Dr. Rislanudeen Muhammad, a Harvard trained economist and former Acting Managing Director/CEO, Unity Bank and now the Chief Executive Officer, Safmur Investments Limited in this interview sets an agenda for the newly appointed Minister of Finance, Mrs Kemi Adeosun.
Muhammad also spoke on how to avoid the impending recession, the Treasury Single Account, the real sector, devaluation of the Naira and other issues as they affect Nigeria’s economy. Excerpts
What agenda would you like to set for the new Finance Minister?
It would be a difficult job for the minister. The first thing the minister would do is to sit with the Central Bank of Nigeria Governor and ensure synchronization of the fiscal and monetary policy. The two must go together. The minister must ensure government policies are implemented and jobs created. Youth unemployment is a time bomb.
In case the 2016 budget is not signed into law early, don’t you see the economy grinding to a halt
in the face of the Treasury Single Account regime?
I don’t want to do a negative prediction. I would want to be an optimist because the budgetary preparation has commenced for some time now. So the government has not been sleeping. Government has been working. If they are able to send the budget to the National Assembly immediately, we should have a budget in January. Not having a budget in place in January will be ill-advised because the expectations are high. They can’t afford any further waste of time. If there is no budget by January, there would be a constitutional crisis because there wouldn’t be an approved law to expend resources. You can’t spend without an approval except there would be a supplementary budget.
How can we cut down on recurrent expenditure in the budget?
Government doesn’t need to sack anybody; it only needs to block all leakages. With that, it can conveniently pay salaries and genuine allowances. This way, it won’t have problems with union members and nobody will tell it not to block leakages.
How can Nigeria avoid the impending recession?
It must reduce interest rates and support growth. The monetary policy committee can do that. If the federal government must support growth, the MPC rate must be in single digit, while lending rate should be not more than 13 per cent. We must liberalize the foreign exchange market but put controls on mutualisation. Those who violate the extant laws should be punished. But demand management policy shouldn’t change.
In concrete terms, how do we support the real sector?
The manifesto of the All Progressive Congress is good. Let them focus on agriculture, SMEs and mining. The government should invest massively in infrastructure so jobs can be created. It’s very simple.
As a former banker, would you say the banks are doing enough to support the real sector?
The banks have a Bankers Committee, which always says it supports the government’s policy directive on job creation and the real sector. The answer to your question depends on individual banks. Remember the banks are private businesses; so they invest where the returns would be high. It is the responsibility of government to ensure that the atmosphere is conducive enough for the banks to support growth. If the banks can easily get long-term deposits for five years, they can lend for three to four years. If the deposits are short tenure, the banks can’t lend long-term.
Government’s policy direction can help the banks to support growth in the real sector. I know some banks have become lazy because they could easily raise funds from government and the same government would in turn borrow same money from the banks at high interest. That is why the TSA is beautiful for the government and Nigeria. Surely, the TSA isn’t something that any bank would love.
Why do you think devaluation of the naira at this time of an impending recession is the best way to go even though the CBN and the government are averse to it?
Just recently, the former CBN Governor and now Emir of Kano, Mallam Sanusi Lamido Sanusi, made a similar position saying Nigeria must devalue its currency. You would ask why he didn’t devalue the currency when he was the CBN governor. The explanation is simple: at that time, we had rising revenue position and we had enough foreign reserve to withstand the shocks, but we don’t have now. Don’t forget, we are a mono-product economy. We largely depend on oil to succeed. But in a situation where the price of oil has been going down and you still want to insist on keeping the naira value, it won’t work. There must be a trade-off. The position taken by the CBN is simply not sustainable. What is happening is that the CBN is consistently funding the foreign exchange market by depleting the reserve. For how long would we sustain this? Is the CBN expecting oil prices would go up anytime soon? Are we expecting to support export with this sort of monetary policy? Are we expecting incentives to support exports?
Already there is projection of a recession and whether it will happen, we can’t tell. But what we do know is that for two consecutive quarters, the GDP growth rate declined. We don’t know the third quarter position. Should we close our eyes and say it’s business as usual and it’s sustainable? Inflation is going up. You allow inflation to go up and you don’t alter your interest rates, how do you support production, manufacturing and SMEs? For companies producing in this environment, the cost of production will be naturally high and the retail value will be high so how would they sell? A developing economy like Nigeria needs consistent growth in its GDP for it to run a sustainable economy. Take for instance, India and China; for more than 10 years, their GDPs have grown consistently. So can we sustain the slow GDP growth rate, no! This is not a popularity contest; let’s do a reality check. No one is blaming the present government for the economic woes because it’s not their creation. But it’s the responsibility of fiscal and monetary policy to address the economic challenges holistically without pursuing a populist agenda. Can we sustain depleting the reserve to protect the naira? As at September 30, 2015, our foreign reserve was $30.4 billion from about $35 billion last year. There are about 3000 Bureaux de Change and every week, they are given $60,000, so do the arithmetic. They buy at N197 and sell at over N225. There is round-tripping in the system. Can we sustain the rent-seeking in the forex market where the official rate is N197 to the dollar and the BDCs are selling at over N225? Who is benefiting from the wide exchange rate gap?
If we keep devaluing in a mono-product economy, how would local manufacturers survive? What are the specific gains of devaluing the naira at this time?
If you don’t devalue the currency, how can you appropriately apportion the foreign exchange? Why are you excluding 41 groups of importers from accessing forex? What is the effect on their businesses and jobs?
But didn’t the CBN explain the policy was to engender local production of those excluded products?
Are we ready to produce? What is the immediate impact on jobs? The major campaign slogan of this government is job creation, but will this policy create jobs? How do we support export with a currency that is overvalued? How do you support growth when you can ignore portfolio investors? You can say anybody is a neo-liberal economist or is anti-populist but the truth is constant. How can you, with a wave of the hand dismiss some $3bn investment in your economy in the face of complaints of lack of transparency in the management of the foreign exchange market? These investors gave you a prior warning and you ignored them. Now, Barclays are following the same path with JP Morgan and you ignore them. We can’t operate in isolation of the international system. If our economy is strong, we can determine our exchange rate.
Saudi Arabia can decide to have a fixed exchange rate because they have strong reserves. For Nigeria, this is not the right time for us. The CBN governor was talking of raising taxes, but I don’t agree with him. You can’t tax someone who has nothing. Theoretically, we are told that in a period of recession or close recession, you should increase government spending by investing in infrastructure so jobs can be created and reduce taxes so the burden on the poor can be reduced. But this is clearly not the time to raise taxes.
But the policy doesn’t exclude them from accessing forex at the official rate if they want to import machinery and manufacture those items locally. That’s a financing option, or don’t you agree?
You are talking of maintaining interest at 13 per cent and MPR at 13 per cent and banks’ lending in excess of a 20 per cent interest rate. With the TSA, the banks don’t have as much money and interest is going up, yet the CBN isn’t doing anything about the interest rate. What I’m saying is there must be a trade-off and this is real. You cannot eat your cake and have it. You can’t sit down in a Monetary Policy Committee and say you want to allow interest rates to continue to go up, and at the same time, you want to control the exchange rate and allow inflation skyrocket. By the end of the year, we may have double digit inflation, high interest rate and a controlled exchange rate, so how do you support growth? Where is the incentive?
The cash reserve ratio must be reduced further. In fact, private sector deposits should be reduced further with the TSA; 25 percent isn’t enough. You can’t take away government funds and still keep private CRR at 25 per cent. It shouldn’t be more than 20 per cent. If you squeeze the banks too much, their capacity to lend reduces and that means you can’t stimulate economic growth.