20 February 2016

Nigeria: 'Things Will Get Worse in the Economy Before It Gets Better'


Chidi O. Ajaegbu is the immediate past President of the Institute of Chartered Accountants of Nigeria (ICAN). He is the Chief Executive Officer (CEO) of Heritage Capital Markets Ltd, a dealing member of the Nigerian Stock Exchange (NSE). In this interview, he takes a critical look at the state of the economy with the verdict that things would first get worse for the country before there would be a turnaround.

The Nigerian economy is challenged on all fronts currently and the Central Bank been has been churning out policies to stabilise it. What is your take on the situation and the various policy initiatives of the CBN?

I think the problem is far deeper than the various policies that the Central Bank of Nigeria (CBN) is churning out to deal with the issue. I think the policies are a bit peripheral in nature; I think they are not sustainable and strategic.

I have always said that until there is dispassionate evaluation and transparency in terms of policy implementation and its impact on the people, we will not be able to actually determine the right policies for our conditions, not just in this difficult times for our economy but also when we have boom.

Today we are grappling with a very dramatic drop in crude oil price and because successive governments had not dealt with the issue of diversification of our economy and corruption, we consistently seem to fall into major crisis when there is volatility in the crude oil market.

There is no doubt that things are going to get worse in the economy before it gets better. There will be massive loss of jobs across all sectors irrespective of whatever policy you bring in place. The key thing I think government has got right is the recovery of looted funds and the focus on effective tax collection. A lot of countries in the world today depend essentially on taxation for the running of their economy. But you see, we Nigerians, we have a way -- crude oil is the cheapest way. It made everybody lazy to think and to work and now there is no crude oil. And ultimately in the next 10 to 15 years, there will be alternative sources of energy to crude oil.

If truly we are serious about the viability of this project called Nigeria, I think this is the right time, if not late, for government to start thinking seriously about how to actually diversify the economy because in 15 years time, it is either crude oil will sell for $5 to $10 or there will be far cheaper alternative sources of energy to crude oil. The only reason we are still talking about export of crude oil today is because the cost of crude per barrel is lower that the cost of production of Shale Gas and Oil in the United States of America because these things have been discovered in massive quantities in the U. S. The moment crude oil sells for may be $50 - $55, our ability to export crude oil or refined products will drop dramatically because the competition coming from Shale Gas and Oil will totally overtake us.

The CBN has consistently retained the official value of the naira despite calls for the devaluation of the local currency. Do you think it is appropriate for the CBN to do that given the pressure on the currency?

My view is that the CBN policy is unsustainable; it is doing a terrible harm to foreign direct investment to this country. It is actually a policy that must be revisited immediately. The President must be told that economics does not obey orders. We have to ultimately devalue. We can't be deluding ourselves selling dollar N199 to $1 when the market rate is N373 to $1. You know that it is not sustainable; it is unrealistic. The international community knows the right rate. I am not saying you should completely deregulate the currency but you need to make an attempt towards achieving what the market dynamics is saying. But for you to sit somewhere and say you are going to sell N199 when the market is saying N373 is ridiculous and unsustainable.

You are a major player in the capital market. How has the policy impacted on the market?

Because the capital market is made up largely of foreign investors, they are exiting the market. So you have an over supply of most of the stocks and then you have glut in the market. Of course that is basic economics; when you have excess supply over demand, price will go down. That is what we are experiencing and until we are able to get the right value for our currency they will not be able to come in because they are not going to go through the black market.

So, we need to devalue to be able to encourage foreign investors to come in not just in the capital market but also in other facets of the Nigerian economy. Saying that you will not devalue the currency when you truly know that the true value of the currency is about 50 per cent more than you are using to transact is simply ridiculous; it absolutely doesn't make sense. And ultimately we must devalue if the price of crude oil continues to decline. By the time our foreign reserve comes below $20 billion, the country will start looking for realistic measures to deal with the issue of the devaluation of the naira. As it is now, we are just in an utopian world in terms of the exchange rate that we are using to transact business vis-à-vis the dollar.

How soon do you think government should devalue the naira?

I don't know; I can't put a date to it. As you know we have a very opinionated President. I think he needs to be convinced. I also think we need to remove the toga of 'I won't listen to the IMF' because it is a global village and the direction is that you have to devalue the currency because you are not earning enough to sustain the value of the naira. That is essentially what it is all about and there is nothing else to it. We will devalue, but whether it will happen in March or April I don't know. But we will be forced to do it because that is the right thing to do.

What determines the percentage of devaluation?

If you ask me, the right thing to do is to allow the market to determine the value but that will be dangerous. It needs to be managed. Nobody ever advocates 100 per cent devaluation. So, it has to be managed. So, the percentage will depend on how that fits into the overall strategy of the government to manage the economy in the next few years.


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