Adebajo: Lack of Policy Direction Creating Uncertainty


Mr. Tilewa Adebajo is an economist, an accomplished investment banker and corporate finance expert. In this interview on ‘The Morning Show,’ on Arise Television, he stressed the need for the federal government to initiative policies that would stimulate economic growth and also synchronise monetary, fiscal and trade policies. Peter Uzoho brings the excerpts:

Before we begin to talk about the economic outlook for 2020, we like you to review some of the measures adopted particularly on monetary and fiscal policies in 2019?

It was quite a challenging year and I think one of the most unfortunate things as we go into the New Year is the fact that all the key credit agencies have downgraded Nigeria’s outlook. Instead of looking at us now as a stable economy, that outlook has changed, which is rather unfortunate. And why has this happened? 2019 was a particular challenging year for Nigeria and one of the key problems we had with the economy was the fact that the monetary policy side of the economy was the only focus of the economy. But unfortunately, we had challenges on the fiscal side in terms of government being able to mobilise its revenue and to be able to get its fiscal restructuring in order.

That is because over the last four to five years of this government, they have been financing their budget with deficits, which has accumulated the country’s debt profile. The debt profile of Nigeria has gone from about $40 billion and currently now at $80 billion. We are now using close to about 55 to 60 per cent of our revenue to service debt. So, on the fiscal side, there are lots of challenges. So, what monetary policy has been doing is to try to stabilise the rates. But unfortunately, one of the key economic indicators which is inflation is something that is now getting out of control of the central bank.

It was as high as 19 per cent, they were able to bring it down to 11 per cent and now it is on the rise again. Talking about growth, unfortunately the growth numbers are not positive, in the sense that our growth has only been about 2.5 per cent. Now, if you are growing at 2.5 per cent and you have a population of 180 million people that is growing at three per cent a year, then the growth cannot impact on that population. So basically, with the growth of 2.5 per cent, we are not even near our population growth of three per cent. So, at minimum, Nigeria’s economy must be growing at five per annum and we haven’t reached that target.

Will you say the uncertainty around last year’s elections as well as the border closure also impacted on the economy?
What tends to affect the economy during elections is more of the foreign direct investments (FDIs) and the foreign portfolio investments (FPIs). The portfolio investors fearing the outcome of the elections might have priced the risk into their investment. And we saw that a lot of all these affected the Nigerian economy in terms of confidence. The problem of the overall economy has been confidence. If you recall this government came up with an Economic Recovery Growth Plan (ERGP) and they had projected that the economy was going to grow at five per cent this year and seven per cent. Clearly, that is not happening. So, it is important that they need to go back to the drawing board with this new Economic Advisory Council they have put together. They need to set a new policy direction.

It is that lack of policy direction of this government in terms of how they want to manage the economy going forward that is creating a lot of the uncertainty. And basically, we don’t have the stimulus that will grow the economy. As you know, if our economy is not growing at more than five per cent, with three per cent population growth, your economy is growing at a lower rate than your population growth. That accounts for more than the 100 million Nigerians in poverty and we are now named the poverty capital of the world.

So, the key thing really is that we need to grow this economy at five per cent a year at the minimum, and six per cent at the optimum level. If we are not doing that, we will continue to have a 100 million Nigerians in poverty. What this government needs to do is to create that stimulus to be able to balance, not only monetary policy on one end, but they need to also balance fiscal policy, investment policy and trade policy. It is the synchronisation of those four policies that will eventually drive economic growth. And we need to see a clear policy direction from this government in the next three years. President Buhari spent N650 billion in subsidising petrol which is more than education and health put together.

The government is taking steps to increase non-oil revenue, which is why they are proposing an increase in the Value Added Tax. What else do you think they should do?

Well, we need to be very careful because VAT is a consumption tax and if there is no stimulus already and there is no disposable income, and you have unemployment at about 35 per cent, so where is the productive capacity in the economy to spend to be able to create that stimulus? So if you continue to tax at a very high rate, then you are going to decrease consumption and you will not be able to get that spending from that stimulus to create growth. So, these are challenges that you really need to balance and to be very careful about.

As you have said quite rightly, we need to diversify this economy because we are very dependent on oil. It is something that we have talked about a great deal. And it is something that we are not doing much about and what is important or what people want to see or investors, both local investors and foreign investors, even companies here should be able to expand their factories and they want to see clear direction. Once you have that clear direction and you have business confidence, then local investors will go out, they will spend, build more factories, build more factories, they will invest in more business, expand their businesses and the foreign direct investors will also come in. But if we do not have the right structural approach to our economy, then that becomes very difficult and we are going to have stagnant growth for foreseeable future.

Is security also a factor?
Security is also very critical. We have been able to deal with security issues. And I think that security is not something that is on the front burner as we speak, we believe that has been managed and it is under control. And it is important to be able to project that positivity and to be able to deal with that situation once and for all and manage those perceptions, because it is all these issues that affect investments. This is because if you are not investing and you are not attracting investments, you can’t grow the economy. When the right policies and incentives are not there, then investment becomes very difficult. And if you have a situation whereby 100 million people are in poverty, already if you are increasing VAT and all the consumption taxes, you are going to impact them negatively.

So these are the sort of things that we need to be very careful about to be able to provide the stimulus. Now, we are going out to borrow $30 billion and you are going to take the debt profile from $80 billion to over a $110 billion. Now if you take a debt profile from about $50 billion to $110 billion in five years, and you don’t have much to show for it in terms of economic numbers, in terms of GDP growth, then we are going to be in trouble. And another problem I have with this, which nobody is talking about right now is that there is something called the Fiscal Responsibility Act.

Clearly with this borrowing, government is in violation of the Fiscal Responsibility Act. And I think that, that is a debate that I would like to have in the House of Assembly. I want the Senate to talk about the Fiscal Responsibility Act and the violation of this Act with the proposed borrowing and how they are going to readjust the limit. This is because, clearly, the borrowing limits have to be reset and we have to look at this borrowing because the impact on this economy of this borrowing is going to be negative if we are not careful.

With all these you have said what is your prediction for the pricing of foreign exchange?

Definitely, what the central bank has done was that it held rates, especially the monetary policy rate (MPR) very steady for a very long time, maybe for about a year or two, and what they were doing was to use the open market operations (OMO) within the bank and the loan-to-deposit ratio to be able to create some form of stimulus for lending. If the banks are not lending, then it is difficult to stimulate the economy and they are probably trying to adjust the loan-to-deposit ratio to push the banks to lend.

But if your economy is only growing at two per cent per annum and you have a 100 million people in poverty, who are the banks going to lend to? So the banks are also going to be very careful because they don’t want to create bad loans. So, the economic environment also has to be right for us to be able to get things going. In terms of foreign exchange, foreign exchange is also something that I think, in my own personal opinion, the naira is overvalued.

I believe that the naira should be trading close to N210 – N215 to a dollar, because we have multiple exchange rate windows. Nigerians in abroad today bring in $30 billion every year, but unfortunately most of these monies are not going through the banking system. We need to be able to create that confidence into our domiciliary accounts and let this money flow through the banking system. If this money comes through the normal banking channel, I am sure that we will have a normal exchange rate.

What is it that we can do as a country in order to have a better 2020 than we had in 2019?
After all said and done, Nigeria is still the largest economy in Africa; Lagos is still the fifth largest city in Africa. So, the potential of this economy – Nigeria is a G20 economy – is there. So, its now a question of the leadership to be able to create the right policies to be able to grow this economy and deliver value to the citizens. We live in a global economy, we sell our oil abroad and oil price definitely will affect us. Invariably, we have a low interest rate regime globally right now, something close to one per cent abroad. So, how are we taking advantage of those rates? And so I think it is important to understand that, yes, Nigeria is a very powerful economy and it is a question of how the leadership of this economy are managing the economy to deliver value for its people?

You referred to the Fiscal Responsibility Act, what are the limits to government borrowing?
The reality on ground is the fact that, everybody keeps talking about that Debt-to GDP ratio is fine. But even in personal financial management, if you are using 60 per cent of your income to service debt that is not generating income, then you are in trouble. And take a look at the Abuja-to -Kaduna railway line that was financed by the Chinese and we are not making any revenue from that project.

We should focus on projects that generate revenue to be able to, at least pay back some of the loans they took. So, the burden normally ends with the government. What we want to see is transparency and let the Senate and the House of Representatives debate the Fiscal Responsibility Act to see the fact that they have exceeded the existing limits and what laws have they done to be able to adjust those limits. Yes, you want to put these monies into infrastructure and other things, it’s all laudable, but the reality is that as we continue to spend 60 per cent of our revenue on servicing existing debt and we want to pile up that debt from $80 billion to $110 billion, if we are not very careful, we are going to end up with a liquidity crisis. And I think that this is where the anxiety is. So we must look at our Debt-to-GDP ratio, we should take a look at the revenue we have and how much of that revenue we are using to service debt. So, government has only 40 per cent of its revenue to be able to fund its recurrent and capital expenditure. So, we are in deficit financing for the next five years, the way I see it.

Are you predicting another recession?
Recession is too early to say because the economy is growing at 2.5 per cent. It is not a recession, what you have is a liquidity crisis, because the economy is growing. But that growth is not enough for a population growth at three per cent, but it is growing. The trajectory of growth is on the upward, but not enough. So, what we are saying is that what policies are you going to put in place to create that stimulus to be able to get growth at five per cent? If you get growth to five per cent, you have solved a significant problem. The challenge in Nigeria is fiscal restructuring. We have major fiscal issues within the federal government and that needs to be addressed.

So, if you have those fiscal issues, the only thing the central bank does is to be able to maintain financial stability, while the government tries to sort itself out. The central bank needs to get inflation under control, it needs to control the foreign exchange, because they are major challenges. So, the government needs to go through significant fiscal restructuring. There needs to be a structural adjustment on the fiscal side of government and if anything is going to move, it is the economy. Two other factors we don’t talk about is the trade policy and the investment policy.

So, the trade policy is what you are seeing now with the border closure. Now, government is beginning to take a look at that. There are all kinds of issues with Balance of Trade, illegal movement of goods through our and now they are focusing on all that. Now, they have shut the borders and we are beginning to see certain adjustments and they are beginning to insist on certain things. I think it is a positive move because a lot of things we took for granted before, enforcement becomes the key.

Do you think the border closure is positive?
It is and I think we should take a look at the reason why it was done. If you have a trade policy and your trade policy is focused in a particular way and some people, even Nigerians, import things into another country and then bring them in through the borders, with paying duties, that is illegal and makes our market becomes a dumping ground.

I think it is important that the Customs enforce this, and also work with the governments of ECOWAS to ensure that the trade agreement within the sub-region is functioning effectively. That is because it is not only Nigeria that is affected, there are other countries that are also affected. So, in the short-term, the border closure is good, but on the long-term we need to address these issues so that the right things can move through the borders. It is not that we are saying things should not go through the land borders, but we don’t want the wrong things to come in.

Let’talk about the Stamp Duty Act. The fact that individuals don’t need to pay directly, but just the merchants, does that completely exclude the consumers from paying anything at all?

For me, I am not a fan of these sort of taxes, because invariably, it is the consumers that would pay. Invariably, it is the consumers that would pay. The merchants are not going to pay; they are just going to add it to the cost of sales. So, whichever way it is, it goes back to the consumers. For me, one of the things that we have done successfully, Tunde Lemo, who was a Deputy Governor at the Central Bank of Nigeria, spearheaded electronic payments.

This was something that was at ground zero. We didn’t have ATMs, we couldn’t use the phones then to send money. But all of a sudden, within the last few years, we have created one of the most sophisticated electronic payment systems in the world and all of a sudden, transactions are moving in that direction. Now, you have a successful channel to be able to reduce your cost of banking, and what do you do? You start to tax it. So, for me it doesn’t send the right signal because this platform hasn’t yet reached the level of maturity. For me, I think we need to review that because again, you are in a situation where you have 100 million people in poverty. If you have a solid middle class of about 50 million people earning properly, fully employed and have disposable income, then there is no problem, and we can afford that. But, the economy is still fragile, so you need everything to create the stimulus.

So, what are the specific low-hanging fruits to turnaround the economy and what are the identifiable challenges we need to address?

The most significant challenge to Nigeria today is government’s debt profile. At $80 billion, it is not sustainable and now we are planning to take that debt to $110 billion, within a space of five years. For me, that is the biggest threat for our economy because what will happen is that if government begins to spend close to 70 per cent of its revenue to service debts, them there is no stimulus in terms of what it plans to do.

Infrastructure deficit is something that has been for us for a long, power sector challenges have been there and we need to address those issues. You have to create a market-driven model to drive investments into these sectors. Petroleum subsidy is also something that is going to affect us and we need to address that as well. There are many things we can do and like I have said, the fundamental of the Nigeria economy are still very sound. What this economy requires now is the leadership and policies that would drive growth for the benefits of Nigerians.