Rislanudenn: New Forex Policy Alone Not Sufficient to Trigger Economic Recovery



In this interview with James Emejo, economist and a former acting Unity Bank Managing Director, Mr. Muhammed Rislanudenn maintained that without a complementary fiscal synergy, the new foreign exchange policy introduced by the Central Bank of Nigeria, is not sufficient to trigger the recovery of the economy

Sir, how would you assess the Nigerian economy presently in terms of opportunities and challenges?

There is no doubt about the fact that Nigerian economy is experiencing a lot of challenges due in large part to years of heavy reliance on oil export for foreign exchange and income earnings. We rely on oil exports for about 95per cent of our foreign exchange earnings and 70per cent of income generally. Without requisite fiscal buffers in strategic reserve, oil price decline caught us off guard. More so we are import dependent and with weak reserve, understandably led to pressure on the forex market due to limited supply and excess demand. Distortions in the market led to some speculations etc. Hopefully the new forex policy will deal with that. These problems has led to spike in inflation for example with May headline inflation index increasing to 15.6per cent year on year or 1.9 percentage points higher than 13.7per cent recorded in April and a fourth consecutive increase according to National board of statistics (NBS) report. Increased electricity rates as well as other energy prices combined with imported foods (imported inflation) as well as draw down of inventories across the country were part of the causes of such increase. Meanwhile with 2016 first quarter Gross Domestic product growth rate on similar negative trajectory at -0.36per cent, unemployment rate going up to 12.1per cent in first quarter of 2016 from 10.4per cent in fourth quarter of 2015, underemployment of about 30%, added to loss of 1.5 million existing jobs in first quarter of 2016, it is only a matter of time before our economy is officially declared in recession. There is no dispute among economists that two consecutive quarters of negative growth implies recession. Monetary policy committee seem to have surrendered at its last meeting as all ratios were not tinkered with especially monetary policy rate, technically meaning they can’t use any instrument at its disposal to deal with inflation. The new forex policy, though necessary, but is not sufficient solution in itself. It will hopefully trigger recovery with strong synergy from the fiscal side whose expansionary budget will target steering the economy away from potential stagflation and recession. I remain optimistic that we will achieve recovery subject to well-articulated and actionable strategy towards economic diversification away from oil to Agriculture, mining, manufacturing, services etc in the medium term and in the immediate, strong synergy between monetary and fiscal policies by putting in place strong structures for the two to be effectively synchronised. That is entrenching a managed floating forex policy that can hopefully manage inflation and interest rate to support growth in manufacturing, Agriculture etc while still achieving the objective of expansionary budget of reflating the economy and job creation.

The issue of fraud in the banking system appears to be endemic despite huge investment to fighting online and insider abuse. How far can banks cope with the menace?

Banks have put in place over the years strong risk management systems including information security system to detect and deal with fraud and fraudulent attempts by staff and fraudsters. In addition to strong oversight by internal examiners as well as external examiners/ regulatory supervision have to a large extent limited the capacity for large frauds. However, if you have a dishonest and fraudulent staff, there is a limit to how you can prevent an operator especially when there is connivance among different departments including those with internal oversight responsibilities. The best way to minimise fraud is to continue to train operators on fraud detection techniques, ensuring adequate compensation to staff while effectively and maximally sanctioning the minority offenders within the ambit of the law.

Bank’s profitability and deposits vaults have been on the decline in recent times, what does this signify and what’s the way out?

There is need for banks to refocus their operations in line with the core mandate of banking. Over time there has been a mismatch between bank’s risk assets and deposit liabilities leading to deposit withdrawal shocks like what happened after the government rightly implemented Treasury Single Account (TSA). Added to that is decline in profit due in part to rising cost to income ratio as well as high non performing loans ratio above the 5per cent statutory limit due in large part to provisions on lending to oil and gas. Additional regulatory induced stress testing now like that of 2009 has the potential of projecting negative impact on Bank’s capital adequacy ratio. Erosion in deposits also impacted on capacity to create risk assets with attendant loss of income. With economy almost in recession, risk free investing options become increasingly limited. The banks need to appreciate the reality of where they are now from the context of the larger economy. Rather than focusing on liability generation and short term investment with little or no impact on larger economy, now there is opportunity for real banking to emerge by refocusing on development and sale of tailor made retail products with multiplier benefits for customers, the banks as well as growth of the larger economy.

There are suggestions that the naira may have been devalued going by the new forex policy which floated the local currency. But this is even as President Muhammadu Buhari has consistently overruled an outright devaluation. So what exactly has happened?

I think what is important is to appreciate the fact that statutorily responsibility over managing and ensuring price, exchange rate and interest stability is that of central Bank via its monetary policy committee. The President expressed his opinion and understanding of devaluation, and openly said he felt unconvinced about its advantages to an import dependent, mono product economy like ours who stand to take no advantage of export incentive associated with it. If I get it right, the President said he needs to be convinced as he is not an Economist. The President’s economic team is responsible for convincing him. However, Nigerians have discussed severally over this matter at radio, television and newspapers. I participated on a live NTA discussion programme on whether we should devalue the naira or not sometime in February this year, among others. An X-ray of challenges faced by the economy for lack of adjusting the currency is well documented. Importantly you can’t give what you don’t have and there is nothing wrong in cutting your coat according to your size. With a weak reserve and reduced export income earnings in an economy that is import dependent, fixing exchange rate will only distort the market by creating further illiquidity, facilitating rent seeking and accentuating economic contraction as depicted in the reduced GDP growth data over the last one year or so culminating in negative growth of -0.36per cent elevated inflation   level, now at 15.6per cent and unemployment, now peaking 12.1per cent. Data available to CBN showing foreign reserve erosion, capital flight, reduced foreign portfolio investment and foreign direct investment are good indicators to prove that the policy wasn’t working. At one of its meeting MPC jerked up monetary policy rate to address inflation challenges while trading off growth. In their subsequent meeting they kept rates on hold even though inflation went up again, underscoring the difficulties they were into because they could not adjust exchange rate at that time. With the one year historical economic data available to the economic team, they must have convinced the president that one way or the other the archaic policy of fixing exchange rate simply doesn’t work and was injuring the economy more, thereby allowing a managed floating where CBN can intervene to ensure stability and medium to long term we will see liquidity improving, inflation coming down, activities picking up and unemployment rate coming down as well, hence steering the economy away from stagflation and potential recession.

The new policy effectively means naira will be traded on a single exchange rate at market determined rate while CBN intervenes from time to time, albeit with weak reserve that can only finance five months of imports. Naira will no longer be pegged at artificial rate of 197 to a dollar. Open and transparent two way quote will help in dealing with speculators and rent seekers.  The policy is more like free floating currency. It will hopefully help foreign portfolio investors and foreign direct investors (who were hitherto sitting on the fence) take positive decision and bring in liquidity into the market with medium to long term effect of bringing down the rates and also dealing with imported inflation. Wondering why the economy was allowed to be so badly bruised for sixteen months leading to stagflation and near recession before taking a right decision.

Even though the action is late, it will hopefully bring down and stabilise prices, reduce inflation rate and improve employment in medium to long term. This move towards market determined exchange rate from both monetary and fiscal policy perspective will be a catalyst for increased economic activities in both the public and private sectors.

How effective is the new forex regime in resetting the macroeconomic index?

Recall that  the IMF released its annual review of Nigeria’s economic situation revealing that Gross domestic product growth  which came in lower at 2.7per cent in 2015(relative to 6.22per cent in 2014), would further slow to 2.3 percent in 2016. Manufacturing alone contacted to -1.46per cent in 2015 from 10per cent of the GDP in 2014. The bank cited headwinds such as lower oil prices, shortfall in non-oil revenue as well as disruptions in private sector activity due to pegged exchange rate policy of the CBN (which has constrained access to foreign exchange) as clog on output growth during the year.  Foreign portfolio investors like firms tracking JP Morgan Index left Nigeria because that policy which they claim lack transparency. This is more so as slowdown in economic activities occasioned by PMS shortage, forex unavailability as well as sub-optimal power supply lend credence to the postulation of slowdown in GDP growth. Headwinds had hitherto constrained output significantly with negative impact on revenue performance of quoted entities on the Nigerian capital market. It is hoped that adopting a flexible foreign exchange regime will help in turning the tide especially with the current Government drive at blocking leakages as well as efficient allocation of scarce resources (such as increased Capital expenditure envisaged in 2016 fiscal budget),  would lead to efficiency gain in the medium to longer term. Market should continue to be allowed to determine the fair value of the local currency with intermittent intervention from the CBN to provide additional liquidity, stability and avoid speculation given the two way quote system. In doing so, activities by speculators and hoarders will fall while investment inflows could lead to improvements in foreign reserves as well as supply to market.

Is devaluation still appropriate at this time?

The new policy is long overdue, simply because you can’t give what you do not have. It is not about the passion on whether to devalue the currency or not. Look at the figures, reality is we have a very weak reserve to support our currency at an unrealistic exchange rate that will only allow for speculation, rent seeking and arbitrage. We had no fiscal buffer and our appetite for foreign goods do not seem to see any immediate end, while the price of oil has gone down and our export volume has of recent also gone down due to sabotage activities in Niger Delta. With weak reserve, weak forex earnings near constant appetite for forex, fixed exchange rate will only be sustained at the risk of creating huge disparity with black market rate thereby encouraging distortion and rent seeking. CBN Governor himself confirmed in announcing the new policy that we were hitherto earning about USD3.2billion monthly and now earn less than USD1 billion with reserve getting to less than five months of imports. 16 months of that policy weakened the economy and the official data from NBS especially on manufacturing GDP growth rate and unemployment, inflation and GDP speaks for itself as earlier stated.


The TSA appears to have changed the landscape in banking presently. What is the future of banking like going forward?

Importantly not all banks were heavily exposed to government funds and hence were not susceptible to so called TSA shock. For those not insulated from exposure to public sector funds, TSA will help Banks to be more focused on core Banking operations as reliance on easy money will no longer be in place. It will take time before Banks correct their books that were embedded with huge assets/ liabilities funding mismatch, a result of years of sitting on government funds. Lack of TSA hitherto forced the government to crowd out private sector in the fixed income market to fix a perceived deficit. Banks need to focus on developing products that will have multiplier benefit on both customers and the Bank itself.

High Lending rates remain a knotty issue for the real sector-both small n big businesses alike. Besides the figure and data, do you see the country moving forward amidst this scenerio. What’s the way forward. CBN can’t force banks to cut rates, so what?

‎Typically parameter set as guide to lending or borrowing by central bank is the monetary policy rate, currently at 12per cent per annum with asymmetric corridor of +200 and -500 basis points for standing lending and deposit facilities respectively. Strategic performance matrix set for CBN by Federal Executive Council as announced by the Honorable Minister of State for Budget and Planning in this regard is the achievement of single digit interest rate to support real sector growth, achieving predictable exchange rate etc. Single digit interest rate will help in supporting real sector growth and reduce unemployment but will in the short term remain a mirage as Monetary policy rate today is even lower than inflation rate currently at 15.6per cent, implying negative earnings or disincentive to savings and investment. CBN can use moral suasion for Banks to reduce interest rates charged customers but with above data, it’s practically impossible. Over medium to long term, inflation will start coming down with improved liquidity in the forex market and particularly reduced cost push, imported inflation. That will give CBN leverage to reduce Monetary Policy Rate and by extension banks will follow suit given anticipated reduction in their cost of funds.

What is it like outside the banking profession for you?

I live a quiet life away from the stress of banking while also offering my little contributions towards promoting growth in our economy for the betterment of our society. Notwithstanding our bulging population that is growing at about 3per cent, way above our GDP growth rate, Nigerian  economy is big enough to optimally provide opportunity for all irrespective of ethnic, regional religious or regional background only if we believe and have trust in our country.