At the recently concluded Afreximbank 2024 annual meetings, which included the Afri-Caribbean trade and investment forum in Nassau, The Bahamas, Yemi Kale, group chief economist/MD of Afreximbank, provided insights into African trade and Nigeria’s macroeconomic issues in an interview with Hope Moses-Ashike. Here are some excerpts.
The African trade report you presented indicated that Africa’s trade contracted by 6.3 percent in 2023. What caused this decline?
The report also mentioned that global trade declined, so it wasn’t just Africa that was affected. This was consistent with a global economic slowdown. Economic growth slowed worldwide, leading to reduced trade activity. Multiple factors contributed to this, beginning with the COVID-19 pandemic. Economies have been trying to recover since then, facing various headwinds.
Regarding Africa, the decline in global trade impacted the continent because trade relies on the demand from other countries. If these countries experience economic difficulties, their interest in buying goods decreases. For instance, if you’re supplying raw materials to a manufacturing company in the US, a slowdown in their economy means they need fewer materials. Consequently, they buy less from African suppliers. With the global economic slowdown affecting every country, demand for African exports naturally decreased. For example, there’s no reason to buy crude oil from Nigeria if it can’t be utilized in the purchasing country. Thus, the general slowdown in global economic growth led to a reduced.
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In the same report, the decline in global trade prompted an increase in intra-African trade. Unable to trade as much with our usual partners in China, Europe, and the US, we turned more to intra-African trade. Overall global trade decreased, but intra-African trade improved, although it remains relatively small in scale.
The report also forecasts that African trade will grow by 3.5 percent and 4 percent in 2024 and 2025. What are the factors driving this expected growth?
Firstly, the challenges we faced due to the slowdown in economic growth in our traditional markets are now easing. Economic growth in the US, for instance, has picked up again, leading to increased demand for our goods. Similarly, Europe and China, which previously reduced their demand for African exports due to economic slowdowns, are now showing stronger demand as their economies recover.
Secondly, commodity prices, including crude oil, gold, and platinum—major exports for many African countries—are rising. This price increase benefits countries that export these commodities, contributing to trade growth.
Thirdly, intra-African trade is expanding. Trading more within the continent taps into growth opportunities that are unique to Africa. Compared to more advanced economies with smaller growth potential, Africa has greater capacity for expansion. Increased intra-African trade fuels additional growth opportunities across the continent.
Furthermore, climate factors posed significant challenges in 2023, with events like El Niño affecting many African countries. While 2023 was a year of recovery from these impacts, ongoing climate stability is crucial for sustained economic growth.
Lastly, infrastructure investments made by many African countries in recent years are expected to yield economic benefits going forward. These investments are enhancing economic stability and supporting future growth prospects.
In addition, various fiscal and monetary reforms undertaken in response to debt issues are also contributing to economic stability and laying the groundwork for positive growth in the long term.
One of the key topics discussed at this forum was the lack of infrastructure hindering trade between Africa and the Caribbean. There is a growing call from Caribbean stakeholders for African banks to establish a presence in the region. Do you believe Nigerian banks are capable of opening branches here?
I don’t perceive the infrastructure deficit in the Caribbean as significantly better or worse than that in African countries; they are quite comparable. I don’t view this as a major determinant for financial institutions when deciding where to invest. They prioritise locations where there is demand for their services. As this region starts to develop, especially through partnerships with African nations—something we’ve been actively discussing in recent days—I believe this will incentivise financial institutions to consider establishing a presence here. Such collaborations create opportunities for business growth.
For instance, when a bank in one country seeks to expand and determine where to open new branches, this region presents a promising opportunity for expansion.
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Looking at inflation in Nigeria from the time you left office until now, with figures around 33.9 percent, there has been a significant increase in inflation. What factors do you believe contributed to this issue?
Well, to understand the drivers of inflation in Nigeria, we need to consider two main factors according to macroeconomic theory. The first is cost-push inflation, which arises from increases in the cost of production or distribution. For example, if the prices of petrol, diesel, or electricity rise, businesses cannot sell their products for less than the total production costs. When banks raise interest rates, businesses incorporate these higher costs into their pricing, adding a margin for profit. Therefore, any increases in these costs necessitate higher product prices to maintain profitability.
Much of the recent economic upheaval can be attributed to the reforms implemented by the current government over the past few years. Removal of fuel subsidies and FX reforms led to price increases. When such measures are taken, producers are compelled to raise prices to maintain profitability. However, it takes time for the economy to adjust and stabilise after such shocks, which can vary in duration—whether short-term or long-term. The pace of economic adjustment differs across economies, making it difficult to predict. Regardless of whether the reforms are deemed appropriate or not, there is typically a transitional period before stability and normalisation are achieved. This phenomenon is known as cost-push inflation.
Additionally, there is demand-pull inflation driven by an excess money supply. This occurs when there is too much money circulating in the economy relative to the supply of goods and services. Similar to bidding for a single house between two buyers, excess money leads to competition for limited goods, thereby driving prices upward. Until the supply of goods and services increases to match the excess money supply, this imbalance continues to exert upward pressure on prices as people compete for scarce resources in the economy.
During the period of conducting ways and means, we witnessed a substantial injection of money into the economy. When trillions of Naira are pumped into circulation without corresponding increases in goods and services, it creates an imbalance. People compete for limited goods, driving up prices and fueling inflation. To address this, money needs to be gradually withdrawn from the economy or the supply of goods and services must increase—or both. Until this adjustment occurs, factors contributing to demand-pull inflation persist.
Currently in Nigeria, the combination of high production costs due to reforms and other factors, alongside excess money in circulation, is exacerbating inflation. Resolving these issues will take time and careful management.
So, does this mean that the continuous increase in interest rates by the CBN cannot solve the inflation problem?
Increasing interest rates alone cannot solve all aspects of inflation. It primarily addresses the demand-side of inflation by encouraging savings. Let me illustrate with a theoretical example: Suppose you want to buy a television priced at N100, but you’re concerned it might cost N150 next year. If your bank offers 100 percent interest, you might decide to deposit your money and earn N200 by next year, allowing you to still afford the TV at N150. However, if the interest rate is only 10 percent, you’d prefer to buy the TV now for N100 rather than wait and pay N150 later.
When interest rates are raised, they incentivise saving rather than immediate spending. This reduces urgency to purchase goods like televisions or stockpile food when prices are expected to rise. By depositing money in the bank and earning interest, individuals can afford to wait and purchase goods later, even if prices increase in the meantime.
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What are your expectations from the MPC as it convenes for its meeting next month?
The MPC primarily relies on limited tools like interest rates to combat inflation. They can also intervene to support production and increase the supply of goods and services, which can help alleviate inflationary pressures. However, their actions are confined within their mandate, and they cannot exceed their regulatory boundaries. The CBN can only address inflation using the tools at its disposal, and this necessitates a combined effort of fiscal and monetary policies to effectively manage inflation. It’s unlikely that monetary policy alone or actions solely by the CBN can resolve inflation issues.
I anticipate that the CBN will continue to raise interest rates as long as inflation persists. Failing to do so could lead to further economic instabilities, such as discouraging foreign exchange inflows due to an unfavorable interest rate environment. Therefore, increasing interest rates is likely to be a continued strategy until inflation is under control.
The word bank has approved $2.5 billion for Nigeria. How can that help to solve foreign exchange issues?
FX issues are demand or supply. The reason why the FX is not stable or why the naira depreciates is because the demand for FX is more than the supply. So if you get 2 billion, you have added to supply. So let me give you an example, assuming demand for FX is $5 billion and you have only $3 billion, it means people are fighting for that $2 billion. So they’ll be offering more and more dollars. There’s only $2 million. There is a $5 million demand. So they would be asking, give me, give me, adding more on top of it just to get the dollar. Now if it is $5 million, $5 million, then there’s no need to be fighting, all of us will get what we want and the price will be stable. But if you are fighting for the limited availability, the incentive for me to be increasing my price, because I’m competing with you.
If the demand is $5 million, and the CBN has only $3 million, the World Bank gives them $2 million, now it’s $million that creates stability. So that’s how it helps to stabilise the exchange rate but it is a temporary measure, because that demand will continue next month. You have to ensure that in that short period while you have been able to stabilise the exchange rate you do other measures that will attract the most sustainable inflows because you can’t keep borrowing and borrowing forever. Borrowing is only to fix some temporary problems. But you have to create a system where you have a sustainable inflow of foreign exchange after that.
