Onaolapo: Costs of CBN Earlier Stance on Forex Market Are Very Apparent


The Chief Executive Officer of Eczellon Capital Limited, Mr. Diekola Onaolapo, in this exclusive interview with Eromosele Abiodun, spoke on the costs of the CBN’s earlier stance on the foreign exchange market, the way out of the current economic crisis and several other issues. 

The much expected Monetary Policy Committee (MPC) meeting ended recently, what are your takeaways from the outcome of the meeting?

The main expectation from the last MPC was that on the foreign exchange, which seems to be central to the current economic issues in the country. Although the MPC resisted the call for adjustments to the official pricing of the Naira, its pronouncement on an imminent introduction of “Flexibility in the Interbank Foreign Exchange Market” excited the market, albeit without providing much clarity on the actual direction of that foreign exchange policy.

It is believed that this “flexibility” may herald the succour to the scarcity of foreign exchange which has plagued businesses in the country. As for takeaway on policy direction, economists may argue that the decision indicates that the MPC is now more interested in pursuing economic growth as a macroeconomic objective as opposed to its price stability stance at its meeting in March where the MPR was increased by a 100 basis points to 12.0 per cent from 11.0 per cent. The question is, would monetary policy quick fixes be adequate to kick-start an economy, stalled more by fiscal challenges? It is instructive to note that, before the Monetary Policy Rate (MPR) was left unchanged at this last MPC meeting, it was increased to 12 per cent at the penultimate meeting, before which reduced by 200 basis points from 13 per cent to 11 per cent at the preceding meeting.

This implies that there have been changes to policy direction by the MPC in its last five consecutive meeting. It leaves analysts sensing that these policy changes are only reactive to volatility of the economic situation and not for planning for long term objectives. The fear is that such changes are mere academic exercises which may not be as sensitive to context as they should, possibly because of misalignment with fiscal policies or the presence of great challenges in the fiscal structures of the economy. What is required are bold monetary policies, supported by focused fiscal directions, for a reversal of the current downward trend of the Nigerian economy and the achievement of long term development objectives of the country.

After rejecting calls for the adoption of a flexible foreign exchange regime, the Central Bank of Nigeria (CBN) finally bowed to pressure, stating that it would introduce greater flexibility in the interbank foreign exchange market structure. Is this coming too late and what has the CBN’s earlier stand cost the economy?

The decision is long overdue and it is better late than never, but even this is still less than required, in the current circumstances. The costs of the CBN earlier stance on the foreign exchange market are very apparent and can be summarised into four key areas. First is the slowing growth of the economy. Gross Domestic Products (GDP) growth is in a negative territory (-0.36% as at the end of first quarter of 2016) after consistent decline in previous quarters. Second, is the recent scarcity of petroleum products caused by the inability of oil marketers to access foreign exchange to import products, which has also contributed to rising inflationary pressures in the country.

The third impact is on the nation’s unemployment and underemployment numbers, currently at 31.2 per cent has consistently risen on a quarterly basis in the last 12 months due to closure of factories and other businesses that could not cope with the prevailing operating environment, with liquidity squeeze and market downturn – also linked to foreign exchange scarcity. The last could be seen in the stable decline in capital importation into the country which fell by about 73.8 per cent to $710.9 million in the first quarter to the year compared to the corresponding period of 2015. The $710.9 million recorded in the first three months of the year is the lowest the country has achieved since 2007 according to the National Bureau of Statistics (NBS) numbers.

It is obvious that foreign exchange issues are central to current economic challenges and therefore require bold decisions, which are by no means easy choices. Refusal to take bold decisions in a timely manner is essentially a decision to prolong and possibly worsen the issues. Sometimes you cut off a limb in order for the person to survive a cancer and eventually live. Hopefully, the expected flexible interbank foreign exchange market, when its details are known, should assist to restore some level of confidence on the Nigerian economy and reverse some of these negative trends.

In what way does the flexible foreign exchange regime align or conflict with the announcement by the CBN that it will retain a small window for critical transactions for prospective investors?

It will be difficult to tell at this point since the details of how the new flexible exchange rate regime will function are not yet known. However, the creation of a “small window for critical transactions” would likely bring about a dual exchange rate system which is susceptible to abuse if not properly managed. Economists have called for a harmonisation of the foreign exchange markets to remove arbitrage opportunities and propensity for speculations which distort the market. Multiple foreign exchange markets in a market where the ratio of parallel market to official rates is almost 2:1 is worrisome.

The CBN also warned that the Nigerian economy might further contract in the second quarter of this year into a full blown recession, as some of the conditions which led to the contraction in the gross domestic product growth rate in the first quarter remained largely unresolved. What is the way out of this situation?
The way out of the current economic conundrum is through the implementation of appropriate fiscal policies, supported by sound monetary policies. Good news is that the 2016 budget has been signed into law and we hope its implementation comes into full swing within the shortest possible time.

This should help to stimulate critical sectors of the economy and generate needed multiplier effects on businesses and the populace in general. On the monetary side, optimistic outlook on the decision of the MPC to adopt a flexible exchange rate regime is that it will ensure businesses have access to foreign exchange to conduct their transactions. The hope is that the proposed foreign exchange policy will ultimately lead to a boost in trade (which is a key component of the Nigerian economy), growth of manufacturing and in-country production and attraction of necessary Foreign Direct Investments (FDIs). Thus putting the right monetary and fiscal policies into action will positively impact investment and business sentiments of economic agents. This will stimulate spending and investments which are required to initiate the revival of the economy.

Another outcome of the MPC meeting was the decision by the CBN to leave the monetary policy rate unchanged at 12 per cent with the asymmetric corridor at +200 and -500 basis points around the MPR, citing tight fiscal environment and the need to allow previous monetary policy decisions to crystallise. What is your view on this?

The decision to leave the MPR unchanged is not a surprise to many analysts given the confusion occasioned by multiple challenges being faced by the economy. With the current stagflation – slowing growth and increasing inflation – choices are tough. Rate hike may curb inflation and attempt to stabilize prices, but it further stifles growth due to its tightening nature, increasing cost of capital to businesses as well as mop up liquidity.

Rate reduction may also be attractive to stimulate growth, but it may increase inflation and release liquidity which may drive further pressure on the foreign exchange environment. The rationale given for leaving rate unchanged seems plausible given the current weak posture of the Nigerian economy. The MPC may choose to watch the impact of its current policy directions, coupled with the effect of fiscal activities – from implementation of the budget – before making further changes to the monetary policy environment.

Your comment on the first quarter GDP report released by the NBS was quite damning. It was like you foresaw what the CBN will say about the economy in the first and second quarters, can you comment further on this and give us your thought on what the CBN said about what to expect in the second quarter?

The comments of the CBN on the economy, a warning of further contraction of the economy – is logical. Economic decisions typically have a lag period before their full impact is felt in the economy. This is why we also believe that the full impact of the delayed budgetary process and foreign exchange scarcity is yet to fully play out on the economy.

We expect some residual effects of the above to further weaken the economy in second quarter, if other factors remain the same. Some of the earlier decisions of the monetary authority, or decisions not to decide, were not favourable to businesses and investor sentiments. The delay in investment decisions, caused by the mentioned impasse in monetary policy environment will affect the economy beyond the first quarter. The delay in budget passage, continued restiveness of militants on oil and gas infrastructures, unclear foreign exchange policy directions and others will impact the economy adversely.

The slide in the oil price has brutally exposed Nigeria’s Achilles heel. In your comment on the first quarter NBS numbers you said the figures has set the tone for the nation to enter into an economic recession by the end of the first half of the year as the weaknesses in the non-oil sector (Manufacturing & Financial services) are still very inherent. Can you explain this to our readers?

An economic recession occurs when an economy posts negative growth in two successive quarters. Some economists argue that a country is already in recession if it experiences three consecutive quarters of falling growth. Both scenarios seem imminent to play out in Nigeria, with the current outlook on second quarter following a negative first quarter growth rate. While the slump in oil prices might have affected the Nigerian economy, with the over-exposure of government revenues and foreign exchange earnings to the sector, the non-oil sector have been further impacted by the monetary policy challenges and other system issues.

The above will inevitably tell on gross domestic products numbers for the second quarter, and possibly linger into the beginning of the third quarter due to lagged effects of these economic challenges. The recently passed budget and positive news in the foreign exchange environment may have positive impacts in the third quarter, but I am not sure these would impact the second quarter GDP numbers.

The Nigerian government plans to raise about N2 trillion to balance the 2016 budget, a large portion of it will be borrowed domestically, but there are liquidity concerns in the capital market. What other option is available for the government?

The Nigerian capital market has the capacity to absorb the federal government borrowing. As observed following the removal of Nigeria from the JP Morgan Bond Index recently, the expected negative impact of the decision was tempered by in-country containment of the pressure. The Pension Fund Management structure in the country is an untapped resource, which can be tapped for the provision of needed financing for the federal government’s developmental initiatives. Creative structures around the Pension Funds are a viable option for the federal government. Also, the other options available to the government are from the international financial markets and multi-lateral developmental institutions.

The federal government has already successfully pursued some of these channels, especially with China where it sealed currency swap deals and a financing agreement earlier in the year. The key challenge for the government may be the continued valuation of Naira at its current levels. We believe once details of the proposed flexible exchange rate are made known, it will make it easier for the government to access the international financial markets to raise the required fund to plug the budget deficit.

The resources needed a year for improvement in energy, irrigation, roads and rail in Nigeria and other Africa countries is put at over $200 billion, given the declining crude oil prices how achievable is this and what role can private equity funds play?

It is very clear at the moment that governments on the African continent cannot on their own finance the needed investments to drive the developmental objectives required for and by the African people. Private sector investment – whether equity, structured debt or even other hybrid capital structures – is key as well as encouraged foreign direct investments. Majority of African countries currently rely on commodities which is susceptible to periodic slumps.

The return to the African growth story, and the sustenance of the same, therefore require a shift from this “crude” economy – based on extraction of crude mineral resources alone. This shift requires investment in infrastructure – both tangible and social infrastructure. These cannot be paid for by the governments alone. Private capital investment was very instrumental to the growth of the African economy of recent history. FDI inflows into Africa in the last decade are estimated at over $150.0 billion.

This aided the development of several sectors, many of which were erstwhile not even considered in GDP computations, but are now key drivers of the economy. Such sectors include telecommunications, e-commerce, finance, real estate, etc. Private capital will continue to be very important to Africa, and governments on the continent must ensure they remain open to the encouragement of capital inflows into the continent, with improvement in the regulatory environment that checks excesses and protects the market integrity and ensures Africa is not a dumping ground of hot money which leaves the market worse in the long run.

Governments on the continent must be willing to create an enabling environment for investors in terms of consistency in policy formulation and repealing/reviewing archaic laws that do not encourage private sector investments in critical economic sectors. Likewise, there is a need for structural reforms necessary to strengthen institutions of government so as to improve the ease of doing business in the continent and aid in diversifying income streams of the various countries and thus, reduce their susceptibility to vagaries in prices of commodities. A combination of all these should go a long way to attract private equity Funds to complement government’s investments in infrastructure in the continent.

Any hope for the Nigerian economy?
Definitely! Although the Nigerian market, just as many other emerging economies in the world today, is faced with some economic challenges, we still remain a beacon of hope for the African continent and the continuance of its growth story. We believe economic performance should stabilise towards the end of the year 2016 due to the expected impact from the government’s expansionary fiscal programme and, hopefully, with the adoption of monetary policies which are realistic and sensitive to the prevailing circumstances.

Challenges of the past are being mitigated. Security challenges are being resolved, with the near eradication of Boko Haram, although recent issues such as Biafra agitations, Fulani herdsmen issues and resumed restiveness in the Niger Delta are worrying. The political environment has shown improving maturity over time, culminating in the peaceful 2015 change of government and change of ruling party.

We therefore believe that current economic challenges will soon be weathered with appropriate policies, especially since the fundamental drivers of the Nigerian growth are unchanged. Although former economic growth was fuelled by record prices of oil and other commodities, which are now in slump, the Nigerian market, with the highest population on the African continent, dominated by youth with high exposure to global trends, remains very promising and a return to economic growth is expected sooner than later. That said, one is not oblivious of the short and medium term threats to the growth potentials we see.

A key threat at the moment is the seeming inability to speedily enact relevant policies that arrest current economic issues. The impact is that this may unnecessarily worsen the circumstances and make revival more difficult and slower. Another threat is the return to restiveness in the Niger-Delta region which has severely reduced the nation’s oil production activities, hindering the country from tapping into the recent upsurge in crude oil prices. We believe it is essential that the government addresses the issues in a holistic manner within the shortest possible time, otherwise, the strain from the nation’s oil revenues will likely continue, which will in turn hamper the ability of the government to drive its developmental programmes.

How has all that we have talked about affected your business at Eczellon Capital?

Eczellon Capital, like any other business concern, continues to feel the impact of the various developments in the markets and economies in which it operates and these (impacts) have been mixed. As you are aware, we are a full service investment bank and licensed issuing house with services spanning business and financial advisory, corporate finance, project advisory and private equity. Although our focus is mainly Nigeria, we also actively operate in other countries within the equatorial (West to East) Africa.

So, you can say “the challenge is the opportunity”. While the uncertainties around the Foreign Exchange has impacted the facilitation of foreign investments into Nigeria, there have been opportunities for in-country investments occasioned by depressed asset prices and opportunities to make acquisitions at attractive entry prices. The current challenges have also necessitated the need for businesses and governments to evaluate their strategies and we continue to support our clients in this regard.

Overall our outlook and business sentiments are also tempered with our long term focus on the market. We believe in the Nigerian – and African – dream and the promise thereof. We are committed to presenting Nigerian businesses – and other enterprises with which we work around the region – with access to finance and business advice which they require to reposition and grow their businesses and position appropriately to harness emerging opportunities.