A former Deputy Governor of the Central Bank of Nigeria and presently the Chairman of Lambeth Trust & Investment Company Limited, Mr. Tunde Lemo reasons that with the present economic challenges facing the country, policy makers must prioritise growth to save the economy. He spoke with Obinna Chima. Excerpts:
The Nigerian economy is presently faced with the twin devils of high inflation and recession, at this point in time, what should be the trade-off?
We are in a dilemma. There is no policy maker that wants to be in this kind of dilemma in the sense that on one hand, you are in recession officially and at the same time, you have high inflation.
In most other climes, inflation is very low when you are in recession and with that it is very easy to deal with. This is because, the simple thing to do, textbook economics tells you is to spend your way out of recession. You increase spending so that you can stimulate consumer demand by pushing out a lot of money. But if you do that in a high inflation environment, then you have a problem. Ordinarily, when a policy maker has that kind of dilemma, in my view, my priority should actually be to drive growth. In other words, let high inflation be for the time being and try to stimulate the economy. When you have done that, you can now come back and deal with inflation. However, our own economy is peculiar in the sense that if you do that in Nigeria, the structure of the Nigerian economy is such that the key elements driving inflation are things you could pick up on your fingertips. The bulk of the inflation we are seeing in Nigeria today is imported inflation pass-through. In other words, there is inflation today because the exchange rate of the naira has been impacted. You know we moved away from fixed exchange rate to a flexible exchange rate regime. And there is significant increase in price level because the bulk of commercial activities happening in Nigeria are as a result of imported goods. That necessary means that something has to be done to the exchange rate. If you don’t deal with the exchange rate, then it becomes slippery slope. In other words, if your propensity to import is very high, and then you don’t do something about exchange rate, as you keep fighting inflation by raising interest rate; of course inflation would still impact you through depreciation of your currency. What then should you do? You necessarily need to also address the foreign exchange issue. You know in Nigeria, policy makers basically use demand management to manage foreign exchange. One way you use demand management to moderate the demand for foreign exchange is to raise price of money. This was why the central bank in their wisdom decided to raise interest rate. Ordinarily, that should be their priority, but in Nigeria, it is different. It should be their priority because in Nigeria, they want to achieve so many objectives at the same time. The objective of growth is thee, but there must be foreign exchange stability. And for foreign exchange stability to be there must be inflow of dollar. We just reformed the market, the flexible foreign exchange regime is up and running, but supply is muted on the short-run, largely because foreign investors would still do ‘wait and see,’ to know how the market is doing. And for foreign investors to come into Nigeria, the real interest rate must be positive. If you have negative interest rate like we are having now where inflation level is higher than interest rate, they would not come. So, temporarily, you needed to signal the fact that you are going to be efficient in that respect and that was what the central bank did at the last Monetary Policy Committee (MPC) meeting, which for me is okay, provided it is not a permanent phenomenon. As soon as there is stability in that foreign exchange market, they should move back a bit, ignore inflation for now and let us drive growth.
One thing the CBN over the years has always been criticised for is its timing in adjusting the naira exchange rate when faced with pressure. The current leadership of the CBN was criticised for the delay, same as the two past CBN governors you worked with. What is usually responsible for that?
You know that we had the oil price shock just as former President Goodluck Jonathan was winding up. In my view, because I left the central bank over 30 months ago…
(Cuts in) Not just under the present CBN leadership?
Ours was different. We never embarked on fixed exchange rate policy. There was no peg in our time at all.
But the central bank then defended the naira with significant amount of forex from the reserves..
Yes, we were defending the currency. Yes, you use your reserves level to defend your currency. We had very rich reserves buffer. At the time we had the financial crisis in 2008/2009, at the peak, external reserves was close to $60 billion. So we had reserves buffers that we used. Then, we were also lucky that the economic issue then was temporary. With our reserves buffer, it was pretty easy for us to adjust. But every central bank in most developing economy would defend the value of the local currency because of the fragile nature of the local economy. But this currency adjustment shouldn’t have lasted for 16 months. Apparently, it was because a new government was coming and perhaps there was a need to allow the government to settle down. So, you don’t get the government to be on the edge right from the beginning. Again, you may never know what the constraints are. The governor of the CBN reports to Mr. President and usually discussions between them may never be in the public domain. But ordinarily, my view is that if we had done this much earlier, perhaps, we would have seen better traction than now. Economists and some of us were canvassing that, but you remember also that we heard the President saying he didn’t want devaluation. So, whatever happened should be between the CBN and Mr. President. I would not say whether or not they were wrong to have done that. This is because there could be a lot of things they were seeing that we are not seeing. So, my view is that if we had a flexible market in the past 16 months, we would not have been where we are today.
How independent should a central bank be? I ask this because a lot of people believe that the delayed move on the naira exchange rate was because of the opposition of the president to devaluation?
The central bank should actually be independent. Particularly, they should have instruments autonomy. It is good to strengthen the economy. This is because the monetary authorities should be complementing what the fiscal authorities are doing. The move all over the world is for central banks to be as independent as they can possibly be. It doesn’t mean they would not complement fiscal authorities. Ordinarily, if at the beginning of the year, the government announces the direction of the economy, the central bank governor, in consultation with the finance minister would agree on inflation rate that they would target. Once that is agreed, they then go to use all the instruments available to ensure that they do inflation targeting methodology. That has been the direction in most other climes. I believe that is the direction the CBN should be following. But I believe the CBN is autonomous and whatever it is that might have caused the delay, it is the CBN governor that should provide answer for that. But it is better to be late than never. They have come up with a flexible foreign exchange policy. I am really glad that they came up with complementary policies, particularly the OTC FX Futures on FMDQ, which would ensure that frontloading, is not allowed. The market becomes very inelastic when you frontload your request as a trader or as a manufacturer. You had trade finance with your foreign counterpart which then means there would be regular cash outflow of about $200,000 a month. But because you are unsure of what the rate would be in the next two to three years, you now want the entire $30 million today. But, with the derivatives instruments that are available in the market today, you can actually hedge that foreign exchange need. So, the cash flow requirement is not needed from day one and that relieves the market. I am glad that as the market started six weeks ago, even the futures that they kick-started, they have actually started settling them and that would bring sanity in the foreign exchange market.
One challenge the forex market is facing presently is the issue of liquidity. At this point, don’t you think the task of canvasing for foreign investors should be for the fiscal authorities because from the look of things, it appears as if they have left that for the central bank alone?
I agree with you, but all of them should do it. I agree that it should be more from the fiscal authorities. This is because everything is about confidence. Now that we have a flexible foreign exchange market, the foreign investors are watching. Everything is about the confidence in our economy. Every time there is a news flash about Nigeria: something happening in the hinterland, kidnapping, Niger Delta Avengers, and all of those things, they are doing their risk analysis. All of these wash into our confidence index. That is what then determines when the foreign investors would come. I have said it time and again that Nigerians are a bit impatient. If we started a market six weeks ago, it is too early to start to say foreign investors have not started coming. They would take their time! When they take their time and they realise that the market is up and running and is organised, they would come. When you do a trend analysis, you will find out that the foreign exchange flow that you have been seeing in the last two weeks is higher than what happened before. When the market started, the trade arrears of about $4 billion were cleared by the CBN. But today, I can tell you that in the last two weeks, the CBN has not been the major supplier of foreign exchange. It is now from independent sources. Then, you are beginning to see the market settle. So, before long, the naira would find a new equilibrium and then we begin to see the sanity that we expect. It would take some time. Good a thing, the government is addressing the issue of security. Now, there are discussions going on with the militants and they are working very hard to fix infrastructure. So, the good news coming out of Nigeria now, should encourage foreign investors to return to Nigeria any time soon.
So what do we need to do to come out of this present economic situation we are in as a nation?
My advice would not be so much to the government, but my advice would be to you and I. I often say it that a devalued currency is not a death sentence. Those of us who are students of economics should go and read again about the evolution of the South Korean economy. The South Korean currency depreciated heavily in the 80s. That was when their growth was also very high. In other words, depreciation presents its challenges, but it also presents its opportunities. What all of us should watch out for and do that government would embark on medium to long term policy to diversify the economy and bring the needed foreign exchange, but those policies won’t kick in today and tomorrow. It doesn’t seem as if we are bereft of those ideas, the ideas are there: Leverage on agriculture to improve your export earnings. But agriculture is not something you can improve immediately. The second thing is that you should also work on productivity. When you make your economy a lot more productive, then people would come. All of that is also medium to long-term. But you and I have a responsibility today to moderate our importation. We should reduce our propensity to import. About four items gulped 56 per cent of our forex. Last year we spent 30 per cent of our forex importing refined products. That is self-inflicted. If the Yar’Adua government had not reversed the sale of the two refineries in 2007, we would not be where we are today. Hopefully, by the time Dangote Refinery comes on stream hopefully by 2019, we would stop that. So, just imagine us saving that 30 per cent. Eleven per cent of our forex goes into food importation, 15 per cent goes into medical and education tourism. And when you add the three, it gives you 56 per cent. Can’t we do something about that immediately? If we do something about that and alter our lifestyle, things would be better. Exchange rate is just a reflection of your import and export, and nothing more. But everybody sits down and expect that government would do magic. There is no magic wand anywhere; we should understand the structure of this economy. The days of very high oil price is over. But why can’t we sit down and decide to stop importation of most of these items and all of us embark on significant lifestyle change? I hear Nigerians say we are not an exporting nation, I say it is either you export or you perish. Instead of saying we are not an exporting nation; we should all sit down and see what we need to export. There is America Growth and Opportunities Act (AGOA). The first tranche ended 2015 and Nigeria didn’t have anything to show for it. Now, it has been rolled over by another 10 years, we should log into it. Why can’t we sit down and work on the quality of our goods and then embark on aggressive export? So, export drives import substitution and lifestyle changes. These are the short-term things that would moderate the exchange rate. And let good news continue to come from Nigeria. Foreign investors would come. But, don’t rely too much on foreign investors because 70 to 80 per cent of money coming in is for carry trade activities. It is good for a short-term, but the speed at which such funds come in is the speed at which it goes out. We would prefer proper foreign direct investments, where you bring in foreign exchange to set up manufacturing plants. But that can only happen is the confidence level grows. And that is what we should embark upon.
With increasing non-performing loans in the banking industry, how safe are Nigerian banks?
We knew it that non-performing loans would spike, to the extent that banks were exposed to companies that are now issuing profit warnings, to the extent that some of them have foreign exchange exposure. Nobody should be surprised. But, it is not as bad as it was the first time it happened. But now, banks have very robust capital levels. Capital levels today are much higher that we were in 2008/2009 when it happened. I was the Deputy Governor supervising the financial sector then. So, with increased capital levels, I think they have the reserve buffers that can make them to overcome the challenges. Yes, there could be occasional pressure, but I believe the central bank is strong enough to deal with that and there should be no reason to panic. My take is that the industry is calm, the regulators are up to it and they would deal with it on a case-by-case basis. But there is no systemic problem at all.
If you are still in the central bank, is there anything different?
I would not be able to talk about that because the kind of things those in there see, I don’t see here and it will not be fair for me to sit down here to comment on that. This is because the number of files the CBN governor opens in a day, I don’t have access to those files. Most of the information today, it is only when I read in the newspaper. As a former regulator, I don’t think it is right to sit down here and say if I were in his shoes I would have done it differently. Our own is to advise them to continue to do what is right and for us Nigerians to do things that would also be in line with what they are doing.