How to reflate Nigeria’s economy – Ajaegbu
Mr. Chidi Ajaegbu, the 50th President of the Institute of Chartered Accountants of Nigeria (ICAN) and currently Chief Executive Officer of Heritage Capital Markets Limited, gives, in this interview with the a succinct analysis of Nigeria’s current recessi
WDaily Trust on Sunday,
hat is your view about the country’s economy and the attendant recession?
There is no doubt the economy is challenged, essentially as a result of certain things not being in place and lack of an articulated policy on foreign exchange. The scarcity of dollars in the economy has created a lot of problems to virtually all sectors of the economy mainly because this is an import-driven economy and the dollar is no longer there to do business.
This has created a lot of problems for people who have contracts that are domiciled in dollars. A lot of companies in Nigeria actually borrowed from international markets and that, coupled with the fact that there is recession, has created a growing percentage of non-performing assets in the banking sector. That is one key area that the Central Bank and the Ministry of Finance must address. The rise in nonperforming assets portfolio in the economy will become a major problem if the federal government doesn’t articulate or evolve a strategy to deal with the reform.
Devaluation, though well intentioned, hasn’t brought the kind of effect that policy makers anticipated it would bring. I foresee a major challenge arising out of the rather unmanageable exposure that companies that borrowed from international capital markets would face, attributed, of course, directly to devaluation.
And, again, because of a lot of reasons, we will not recover from recession as much as we would have wanted to in 2017 though there has been some sort of hope in the last two, three months with the rise in the price of crude oil.
It is critical that all organs of government in the country cut cost of governance. That will strengthen the ability of government to redirect, redeploy or reapply the overheads that have been incurred on these structures towards infrastructure development across the country.
The way we are now, to me, is not a sustainable model. We can’t continue borrowing from the market to boost another instrument to pay salaries and all of that. We need to find a way of making sure that over time, in the medium term, what we earn is what we spend. That is not the case right now.
The economy is bleeding, and the impact of inflation in the economy is being passed on to the average man on the street, thereby completely eroding his purchasing power and making life more difficult for him.
It is critical that we address the issues of, one, supplying the economy with dollars. We need to reflate the economy with dollars. There was confidence crisis among investors; we need to regain investor confidence. Nigeria is even behind Southern Sudan in terms of investment destination in Africa, from number one to maybe 28. We need to see how to pull back the over $80 billion that was taken out of the country in the first six months of this administration.
We should be more scientific in the ways we drive our policies. Our port policies, for instance, are a bit hard and not properly tinkered as to the impact it would have on the economy. The impact assessment of any policy we bring in to bear on the economy should be well researched, scrutinized and stimulated so that it doesn’t have a reverse effect on the economy, instead of growing it.
Don’t you see the 2017 federal budget as addressing some of the problems you have pointed out?
The 2017 budget is ambitious. Borrowing to fund the budget would have been okay, but in a situation where we have an endemic corruption, except we are able to deal with the leakages, borrowing to fund the budget is actually mortgaging the future of Nigeria.
The key thing is that the corrupt practices in the society must be dealt with. The downside of that is not dealing with it and, instead, we are borrowing. The cost of even borrowing is more than what you see on the paper. Borrowing to fund the budget should actually come after we have taken a very drastic position on corruption.
What other areas should government address?
The National Assembly budget should be reviewed. The way to address it dispassionately is for the Presidency to slash its own budget by, maybe, 35 to 40 per cent because he who comes to equity must have clean hands. After those levels, we can also go to the state and local government levels to reduce cost of governance. For goodness sake, the figures I hear they collect at the National Assembly are mindboggling. When we have been able to effect savings, we can then identify specific developmental projects that these monies would be channelled into.
The budget has a N2.1 trillion deficit and the Minister of Finance maintains we don’t have any other option than to borrow. Do you see the budget as truly bringing Nigeria out of recession?
One of the dysfunctional aspects of our budget is the fact that recurrent expenditure keeps rising above 70 per cent. How can you be budgeting recurrent expenditure 70 per cent and then capital, 30 per cent? You can’t be borrowing to fund your recurrent expenditure. You are not investing borrowed money in things that would reflate the economy so that people can have employment and pay taxes, and companies can generate income and pay taxes.
You are not doing that when you invest in recurrent expenditure. You are actually spending today to pay staff and other overheads money that is meant for solidifying the future. You are not even investing in strategic industries that could run efficiently by partnering with the private sector. Governments all over the world, not just Nigeria, are not known for efficient running of public interest entities. What they do is take a minority position in an entity and let the private sector people who are experienced run it efficiently and then sit back and make sure that the interest of the country is protected.
To what extent do you think an agreement the Central Bank entered with the Chinese government on transactions in Chinese Yuan would grow the Nigerian economy?
Is our problem the currency in which trade is domiciled? That is not our problem. If you like domicile our trade in CFA, that is not the issue. We just need to start producing and cut back our appetite for foreign goods. We need to cut back cost of governance, save more, invest more. The key problem is that there is a fundamental disruption of our structure in-house. Efforts are being made in diversifying the economy in the
area of agriculture, solid minerals and so on. How would you rate government’s success in this direction?
Even if we are genuinely diversifying our economy, the impact would take years upon years to be felt. It is a good way, a good start, something wonderful but that is not the kind of short-term strategy that you need to deploy to a recessionary environment.
What is your stance on interest rate? Are you in support of a slash or it should be retained?
If we are holding down the translation rate of foreign exchange, cutting the rate would release a lot of liquidity in the economy and that could present an additional challenge to the CBN, not just on inflation, but on an additional challenge in managing the exchange translation rate. We should take it from a holistic point of view. What the CBN is saying is that we are looking at inflation, we are looking at translation rate and if we flood the system with liquidity by cutting down on the Monetary Policy Rate, we might create a situation where you have excess liquidity, and that would be channelled towards pursuing the very small quantity of dollars in the system.
The implication of that is that it would actually drive the translation rate roof-high and the economy would be worse off. Maybe they are being conscious of the fact that we have a weak structure, and are struggling to manage the foreign exchange situation. Cutting down the rate might actually be helpful at this moment.