Ife: Banking Sector will be Stronger this Year

In this interview, renowned economist, London Enterprise Ambassador and Chief Economic Strategist, ECOWAS Commission, Ken Ife predicted that the banking sector would thrive in 2023 and also gave insights on various sectors of the economy. Nume Ekeghe presents the excepts:

It is the beginning of the year; can you forecast where our economy is headed in 2023?

2023 would be a very difficult year for the country, in the context that we still had runaway inflation that consistently keeps rising. We closed the books at 21. 47 per cent and also, the food sub-basket index still kept on driving the upward pressure on inflation giving a much wider gap.

The second point on inflation is that there is an inflection where the urban sub-index actually went higher than the composite price index. This means that it is coming on higher than the average meaning that the price rises in the urban center are phenomenally high and you can now trace it to the difference between rural and urban. Understanding the complexity of that inflation helps us to see what the dynamics were. There is a very high degree of imported inflation because of the forex dynamics and so many things are going on the forex front.

Can you elaborate on issues around foreign exchange? 

Three different demand pressures were on the currency. You have the supply push, which is structural and then you have the demand pool, which is really around the Francophone countries that are actively buying crops and foodstuff from Nigeria and northern frontiers and they have been contributing to demand-pull inflation.

Also, the imported inflation is due to very high differentials in the black market and the domestic market. So approaching the Christmas season, a lot of money was demanded which caused a big spike towards the end and also because of the speculation on the currency and the announcement of the redesign of the currency. So all of that contributed to the very high push; but then it came down when other factors started kicking in inducing panic buying, people going on holiday people paying school fees and people importing to sell during Christmas, causing it to subside. And then the diaspora saw a very high dollar rate and had to start buying naira because it was very high. But all of that subsided, and they will remain a little cool.

The other area that was such a challenge was the forex and I find it so difficult to get people to understand that even though our economy is well diversified on the domestic front, especially as the petroleum sector has come down to  6.5 per cent of the GDP and now many sectors are bigger than the petroleum sector. Trade is about 15 to 16 per cent and ICT is about 7 per cent. Then you have the other sectors like financial services, which is over 20 per cent, services are around 56 per cent all of them are doing higher than oil. But then it is a different story when you come to the export sector of the economy where the dominance for forex receipts is crude oil, accounting for 79 per cent of our revenue. And then gas accounts for 10 per cent, leaving only 10 per cent to be shared by the dwindling foreign direct investment, the foreign portfolio investment and diaspora remittance. Diaspora remittance went down from $26 billion to just over $5 billion during the COVID-19 but has recovered fully to $20.5 billion just before the close of the last quarter.

But that notwithstanding, it is a huge challenge for two reasons: one is that Nigeria is not in control of the prices of crude as well as the production volume. The production volume limit is set byOrganization of the Petroleum Exporting Countries (OPEC) but at the same time, the militants in the Niger Delta are bursting pipes and were shut down to minimize losses so we are never able to reach our capacity. And then because we are not having enough production volume even though the prices are high and whatever comes in is consumed by the budget. So you don’t have that excess crude to go into the excess crude account and then you don’t have any accretion to foreign reserves. So the forex situation worsens.

And then the second aspect is that this NNPC did a crude swap, which means they simply ignored the central bank and every other need for forex in Nigeria by simply pushing out the whole crude to refine in exchange for premium motor spirits (PMS). I have fought against this because it doesn’t make sense.  The fact of the matter is that you cannot bundle these two transactions into one. For example, if you have 20 per cent leakage in the export of crude accounting, and then you have the same 20 per cent leakage in imported PMS accounting because remember, we are still arguing about the volume that is being consumed. So, you are now having multiple impacts of 40 per cent. So you can’t put them in the same accounting framework. I’ve been telling this to the Minister of Finance, and she agrees with me.

Now the impact of what they are doing is that since 2014, $3 billion has gone into the central bank from crude proceeds, and then they will still come back and take some of that to pay for the PMS. But what happens is that the CBN disburses $1.8 billion every month and then the overall request for dollars for imports is about $4.6 billion. So it’s already providing less than what the market requires.

For the whole of 2021, CBN wasn’t getting anything didn’t get anything from NNPC but towards the last quarter, it started getting $300 million which is only 10 per cent of what you should be getting from NNPC. So there is no way you can expect the central bank that has to disburse $1.8 billion monthly that only receives $300 million from the NNPC and still needs to pay for all kinds of import bills for raw materials to cope.

80 per cent of our manufacturing capacity in this country is dependent on imported raw materials and pharmaceutical is almost 100 per cent for active pharmaceutical ingredients. So you are starving the legitimate people who need them for manufacturing to keep the jobs, starving invincibles, which are people going for medical treatment or paying for school fees for their children, and all kinds of things. Then all the others that are waiting, which amount is put at $4.6 billion. They all have to now head to the black market to buy dollars. So, it is difficult, CBN can’t print dollars in this country.  So it is difficult and people don’t want to hear all that, they’ll just say it is CBN that is failing in their policies and they forget that there are other people are playing their part in all of this.

Furthermore, when you now come to the quantum of money trading on the black market, you can now connect it to the N2.6 trillion that is out there outside the banking sector out of the N3.3 trillion that is supposed to be in circulation. Now that quantum of money is trading and speculating on the strength of the naira and then they’ve got cash liquidity there to be trading on this currency. You also have the laundered money in the mix.

Can you speak on the redesign of the naira and what impact it is having?
When CBN decided to change the currency it began to bring sanity to that currency arena. But that wasn’t well received but people have now come to agree that it is necessary. 20 years is such a long time not to change the currency because the technology of the previous currency is completely outdated and now we have a new currency that has electronic assets in there. You can track money and all kinds of other things.

How would you assess the financial sectors in 2022 and how do you think they would fare in 2023?

Banks have been doing extremely well. If you look at the GDP figures of the third quarter, the banks were returning 18.3 per cent growth rate. That is phenomenal. Remember that throughout 2020 and 2021, the banks were running at 15 per cent growth rate, which is five times more growth than the rest of the economy. And they were running pari passu with the ICT. Now what has happened is that all of the banking sector and the financial sector have benefited from Central Bank’s massive investment in payment infrastructure because they invested heavily in permanent infrastructure.

So when there was the COVID disruption, and there was a shutdown, people were comfortable trading and doing transactions at home because they had their mobile money, POS, and agency banking to the point that Nigeria in 2021 is number six in the world in electronic transactions. We are even ahead of America, which was 1.2 billion while Nigeria was 1.8 billion transactions a year; while those ahead of us are India, China and South Korea, but Nigeria was doing really well. And then in 2022, Nigeria’s transactions doubled and went to 3.5 billion transactions, which was equivalent to $200 billion turnover. So, Nigeria has gone nuclear in that respect with 100 per cent increase. I just laugh when people complain about the transaction, we are ready for electronic transactions and the evidence shows that we are.

Over 30 per cent of Nigerians are not banked but when you consider we unstructured supplementary service data (USSD) infrastructure, people can do transactions with Nokia to Nokia, they don’t have to have Android. They use their small phones to transact business and, of course, if you have access to the Internet, you will do mobile banking. So the population is pushing in that direction, and that’s why the Financial System Strategy (FSS) is working and when they do more, people get into electronic platforms. Embracing more technology will improve services. It would enhance consumer credit and so many other benefits.

The measure of the profitability of your banks, you can see from the reports of the Monetary Policy Committee meetings, if you look at the non-performing ratio, it is the same as the Prudential guideline which is 5 per cent. If you look at the capital adequacy ratio, they’re also very close at 15 per cent. And then you look at the loan to deposit ratio has gone up from 55 per cent to 60 per cent and it can even go to 65 per cent. Many other indices are now pointing to a heavily commercial banking sector.

So basically, in terms of the economy, you think the banking system is the biggest gainer this year?

I think they will be even stronger. With the new policy on withdrawal limits, that comes with a fee, which is a lot of money.  I don’t see any threat to the liquidity of any of these banks at the moment. Unlike what has happened globally throughout the period of the recession and also during the COVID-19 lockdown.

So the investment is continuing on payment infrastructure, and even now we have the Pan-African payment and settlement system that is also coming in that is even going to make things a lot easier on the continent.