Nigeria’s external reserves at over $40 billion, one of the highest in Africa and sufficient to finance over 10 months of imports, is considered healthy.
Olakunle Olafioye
Nigeria’s first Professor of Capital Market and the Head of Banking & Finance Department at the Nasarawa State University, Keffi, Prof Uche Uwaleke, has harped on the need for politicians to make issues around job creation and poverty alleviation the focus of their campaigns in the interest of the capital market and the economy in general. He spoke on other national issues as they concerned the capital market.
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Let’s get your take on the economic performance of the Buhari administration so far?
If we go by the performance in key macroeconomic indicators, the journey is still far. Real GDP growth rate is still weak and fragile and well below the population growth rate of about three percent. The 2018 Q1 and Q2 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 percent compared to 2.11 percent in Q4 of 2017. Recall that it was 1.95 percent 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. This was despite the fact that crude oil price in the international oil market maintained a steady rise over the period. Headline inflation rate is still in breach of the CBN’s upper band of nine percent, which explains, in part, the reason the MPC is hamstrung in bringing down the policy rate. We do not have an up to date figure on the unemployment rate in the country, a situation the National Bureau of Statistics blames on poor funding. The most recently published relates to the third quarter of last year, which put the unemployment and underemployment rate in the country at about 40 percent. This is high by any standards. The public debt burden has manifested more in the debt service to revenue ratio, which is becoming unsustainable. It does appear that the FG is beginning to be concerned about mounting public debts with its plan to reduce borrowing next year. The implementation of the ERGP, the government’s economic blueprint is progressing at a very slow pace, no thanks to avoidable budget delays.
The negative impact of budget delays cannot be overstressed, especially on an economy that exited a recession not too long ago. It did not come as a surprise, therefore, when the IMF recently cut the GDP growth projection for Nigeria from the earlier 2.1 percent to 1.9 percent. What all these simply say is that with respect to rebuilding the economy, there is much work to be done. To be fair, the present administration has done some groundwork in the area of getting the economy on a growth path. The efforts of the CBN in stabilizing the forex market should not go unnoticed. One can equally point to the successes recorded by the Presidential Enabling Business Environment Council including the Focus Labs conducted in key sectors of the economy. Nevertheless, a lot still needs to be done and this requires speed. The government should leverage on the current favourable crude oil price to diversify the export base of the economy and ensure macroeconomic stability conducive for capital flows.
Talking about macroeconomic stability, don’t you think the new minimum wage being demanded by labour will increase inflationary pressure and make this difficult?
I do not think so. The fact is that real wages have dropped drastically in Nigeria since the N18,000 was arrived at if you take into consideration the trends in inflation and exchange rates in the last couple of years. The talk about inflationary pressure, for me, holds no water. Any spike in inflation rate as a result can only be the immediate response which will fizzle out in the medium term. By the way, it is clear from quarterly reports of the National Bureau of Statistics that inflation in Nigeria is more of cost-push than demand pull. Key inflation drivers have been identified as high cost of transportation, power and so on. Therefore, the solution to low inflation environment is fixing infrastructural bottlenecks to reduce the cost of doing business. The growth in GDP is still weak due in part to weak aggregate demand and, therefore, one way to stimulate the economy should be by implementing the new minimum wage. Given the continuous decline in economic activities evidenced by sliding GDP growth rates and relatively low inflation rate, the economy can absorb the new minimum wage. I also think the Federal and state governments can foot the bill if only they get their spending priorities right.
So, I do not buy the idea that implementing the new minimum wage will have a knock-on effect on macroeconomic aggregates. On the contrary, it will have a positive impact on the financial markets and financial inclusion.
Recently, there has been the fear that the economy could once again slide into recession just as many continue to argue that the nation is yet to exit recession in the first place. Do you think such fears are justified?
First of all, on whether or not we have exited the economic recession, I would say we have since the second quarter of last year going by the technical definition of economic recession, which is two consecutive quarters of negative growth in GDP. The current apprehension regarding a possible relapse of the economy is coming against the backdrop of the downward trend in real GDP growth recorded in the first two quarters of this year. The resurgence of inflationary pressure and depleting external reserves are also pointers to a weakening economy.
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.
You just mentioned depleting external reserves as one of the signs of a weakening economy. This is one developments that is currently giving the CBN a lot of concerns at the moment. Why do you think this is so and what impact is it likely to have on the ordinary man on the street?
The CBN has reason to worry over depleting external reserves because apart from helping to meet international payment obligations, it is the country’s buffer against external shocks. The reserves empower the Central Bank to intervene in the forex market and maintain exchange rate stability. It is important to note that the IMF recommends three months of import cover as a minimum benchmark for reserve. Nigeria’s external reserves at over $40 billion, one of the highest in Africa and sufficient to finance over 10 months of imports, is considered healthy. The CBN is obviously worried by the recent downward trend in the country’s external reserves largely on account of the exit of foreign investors being lured by increasing returns in the US. The ordinary man in the street should also be worried by this development because if the reserves continue to go down and the CBN is unable to supply forex, the exchange rate will shoot up and given our import-dependency, prices of commodities are bound to hit the roofs.
What then should the CBN do to halt the decline in external reserves; do you think the Monetary Policy Committee of the CBN should increase the Monetary Policy Rate to attract foreign investors and boost reserves?
I do not think the CBN should discontinue the interventions as some have suggested. While the latest onslaught on foreign reserves may be due partly to influences beyond the control of the CBN, it should remain committed to ensuring stability in the forex market through adequate liquidity. With inflation rate once again on an upward trajectory, abandoning intervention in the forex market in a bid to conserve external reserves will be detrimental to its primary mandate of maintaining monetary and price stability.
Some economic experts have been calling government’s attention to the economic dimension of the ongoing politicking in the country ahead of the 2019 election. What impact will the coming elections have on the nation’s economy?
The impact will depend on how the entire process is handled. If you have been following the commentaries on why the stock market has been on a downward trend, especially since the beginning of the second quarter of this year, they all boil down to increasing political tension. The fast pace of foreign reserves depletion I spoke about earlier also has a lot to do with it. There seems to be a consensus of opinion that the increasing political tension, more than any other factor, is to blame for the bearish stock market trend. This is despite the favourable crude oil price and relatively good corporate results. So a great deal of effort must be made by all stakeholders to reduce the political risk, which is making both foreign and domestic investors shy away from the market. Judging from our recent history, government spending usually goes up in an election year, which tends to fuel inflation rather than spur growth, suggesting that the extra public expenditure ahead of polls is largely wasteful. This narrative has to change. If the public is clamouring for low interest rate regime that lowers cost of doing business and boosts credit to the private sector, then unproductive spending that aggravates inflationary pressure must be avoided else the CBN is constrained to tighten monetary policy. The government must not allow the economy take the back seat in the coming months. Nigerians and indeed the international community require constant assurances that the economic policies of this administration, especially in relation to infrastructure development, job creation and poverty alleviation would remain on track and not sacrificed on the altar of politics.
