In Break with Buhari, Osinbajo Wants Naira Devalued to Market Rates

•Analysts urge caution, say local production, exports way out of FX crisis

•Adesina: $15bn annual investment required to bridge infrastructure gap

…POLITICAL NOTES

The retreat provided a platform for both Osinbajo and Adesina to showcase themselves, leaving many wondering if it was a quasi-presidential debate. Is Osinbajo running? Is Adesina running too? There are indications that some PDP leaders may be wooing Adesina as their southern presidential candidate. THISDAY will keep you posted…

James Emejo and Olawale Ajimotokan in Abuja

In a major break with President Muhammadu Buahri who has consistently opposed the devaluation of the naira, the Vice President, Prof. Yemi Osinbajo, yesterday openly advised the Central Bank of Nigeria (CBN) to adjust the naira exchange rate “to be as reflective of the market as possible to boost supply.”

Past efforts to persuade the president to allow the adjustment of the exchange rate had met a brick wall.

But in quick reaction, analysts cautioned that the suggestion by the vice president could have a damaging effect on the economy. They advised the federal government to improve local production of goods and exports in order to solve the current foreign exchange (FX) crunch.

The experts, who spoke with THISDAY, argued that the effective exchange rate, even by International Monetary Fund (IMF) standard, was between N435 and N440, stressing that the over valuation was less than five per cent.

This is just as the President of the African Development Bank Group (AfDB) Dr. Akinwumi Adesina, yesterday stated that Nigeria requires $15 billion annual investments on infrastructure to bridge the huge infrastructure gap in the country.

They both spoke on the first day of a two-day Mid-term Ministerial Performance Review retreat, presided over by President Muhammadu Buhari.

Osinbajo said the naira exchange rate was artificially low. He lamented that this was discouraging foreign capital inflow to the country.

The vice president called on the CBN to review its strategy on forex and ensure that the naira value reflected the market reality, rather than the “artificially low” rate that was deterring investors from bringing foreign exchange into the country.

He stated, “As for the exchange rate, I think we need to move our rates to be as reflective of the market as possible. This, in my own respectful view, is the only way to improve supply.

“We cannot get new dollars into the system, where the exchange rate is artificially low. And everyone knows by how much our reserves can grow. I’m convinced that the demand management strategy currently being adopted by the CBN needs a rethink, and that is my view.”

Currently, the naira is changing at N411 to $1 at the official side of the market, while the same goes for about N565 at the parallel market.

According to the vice president, “There must be synergy between the fiscal and the monetary authority. We must be able to deal with the synergy; we must handle the synergy between the monetary authority, the CBN, and the fiscal side.

“Sometimes, it appears that there is competition… If you look at some of the interventions, you will find that those interventions are interventions that should be managed by ministries.

“The Ministry of Industry, Trade and Investment should handle MSMEs interventions, and we should know what the CBN is doing. In other words, if the CBN is intervening in the MSME sector, it should be with the full cooperation and consent of the Ministry of Industry.

“Sometimes you will get people who are benefiting more than once because we simply have no line of sight on what is going on, on one side.”

He stated that there should be one clear economic plan, not two, saying, “We cannot have a CBN-led economic plan and a government-led plan. We would end up duplicating, and even there may be beneficiaries of grants benefiting multiple times.”

However, speaking in separate interviews with THISDAY, analysts said the current exchange rate was a direct result of the country’s inability to boost local production and increase exports to, among other things, strengthen the local currency.

The analysts disagreed with Osinbajo’s call for further devaluation of the local currency, warning that the dangers of such move far outweigh the benefits. They said the implications of devaluing the naira could be “quite scary.”

Nigeria currently operates a managed float exchange regime, where the CBN can intervene in the market whenever it deems appropriate.

Chairman, Chartered Institute of Bankers of Nigeria (CIBN), Abuja Branch, Professor Uche Uwaleke, said the first casualty of another devaluation would be the 2022 appropriation bill.

Uwaleke said, “It means the 2022 budget, which is predicated on N410.15 per dollar, is dead on arrival. The vice president, obviously, means well. But this statement is capable of triggering panic buying and speculation in the forex market (official and parallel) and further complicating things for the CBN.”

He also said the argument that devaluation would incentivise local investors was questionable, as other variables, particularly, insecurity also acted as disincentive to capital inflow presently.

However, Uwaleke said devaluation would force down the volume of imports and reduce the pressure in the forex market temporarily.

“But have we thought of the impact it would have on pump price of fuel and the multiplier effects?” he asked.

He added, “How about the knock-on with regard to inflation and interest rates, especially, at a time when inflation rate remains elevated?

“Is high inflation rate not inimical to investments, whether local or foreign? The argument that naira devaluation will incentivise foreign investors remains to be seen, as other factors, such as insecurity, equally play a part.”

Uwaleke stated further, “To be sure, the naira has suffered several devaluations in recent past. It has neither solved the fundamental problem of helping to diversify the export base nor curbed unbridled imports. Doing so yet again will not change anything. Rather, it’s a recipe for high poverty and unemployment levels.

“Again, suggesting that the CBN should discontinue its forex demand management strategy to the effect that certain items are excluded from accessing the official window has grave implications for exchange rate and the economy. If anything, it negates the import substitution drive of the present administration.”

However, Uwaleke said the good news was that the CBN had sufficient external reserves to meet genuine demands for forex at the investors and exporters window.

In his contribution, Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said there were several ways of managing the exchange rate crisis, including enhancing local production capacity, which the CBN had been committed to achieving.

Ekechukwu stated, “The situation with our current exchange rate does not have one solution, but a myriad of them, nonetheless, they are interlinked

“Enhancing the local production capacity, which creates availability of the products and opportunities to export, must be our focus.

“We need to do everything we can to stop importation of petroleum products, by encouraging as many private refineries as possible to come on board.”

Ekechukwu added, “Insecurity has indirect adverse effect on our exchange rate in many ways. These are the things to address, in order to contain the soaring exchange rate in the short run.”

Similarly, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said the country needed to boost local output and strengthen its export capacity in order to resolve the exchange rate disparity.

Gbolade explained, “The major challenge with FX rate has been that Nigeria has been exporting less goods and services than it imports over the years.

“This problem has persisted with various administration and the intervention policy of the CBN is just to ensure that international trade improves within the confines of our reserves.”

He also said, “Devaluation of the naira now, though a good initiative, could hamper efforts to increase production and international trade.”

But the Managing Director of the Financial Directive Company Limited, Mr. Bismark Rewane, argued that the solution to the present challenge the forex market was, “to increase supply at an efficient price.”

Rewane, who is a member of President Buhari’s Economic Advisory Council, described the suggestion by the vice president as a healthy debate.

He added: “Technically, what you are looking for is convergence of rates towards a fair market value. One thing must be clear, an overvalued exchange rate is not a good thing for a country. Therefore, it is important that you get the exchange rate to a fair value that is acceptable to the market, manufacturers and everybody.

“Right now, there is a perception by the market that the currency is overvalued because the difference between the official and the parallel market rate is so wide that there is a motivation for speculation, which is not good for the economy.

“And the answer to that is to increase supply at an efficient price. That efficient price is a converged rate because if you move one rate, the other one should naturally appreciate to a fair value. So, the most important thing is that an overvalued exchange rate does more harm to the economy.

“As long as a currency is overvalued, people would begin to bet against that currency. So, what you are seeing today is a bet against the currency that either now or later, the currency would adjust. So, this is a healthy debate, but an overvalued exchange rate is not good for any economy.”

Speaking further at the retreat, Osinbajo stated that despite the challenges of funding and other issues, the implementation of the N2.3 trillion Economic Sustainability Plan (ESP) had made significant impact across different sectors. He said it had also helped the country to effectively tackle the fallout of the COVID-19 pandemic, by creating jobs and safeguarding existing ones, while also putting the economy on the path of sustainable growth.

Osinbajo stated, “The ESP tried to mitigate the shock of COVID-19, but also took the opportunity to try to tackle longstanding structural challenges, while repositioning the economy for the future.”

Osinbajo explained that following the global pandemic, “There were sharp declines in some key sectors: transportation sector declined by 49 per cent, hospitality sector fell 40 per cent, the education sector fell 24 per cent, real estate declined by 22 per cent, trade declined by 17 per cent, and construction declined by 40 per cent.

“But since the ESP implementation began, which was credited as a major reason why Nigeria exited recession faster than predicted, data showed that these sectors have rebounded to positive growth:

“Transportation to 77 per cent, hospitality to two per cent, education to one per cent, real estate to four per cent, trade to 23 per cent and construction to four per cent.”

The vice president further said, “In response (to the pandemic), the president took two actions. The first was to set up a small inter-ministerial committee headed by the Minister of Finance to quickly examine the implications of and the immediate mitigation steps that would be taken for the economic shocks we were experiencing. The second step, which Mr. President took, was to ask that we draw up a full Economic Sustainability Plan to provide at least a 12-month response to the fallout of the pandemic. And Mr. President asked me to chair the committee to draw up the plan and later to implement it.”

Adesina: $15bn Annual Investment Required to Bridge Infrastructure Gap

Meanwhile, in his paper, titled “Nigeria’s Economic Resurgence: Learning from the African Experience,” Adesina identified infrastructure as critical for unlocking the full potential of the country’s economy. He called for priority attention to financial innovations, saying government alone cannot afford the huge financial cost.

The former Nigerian Minister of Agriculture proposed that the private sector should be given incentives in form of tax credits to encourage investment in infrastructure.

Adesina said, “To be sustainable and more efficient, Public-Private Partnerships (PPPs) should be accelerated to finance major infrastructure across Nigeria. Nigeria’s institutional investors, especially the pension funds, should invest in infrastructure.

“Governments can also implement ‘Infrastructure Asset Recycling models,’ where existing infrastructure assets on government books can be turned over to the private sector, freeing up financing for governments to invest in new infrastructure needs.”

He said sustainable financing approaches, such as PPPs and infrastructure asset recycling, would allow Nigeria to attract significant private sector investment into infrastructure.

Speaking on trade, the AfDB president stated that the Africa Continental Free Trade Area presented a major opportunity for Nigeria given that consumer and business expenditures in Africa are projected to rise to $6.7 trillion by 2030.

He said significant support should be directed toward boosting the country’s industrial manufacturing capacities, adding that Nigeria should also move rapidly to the top of selected value chains, such as automobiles, computers and electronics, textile and garments, and food manufacturing, transport, and logistics.

The former minister, however, admitted that much of the gains would depend on the ports in the country, where, according to the sector operators, the cost of exporting 100 tons of cargo in Nigeria is $35,000, compared to $4,000 in Ghana.

Adesina stated, “Today, the leading ports for West Africa are in Cote d’Ivoire, Ghana, Togo, and Benin Republic. All these countries have modernised their port management systems, leaving Nigeria far behind. Nigeria can learn from Morocco’s world-class Tangier-Med port. The port is unique in that it is an industrial port complex, and a platform that has over 1,100 companies.

“They collectively exported over €8 billion worth of goods in 2020. Companies located at the Tangier-Med port have allowed Morocco to move up the global value chains, including automobiles, automotive parts, aeronautics, agriculture and food manufacturing, textiles, and logistics. Annually, over 460,000 cars are manufactured in the zone for exports. And more interesting is that the bulk of the human resources to do these are Moroccans.

“I took a walk at the Tangier-Med Port. I actually thought they were on vacation, as I did not see people – just machines, haulers, automated systems moving containers in what looked like a well-synchronised maze, with incredible efficiency.

“There were no kilometres of trucks waiting to get to the port. Your Excellency, we should not be decongesting the ports in Nigeria, we should be transforming the ports. This must start with cleaning up administrative bottlenecks, most of which are unnecessary with multiple government agencies at the ports, high transaction costs or even plain extortions from illegal taxes, which do not go into the coffers of the government.

“Here is the lesson: Nigeria should rapidly modernise and transform its ports. Ports are not there for revenue generation. They are for facilitating business and exports, and stimulating industrial manufacturing, and competitiveness of local businesses and exports.”

He also urged the federal government to relaunch the ‘Growth Enhancement Scheme’ and the e-wallet system by putting millions of farmers at the heart of agriculture.

According to him, there would be a dramatic turn-around in national food production if this is accorded immediate attention.

Using Sudan as a case study, he said AfDB helped the country to finance the revolution of wheat with heat tolerant varieties, by producing 65,000 metric tons of seed, which is equivalent to 660 Airbus 380 aircraft parked on a landing strip.

Adesina Sudan moved from 25 per cent self-sufficiency to 54 per cent in just two seasons, and it expected to become a net exporter of wheat within three years.

He said, ”We also supported Ethiopia to cultivate the heat tolerant varieties on over 184,000 hectares. Interestingly, these same heat tolerant varieties were introduced to Nigeria when I was Minister of Agriculture and we worked hard to give them to farmers in the Lake Chad Basin.

“Your Excellency Mr. President, You may wish to know that during the insecurity in the area, my staff at the time, led by Dr. Oluwasina Olabanji, the then Executive Director of the Lake Chad Research Institute, and his team, stayed in the fields, protected the seeds being multiplied, and risked their lives.

“When insecurity became much more serious, they moved the varieties to Kadawa valley in Kano. Dr. Olabanji deserves a national award. I was on the farms in Kano with several Seriki Nomas or farmer heads.

“They could not believe that wheat could be as tall as they were! These varieties yield five tons per hectare compared to average yield of 1.5 tons per hectare – a 400 per cent increase! Nigeria should take advantage of the work of the Bank on this and scale up cultivation of heat tolerant wheat across northern Nigeria.”

He also said arising from COVID-19, Nigeria’s economy recorded a negative growth rate of 1.8 per cent in 2020, while the African continent posted a negative growth rate of 2.1 per cent growth rate, its lowest in two decades.

Adesina said AfDB, which launched a $10 billion Crisis Response Facility to support countries and provided $289 million in budget support to Nigeria, projected the country’s economic growth rate to rebound to 2.4 per cent this year and reach 2.9 per cent by 2022.

He said the recovery would depend on access to vaccines and tackling debt issues as Africa had only two per cent of its population vaccinated, compared to 54 per cent in the United States and 75 per cent in Europe.

Adesina assured that the AfDB would invest $3 billion in support of local pharmaceutical industries in Africa, including in Nigeria, while urging the federal government to decisively tackle its debt challenges.

He said, “The issue is not about debt-to-GDP ratio, as Nigeria’s debt-to-GDP ratio is still moderate.

“The big issue is how to service the debt and what that means for resources for domestic investments needed to spur faster economic growth. The debt service to revenue ratio of Nigeria is high at 73 per cent.

“Things will improve as oil prices recover, but the situation has revealed the vulnerability of Nigeria’s economy. To have economic resurgence, we need to fix the structure of the economy and address some fundamentals.

“Nigeria’s challenge is revenue concentration, as the oil sector accounts for 75.4 per cent of export revenue and 50 per cent of all government revenue. What is needed for sustained growth and economic resurgence is to remove the structural bottlenecks that limit the productivity and the revenue earning potential of the huge non-oil sectors.”