‘Currency adjustment has a strong political element in Nigeria’

David Cowan, Africa Economist managing director, Citi Research, London, was in Lagos for EuroFinance West Africa Conference on ‘Treasury, Risk and Cash Management’, and was cornered by a group of journalists led by Hope Moses-Ashike. He looks at 10 percent adjustment in naira from its current fix, and other macroeconomic issues. Excerpt.   

Opportunities in Nigeria

Is there any one part of the planet that is going through significant population growth in demographic dividend, it is Africa? You see big forces pushing Africa up. Demography is pushing Africa up, Agricultural growth is helping push African growth up, and technology is helping push Africa up. The mobile phone is pushing Africa up, and people are interested in Africa. This is growth happening in part of the world, it is under exploited, and you see businessmen return in Diaspora, all in a bid to push Africa up. That drives this fundamental underlining growth in optimism.

One problem we find in Africa is that these forces pushing up, hit other forces coming down. In Nigeria’s case, you hit an election that has created political uncertainty, you hit weakening of the oil price. In Ghana, you hit policies in-balances. In other countries you hit slightly more political serious crises like in Burundi. The forces pushing up, meet the forces pushing down and you get instability.  That is the kind of thing Nigeria is going through. In Nigeria forces pushing up are still very powerful forces. China’s population growth is going to start to slow. Europe has slowed a long time ago. In most of the big emerging markets, you see that population growth is starting to slow. This is a big and growing market as a result of its demographics.

Aside from elections other issues affecting Nigeria

The two big ones in Africa are commodity prices and policy indiscipline. You don’t see policy indiscipline so much in Nigeria but in Ghana, you see policy problems. The Ghanaian government ran a fiscal deficit of 10 percent of GDP for a number of years. Then stock is rising rapidly against the background of the current account deficit. The problem it had with cocoa is pushing the Cedi down to very deep low. Nigeria never ran down and the stock is quite low.

Nigeria built up a lot of savings for the rainy day and it ran that savings down within the last few years. It didn’t borrow money but it ran its savings down. When it got a hit by an oil price shock, it didn’t have enough money that allows it make a more gradual adjustment. That is why the naira came under pressure.

Algeria has 200billion dollars of foreign exchange reserves compared to Nigeria’s 30billion dollars. At one point Nigeria had 60billion dollars and if it kept savings, it could have got 100billion dollars. What that means is that Algerian government could say ok we got a problem and we will run a bigger fiscal deficit this year. We can run 10 percent fiscal deficit and it will use 2billion of foreign exchange reserve, we still have 195 billion or whatever. So they can make the adjustment more gradually. If you run down your savings, you are forced to make a gradual rapid adjustment which is what we are seeing now, the states can’t pay salaries, naira is under pressure and inflation is going up.

Ways to solve the problems

There is no short-term solution. The short-term solution is time. But the long term solution is to let the naira adjust, which will help increase the amount of revenue going to the government, which will help control its fiscal spending. It will push up inflation in a short time, but this should drive the production response from the agricultural sector and food will come into the market. A good portion of the consumer price index here is determined by food. But you still have to live through the pain before those factors start to benefit. You have to see a full naira adjustment. At the moment, we are in a dispensation where there is tradeoff between the CBN that thinks the naira has adjusted enough and the market that doesn’t think the naira has adjusted enough. That battle will play out over the coming months.

Thinking about the naira, it has moved forward a lot, there is discontinuity of sort. From Soludo, through Sanusi, through now Emefiele, they all understand that when the oil price moves, the naira has to adjust. What we have not agreed is how much we should let the naira adjust, that is where it becomes quite complicated.

Suggestion on where naira should adjust to

My forecast is in the year 2020 , we see about 10 percent adjustment from where we are and if you think the totality of where it has moved from – 163 to 220, that is probably about sufficient.

Only time will decide on that.

Western world forecast naira to be at N220, N230

The best example of development policy in the past 20 years in the world is China. What has China based its development’s strategy on? A fundamentally undevalued currency. Your greatest result in Africa is people, labor, and you need to put them to work. You have to make your labor force competitive in a global economy. The large part of Asian development was based on cheap currency. What is interesting in Africa is that we still have to think more on what we want to do with our currency. It doesn’t mean you want your currency to be a free fall. It doesn’t mean it will be 220, 250, 300 forever. You have to think of how to make your currency change over time to reflect the different forces of demand and supply to serve the interest of the nation. It doesn’t put up inflation too much but make labor force competitive. By itself it won’t work. You still need to fix roads, power and all the structure issues in Nigeria but currency is a very powerful tool. If you let the naira weaken, importing tomato paste becomes more expensive, which should encourage farmers to say they can produce tomatoes; it should make industrialists say they can make tomatoe paste. There is danger importing tomatoes. This country can produce more than enough tomatoes and the currency is part of that solution. You need to provide fertilizers to the farmers and a market where they can sell but the currency is also a part of that solution.

Government focus to solve all these problems

It is power. Why will you invest in tomato paste if your cost of production is high? Electricity has the potential to transform this country. Invest in infrastructure, but make sure you have power.

Factors affecting the Nigerian stock exchange market and solutions

Foreign investors got too excited about the idea of the African middle class and the very good results that came out of some of the Nigerian companies. I believe this will grow very rapidly. There is also the Nestle story of cutting down some of their work force. My point is there is an African middle class but it is quite small. Africa is a consuming class which is driven by demographics and that is quite poor; and to service that market in terms of goods and products is quite hard. You have to understand that market. Then, you need to keep your cost base down. That is how to tap into low income consumers.  There is strong growth going on here but it needs to be stronger and needs to create more formal sector jobs to really kick off. Some people are so excited selling their shares before they lose too much. Shares have not performed as expected and the currency is weakening significantly.

CBN governor adjusting naira very soon

Not very soon. The CBN governor has allowed the naira to move considerably from 160 to about 200 and that is a significant move. Currency adjustment has a strong political element in Nigeria. I think there is a feeling of what to do with naira. We want in place a ministry of finance and some of the cabinets that can collectively agree. Until we have a government more than a president and vice president, I don’t think we are going to see a significant change. Then hold the line until then. It becomes more interesting as we know the economic teams are working all hours for what they want to do. When we get a government in place, that plan will be presented to the new cabinet and decisions will be made at some point. when? I don’t know – August or September. This year will be different; there will be a lot of government ministers in Abuja in August gradually drawing out plans and thinking what to do.