Osinibi: FG Must Align Its Fiscal and Monetary Policies



Tolu Osinibi, is the Executive Director, FCMB Capital Markets Limited. In this interview with Eromosele Abiodun and Ebere Nwoji, he critically examined the economic direction of the administration of President Muhammadu Buhari pointing out that the government has no concrete economic policy and strategic communication plans. He also reasons that the government should align its monetary and fiscal policies. Excerpts:

The last one year has been tough for businesses and every Nigerian; I will like to start by asking you to take look at the first year of President Muhammadu Buhari administration. What have been the positives if any?


If we look at the government and the entirety of the cabinet or the ministers and every one there, it is perhaps not fair to say the past one year because frankly, we didn’t have a government for a full year. Ministers were appointed towards the end of last year, as we all know. It took them the first few months in 2016 to settle in. So you could say really, we had a government in place for about three to four months. I think it will be harsh to ask what has been the performance of the government in that short space of time. However, some ministers have been able to give ideas of what they want to do; some we haven’t heard anything from, don’t know what they are thinking or what they are doing. For example, we have heard from Ministers for Mines and Solid Minerals, Works, Power and Housing, and Finance. We have heard very little to nothing from the Education and Health Ministers, at least to the best of my knowledge. I singled Education and Health out as they are very critical to the country and like I said, to the best of my knowledge, we have no idea of the strategic priorities of the responsible ministers. The summary is, in the first year we had a government for three to four months, we got an idea of what some of the ministers are prioritising, and there was a near singular focus on discussing corruption, currency devaluation and inflation. Very little has happened, and you can’t rate performance on nothing. Essentially, we are just getting started and the government has been trying to find its feet in the past year. Unfortunately, in governance, no matter how you plan, you can always be guaranteed that events and circumstance will derail you. I’m sure the presidency wasn’t anticipating Niger Delta Avengers (NDA), or Boko Haram becoming a guerrilla warfare; the adverse impact of these unexpected events are much worse on the country where there isn’t a clear plan for executing other critical matters e.g. Health and Education, which the civil service or heads of the relevant departments and agencies can focus on while the leadership is grappling with the unexpected events.

Talking about devaluation, after much pressure, the Central Bank of Nigeria (CBN) recently said it will implement the flexible exchange rate. True to its promise the CBN has realised the guidelines for the flexible exchange rate regime. What is your view on this especially in regards to devaluation or no devaluation?


The CBN has now established a structure for a managed float of the Naira largely driven by market forces and this has essentially led to an official devaluation of the Naira. I say officially, because unofficially the currency devalued a long time ago. Very few people were able to buy currency at the official peg of N199/1$, even my major companies, who also had to resort to the parallel market to meet a significant portion of their foreign currency needs, so they were already paying a blended price. I think government did not really have a choice as it didn’t have the foreign currency reserves to support that fixed peg of N199 to a dollar. The alternative option would have been to reset the peg at a higher Naira amount to, say, N250 and we may probably have ended up with the same thing that happened in Egypt, where there was reset of the peg to move it closer to the parallel market rate; very soon after that, the parallel market rate declined rapidly as the market view was that the Egyptian government couldn’t support supply of foreign currency at the new official rate. Since trading started under the new regime, the CBN has been the main supplier of foreign currency into the market. The consensus view is that foreign portfolio and direct investors will take their time to see how the market works and also to see what the government is doing about other economic issues. As we speak, there are still uncertainties around the backlog of foreign currency demand both from importers, outstanding letters of credits that banks need to settle, outstanding foreign currency loans, outstanding airline repatriations and dividend payments to foreign shareholders etc. I reckon we will have more clarity on the market in another couple of months when, hopefully, there’ll be more activity on the supply side. Overall, it’s been a positive move by the government as I expect that when the market eventually settles, it should enable businesses and individuals to plan better for their foreign currency needs. Also, it will shrink the arbitrage opportunity that’s existed so far, where a privileged few where able to profit from the huge differential between the official and parallel market exchange rates. We simply need to give the new system some time as any new system takes time to stabilise; particularly, suppliers of foreign currency, e.g. exporters including oil companies and foreign investors, need time to observe the operations of the market and trust that they can get full value for their foreign currency in the interbank market.


CBN had also said it was going to announce the primary market dealers, who do you think they will be outside the banks?


The initial announcement is that banks that meet specific criteria, e.g. size of capital base, will qualify to be primary market dealers. These are the banks that will deal directly with the CBN on foreign currency trades and other banks will trade with the primary dealers. There are concerns that it will simply create an opportunity for these ‘VIP’ banks to control the market and, as we speak, indications are that the CBN will change its position and essentially allow more banks into the group. Having primary dealers is not unusual but I guess that our historical experience of institutions abusing positions of privilege without any regulatory sanctions is what gives cause for alarm.

What is the difference between the BDCs and primary dealers?

BDCs are essentially retail focused. Based on the published rules, the primary dealers will be permitted to handle the big ticket transaction which is placed at $10 million and above. Primary dealers will be able to purchase directly from the CBN, and the CBN is also saying it will also go into the market place and deal directly where necessary. I think having primary dealers will create some order in the market; also, the more there are the less likely the risk of collusion. Also, I think the primary dealers will not want to lose their privileged position so more likely to behave appropriately.

In your earlier remark, you talked about some ministries that seem not to be working and people have argued that the fiscal policies of government are not aligning with its monetary policies. How can they change this, why can’t they come together to address issues?

So far, there seems to be a silo approach to the way government is doing things. There isn’t joint thinking, so the question you are asking is where the alignment is? There are various issues that the government has to grapple with, but various ministries seem to be working in isolation. It so far hasn’t appeared that there’s tight coordination between the CBN and the ministry of finance. The coordination should be taking place at the level of the economic management team, which is headed by the Vice President. I haven’t heard much about the policy positions and how they all link together. One of two ministers have suggested that there’s work going on behind the scenes, but one of the biggest handicaps that the current administration has so far had is very weak to non existent strategic communication. This is even more important when the entire country is going through a very difficult period; the economy is weak, people are losing their jobs, inflation is increasing, insecurity is increasing, there’s a lot of concern and fear. With all of these, one would think the government will prioritise communicating with the people in the right manner, even if only to sell the hope of a better future. I think your question on harmonisation of monetary and fiscal policy is rather narrow. We should be asking about the key objectives of the government for the rest of this term in office. Out of that flow the strategic priorities and the policies for different sectors that are to be implemented. Those policies drive the spending plans, fiscal regime, monetary targets, borrowing plans etc. One can’t even ask the question on if the spending plans mirror the comprehensive package of policies; there is a huge policy vacuum and we don’t know what spending plans are anchored on. However, we should wait and see how the 2017 budgetary process will run, though at this stage we should already have clarity on the policy positions that should drive the 2017 budget. Again, perhaps there are a lot of things going on behind the scenes and we should for now give the government the benefit of the doubt.

Looking at the overall economy, we can say that the environment is not in any way conducive for investors and it is taking its toll on businesses, the purchasing power is not there, people don’t have money to attend to their needs what do you think will be the impact on the bottom line of many companies’ balance sheet at the end of this current business year?

We are going through extremely difficult times in Nigeria today. I said to some of my friends that what I am witnessing as an adult today was what my parents witnessed in the mid of 80s where there was a massive destruction of wealth. There was a significant change in the lifestyle of a lot of my parent’s generation. Purchasing power today has reduced significantly. People are able to buy less with the money they have and are having to prioritise spending; this is impacting all businesses across all sectors. For example, as reported in various newspapers recently, the volume of petroleum products currently being sold in the country has reduced by about 35 to 40 per cent from what was the norm. The usual economic theory assumption is that fuel is relatively price inelastic, that is to say, even if price goes up consumption won’t change much as fuel is essential. The recent announcement from petroleum products retailers is suggesting that fuel is much more price elastic than we thought.

Aside the 2008 financial crisis, last year was a particularly very tough year for banks. This year is following the same pattern. What is the way out, how can banks improve their profitability?

Bank revenue is really driven by economic activities. At a very simple level, banks make money from lending and supporting commercial transactions. Demand for banking services is driven by economic activity and therefore we cannot dislocate the fortunes of the banking sector from the wider economy; if there is a significant slowdown in economic activity, one should expect to see the adverse impact in the earnings of the banks. Also, banks are dealing with the overhang of loans that have gone bad from lending to sectors such as Upstream Oil and Gas and Power. Though banks are still lending and supporting transactions, the priority is on loan recovery, preserving capital and protecting depositors’ monies. Also, improving operational efficiencies is a key priority as banks, like any other business, need to work smarter in these challenging times. For the remainder of this year and into 2017, the banking industry is largely in conservative mode to ensure survival, continued support of customer transaction activities and restructuring loans where necessary, and hopefully look forward to improved profitability as the economy picks up in future. I don’t think one can overstate the fact that the banking industry is perhaps one industry that is completely tied to the fortunes of the economy. In some other sectors, there is some resilience. For example people still have to eat; therefore what changes is buying habits; people may stop buying premium products, buy reduced quantities etc, but eat they must. If a company is struggling and has no money to meet loan obligations, there’s very little banks can do expect to restructure and defer loan repayment or in a worst case scenario take over and dispose collateral, for which there may be no buyers. Likewise banks will be extremely reluctant to lend to companies that can’t demonstrate ability to repay. In situations where a business is resilient but its sales have reduced, it’s unlikely to be borrowing money to fund growth.

Like you said, banks are in protective mode and that has seen many of them downsizing and when they downsize, they place the pension industry under pressure. What do you think the pension industry should do to survive in the face of these problems?


The pension industry is largely technology driven and therefore its total staff base is much lower compared to say the banking industry. However, to the extent that no sector is immune from the wider economy, I agree that as a result of job losses, some withdrawals from Retirement Savings Accounts (RSA) and reduced pensions contributions will lead to some erosion of reduction total assets under management (AUM). Considering that some investment returns are still being earned on AUM, I don’t know what the overall impact of current job losses on AUM is but I will hazard a guess that the biggest issue being faced by the pensions industry at present is the ability to generate above inflation returns on AUM as opposed to job losses. I don’t think that the survival of companies in the pensions industry is currently at risk, but I will expect that they should also be thinking about operational efficiencies, similar to other businesses in the economy, and more importantly, work with the regulator, PenCom, on fast tracking the process of bringing the informal sector into the system.