Larbie: FG Needs to Make Tough Decisions to Grow the Economy

The Chief Executive Officer and Regional Head, West Africa, Rand Merchant Bank Limited, Mr. Michael Larbie, posits that for the federal government to take the country out of the woods and attract the desired foreign direct investment, it has to make some tough decisions. He spoke to Obinna Chima. Excerpts:

As a financial institution, how has the issue of forex scarcity affected your business?

I think the issue of forex scarcity or you may call it the increased scrutiny, that the central bank put on the allocation of forex has certainly affected all banks in the market. But for us as a merchant bank, as you know we do a lot of structuring of deals and deals in forex. Essentially, that business today is non-existent today. That is, a market-driven forex regime is no longer there and currently what is in place is a client-ordered driven market where the client opens Form ‘M’ and they indicate their need for forex, we open the necessary Letters of Credit (LCs) for them and then the central bank allocates the forex. But unfortunately, the allocation doesn’t normally cover the extent of what we have done. We have been getting about two to three per cent of what we ask the Central Bank of Nigeria (CBN) for and one needs to manage the extent of backlog of LCs.

You don’t want to have too many of it there so that it doesn’t become a problem. So, the forex scarcity has impacted our fixed income trading business and our corporate banking business with regards to confirming LCs and putting in place working capital lines for the clients who import raw materials for either their manufacturing activity. But if you move that pass forex to a broader corporate activity, quite a bit of our manufacturing clients have had to scale back on their capacity utilisation because they don’t have all the raw materials they need. So, we have clients who are operating at 50 per cent capacity and in some cases lower.

That, in itself is impacted the whole lot of capital expenditure they would have been embarking on. That the whole capital expenditure like building new plants and going into new business activities, clients have generally put those on hold and are assessing the way forward, or trying to get a sense of clarity around where the foreign exchange regime is. But I must say here that it is also opening up opportunity for other clients. So, what has been seen to be bad for some clients is also opportunity for some of our other clients who are able to increase their production base. Specifically, around our clients who source quite a bit of their raw materials locally. Some of our clients have seen increase in production and manufacturing activities because quite a bit of their retail stores and supermarkets are refocusing where they source their products and to the extent that those things can be manufactured or grown in Nigeria.

My tummy tells me that in the short-term, it is a worse for some, than it is good for some. So, there is a need for some clear policy direction. And that clear policy direction, from my perspective should be less of a forex policy as it is more of a trade policy direction. That, it should be more of a Ministry of Industry, Trade and Investment led strategy around what activities do want to see to be wholly Made-in-Nigeria and what incentives are we going to put in place to support it. And those items that cannot be sourced here, either because we don’t have the raw materials or either because the time t bring them to market is going to take time. You can take zinc or steel for example. If we are not mining them in commercial large quantities, we must understand that it takes a long time to be able to do that, and we must put in place policies that allows for it. So, we need to, in a descending way, through good policies distinguish between raw materials that come into the market and appreciate the incremental added value they bring to our economy.

We must do the cost-benefit analysis around how we encourage that. We live in a global village today and there are going to be products that other countries are able to manufacture and create them a lot more cheaply, for a variety of reasons. And if we can source them more cheaply and save our scarce forex, we must do that and direct our focus to areas that we have got a much more comparative advantage. So, it needs to be a holistic solution. We need to carefully review what consumes our forex. It is unfortunate that today, petrol importation still consumes a huge amount of our forex when we produce crude oil. I think we need to take some tougher decisions around those big chunky items that consume our forex.

If you look at the weekly returns on forex utilisation being published by banks, there been huge outlows by foreign portfolio investors. Will these outflows from the equities, bond and money market have any effect on the economy?

Normally, it would have had a big impact if we didn’t have a big local asset management and pension market. I might say that our effort in ensuring a well-functioning pension fund market is actually being very helpful. So, it is not as though there aren’t buyers of fixed income securities when the foreign investors are selling. So, I am particularly encouraged by the growth in our pension fund assets and by the ability of these pension fund assets to buy these fixed income securities when foreign investors are selling. That is an important area that we must grow. I think it is of benefit to the Pension Fund Administrators (PFAs). In terms of a secondary market approach, there are certainly willing local buyers who then buy these securities for the long-terms. And it is for their benefit. So, we haven’t seen an impact there necessarily.

Now, the issue that we foresee would have been if there are new issuances and the take up of those new issuances. Obviously, given the market dynamics, there haven’t been as much new issuances from the private sector. But where the Debt Management Office (DMO) has come to the market to do new issuance, there were take up. So, I think we have benefitted a lot from the cushion that the PFAs have provided and their growing assets under management (AUM). But where we have seen some challenges is in the stock market where the market is down year-to-date and the continuous pressure. So, where we have seen immediate impact is in the stock market.

Are you comfortable with the response of the monetary policy authority to the challenge of forex scarcity you have highlighted earlier and don’t you think the position of the president on the devaluation debate is going obstruct the central bank from taking any major decision on the exchange rate?

It is a heavily loaded question. I always cringe when I hear politicians talk about monetary policy because obviously we have an independent central bank and one wants to continue to believe that the central bank would always take the right decision in keeping with their mandate of ensuring price stability and a well-functioning financial system in the market. So, I want to believe the central bank would perform its duties as entrusted to it by the constitution and its independence is sacrosanct. Politicians obviously have the freedom to also speak and wish whatever they desire.

So, one needs to separate both. That being said, the question is, what is devaluation? Is the issue about devaluation or market participant wanting to see a clear forex regime that is consistent and for one to be able to make long-term decision? I will like to separate the two. We all know what the forex regime is. As an entrepreneur, an investor or market participant, you want certainty to do what you want to do. And whether the central bank by putting in place a stable forex regime leads to devaluation, so be it. But I think what the country needs is a clear direction around our forex regime. I cannot over-emphasise it, but it is very important because any foreign direct investor or real sector investors who want to bring capital to set up manufacturing plants, hospitals, schools, invest in our transportation, power, would want to understand what our forex regime is. With that, they will base their investment. So, we need to communicate that and be firm about it.

In doing so, again, it may lead to some devaluation or adjustment. In terms of devaluation, I have always been a believer that forex rates should reflect the fundamentals of a country. One needs to look at the factors that the country contends with today. Our main forex earner is oil and oil price has come from as high as about $100 per barrel, to about $40 per barrel presently. So, that is a significant one. That has also led to a significant drop in government’s forex revenue. So, our fundamentals have changed and market forces and economics would tell you that other things have to adjust to it. So, basically, one needs to keep that in mind. But in doing so, one needs to analyse the peculiarities of the country.

So, I want to believe that the Monetary Policy Committee, whenever they meet, considers all these factors in their decision-making. So, we need to make sure that our currency reflects our economic fundamental and the jury is out there to know whether that is the case or not and if that is not the case, how long can we sustain it. I must tell you that in other part of the world, when they were confronted with this type of issues, sacrifices were made and those sacrifices need to be made by everybody in the country. The people need to review their preferences by ensure that they support the economy enough by patronising Made-in-Nigeria goods and activities.

There is also a need for the improvement in the quality of our locally produced goods and products to meet peoples’ preferences and quality standards. I strongly believe that if we want to discourage the importation of rice, the right approach is not forex, the right approach is to impose the right tariffs on these rice when they get to Customs and people should be made to know that if they want to go foreign goods, the price would always be higher.

What has been the experience of your firm playing in the merchant banking sub-sector in Nigeria for about three years now?

The industry has been challenging, especially in the last two years, in a declining oil environment. You also will appreciate that given the election cycle, we had quite a bit of policy vacuum. It took the government some time to put its ministers in place. So, there was a period of lull in the market and when that happens, it does impact clients confidence. Clients don’t make long-term decisions. You know as a merchant bank, one of the areas that we play in is infrastructure financing and project development. But what has come to play has affected the capital expenditure needs of our clients. But like I said earlier, it has opened up opportunities in our fixed income securities market. There are good activities in the corporate banking space with regards to working capital. So, overall, it is a mixed operating environment.

But we have a long-term view of the market. We still believe that the fundamentals of the Nigerian economy are strong, we believe that the future dynamics is positive given the size of the population, given the extent of resource endowment of the country. But we need to fix power, eliminate corruption, reduce bureaucracy and improve the environment in which businesses operate. I think if we are able to get some of these things right, there would be an encouraging future. But we have to take some tough decisions, which necessarily mean some pains. So, we are encouraged by the long-term prospects of the country.