• Friday, December 01, 2023
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“If you had come back ten years earlier and looked at Egypt and Nigeria, you would have bet the opposite outcome”


I was kind of curious in your presentation, you did mention that in Africa a lot of the Governments are not too worried about the so called ‘currency war’ and appreciation of their local currencies, with the exception of South Africa where the Rand is depreciating. What do you think is the reason for this, is it the lack of a productive or manufacturing base as opposed to Japan that wants a weaker currency to boost exports?

I think you are right. For commodity exporters it is not clear whether a weaker currency is always good for exports. But I think it’s more than that, I think if you look at African Governments historically, African currencies have always depreciated, and so the feeling is that you want to go into a period where your improved economic performance is reflected in the currency.

So you want to see these periods of a stable currency, and then I guess you have to take that further and say that there has not been a lot of thinking about what the perfect exchange rate would be for Africa. I think that is a policy decision that has to come. One way to think about African economies is that they have liberalized. They have liberalized their exchange rate regimes and in many countries – although not in Nigeria always- as a result the parallel markets have disappeared virtually.

So now you have currencies that are determined by the markets. But that has led to some volatility, but it has not really been replaced yet by a concrete thinking about exchange rate policy. But that has improved things a lot because the biggest constraint to growth is when you have foreign exchange shortages. The question is now, how do we manage our currencies going forward, and I think that question hasn’t really been answered yet.

The other thing to remember is that apart from Nigeria arguably, not many other countries are undergoing pressure for appreciation, because the answer is still that if you take Brazil, Mexico, they see billions of dollars thrown at them every day, which is going to be outside of what Nigeria can attract at the moment, because of the size of the market. But they do come under pressure all the same, I mean Uganda has toyed about whether they want appreciation or depreciation or not, so there are questions and I think the answer is that people haven’t thought a lot about how we want our exchange rate policy to evolve.

Do we want to go down the Asian route of constantly devaluing to try and preserve competitiveness or do we want stability.

What is your own opinion, do you think the Naira is too strong?

I think that there is a fascinating parallel going on here at the moment between Egypt and Nigeria; the biggest countries in Africa, ex South Africa.

In a way what you are both doing in technical terms is that you are targeting a nominal exchange rate. In Nigeria its 150 or 160, the Egyptians are targeting 6. It is irrelevant you may as well pick any number you like.

Now are those numbers competitive, are those exchange rates competitive? It is difficult to say without the oil distortion. If you really wanted to say where the Naira should be to compete against China, it could anywhere maybe 400 or 500, but it is not going to go there if the CBN has any say. So we live in this what I call Naira world, and that is determined at the moment by the supply and demand.

What is the risk inherent with that?

That is my point about in the presentation about declining oil prices going forward. Nigeria has this issue, at the moment it has seen a huge surge in demand for foreign exchange as the economy has been growing very strongly, and it is being met, because although oil production has been stable, oil prices have been high. So going forward if we believe that oil prices are going to fall, it means the foreign exchange becomes less available or production has to rise.

What is your own projection on crude oil prices?

Our projection is that they go down to about $95 per barrel by the end of this year, and average $93 in 2014 for Brent crude.

Do you see this posing a risk first to portfolio inflows into Nigeria which have been quite high in the last two years, and how would that affect the exchange rate?

I don’t think it is a risk per se. Nigeria has got itself into a really interesting position here I think due to the inclusion of Nigeria into the JP Morgan emerging market bond index, and Barclays emerging market index. Historically if you look at Nigeria, or if you look at any other African country, what you saw was portfolio inflow which tended to rise and ebb with the level of interest rates. If interest rates were high people would come in, and if they are low they would leave.

However a lot of funds out there are index trackers, and so they have to keep money in there, their only choice then is when you go overweight the index or underweight the index, and at the moment where Nigerian rates are, most of them are overweight.

So there is no reason why, even if oil prices weaken and the interest rate stays high, people would then have to make a decision on factors such as interest rates level, naira weakening, rates of return and so on.

It is very interesting, I don’t think they would flee; you have to remember however that the fiscal side would then come under pressure and the politics would come under pressure, you would then expect probably portfolio inflows to go from overweight to neutral and perhaps underweight. But the Central Bank can easily meet those flows, because of the way it has built up reserves.

You can set policy at $100, but if the oil price falls to say $75, you have to then rethink your policy and if that involves devaluation, you go ahead and devalue. As Keynes said, if the fact change, my views change, or if the oil price or view changes, the policy changes.

Are you factoring any incremental change in the structure of the Nigerian economy to your macroeconomic models? Like the Finance Ministry say they want to bring oil prices as a percentage of Government revenue down from 80 percent to 60 percent, and grow non-oil exports, will that have any impact at all?

Yes it would have an impact, but it is a slow impact, and none of these things will easily happen. If you say you are not going to devalue the exchange rate, then how do you improve competitiveness? Well it has to be through infrastructure, through education, and this will take a long time to happen.

When I think of Nigeria, I look at Indonesia. How do we go from where we are today, to where Indonesia is, where they pulled out of OPEC and are now a net importer of oil, but their economy is still much more diversified than Nigeria’s?

My answer is that in Nigeria’s case the direction is very straight forward, you keep investing in Infrastructure, you keep trying to improve the business environment, and ultimately there would be enough entrepreneurial people here that will take advantage of that, but it is a slow game, we keep forgetting that it took Indonesia a long time to do it.

They are doing the same thing, trying to reduce corruption, improve infrastructure, you can create export processing zones, but there is no magic bullet for development unfortunately. In your analysis, do you expect that this will happen? I mean if you look at infrastructure spend as a percentage of GDP or the Budget, it is still very low for Nigeria.

Okay, I will spin this around and say, when you think about how countries evolve it is pretty interesting. In 2011, you could effectively say that Egypt pretty much had a military coup. If you had come back ten years earlier and looked at Egypt and Nigeria, you would have bet the opposite outcome.

So things do change, and things have changed a lot in Nigeria, and they are still changing. However if you want to really develop you have to grow at the 10 percent clip or double digits and the only way to do that is to spend big on infrastructure, and when countries are spending on infrastructure you know, because it is a building site, they are knocking things down as fast as they are going up again. So it may not be as fast as we all want it to.

How do you grow consumer credit and increase bank lending?

There are two ways you can do it, get banks to follow the Kenyan Equity Bank model, where you basically have more of a micro-finance model, where you lend people money and help them build a credit history, whereby you lend them N100 and if they pay back, you increase to N200 and so on. Whether that can work in Nigeria, who knows, but the Kenyans have done it quite successfully.

The second thing about credit is that it depends on the rule of law and speed in which banks can repossess collateral used to facilitate lending. 


Business day analyst PATRICK ATUANYA and Head of Research unit ANTHONY OSAE BROWN engaged in a chat with David Cowan, Africa economist at Citibank on the sidelines of the Euro finance conference on Treasury activities held in Lagos last week.