Market News

by  Johnson Chukwu

The Managing Director/Chief Executive Officer, Cowry Asset Management Limited, Mr Johnson Chukwu, speaks to ’FEMI ASU on the state of Nigeria’s economy and what the country needs to snap out of the current doldrums, among other vital issues

Nigeria slipped into a recession in the third quarter of last year. What do you think the economic outlook would be this year?

My take is that the economy will most likely come out of recession in the second quarter of 2021. I doubt if it will come out in the first quarter. We are already witnessing a high level of coronavirus infection in the first quarter of this year, which means we are already seeing the government restrict large gatherings of people, and therefore shutting down some social engagements. Even at a household level, a lot of families are restraining their interactions with other people. So, in effect, we are seeing some level of coronavirus-induced lockdown in the economy. If that continues throughout this quarter, I doubt if we are likely going to see an economic recovery in the first quarter. I want to believe that if the government is aggressive with the rollout of vaccines, by the end of the second quarter of this year, we should begin to see a full economic recovery. The IMF is projecting 1.1 per cent economic growth in 2021 for Nigeria. My take is that our economy should grow at between 0.5 per cent and 1. 5 per cent at the end of this year, assuming that the government addresses the health challenges associated with COVID-19.

Some of the government policies are contradictory to the protocols of COVID-19; particularly the issue of asking people to go and get their National Identification Number, otherwise, their phone numbers will be disabled. That, for me, has created a center for super infection, and we must hold the government responsible for that. If we do not stop such policies, then the health challenges associated with COVID-19 will vitiate economic recovery in 2021.

The National Bureau of Statistics released on Friday the inflation report for December, and it showed that inflation rose to 15.75 per cent, the highest since November 2017. Are you not worried about inflation figures rising fast?

I won’t say I am not worried, but I will say I expected it. We have inflationary pressures coming particularly from the food inflation angle of volatile food items. We must recognise that the disruption we have had in the northern part of the country in terms of food production has a direct impact on food inflation. If you look at the food inflation for December, we saw food inflation rise to 19.56 percent from 18.3 per cent. Compare that to the core inflation, which came at a print of just 11.37 per cent, just a marginal increase of 0.32 per cent when compared to 11.05 per cent in November. So, if you look at the core inflation of 11.37 per cent and food inflation of 19.56 per cent, you will recognise that the pressure is coming from volatile food items, and those items are largely produced locally. Granted that the government has opened the borders, but that border opening came towards the end of December; so, the impact of the border reopening did not reflect in food inflation. So, I expected above 15 per cent consumer price index in December.

In terms of the outlook, my take is that we should expect these pressures to continue in the next couple of months. We should expect that the price of diesel will further increase because crude oil price has moved up and exchange rate has also deteriorated. I also expect, given that the Minister of Finance said there was no provision for petrol subsidy, that the Nigerian National Petroleum Corporation will allow adjustment in the pump price of petrol, which will have a direct impact on transportation costs and an indirect impact on consumer prices. So, these are pressures that will come to bear on inflation figures in the coming months. Not forgetting the fact that although the government reversed the increase in electricity tariff, that reversal is not likely going to be sustained; we should expect that the government will allow the electricity tariff to be adjusted upwards in the next couple of months.

The naira has been wobbling in recent weeks, after hitting a record low of 500 per dollar on the black market on November 30. It closed at 475/$1 on Thursday, down from N470/$1 in the previous week. Some experts have said the local currency is still overvalued; what is your take on this?

What I will say is that it all depends on the policies that the Central Bank of Nigeria adopts. In the first place, we are not witnessing a significant flow of foreign capital into the economy. If we adjust our policies to attract foreign portfolio and direct investments into the economy, we are likely going to realise that the current exchange rate may actually be undervalued because it is all about your flow of capital. As it stands today, we are witnessing a negative balance of trade, which means the value of our imports is higher than the value of our exports. So, on the balance of trade, we are losing our reserves. On the balance of payments, we are also losing reserves because we are witnessing more capital outflow than capital inflow. But these are all driven by policies. If we get the policies right, we should see a reversal of capital flows. And the flow from foreign portfolio investment is enough to restore stability in the foreign exchange market as well as lead to appreciation in the local currency. So, I wouldn’t say the naira is overvalued. Remember we have different market segments; if the CBN improves supply in the official window, the Investors’ and Exporters’ window, and clears the arrears of demand, the naira could appreciate. When we put the right policies in place, we will be able to determine the effective value of the local currency.

The implementation of the African Continental Free Trade Agreement kicked off this month. Do you think Nigeria is well-positioned to derive maximum benefits from that trade deal?

The answer is a straight no. In the first place, we are not a productive economy. Two, our policy choices are not right. Three, we have flip-flops in policies. Four, we do not have the supporting infrastructure that will encourage direct investments into the country. Remember that the AfCFTA is creating a single economic bloc in Africa, and the investors will go to locations where the ease of doing business is better and the cost of production is cheaper. And Nigeria is not one of those destinations in Africa. We lack infrastructure support, transport infrastructure, electricity, logistics support, seaports; we do not have the right policies, and we have a high level of insecurity. These are not factors that will make us the first choice for investors that want to invest in Africa and serve other markets. Granted we have the largest market size, but we cannot optimise the market size. And what will happen eventually is that investors will go to countries that are contiguous to Nigeria like the Benin Republic, Togo and Ghana, and set up manufacturing activities, targeting Nigeria as their primary market.

What do you think needs to be done urgently to speed up the recovery of the economy?

One is that we need to address the issue of productivity. Today, the Nigerian economy is not very productive. First of all, we need to address the COVID-19-induced healthcare challenges. That is the number-one priority because if people are not healthy; if they are worried about going out; if they cannot interact with one another, then they cannot be productive. The second issue is our policy choices. We need to quickly address some of those constraining factors that are making doing business here difficult and the cost of doing business high. Then we need to address the issue of capital flows, particularly foreign capital. Remember that if foreign capital is not encouraged, local capital is also not encouraged. All these things are focused on improving the level of productivity in the country because the way to come out of the recession is to address the issue of productivity.

The Monetary Policy Committee of the CBN is expected to meet later this month. What are your expectations?

If you look at what is going on now, the MPC cannot afford to lower rates because we have high inflation. There is an exchange rate pressure. If the monetary policy rate is reduced, there will be a higher rate of inflation and higher exchange rate instability. And they cannot also afford to increase rates because the economy is in a recession. So, these are contradictory issues that they can only resolve by keeping rates at current levels. So, my expectation is that they will keep rates at their current levels.

Nigeria’s public debt stock rose to N32.2tn as of September 2020, according to the Debt Management Office. Do you think that the country is making the most of the debts it is accumulating?

Unfortunately, a lot of the debts we are currently accumulating is going to recurrent expenditure because if you look at the country’s fiscal balance, you will realise that by the time you add the non-debt recurrent expenditure to the debt service expenditure of the government, it is higher than the government revenue. So, in the first place, the government is borrowing to meet recurrent expenditure, and it is also borrowing for capital expenditure. So, a significant portion of our current borrowing is going to recurrent expenditure, and it simply means our borrowing cannot be reflected in capital assets. You are borrowing to meet recurrent expenditure and debt service. As long as that is the case, we will continue to accumulate debt. And if we are not careful, we will get to a stage where we will have a debt overhang because the debt is not going to assets that will eventually contribute to paying back the debt.