Nigeria’s central bank recently tweaked its foreign exchange policy for diaspora remittances which will allow recipients of money transfers to withdraw such funds in dollars rather than be forced to settle for the naira equivalent at an artificial exchange rate.
Bismarck Rewane, a leading economist and CEO of Financial Derivatives Company Ltd, shared his thoughts on the policy and other matters affecting the economy in an interview with Arise News.
Here are excerpts:
How much of a game changer is the policy on diaspora remittances ?
REWANE: Well it is a game changer to the extent that there is a shortage of foreign exchange in Nigeria, we know that already. Secondly, the policy can help make up for the balance of trade deficits which we are facing. We’ve had a balance of trade deficit of about $12 billion in the last one year. But prior to that, we’ve had a balance of trade surpluses, but you make up for the shortfall on the balance of trade with these investment flows.
Nigeria’s control of investment flows is 0.35 of global investment flows. What this shows you and what this points to is the fact that the central bank of Nigeria wants to encourage the Nigerian diaspora to bring their money in. For reference, Nigeria is the fifth largest source of diaspora remittances in the world, I think number one is Philippines, India and so on. Now, what does this mean? It means that you can bring your money in and you can get it in the currency in which you remitted it. You can also sell it in the market, at a price which is not controlled. Prior to this, if you brought dollars, it was converted to naira at a nominal price of what is obtainable on the I&E window, where the reality is that the effective price is different from the nominal price and the exchange rate of a currency is the price of one currency in terms of another.
Read also: CBN auctions first special treasury bill worth N4.1trn at 0.5%
Is the CBN’s special bill also a game changer?
REWANE: Well, it is a movement in the right direction in the sense that October 23 last year, the central bank actually prohibited more or less private individuals and institutions from participating in the open market operations market (OMO). Now, open market operations are usually used to manage bank liquidity in the system. And because foreign portfolio investors are coming in, and pension funds are coming, we saw a situation where the rates actually moved quite high. The Central bank’s restriction on OMO meant there was excess liquidity outside the banking system. And then they brought rates crashing from an average around 14% to about 1%. So the reality is that today, you have treasury bill rates at less than 1% and you have inflation rates at more than 14%. This is a recipe for disaster. And so I think the Central Bank, in recognition of this anomaly is trying to work its way back so that you can have a single yield curve, which says that these instruments would have a maturity of not more than 90 days, and it is zero coupon, which means you get your interest at the end of the period. So basically, you’re trying to bring some stability and to change the trajectory of interest rates to bring it in the same direction or closer to the rate of inflation where it will take a long time for you to have that. And if you don’t have that closure or convergence between the interest rates and the rate of inflation, your currency will continuously be under pressure, and you know that the currency is under pressure.
How can we bring about that equilibrium?
REWANE: With all due respect to the central bank, the reality is that today, there’s rationing of foreign exchange. If you ask any manufacturer today, they will tell you, they’re not getting as much as they would require. Part of it speculative demand, part of it out of fear out of it, part of it is a risk premium. But the reality is that in economics, we say that you produce where your marginal revenue equals marginal cost. It doesn’t matter what your average is, it doesn’t matter whether 90% of your inventory is at one rate. You sell on the last, the last effective price. So the test of it is that you go out there into the market, and find out “what is the price?” I said the other day on national television that you see, the effective price is a rational price. The control price is the emotional price. If you want to talk about emotions, then Dr Ruben Abati will tell you, you can go and read Romeo and Juliet. If you want to talk about rational price and economics, you talk about Samuelson, we call it the real effective exchange rate path. And that is the path at which the currency is in equilibrium. Right now, if you ask me, If I go out onto the street to find out what the price is, I may not be able to get the official price. And if I have to get it, I’ll have to wait. So that creates a gap. That gap is filled by speculators and people who take advantage of the situation; at times they win and at times they lose, but the reality is that they do take advantage of institutions and what you are looking for is stability, predictability, and ability to bring the money in. It is because of this that you are now asking diaspora remittances, and people bringing money into the market, please bring their money in, it is safe, you get true value, and you’ll get fair value, you’re not going to get a special price.
In all fairness, the central bank has moved from N306 per dollar to N320 and to N360 to N380. But what the market needs is not just a rate, the market needs a mechanism and a management system, which will produce a rate based on certain parameters. I heard you talking about the pricing of petroleum that takes away the charter and demurrage. There, what you have is the crude price, the correlation between the price of crude petroleum and the price of refined petroleum in Nigeria, and that price is determined by a template. If you have the same in terms of determining what the exchange rate is in Nigeria, you have a mechanism, you don’t have to publish it and it is the central bank of Nigeria that has all the resources to do that. If you look at the competitiveness of our currency relative to those of our trading partners, you’ll find out that you do come up with a sweet spot rate that is not so divergent from reality. And that stops sharp practices and people from thinking about it and that stops that arbitrage opportunity. Arbitrage itself is an act of trying to bridge the information gap, information asymmetry, and making sure that the market clears and so you don’t call arbitrage sharp practice, because the arbitrageurs also lose money. People have lost fortunes. But it’s just a process by which people hedge against volatility. People hedge in the petroleum market, people hedge in the jet fuel market, people hedge in commodities; in sugar in cocoa, and that’s what’s happening. So once if you understand and believe in the theory of markets, Adam Smith says the invisible hand is the most powerful hand in markets. And then what we call the Hidden Hand, which is where the regulators try to intervene and that hidden hand produces an artificial price. An artificial price is however not sustainable. So in all fairness, I think the central bank is moving in the right direction, in terms of trying to allow for a free market price to determine what diaspora remittances you can get your true value rather than a command value. If you do that, and we do the rationing of foreign exchange in the official market, you’ll find that the currency will appreciate and it will stay that way.
What’s your take on the federal government’s decision to cut petrol price by N5 per liter, is this not a reversal of the subsidy removal policy?
REWANE: As long as you keep tying the price of refined products to the price of crude and as long as you can use the effective exchange rate to determine the price, then you come up with a formula and a price that will get there. I don’t think the price of petroleum should be a subject of negotiation. It should be a subject of market forces. And then the real question is that because the subsidy has been reduced or eliminated, the revenue of the government is much more robust and much stronger. The question you and I should be asking is, what is the government doing with the revenue? The new and increased revenue? Is it being used to improve the quality of life of people, is it having an impact on poverty, is it having an impact on investment? Are investors coming to this sector? And if investors come into this sector and create jobs, then it becomes a win win. But as long as all you’re doing is improving government revenue, and leaving the people to languish, then you will continue to have all sorts of resentment, or protests. So I think it’s a two way thing, one, to improve revenue, two, simultaneously, increase the level of expenditure on health care, on education, on roads and infrastructure so that people can have a better and a much more sustainable quality of life.
Despite significant interventions in the agricultural sector by the CBN and schemes like the Anchor Borrowers scheme for rice farmers, the sector is not performing as expected. What are your thoughts on this?
REWANE: The reality is that evidence-based analysis will tell you that if you put money through a government program, you’ll get some lift, but it won’t be impactful. The economy is a give or take, N150 to N160 trillion naira economy. When you put 100 billion and you put half a trillion (N 500 billion) into an economy, it is not going to move the needle. It has no catalytic effect whatsoever. So all you’re going to be having are photo ops and a lot of talk shops, sound bites, which will get you nowhere. The reality is that if you have an exchange rate that is effective, if the borders are opened, you can then begin to deal with the issues of growth. Because at the end of the day, if the economy is not growing, you’re going nowhere, right? So tell you what will happen: Inflation is at 14.3% Put inflation at 17.25% If the borders are open tomorrow, if the central bank releases money to all the manufacturers, output will increase almost simultaneously, almost within 90 days to 180 days. And you’ll see with output increasing and money supply staying stagnant, interest rates increasing somewhat, you bring inflation under control, growth will take off. And you know, things will be much better. It’s not a silver bullet, but it’s something that will help to get things done. But every day we go and talk about this program, the programs are well meaning, they are there, but they will not achieve the desired objective. I don’t think so at this point in time, if you look at the default rates amongst agricultural borrowers, if you look at that, it is even more frightening. So what’s the alternative? I think what’s happening here is that the central bank will try its best, the Ministry of Agriculture will try its best, but you need to complement this with private sector investment. Without investment, you are not going to achieve accelerated and sustainable growth. It is important. It’s an open secret that in economics, the investment multiplier, private sector investment multiplier is always infinitely higher than the government multiplier.
About the pension funds that the state governors are saying they would like to borrow about N17 trillion from starting with about N2 trillion to fund infrastructure development. The National Union of pensioners say no, governors do not have any authority over pension funds in Nigeria. One NGO has already written to the president to use his good office to prevent governors from accessing funds under the contributory pension scheme. What are your thoughts?
REWANE: Pensions are people’s savings, pensions are invested normally in guilds, so that when the time comes, the pensioner gets his returns. With all due respect to the governors’ forum , I think, raiding the pension fund will be a very dangerous precedent. The state governments have taken money in the bond market in the past. I want you to go and audit and see what each of these state governments have done with the funds. So if the money they borrowed from the financial markets have not been well and efficiently deployed, where is the guarantee that the one that they’re going to take from the pension, which is for the people’s retirement, will be used properly and when the time comes for redemption and repayment and the state governments say they don’t have the money. We are not going to use pension funds for security vote, we’re not going to use pension funds for this. And that is not to say that there are not some good state governments but so far, the records and history shows that they have not been prudent and they cannot be shining examples of fiscal efficiency and fiscal consolidation.
Therefore, we shouldn’t experiment with people’s pensions. It took a long time before we passed the pension act of 2004, it took a long time, the total force in the pension pot is about N13 trillion. Don’t forget that because the pension guidelines were strictly adhered to, that was why during the margin calls and everything in 2008 and 2009, no pensioner lost his money, they got their money as at when due. So when the recession came, and people were being laid off, you found that people could get their money, I think it’s only prudent and efficient that the pension funds should be allowed to be deployed in the market. And from there, in that same market, the state governments can raise money at market rates, to carry out and execute projects, which will have an internal rate of return, which will more than cover the cost of the borrowing. In any case, state governments if you are borrowing, you are borrowing what we call revenue anticipation bonds. So that when your revenue comes, you use that to retire it, if you’re going to do that, go and get rated. If you’re going to do that, go to the market, the pension funds can invest in the state bonds. But that way, they would have gone through a very good process where to allow the pension fund to be there and to be rated for whatever purposes will not be a useful deployment of resources in Nigeria.
Thoughts on the prolonged broder closure
REWANE: In economics, we have what we call the “Robinson Crusoe” economy. The Robinson Crusoe economy is a hypothetical economy, it is an economy that doesn’t exist. The world economy thrives on investment flows, trade flows and people movement. We are not in a lockdown situation.
We have been told in the past that because of border lockdown, there’ll be no Boko Haram, there’ll be no narcotics, but that’s not true. We are in the trading world. We have signed the ECOWAS protocol, we have ratified the African Continental Free Trade Agreement. So from January 1, effectively, you are going to be having movement of goods, we are the beneficiaries, because of our scale and because of our certain efficiencies, we are going to be able to benefit from regional integration and open borders. So I think that the borders will be opened. A closed economy does not satisfy anybody. If that is the case, why don’t you just close the airports and everything and let us drive internally, close the seaports, close the road, so that you can then grow? That model does not work. The old model of economic patriotism, without talking about globalization and trade is not is not a practical model.
Government spending has surpassed private investment in terms of contribution to GDP for the first time since 2010. What’s your take on that?
REWANE: No, but this was expected. What happened was that the government was getting their exchange rate at N320 per dollar. The private sector was getting their exchange rate at N360. Now, the central bank is using N380 to actually monetize the dollars that came in. Because of the lockdown, the government workers were working from home. So overheads dropped, the government reduced subsidy, so government revenue, the truth is our government revenue has improved between March and now. The main question is what the government is using this money to do ? To complete bridges, complete the roads, kick off the railway and improve the quality of life of Nigerians in terms of healthcare, education, and transport and infrastructure? If you do this and do it consistently, at a level that is impactful, this economy will take off. So it is a combination of government investment, together with private sector investment, but private sector investment has to be more and that is the investment-led strategy that will take this economy into recovery in the year 2021.
