Dr Ayo Teriba is the Chief Executive Officer of Economic Associates (EA). He is also a Visiting Faculty at Nigerian University of Technology and Management (NUTM); Vice-Chairman of Technical Committee of the National Council on Privatization (TC-NCP), and Member of Governing Council of Ministry of Finance Incorporated (MOFI). In this interview with PAUL OGBUOKIRI, he says the solution to Nigeria’s present economic hardship is reserve adequacy. He tasked the government to grow its reserves to stabilise the exchange rate and reduce rising inflation and force prices of goods down
Despite the relative decline of inflation in July and August, the CBN Monetary Policy Committee (MPC) in its recent meeting raised the Monetary Policy Rate (MPR), the benchmark interest rate by 50 basis points to 27.25 per cent from 26.75 per cent. Could they have envisaged that the inflationary trend would continue in September?
The slight contraction in inflation in the two months ran contrary to reasonable expectation and it was clear to everyone who was informed that inflation would most likely continue to rise. Why? The primary fuel of inflation is devaluation and that has continued unabated. Yes, in spite of the few days of respite, the journey has been downward and as long as that is happening, it is not reasonable to expect inflation to come down.
What happened in those two months were attributed to harvest, inflation anywhere in the world is a monetary phenomenon. The trend of inflation in Nigeria would remain on the upward trend until you stabilise the exchange rate and so, if the Monetary Policy Committee (MPC) tightened the MPR, they were doing so because they saw that the exchange rate of the Naira was not strengthened, and unless the exchange rate of the Naira strengthens, then you would not expect the inflation to start declining.
Manufacturers are not comfortable with the raising of the MPR; they’re worried about the cost of money, the eroded purchasing power of the ordinary consumers and their high unsold inventory put at about 42 per cent. What is your take?
When you say manufacturers are not comfortable with the situation, the question I will ask you is; who in Nigeria is comfortable? There is no stakeholder in the Nigerian project that is comfortable with the rising interest rate, which is fueled by the endless tightening of the MPR by the Central Bank. However, you can’t blame the Central Bank for the tightening; clearly, they are trying to use the instruments at their disposal to stabilise the exchange rate and they are doing that in the hope that if they stablise the exchange rate, the inflation will as well moderate.
So, it is not fair to say only the manufacturers are not comfortable. We all are not comfortable. Nobody is comfortable with the hardship in Nigeria.
The monetary policy rate of the CBN is now 32. 75 per cent while NPR is 27. 25 per cent. If you add the corridor, which is plus 500 that will take you to 32.75 per cent.
The Central Bank is charging banks 32.25 per cent for accessing its funds after holding 50 per cent of the bank’s deposit at zero interest rate. So, you wonder if the banks have to 32.25 per cent which customers pay regardless whether they are customers, whether the customers are workers, consumers or manufacturers. Nobody is comfortable. That is really, really killing for real output. It is a cost imposed on production in the hope of getting stability. It is a real output cost imposed in the hope of getting price stability benefit but the price stability benefit is not materialising.
There is this notion that the CBN monetary policy tools are not enough for tackling Nigeria’s inflation. So, it has been argued elsewhere that can’t the government start to use other tools, fiscal tools to fight inflation, rather than depending on these monetary tools alone?
Still on monetary policy tools, before the Monetary Policy Committee was constituted and before they met in February, they had not met since July 2023. Before they commenced meeting in February, inflation has worsened, exchange rate has worsened. At the point they started meeting, it would make very little difference if they hike rate because the problem wasn’t rate hiking; the problem was reserve inadequacy.
Since the Monetary Policy Committee started meeting in February, what has happened to reserves? Has the reserve become more adequate? So, it is futile to be hiking interest rates if the reserves are not adequate because inadequate reserves means capital volatility, exchange rate volatility; capital flow volatility and exchange rate volatility will make the MPR hike ineffective in achieving the price stability objective. So, what the Central Bank needs to do in concert with the government is to get reserves up to adequate levels. Somebody tells us that reserves have been increased to $37 billion! Is that the adequate level? Two year ago, we had $40 billion reserves. So, let’s stop deceiving ourselves. We are talking of the threshold. If you say that a patient does not have blood in his body, you don’t come and tell us that he has one pint of blood in his body as if that is what he needs to stay alive.
So, what is necessary that the Central Bank of Nigeria should do in concert with the Federal Government of Nigeria is to ensure that the reserves reach the minimum threshold required. Is $37 billion the minimum level for an economy that is a $400 billion economy? So, if you are telling the banks to go and meet a higher capital threshold, what are we telling ourselves as the Nigerian government? What reserve threshold must we meet and what have we done since the MPC started hiking the MPR. We should not be proud of our reserves increasing by $5 billion, when we know that NNPCL and the Federal Government have obligations. There are indications that NNPCL has obligations of $6 billion and you are saying that your reserves have increased by $5 billion. That is why people make a distinction between gross reserves and net reserves, and what matters for your exchange rate to appreciate is your net reserves status.
Our level of reserves is very poor, no matter whatever you are doing; desperately and very urgent, take steps to shore up the reserves because if you are able to reach adequate reserves, the exchange rate will come down and if exchange comes down, inflation will come down; you bring down the interest rate, so that everybody will breathe more freely than choking everything up. If you have not met reserve adequacy, you are not doing anything. That is the reality; you must make the reserves adequacy rate up to required levels. If you like, raise the MPR by 100 per cent; if you like, raise the CRR by 100 per cent, it is not going to stabilize the exchange rate and if the exchange rate is not stable, inflation will not come down. I have said it before, and this is an opportunity to say it again, you don’t have to hike MPR or hike CRR; just go and raise the reserves, just whatever you need to do to raise the reserves, do it. Nations go out of their way to raise their reserves because that is what drives exchange rate stability.
The pains of the fuel subsidy removal and the floating of the Naira don’t seem to be in a hurry to go away, even as the standard of living of the average Nigerian has drastically gone down in the last one year or so. What is the way forward?
My take on it is that floating the Naira to eliminate multiplicity of exchange rates is always the right thing to do, and no consequence that comes after it can make it wrong. It is the right thing to do and we should encourage the government to stay on that path. Now, whether the rate will be stable after the unification, bring us back to the issue of reserve adequacy. So, floating the rate and getting reserves to adequate level is the policy gap the government needs to fill. Everywhere in the world, countries go out of their way to borrow to shore up reserves. An example is China, and they have the biggest reserves. Another example is Saudi Arabia. They hold high reserves, which enables them to maintain a peg on their exchange rate without which they would not be able to have the stable economy they have. They borrow aggressively from the World Sukuk Market to build up their reserves, in order to maintain the high reserves; it is not as if they have all the money in the world but it is because it helps them to maintain a stable exchange rate in their economy. They keep the high reserves to insulate their domestic economy from the things we now suffer, like the scourge of inflation, when the exchange rate is not stable and the scourge of capital volatility, when the reserves are not adequate. So, there is nothing wrong in floating the rate but everything is wrong in not putting a buffer to ensure that the rate is stable.
The fuel subsidy issue which you raised is a secondary variable because it is a mirror of the issue of exchange rate, which is central. If the Naira had remained at N455, we wouldn’t be talking of raising the price of fuel to N900 per litre.
So, we will be repeating ourselves if after talking about exchange rate stablisation, we start talking of the price of fuel, price of food, minimum wage and other secondary variables. Stablise the Naira and there won’t be any reason for the price fuel to be high. That is true about the price of gas. That is true about the price of electricity and the minimum wage. Concentrate on stabilising the exchange rate and all those variables will fall in place.
Without fuel subsidy, can Nigerians still be able to have fuel at a price below the international market price?
Fuel is not sold in dollars in Nigeria. It is sold in Naira and Naira is a function of the exchange rate. If your exchange rate had remained at the President Goodluck Jonathan administration era’s rate of N160 per dollar, you would not be talking about whether it is higher than international price because even at the current price of about N1,000, it is below $1. Let’s not confuse ourselves. Let’s not multiply conversations on other variables, as if they are separate. They are not. Pump price of fuel, food prices, inflation etcetera are all reflecting the instability in the exchange rate of the Naira; they are all functions of the exchange rate. Stabilise the exchange rate and all those issues about price of goods, pump price, etc will evaporate. If you are selling the petrol at one dollar, you will be selling it at about N1600 per liter; but at the current price, it is below a dollar per liter but because of the exchange rate issue, it is too high for us as citizens.
There is fear over Nigeria’s rising debt, even as the country continues to borrow. Has our debts got to where we should start to entertain fears?
Nigeria’s total debt declined in the first quarter of 2024 from $108 billion to $91 trillion. So, you cannot say that Nigeria’s debt figures are rising. Nigeria’s debt is declining. If you measure it in dollars which is the international benchmark for measuring all debts but when you convert to Naira, you can see the exchange rate problem showing up again. But the point is that even that lower debt stock now cost us more to service. So, debt has fallen but the interest payment has not fallen because interest rate has risen both domestically and globally. So, the problem is not high debt. You are not even in a position where your debt can rise because our credit worthiness, our ability to issue debts is now constrained. We don’t have a very favourable rating now. We are rated an Issuer Default Rating (IDR). You can’t go to the Eurobond market to issue debt. You are confined to issuing debt domestically at 9 per cent, raising dollar bond domestically at 9 per cent whereas, countries like Saudi Arabia are issuing international bonds at 3 per cent. So, we are not in a position that our debt can rise. It has contracted. Unfortunately, though contracting, you are issuing domestic dollar bonds at 9 per cent. Your debt cost will keep rising. So, we have a debt cost problem, not problem of debt rising.
The way to deal with debt cost problem is that you should not be issuing debts. In other words, you should not be borrowing against expected income. Everybody is seeing that our expected income is mortgaged; growth prospect is mortgaged; much of our crude oil, has been swapped. We borrowed money against our expected income. So, nobody will be eager to lend you money. Tomorrow’s income has already been borrowed. The only people that will lend you money are the people that will make 9 per cent where they will make 3 per cent from other countries. We are just issuing Promissory Notes. We are issuing IOUs against our revenue. That is what our debts are for revenue that has not materialized.
Rather, what we are supposed to be issuing is investments. So, instead of writing IOUs against income without any assets beside, bring one asset, put the asset on the ground and ask people who have the money to come and invest in that asset. That asset could be our state owned company that you can take to the stock market and raise equity. You are not going to pay any interest rate. It is equity.
You are not doing that but the state owned company on its own is borrowing money against crude oil that has not been produced. It is the wrong step to take. They are compromising future revenue. They are incurring interest costs that they won’t have the revenue to service. You can imagine the NNPC declaring a net profit of N3.297 trillion at the close of the financial year, which ended in December 2023, but it owes $6 billion. That’s the trouble that Nigeria is facing. Stop issuing debts. Start to issue equity. You can issue equity not only on your state owned companies but you can also issue equity on your real estate and you can issue equity against your infrastructure. To eliminate the rising debt cost, begin to issue equity. When you bring assets and issue equity on them, they become a new revenue source. So, not only would you have reduced interest payment but you will generate revenue.
What can the government do to rekindle investors’ interest in the Nigerian economy?
Offer them assets that they can invest in. We are so rich in assets but the Nigerian government shies away from the equity market. The Nigerian government will go to the bond market and shun the equity market both at home and abroad. This government has the opportunity to change that narrative. Let us embrace investors rather than creditors. Let us embrace investors at home and investors abroad. They will over subscribe to our debt issues.
President Tinubu’s six months zero duty on food import has failed to take off less on than three months to December 31st when the waiver window will close. What is your reaction to this situation?
In the interest of Nigeria and in the interest of Nigerians that are suffering the hardship occasioned by the ongoing reforms of the government, I pray that the policy does not take off. There is no better way to push the exchange rate into total collapse than a policy like that, which encourages people to increase their demand for foreign exchange. I am happy that the government that muted the idea, maybe, they have thought about it twice, because if you listened to the president’s speech on August 4, he suggested that they will do it; he also suggested that they were going to import tractors to boost farming activities in the country but in the independence speech, he changed it to what will be better for all Nigerians. He said that the government is assembling at home about 2,000 tractors or thereabout; which is the right approach to boost the domestic economy and reduce foreign exchange outflow.
So, don’t go and encourage foreign exchange demands to import tractors or import food. Encourage our people to grow food at home. We have very good weather and the required human capacity to grow our food. Give tax rebates to farmers to grow food, much of which can be grown in 60 days. Encourage our people to grow food at home rather than giving foreign exchange to go and import food. If we had started that policy, Naira would have collapsed.
I am happy for the delay and I hope that the delay is for good. It is not in the interest of anybody that we start engaging on something that would increase demand for the scarce foreign exchange and it will not even bring down the price of food because the more demand for foreign exchange for food import increases, the exchange rate will increase. So, by the time the food imports would arrive, it will be sold at a much higher price than it was before they were imported.