Nigeria’s investment climate is still very risky — Dr Bongo Adi

Dr. Bongo Adi, is a senior Economics lecturer with Lagos Business School, who has led various collaborations on research, case studies and stakeholder engagement with various government agencies including ICRC, NERC and several ministries involved in PPPs. He is a renowned public commentator on the Nigerian economy and has consulted for the World Bank, UNCTAD, JIRCAS, JICA and UNU.  In this interview with FELIX OLOYEDE, he assesses the impact of the Central Bank of Nigeria’s (CBN) adopted float management system of the foreign exchange market and why the stock market may not rebound anytime soon. Excerpt:

There is now increase in crude oil prices and the relative stability in the Niger-Delta, how have these impacted on the value of the naira?

If we start from the premise that the fall in the value of the naira against the dollar in the past one and the half or two years is as a result of dwindling oil revenue, then it follows that the value of the naira would appreciate as the oil revenue increases. How far has the recent positive appreciation of the oil price rub off on the naira? It is still very modest. The naira over the last two and a half years has lost over 70 percent of its value.

Similarly oil price dropped, because after getting to over $100 per barrel, it crashed to below $30 per barrel. Now it has appreciated by about 50 percent. What we can say is that would bring in the much needed foreign exchange into the system. There would be a bit free flow of dollar, which would alleviate the current supply constraint that we have witnessed in the market. To that extent, yes, the naira would be positively impacted by this development.

What is your assessment of the float management policy which the CBN adopted in the running of the foreign exchange market?

The fact that you are still encountering supply constraint in the dollar market in Nigeria shows that the floating system has not really addressed the problem. Before the CBN adopted the float management policy last year, the exchange rate was almost N400/$. Analysts have suggested that the naira should be floated on the FMDQ system to allow people trade forward, futures, and swaps. That should somehow alleviate hiccups in the foreign exchange market. After that initiative the naira continued to depreciate to a point that it got to N500/$. Instead of appreciating, the naira depreciated. We also noticed that there is still scarcity in the market that seems not to have solved the problem.

Autonomous sources that we thought could have helped that system has not materialized because of the macroeconomic headwind in the country. The implication of this is that foreign investors are still weary of the situation and the fact that the cost of doing business in Nigeria has not been very clement.

The issue of multiple foreign exchange markets has been a major challenge in the country. What do you think the CBN could do to ensure we have a single forex market in the country?

Let us understand why we have multiple foreign exchange rates. Understanding that would help us to be able to suggest what the CBN could do to harmonize the various markets. The problem is that though the CBN claims it is running a managed floating system, the rate at the interbank market is fixed, oil marketers rate is fixed, the rate pilgrims get the dollar is fixed. This is a big challenge. Perhaps what comes closest to the real value of the naira is the BDC rate and what you get from parallel market, which is determined by the market forces. This is a big problem.

It creates stringent situations for market operators, for people who demand for foreign currencies. If there is any way you can get it from the interbank market, fine. But if you must get it from the BDCs, let it be at the market rate, which seems to reflect the true value of the naira.

So, the Central Bank is caught in between two things. They are struggling to contend with the parallel market devaluing the currency. They would want to ensure that the naira does not depreciate any further. They have to defend the currency. If the naira continues to depreciates, that would affect government projections. It has been a very difficult battle for them. But at the same time, they have to allow the naira float. They have to be realistic and pragmatic. Though it may harm the system in the short run, at least, people who have to import things can have access to foreign exchange.

The stock market has lost a lot in the last one year. With the seeming hope that the economy would improve this year, how would this rub off on the exchange?

We need to look at the basic economic parameters, what has changed between last year and now? Let’s look at interest rate, inflation rate, foreign exchange rate and economic growth rate. Have these rates been improved? Is anything that tells us that they are no longer a threat? My answer is no. Government has done its best, but I don’t think that is good enough, because it has not been able to restore investors’ confidence in the economy by the range of policies it has introduced. And the way they have been going about it.

To a typical average investor, the investment climate in Nigeria is still full of uncertainty. The growth projection by IMF is about 1.1 percent, which is anchored on the strengthening oil prices. If you look at the last inflation figure, it is still very high. You are talking of single digit inflation to double digit- almost 20 per cent inflation rate. That is just the official inflation figure. If you are a businessman and buys things from the market, you would know that the prices of goods have tripled and even quadrupled. It means inflation for even staple goods is more than 100 percent.  That has eaten deep into people’s purchasing power and shrunk their disposable income.

As that happens we begin to understand the implication it would have on development, because for these goods people can’t buy, meaning that factories are full with inventories. Then you look at the Purchasing Power Index, it is in the lower half. When you put all these things together, the investment climate is not less risky. In the first and second quarters, you would see some significant and noticeable change in some of these variables. It is hard to say things have changed or we are going to experience positive development in the stock market.

The Senate decided to review the oil benchmark for the 2017 budget from $42.5 to $44.5. Do you support their decision to adjust the benchmark upward?

We have to look at where we are coming from. We are doing a benchmark of $20 sometimes ago, when oil price was doing well above $80 or $100. From there it came to about $30 and to $40. Everything is oil. It shows we have no plan to diversify the economy. But I can understand the senate, because it is aimed at reducing the debt overhang. The larger the amount you borrow, the larger the amount of your debt-servicing obligation. So, I can understand, perhaps to reduce debt-servicing obligations. That would help reduce government budget deficit. It would also help reduce the crowding out effect that we have when government compete with private sector investors for funds in the money market.

Right now, the Treasury Bill is selling for about 17-18 percent. That tells you that government is borrowing heavily and creating incentives for everybody to go for its instrument. That takes money away from the private sector. If the TB is 18 percent, what do you expect other interest rate to be? If they did that to reduce government deficit, from that we would have positive effect on the interest rate generally. So, the cost of borrowing should reduce. So, I go with the senate on this.

Do you think it is right for the government to borrow up to $30 billion?

I don’t know of any country that can do without borrowing; especially, cheap money is good. It depends on what you are going to do with the borrowing. If the borrowed fund is put in infrastructure and other critical needs, then, that is justifiable. But if you are borrowing to pay salaries and consumption that is the problem. I don’t even have problem with borrowing to pay salaries in the short term, because there are still capital components in salaries. It is from salaries that workers pay schools, which is human capital spending.

It is from there they pay hospital bill, which is also human capital spending. I think we have the capacity to borrow given our debt-GDP ratio. Nigerians have lived through the period where they never feel the impact of borrowed funds. So, we accumulate a huge amount of debt for future generation, these debts are not used for things that would bring development. We have cases where a government towards the end of their tenure would go to the capital market to issue bonds for infrastructure, but everybody knows they are looking for a package for themselves. They take this money and disappear and leave the debt burden on the state. I think this is what we need to put structure in place to control. So, it is not just borrowing for borrowing sake. What are you going to do with the money?

Do you think the economy blueprint would bring the needed change in the economy?

A government that has been running without a blueprint for two years, you don’t believe whatever they say. I think they released the blueprint in response to the complaint of some people that they can’t see the direction this government is going. It is not about bringing out the blueprint. The blueprint should be read from your budget. Last year’s budget came short of having economic direction. It was just 10-0-10. If you look at the budget, you should know where the interest of the government lies. But we can’t just see it!