBN said it is working to unify FX rates, do you think it can achieve this now, having been on the unification of the FX rates for a long time?
I don’t think there was any structural bottleneck that stopped them from achieving it earlier than now. It is a matter of policy decision. Once decision is taken it doesn’t take anything to unify the exchange rate. Of course, we know the implications of that. The issue we have is to deal with those implications, which include expecting a higher inflation rate. You’re going to see higher exchange rates, higher prices in areas like petroleum products, because you have to now import them with new exchange rates. And we know the political impact of some of those changes in prices. So I think that’s what that has constrained them. It’s not that it’s such a difficult thing to do.
We also know that the long to medium term benefit of such harmonization will outweigh the short term pains that will emanate from such harmonization. We should expect a lot more investment coming into the country. We expect Nigeria to become an international investment destination. We need a lot more foreign capital. And today our capital acquisition process is weak, given the wide gap between supply of fiscal infrastructure and the demand, there is a need to attract capitals outside this climate, environment, to support some of these critical sectors of the economy. .

We saw the equity markets go for days on the negative trend. What is responsible for this new downturn?
I don’t think anybody should worry about what has happened in the past one week or so in the equity prices. You have to actually deal with the fact that close to three weeks, we saw rallies in the equity market. Sometimes people will have to take profits. I don’t think the losses have in any way outweigh the gains that have been made prior to when the losses set in. So some of them could be market sentiments, some of them could be profit taking; there are several factors that could be responsible, but I don’t think there’s any fundamental shift in the economic structure that is leading to market losses. It is basically sentiments and profits-taking. Because sometime when you look at those most active stocks gaining on alternate days, it is an indication of profit-taking.

Banks recently approached the CBN that they want to restructure about 33% of their loans. How would this impact their bottom line at the end of the year?
Clearly, it will have a direct impact on the profit and loss account, because if you restructure a couple of things what it will do is that you have a longer repayment term. The key thing is that in some instances you may accept a lower interest rate for the customers to be in a position to repay. In effect, it will have a direct impact on their bottom line, on the profit and loss of the banks; and to some extent on their liquidity.
Well, the banks are very, very strong now, and I don’t think that will lead to any material shift in liquidity, because what you’re going to see is that the cash flow expectation from some of these loans, because it will have to be lengthened. Well, I don’t think it is going to have any classic impacts on the banks. Yes, it will lead to some reductions in interest income, some reduction in fees income, because you are not turning over these funds as quickly as it should.

Finally, the economic management team set up by the president has spent over a year. How well do you think they have fared?
I think it is too early to call. But we are seeing some sound-bites that indicate the orientation of some of the members of the economic management team. Issues like trying to harmonize the exchange rates sound like the sound bite of the economic management team. Issues like the removal of petroleum products subsidy sounds like sound bite from the economic management team, including the plan to concession about 10 highways. So, I will say that there are sound bites that indicate that somehow the government is beginning to them.

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