Shelleng: Nigerian Economy on Brink of Collapse
In this exclusive chat with James Emejo, the Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, paints a grim picture of the country’s dire economic conditions occasioned largely by the current global headwinds. He, among other things, discussed an array of macroeconomic issues and how the relevant authorities can respond appropriately to steer the economy out of the woods.
Obviously, it is not the best of times for the Naira in recent times amidst a weak export base. What do you think is the problem and what is the way out?
The Naira is simply overvalued and with very little demand for the Naira in the global market (due to a weak export base), there is really no miracle that can be performed for it to gain value in the short term (aside from the artificial defending of it by the CBN, which currently has very little FX liquidity. The parallel (black) market is perhaps a true indicator of the real value of the Naira presently despite the CBN suggesting that the market is artificially inflated. The supply-demand dynamics are clear for all to see. The obvious way for the Naira to gain value is that we become net major exporters of goods and services and demand for the Naira will gradually increase. However, a short-term solution could be to remove the current controls on cryptocurrency transactions as it provides an alternative source of accessing foreign currency outside the CBN and parallel market. Despite the transaction restrictions by the CBN, Nigeria remains one of the highest crypto trading countries globally. I believe a progressive-thinking government should have looked out for how to harness the opportunities within that sector rather than out-rightly banning it.
What is your assessment of the Nigerian economy considering the current global headwinds?
In my humble opinion, the Nigerian economy is teetering on the brink of collapse with no clearly defined strategy in place to deal with the effects of the global headwinds. Inflation levels are at a record high largely caused by cost-push factors, the unemployment rate has remained above 33 per cent, and government debts are at the highest levels the country has ever witnessed but more worrisome is that we are using almost 100 per cent of our revenue in debt servicing. GDP growth has shrunk by almost 15per cent in the last quarter but remains around 3 per cent annually, which is below par for a country with so much potential. The Naira has been in a free fall despite the central bank’s best efforts to continuously defend it, albeit an exercise in futility. Foreign direct investment has continually dwindled and will likely remain low till at least after the general elections but is still hinged on the effects of the Russia-Ukraine crisis. Our delisting from the JP Morgan emerging market sovereign list is perhaps the culminating assessment of where we are economically as a country. Also, there are inconsistencies between the monetary and fiscal in terms of policy direction and synergy, and this has exacerbated the problem and added to the economic malaise.
Foreign direct investment is needed more than ever to stabilise the economy, do you think this can be achieved in the current state of the country?
Typically, there are certain conditions a country must meet to attract significant foreign direct investment. These are political stability, stable exchange rate, low cost of production, and a generally favourable business environment (ease of doing business). Ask a layman on the streets of Nigeria today whether the country meets any of these conditions and I am sure you will get a negative response. The problem is further exacerbated by the global capital flight away from emerging markets caused by uncertainties due to the Russia-Ukraine crisis. Global fund managers, hedge funds and other investors that were favourable to emerging market investments due to potentially higher returns are de-risking their investment portfolios and pulling funds out of riskier regions to safer climes. If Nigeria wants to regain its status as the number one destination for FDI in West Africa (at least), then there are some significant factors that need to be addressed: insecurity, infrastructure, and economy.
The current government has been implementing reforms to remove obstacles to doing business in the country. How would you rate the outcomes so far?
According to the World Bank’s annual ease of doing business rating, Nigeria’s current ranking is 131 out of 190 economies. I personally think that is a subpar ranking given the size of the economy and the potential within it. This administration has made some attempts in improving Nigeria’s ease of doing business ratings. President Muhammadu Buhari inaugurated the Presidential Enabling Business Environment Council (PEBEC) in July 2016, with the Vice President as the Chairman. Though the PEBEC has had some marginal successes such as ensuring some government agencies at least have functional websites, visas on arrival for foreign investors, strengthening of business incorporation process etc. Despite this, the reality is that the current administrations have failed to harness the potential of the private sector business and MSMEs as major drivers of the economy. Multiple taxations, insecurity, inadequate infrastructure, and stringent capital controls have crippled the MSME sector, which has brought about some of the poor economic indicators we are experiencing today. The MSME sector is a major employer of labour in most open market economies and therefore, its stifling has seen unemployment figures reach unprecedented levels.
Let’s look at the nation’s capital market: has it been living up to its mandate in terms of mobilisation of capital for long-term infrastructure? What are your thoughts?
The Nigerian Capital Market is a potential sleeping giant and has remained largely underutilised. However, this could be attributed to investor apathy still lingering after the 2007-2008 financial crisis and stock market collapse. However, with the new reforms and revision of the 10-year Capital Market Masterplan, there is certainly more impetus towards harnessing the capital markets. There are currently two infrastructure funds listed on the FMDQ exchange and the Federal Government Sukuk Bonds for various infrastructure funding have all been oversubscribed, which shows positive investor appetite. Whilst domestic debt may be deemed as generally more expensive, it limits the country’s exposure to currency and interest rate risk amidst current hikes in interest rates by central banks globally. With the FGN’s current debt exposure, it may find it increasingly difficult to access foreign funding and as such a viable option is the domestic market. The impetus is on capital market operators to create the products and structures to harness the domestic capital.
How would you assess the synergy between the fiscal and monetary policies and their effects on economic management?
I believe that the lack of synergy has been one of the major reasons why the economy has performed so poorly. On the fiscal side, the Ministry of Finance has been largely focused on borrowing and raising taxes to fund a deficit budget despite the stagnated economy, whilst the CBN has been battling inflationary pressures and defending the Naira caused by the country’s overexposure to importation and other cost-push factors that cannot be tackled by monetary policy alone. The fiscal side should be concerned with providing an enabling environment for economic growth, encouraging local production, and improving domestic trade whilst moderating areas that have unfair advantages and excesses. However, political and socioeconomic constraints have hampered efforts on that front. The onus has, therefore, been passed to CBN, whose actual function is supposed to be to complement fiscal policy by providing adequate liquidity in the key areas needed for fiscal policy to be effective. The CBN has now found itself delving into aspects of fiscal policy by not only determining economic policy e.g. banning certain imported items from accessing forex or encouraging local production through schemes such as the Anchor Borrowers programme but also providing direct funding to key sectors to stimulate growth. To be fair, the CBN has probably reached the limit of its powers in terms of economic management and the onus lies on the fiscal to take a leading role in the economy rather than merely being focused on how much revenue or borrowing the government can get. Decisions on how the economy can be effectively managed with less borrowing cost-cutting and mobilizing domestic funding sources in conjunction with the CBN will provide the much-needed synergy for better economic management.
Inflation has been a major threat globally. How can Nigeria manage and survive its effects?
Developed countries have been able to use their fiscal buffers and monetary policy to alleviate the effects of inflation but sadly countries such as Nigeria are left majorly exposed due to our over-reliance on imported goods and inadequate fiscal buffers to alleviate the inflationary effects on the economy. With the current global supply shocks, the cost of imported goods, especially food, has skyrocketed. However, this provides an opportunity for local production to improve. Ideally, the government would provide subsidies in key areas such as food but sadly the government is currently too cash-strapped amidst a burgeoning debt profile and dwindling revenue. Our sovereign wealth fund should ideally provide succour in times like this with the stabilisation fund earmarked for economic downturns. However, the Nigerian Sovereign Investment Authority (NSIA) that manages our sovereign wealth was inadequately funded from inception with $2 billion seed funding, despite the oil boom during former President Goodluck Jonathan’s administration that saw oil prices reach above $140 per barrel. Nevertheless, it must be noted that the nature of inflation in Nigeria is typically cost-push caused by an increase in production costs due to increases in petrol/diesel prices, electricity tariff increases, and currency devaluation. As such, the onus would be on the government to spend in key areas that will lower the cost of production i.e. infrastructure, transportation etc.
What are your thoughts about the exchange rate regime?
I believe the multiple exchange rate window has been a major determinant in our underperforming economy. Providing an arbitrage opportunity in a market like Nigeria merely gives rise to people making huge profits without producing and increasing the country’s GDP… all at the expense of the Nigerian economy. Furthermore, the government has spent billions over the years to defend the Naira but to no avail. Imagine if a fraction of that money was used in infrastructure development? The disparity between the official and parallel market rates is comical and will certainly be a negative indicator for the much-needed foreign investment. Whilst there are pros and cons to a free float of the Naira, it may not be wise currently given our exposure to global markets. However, we need to be realistic to ascertain its real value and adjust accordingly thereby providing much-needed forex liquidity.
What is your assessment of the unemployment situation in the country – and how can it be addressed?
The unemployment situation is extremely sad. A generation of youths is watching their lives just go by without any meaningful way to make a legitimate living. A number have turned to crime and other illicit vices. As I mentioned earlier, it is because there has not been a concerted effort in the past to see MSMEs as major drivers of the economy. We currently have an over-bloated civil service and continue to burden the government to offer employment to our wards. Rather, the government should provide the enabling environment for MSMEs to thrive. This alleviates several socio-economic issues. Another aspect that could be looked at is the exporting of human resources; a deliberate government programme that seeks to train and officially send Nigerians to countries and regions that require the skillset. Other countries are currently stealing our brightest minds by offering standard incentives and a means of livelihood, why don’t we look to harness all that human resource potential and export it?
