Akaraiwe: Monetary Policy Alone Cannot Address Nigeria’s Economic Challenges


The Chief Executive Officer at Graeme Blaque Group, a financial advisory firm, Mr. Zeal Akaraiwe, who was a former bank treasurer, in this interview, stressed that the Nigerian economy is facing an unusual mix of challenges which require strong collaboration between the Central Bank of Nigeria, the Minister of Finance and that of Minister of Trade and Industry, to come out of the woods. He spoke with Obinna Chima. Excerpts:

The Monetary Policy Committee (MPC) last week raised the Monetary Policy Rate (MPR) to 14 per cent. In your opinion, do you think that was what is needed in the economy at this point in time?

That is a very tough question. The central bank has boxed itself into a very tight corner. We have a very unusual mix of issues. We have high and rising unemployment because productivity is dropping. The country is going into a recession. With both factors, what we expected the MPC to do was to drop interest rate to stimulate the economy and increase productivity. If you are looking at productivity, recession and unemployment, what you should do is to drop interest rate. That was what the United States did in 2009. They dropped interest rate to zero and held it there. This is because you need to stimulate the economy by making interest rate low so that people can borrow and do business.

As they are doing business, productivity is increasing and you are employing people and the economy comes out of recession. The problem we have is that we have high inflation. So, having a recession and high inflation is very unusual. High inflation is driven by the fact that there is plenty money in circulation. So, how is it that you are going into a recession when with high inflation there is supposed to be plenty money in circulation? So, we are in a very unusual circumstance. In my opinion, our inflation cannot be addressed using monetary policy alone. So, if you are using monetary policy alone, we are in trouble. The situation we have was driven by structural issues. We don’t have enough foreign exchange.

And because we don’t have enough foreign exchange, the currency is losing its value. We have gone from N166/$1, to N199/$1 to N330/$1, in less than two years. Based on that, prices of goods and services have doubled. So, it has nothing to do with monetary policy. So, I think the central bank as well as the fiscal authorities need to sit down together to tackle the issue. The Central Bank of Nigeria alone cannot use monetary policy given the circumstance of the issue of foreign exchange. We had a negative trade balance in 2015 and in the first quarter of 2016. With a negative trade balance, your currency will lose value. As your currency loses value when you are importing most of your goods and services, prices would increase. If prices increase, we have inflation.

That is not just a monetary policy issue, it also involves fiscal policy. So, the central bank has control only over monetary policy issue. So, they are trying to use monetary policy issue to attack structural and fiscal policy. That won’t work. For example, those 41 items that were banned from accessing foreign exchange from the interbank market, the CBN is trying to use monetary policy to address them. But what the CBN ought to do is to bring back the 40 items back to the official market, then fiscal policies such as duties and tariffs would take over. If you want to import any of those items, let’s say rice, Customs would raise the duties by maybe 100 per cent.

So, by doing that, you are using fiscal policy to discourage the importation of those items, instead of saying go to the black market to buy forex to import them. This is because when you send them to the black market, you are starving the official market of forex. So, we have structural issues that we have not yet addressed and we are fighting the symptoms. Inflation that the central bank is fighting is a symptom and not the issue. The second issue I have with them on this hike in MPR is that it takes about six month for a money policy change to be felt in an economy. So, what we are suffering now, the MPC should have been tackling it in November last year or January.

In January this year, when some of us were telling them to hike rate because of the inflation in the future, they didn’t do it. Now that inflation has gone up, they are hiking rate. It is like as they say, locking the stable after the horse has bolted. They should have hiked rate long before now to dampen the effect of a higher inflation. But given the monetary policy tools available, they had no choice. The CBN cannot increase duties and tariffs to prevent import. So, what they can do is what they are doing, but what they are doing is not enough. Monetary policy cannot act alone. So, our economic team – the Minister for Trade and Investment, the Minister for Finance, the CBN Governor, the Vice President, the Head of Customs, all need to sit down and map out a strategy that they would all execute jointly. CBN alone cannot get us out of this problem.

What fiscal policy measures do you think can be introduced to address the situation we face as a nation?

Like what I said earlier, let’s look at the 41 items that the CBN banned from the forex market. You will see that the CBN only banned them from the official forex window and that is all the central bank can do. Now, it is Customs that can ban them from the country entirely. But because of all our trade agreements, I don’t know if they would be able to do that. What I expected was for the Customs to come up with policies that states that for anything that is being imported, which can be produced locally or that is non-essential, there is need to hike the tariff.

We had a negative trade balance, so the value of our import in 2015 was $7.5 billion more than the value of our exports. If we have the same situation in 2016, it means in two years, we would have lost $15 billion. How much is our reserves? Our export is majorly oil and we cannot control the prices of oil and the production of oil is not entirely in our control. So, let us control the value of imports. The only reasonable way you can control the value of imports is to discourage consumption.

So, if you are importing fish from abroad, Vodka and other things that are non-essential or things that can be produced locally, Customs should hike the tariff to discourage the consumption locally so that they become luxury items and it is only the rich that can consume it. If the rich decides to consume it, at least Customs would make revenue from it. Looking at that example, that is what we need to do, let’s start from there.

Factories are shutting down because they don’t have forex and you are now increasing interest rate, how will that help the real sector? If you do not help the real sector, then you are not helping productivity and if you are not helping productivity, then you are encouraging more imports, which is where our problem started from in the first place.

So, I think monetary policy acting in isolation cannot help us, if anything, it would make things worse. Very soon you will hear borrowing is at 30-35 per cent. Of course it would worsen inflation. Unfortunately, they are just using the standard text book approach: If you want to fight inflation, raise interest rate. If you raise interest rate, borrowing would be discouraged and if borrowing is discouraged, then there would be less money in circulation. That is the classic text book approach. But we don’t have a classic text book problem. We have a very unique problem.

The Nigerian economy is boxed into a corner. If you fix inflation, you are worsening recession. If you fix recession, you are worsening inflation. So, this is a unique problem where you need to forge a unique solution. So you are looking at different factors: Interest rate, inflation, employment, productivity, oil production, forex that you don’t have, and all of these issues happening at the same time. Finding solution to some might worsen other problems. That is what I mean that we are boxed into a corner.

That means there needs to be a trade-off?
Yes, that was why I said the Minister of Trade for Investment, Minister of Finance and the CBN Governor need to sit down to decide the problem they need to fix urgently. Look at it like a situation of life and death and someone is in the hospital. If they say he has HIV and tuberculosis, the tuberculosis will kill him in two weeks, the HIV may kill him in six months, but you want to treat the HIV first.

Then you are foolish. So, we should know the problem that can kill our economy first among all the challenges I highlighted earlier and they should tackle it first. Whatever the consequence of treating that one, you must live with it. So, we need to do a trade-off. We need to do an analysis to find out the most pertinent problem today. For me, that problem is not inflation. In my opinion, it is more about productivity and forex. This is because if you don’t produce or if you don’t have forex, your economy will die. Inflation will not kill your economy. Inflation is a consequence. So, why are we worried more about the consequence than the root cause of the problem?

But there is a general belief that by faithfully implementing the new forex regime, the issue of forex scarcity would be resolved in the medium term as it is anticipated that the country would start seeing inflows?

Yes, but before that happens, what we should do is to ensure that our consumption of imported items reduces. We have not done that. Have you heard anything about Customs discouraging imports or any campaign by the government to discourage imports? There is nothing. Have they increased tariffs for anything that is unnecessary? We still import foolish things like Vitamin C, soap, fish. We spent $7.5 billion importing items such as chicken, fish and meat. So, pending when the foreign direct investments start flowing, we need to make sure that our consumption behaviour on imported items is attacked.

What role would the effective implementation of the 2016 budget play in in resolving these challenges we are facing?

The 2016 budget, because government is still the largest single spender around, the 2016 budget would mean when they start implementing, they would be spending money. They said they are going to build roads, they have to give somebody the contract to build the road and that person would employ people. So, implementing the capital expenditure part of the budget hopefully means that there would be jobs given out and some of those jobs would mean that people would get employed.

If you start building houses, people would have contract to supply cement, architects would get involved. So, that is the real thing. But it is very limited. The real sector is losing jobs every day, factories are reducing production and laying off staffs. Already the oil industry is laying off staff as well as banks. So, what we need to be doing is to concentrate on those things we need to do to encourage productivity. Productivity means employment and employment means people are spending and we would be able to get out of a recession.