Ashade: FG Must Increase Tax Collection Efficiency 

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Peter Ashade is the Group Chief Executive Officer of United Capital Plc, an investment banking group that provides capital and financing solutions to African governments, companies, and individuals. In this interview, he advises the federal government to take steps towards increasing its revenue collection so as to stimulate economic growth and address the myriad of challenges facing the economy. Obinna Chima presents the excerpts:

How will you say the economy performed in the first seven months of the year?

The performance of the Nigerian economy was broadly muted in first half of 2019, as evident in the GDP figure for Q1-2019 which came in at 2.01 per cent, slightly above the same period in 2018. In our 2019 outlook, we had identified three dominant themes expected to shape events in the Nigerian economy in the year. These included: the 2019 general election; a possible change in the leadership of the CBN; and lastly, possible structural changes in the system to drive a faster and sustainable GDP growth in the periods after May 29th.  As of July 2019, two of the three key themes we highlighted had materialised. Thankfully, the elections did not pull a major surprise and the government opted to reappoint the CBN Governor for a second term which has signalled stability in the system. Also, oil prices rallied between January and May, exchange rate remained stable, against speculations in some quarters, headline inflation moderated to 11.2 per cent before the recent reversal and yield on government bills and bond fell moderated considerably following CBN’s surprise rate cut to 13.5 per cent in March. Additionally, after tumbling by about 10 per cent year-to-date (YTD) in April, equities reversed losses in May following MTN Nigeria’s listing by Introduction but remained in the negative region. Overall, we think economic outcomes in Nigeria has been decent but very soft.

So, where do you think the economy is headed and what is your projection for the financial market

As noted above, the re-election of President Buhari and the re-appointment of Governor Godwin Emefiele signifies stability in the Nigerian economy over the short to medium term. However, for the economy, we expect growth momentum to remain in the region of two to 2.5 per cent, unless there are major policy changes. We do not see a near term devaluation of the naira on the back the sizable external reserves worth $45 billion in the war chest of the CBN to keep the naira stable, although rising expenditure and debt profile portends a downside risk in the medium to long term. Inflation is unlikely to slip below 10 per cent which is the desire of the CBN, due to pressure on food prices, rising wages and weak output base. As such, the CBN may be forced to keep the rate at the current level, for now, capping average yield on Fixed income assets at 13.5 per cent. In the absence of more primary market activities, our outlook for equities is muted as foreign investors continue to snob Nigerian equities for a higher yield on bills and bonds. Overall, we think the outlook for the Nigerian market depends on government pronouncements in the form of formation of his cabinet, key policy directions and reforms. 

 

Nigeria currently faces revenue challenges, what in your opinion are the ways the government can improve its revenue?

Currently, oil revenue accounts for over 65 per cent of the total government revenue implying a high level of exposure of the economy to vagaries in the oil market. In a move to boost government revenue, the FGN has recently introduced various initiatives such as the Voluntary Asset & Income Declaration Scheme (VAIDS), Whistle Blower policy, and has recovered several billions of Naira that were looted from the treasury. However, these efforts remain too little compared to our needs. To improve the revenue profile of the government, we need to improve the production base of the economy because government revenue exists in the context of the broader economy. A fast-growing economy will boost tax revenue via taxes, duties, licenses, and royalties. But a declining or creeping economy will not. To boost growth, economic activities in the most strategic sectors of the economy must be enhanced. For example, the passage of the PIB will boost investment in the oil and gas sector, thus oil revenue.  Resolution of the Apapa gridlock will increase the flow of goods into and outwards of the country and thus, increase custom duties and tariffs. We also need to find a way to increase our tax collection efficiency and move away from the current five per cent tax/GDP ratio.  Finally, a low hanging fruit that can help increase government revenue quickly will be the removal of subsidy on petrol prices and the unification of the exchange rate across available windows to one. This can boost revenue by more than 25 per cent. If for instance the official exchange rate is taken from N305/$ to the more realistic N360/$, this will increase oil revenue to the government by 18 per cent. Similarly, the removal of subsidy which was estimated at about N700 billion in 2018, will increase revenue by about 10 per cent

What is your outlook on the banking sector, especially with the latest move by the Central Bank to put a ceiling on investment in government securities?

Nigerian banks clearly need to grow their loan books aggressively to plug recent pressure on interest income, however, it is unlikely for banks to rapidly grow their loan books in 2019 given that momentum in the Nigerian economy continues to falter. The CBN’s proposal to put a ceiling on Bank’s play in the Bills and bonds market is a tricky one because you need Banks to fund the huge fiscal deficit from the government. Pension Fund Administrators [PFAs] cannot do it alone. The Banks are the major dealers in that market. On lending to the private sector, the interest rate environment remains highly unattractive for borrowing considering that Nigeria policy of 13.5 per cent remains one of the highest within the sub-region.                                              

But why do you think the banks are shying away from lending to the real sector?

Following the plunge in oil prices between 2014 and 2016, NPL ratio of banks touched a record high as many debtors find it difficult to service their debt. Many banks got their fingers burnt due overexposure to dollar loans in the oil sector. Beyond this, loans to general commerce accounted for one of the largest contributors to NPLs due to the tougher economic environment. So far, developments in the Nigerian economy is yet to show significant changes as GDP growth remained low, inflation stays at double-digit and government debt continues to rise. According to the recently published banking sector data for Q1-19 by the NBS, credit to the private sector added just 0.5% to N15.2tn in Q1-19. This is clearly unsurprising considering the concerns around the election period. Even though political uncertainties are out the way, economic uncertainties remained unaddressed. The government is yet to outline the critical policy initiative it will implement to achieve the lofty goal of lifting 100million people out of poverty. Accordingly, banks are shying away from lending due to structural uncertainties in the economy and the weak capacity of the current economic framework to drive faster GDP growth.         

What reforms do you expect from both the fiscal and monetary policy authorities?

In their second term, both the President and the CBN governor must battle structural and policy challenges which have kept output growth at sub-optimal levels. More specifically, they must tackle economic challenges such as slow GDP growth and double-digit inflation; poor revenue mobilisation and rising debt profile; petrol price subsidy and the naira exchange rate; government regulation, the NNPC and foreign direct investment, booming population and job creation; power crisis and port congestion; corruption and security challenges. In the face of these challenges, if the current policy framework is sustained, the outlook for the economy over the next 4/5 years will be muted. However, if we implement several far-reaching reforms in the oil & gas sector, the power sector, and we review the current exchange rate policy. We may be able to unlock FDI inflows, hasten GDP growth and we can get the economy going faster again.

The CBN has maintained exchange rate stability as its policy anchor over the last few years, what is united capital’s take on this? 

Efforts to keep the exchange rate stable has been done at the expense of huge foreign exchange reserves, a relatively higher interest rate environment, and massive liquidity mop-up. Yes, this has supported the stability of the naira since 2017, but the headline inflation rate remained at double-digit and GDP growth remained weak. We think an alternative strategy that the CBN can consider is ‘inflation targeting’, a monetary policy regime which pursues a low, stable and predictable explicit inflation rate. In contrast to ‘exchange rate stability’, ‘inflation targeting’ has proven to reduce relative price variability, guide market expectation and promote long term growth. While the model is popular in more advanced economies such as New Zealand, Canada, and the UK, experiences in developing countries such as Paraguay, Chile and most recently Jamaica, tells that this strategy is increasingly a more effective policy anchor. However, for monetary policy to deliver a low, stable and predictable inflation rate environment, the CBN must work with the fiscal authorities to reduce fiscal dominance by cutting down public debt to avoid crowding out the private sector. The private sector must be empowered to diversify and boost export earnings, as such, improve the current account position. Finally, the CBN must embrace a more flexible FX regime to enhance its ability to respond to shocks.

How is United Capital tackling financial inclusion?

We have one of the most robust trading platforms in the industry today. Our platform (called “Investnow”), allows users to aggregate all their investments and view them as a single portfolio covering all products offered by United Capital and its group of companies. We also run free investment clinics for clients and their members of staff. We offer financial planning advice as well as informational services investment options in the market. Through our cutting-edge Investment Research unit, we constantly inform our clients on developments in the market and offer investment advice in line with current market realities.

What special initiatives should we expect from United Capital and its subsidiaries in the second half of the year?

The Group launched some unique products and service offerings during the first half of 2019 financial year and intends to ramp up our activities in these areas. For example, we launched an SME financing portal which allows Small and Medium-sized businesses to fill in certain details about the company as a prerequisite to accessing finance. We also have an Islamic investment product (the Mudarabah Investment Scheme) targeted at Islamic faithful whose beliefs do not permit them to invest in traditional investment products.

 

We also launched our new Heritage Trust which allows parents and guardians set up an investment trust to be applied to the education and general welfare of their children. We also have some interesting products in the pipeline which will be publicised in due course.

 

The Group is committed to its corporate goal of being the financial/investment role model across Africa. Our focus is to grow and expand our businesses to ensure that all customer segments have access to financial and investment advisory services. We will also engage stakeholders to ensure we serve them with best-in-class services to enable them to achieve their goals whilst also providing value for our shareholders. 

What is United Capital doing to improve brand positioning? 

At United Capital, we are constantly working on improving our brand position that helps us better understand what our customers want as well as how the organisation can strengthen its brand equity. With the proliferation of digital technology and our heritage that spans over 5 decades, the team is constantly working on market segmentation, customer profiling and targeting that will put us ahead of our peers.  

We have adopted an always-on digital campaign to showcase the strength of the United Capital brand, our investment and financial service offerings right where our customers can take advantage of them.

What are your expectations from the ministerial nominees?   

First, the announcement of the nominees is clearly a positive development. In  2015, the announcement was delayed till November, so this is certainly an improvement from where we were coming from. For us, our expectations are in terms of speedy formulation of policies and decision making to accelerate economic activities. In the last eight months, what we have observed is a situation where politics has taken the front seat due to electioneering and politicking at the expense of policies and economic progress. With the announcement and portfolio allocation we want the ministers to hit the ground running. Formulate pro-market policies and get the system back to work.   

The CBN is proposing another round of banking sector recapitalisation, what is your take on that? 

Well, we have heard the comment from the Governor in his 5-Year plan speech. However, we are waiting for details. By our estimation, another round of capital is likely only going to affect the smaller banks. By Q 1-2019 results of the banks, most of them boast of shareholder’s fund excess of N80bn save for Unity Bank and maybe the newly licensed banks and the rescued banks. So we, imagine that another round of recapitalization may not have a far reaching impact on the sector. From N25billion capital base, increasing the required capital to say N50billion, will mean that almost all the listed banks will meet up with zero effort. Hence, this suspect that the CBN we workout its actual intent and do something in the best interest of the financial system.