Uche Uwaleke, a renowned Professor of Capital Market and President, Capital Market Academics of Nigeria, in this interview with Abdulwahab Isa, speaks on the economy and interventions by monetary and fiscal authorities at the peak of COVID-19
Let us begin by taking a quick look at the current state of the Nigerian economy vis-àvis COVID-19. Would you say the palliatives and various interventions are achieving the desired results?
To some extent, I would answer yes. It is common knowledge that the Nigerian economy is reeling from the negative impact of COVID-19 as you rightly noted. I do not think any watcher of the economy was taken aback by the Q2 slump in real GDP put at -6.10 per cent, according the National Bureau of Statistics. It is easy to see why this happened.
The negative impact of COVID-19 on health which resulted in lockdowns and supply chain disruptions; the collapse of crude oil price and reduction in output in compliance with OPEC plus agreement, the illiquidity in the forex market and the lingering insecurity in the country which affected agriculture output are to blame.
The third quarter has just ended and it is most likely that the economy will record another negative growth in real GDP confirming officially a recession status for Nigeria. It is my bet the contraction will not be as severe as we had in Q2 2020. In other words, the downturn this time will be smaller due in part to the gradual restart of the economy as well as the raft of intervention measures by both the fiscal and monetary authorities. In a nutshell, I think the interventions by the government are gradually yielding results but the full impact may not be felt till perhaps the end of the year and well into 2021.
Still on the interventions, the CBN governor at the last MPC meeting put total disbursements from the bank’s interventions in the wake of the COVID-19 at N3.5 trillion. This is aside plan by the bank to contribute N1.8 trillion of the N2.3 trillion Federal Government’s one year Economic Sustainability Plan (ESP) fund to revive the economy. Looking at CBN’s COVID-19 response measures, what’s your take?
I think the response measures by the CBN, in line with its developmental function,have been timely and are helping to mitigate the negative impact of the pandemic on the economy. In addition to the N3.5 trillion mentioned by the CBN governor are other measures it has taken before now including the reduction in interest rates and extended moratorium applicable to all its intervention programmes as well asforbearance to banks to enable them restructure outstanding loans.
All these are commendable. What the CBN needs to do now is to devote attention to proper monitoring of the credit facilities to ensure they are utilized for the purposes meant. Since the funds were disbursed as soft loans and not grants, it is important to ensure that the loans do not become unrecoverable.
For me, the long term game changer is the establishment of a N15 trillion infrastructure development company which the CBN governor had talked about earlier. It will go a long way in augmenting current funding levels which are grossly insufficient.As you well know, Nigeria has one of the lowest ratios of infrastructure stock to GDP in sub-Saharan Africa and studies have shown that to bridge the infrastructure gap requires about $100 billion investment on an annual basis.It is against this backdrop that the proposed infrastructure company to be co-owned by the CBN, the AFC and the NSIA while being left in private hands for effective management is a welcome development.It goes without saying that the capital market remains a veritable source of unlocking the potentials of infrastructure financing in the country.
So I expect that there should be a plan from the onset to eventually list the proposed infrastructure company on the stock Exchange so that its shares can be freely available to Institutional investors such as Pension Funds and Mutual Funds.
The country is celebrating 60 years of independence and it is an opportunity to take stock. As a professor of capital market, would you say the country has leveraged the market potential enough?
There is no doubt that the capital market has contributed a lot to the nation’s development. It has served and continues to serve as a veritable source of long term capital for not only companies but also States and the Federal Government. Given the size of the Nigerian economy and the growing population, the potentials of the capital market, yet untapped, are quite enormous. So, i think there is huge scope for more positive impact.
The good news is that market infrastructure has improved remarkably over the years. Only a few days ago, the Securities and Exchange Commission granted approval to a company called NG Clearing Limited to launch clearing and settlement of exchange traded derivative products making it Nigeria’s premier Central Counterparty Clearing House. As you know, financial derivatives have yet to be traded in our capital market. So, this is a major step which is consistent with a 10-year Capital Market Master Plan,under implementation, designed to harness the potentials of the market. There are challenges though or what you have referred to as gaps.
These include the fact that the market is still shallow and yet to be properly positioned to support Nigeria’s economic priorities. At less than 20 per cent of the country’s GDP, its size hampers its role in economic development. Compared, for example, to South Africa with over $1trillion in market capitalization representing over 200 per cent of the country’s GDP, the total market capitalization in Nigeria actually pales into insignificance.
Closely tied to this is the non-diversified nature of the issuer base with listing concentrated in a few sectors as well as the small number of listed companies (less than 200) in a country touted as the biggest economy in Africa. Further, seen in the light of the Nigeria’s huge population, the level of individual or retail investors’ participation leaves much to be desired.
What is the way forward?
On the way forward, I would say that, like every other sector of the economy, the capital market requires government support. This can come by way of granting tax incentives to companies that are willing to list on the Stock Exchange.I also think more financial market education should be carried out with a view to expanding the retail investor base.
The cost of living in Nigeria is on the rise with inflation rate now as high as 13.71%. What factors are responsible and what can be done to address the challenges?
Quite frankly, the rising inflation in the country amidst downturn in economic activities is quite worrisome.This situation is what is described as stagflation which further complicates monetary policy against the backdrop of forex market illiquidity and rising unemployment similar to the country’s experience during the 2016 economic recession.
This upward inflationary trend is the pass-through to commodity prices of increase in VAT and electricity tariffs, implementation of stamp duties, border closure as well as COVID-19 impact on supply chains and insecurity in the food belt regions of Nigeria.
It is also a reflection of the high exchange rate.The increase in the pump price of fuel presents a further pressure point. I think the best way to rein-in the rising inflation is for monetary and fiscal policies to synchronise in addressing the major inflation driver, which is the food component that is now as high as 16 per cent. On the fiscal side, it is important that the government puts on its fighting gloves to wrestle the incessant bandit attacks on farming communities even if it means overhauling the entire security apparatus.
This government has articulated a good massive agricultural programme in the Economic Sustainability Plan. The time for aggressive implementation in order to tackle inflation is not tomorrow, not even today, but now.
My advice to the MPC of the CBN is to continue to maintain status quo with regard to the policy parameters while focusing attention on how to improve liquidity in the forex market including through the on-going unification of exchange rates.
There is no doubt that the CBN has done a lot in pursuit of its developmental function to stimulate the growth of the Agriculture sector in particular. I am confident that in the coming months, the impact of these interventions, including the recent non-interest financing schemes for the agriculture value chain, will reflect on bountiful harvest and help moderate inflation rate.
The Monetary Policy Committee in September had reduced the Monetary Policy Rate by 100 basis points from 12.5 per cent to 11.5 per cent. What likely impact will it have on the economy?
Frankly speaking I had expected the status quo to be maintained against the backdrop of rising inflation and pressure in the forex market.By lowering the MPR, the real rate of return has been dragged further into the negative territory which is likely to affect capital inflows adversely.
In reducing the MPR, the MPC must have been emboldened by the recent marginal accretion to reserves as well as the approaching harvest season which is expected to moderate food inflation.
But the reality is that with foreign investors exiting the country following COVID-19, except crude oil price recovers substantially, I see further pressure in the forex market. If you notice, the gap between the AFEX rate and the parallel market has begun to widen following increasing demand on the back of resumption in International flights.Also, given that a lot of cost-push factors are responsible for inflationary pressure including the increase in VAT, hike in electricity tariffs and pump price of fuel as I pointed out earlier, I see headline inflation worsening given all the downside risks. From experience, a reduction in MPR has little or no impact on economic growth due to poor transmission mechanism. Deposit money banks hardly reciprocate this gesture through a commensurate reduction in interest rate due to several other costs borne by financial institutions arising from infrastructure deficit especially power and insecurity. So, empirical studies in Nigeria have shown that a cut in MPR hardly translates to a reduction in lending rates.
I recognize that a number of central banks have cut rates in response to the pandemic. But most of them have done so because inflation rate was within the target range. In the case of Nigeria where inflation rate of 13.2 per cent is well above the CBN’s upper band of nine per cent, cutting the MPR in a season of rising inflation and forex market pressure may not be a wise decision. The CBN has been supporting economic growth in the last few years using more of unconventional measures in line with its developmental function.The MPC could have advised the CBN to strengthen and possibly scale up its interventions in the various sectors of the economy which in my view would have been a more effective way to stimulate the economy. While I support a reduction in both the standing deposit and standing lending rates following the adjustment in the asymmetric corridor, it is my submission that any support to economic growth at this critical time from the CBN is better achieved through heterodox measures. Even in the US that is noted for dual monetary policy objectives of price stability and full employment, the Federal Reserve can only lend a supporting hand to the government. Having said that, the fiscal authorities, ie government at all levels, should be on the driving seat with respect to economic growth and development.The reality is that there is a limit to what the CBN can do in this regard.