By Olakunle Olafioye
Nigeria’s first Professor of Capital Market and the pioneer President of the Association of Capital Market Academics of Nigeria, Prof Uche Uwaleke, has called on the Central Bank of Nigeria (CBN) to adopt a different approach from the 2005 recapitalization by banks in the country in the planned new exercise.
He advocated the use of prudential guidelines to strengthen the present tiered arrangements.
Uwaleke, who is the director of the Institute of Capital Market Studies at the Nasarawa State University, Keffi, also stated his views on 2024 budget proposal before the National Assembly and sundry economic issues. Excerpts:
President Bola Ahmed Tinubu recently presented the 2024 budget proposal of N27.5 trillion themed ‘Budget of Renewed Hope.’ What is your assessment of the proposal?
First, let me note that it is a welcome development as the presentation of the 2024 budget proposal helps to clear uncertainty in the economy though the budget train appears to be leaving the station late. Late in the sense that the timing of the presentation does not allow the National Assembly sufficient time to thoroughly interrogate the contents before passing the Appropriation Bill. To be sure, the International Budget Partnership recommends that budget proposals should be presented to the parliament at least three months before the end of a fiscal year. Having said that, it is important to recognize that this is a transition year and the first budget proposal by the present administration. In this connection, the delay can be excused. I am yet to study the details, which as we speak have yet to be uploaded on the website of the Budget Office. Based on the much disclosed during the public presentation, I think it is an improvement over that of the 2023 estimates in terms of lower deficit to GDP ratio and increased allocation to capital spending. Consistent with the government’s eight-point agenda, the priority sectors comprising security, education, health and infrastructure got the lion’s share. I also consider the oil price of $77.9 per barrel and output benchmark of 1.78 million barrels per day used for oil revenue projection as largely realistic against the backdrop of the fact the short-term energy forecast of the United States Energy Information Administration has projected an oil price of $93 per barrel for 2024. Overall, the 2024 budget proposals hold a lot of promise for the economy if well implemented.
Considering the volatility of the forex market, what do you make of the N750 to dollar rate as captured in the proposal?
A major snag I see in the implementation of the 2024 budget stems from the likely distortionary impact of the new forex regime which renders the N750 to the dollar rate unrealistic. It is this same challenge that will make the attainment of the target inflation rate of 21.4 per cent and GDP growth rate of 3.76 per cent a tall order. Already, reports say the exchange rate for clearing goods at the ports has been adjusted upwards to N951 to the dollar. One does not need a fortune teller to predict the impact of this on the prices of imported goods. It is most likely the exchange rate will be the major cause of wide budget variances in the 2024 budget on account of NAFEM operations. This is particularly so in respect of the dollar-denominated component of the budget much of which can be found in the over N3 trillion proposed defense spending as well as in recurrent debt expenditure of over N8 trillion. It goes without saying that a volatile and high exchange rate will increase the cost of servicing external debt and further widen the budget deficit. Expectedly, the demand pressure in the NAFEM increased following the read mission of the 43 items into the forex market in one fell swoop which is why I had argued at the time that the move was ill-timed. The reality is that given the volatility in the forex market, the CBN may be compelled to revisit the current forex market regime. In my view, a well implemented and corrupt-free dual, as opposed to multiple exchange rate regime, involving one official rate including for debt service and another tier for other transactions, will help to bring certainty in government procurements and short-term planning in general.
If the exchange rate will present a major challenge as you mentioned, how best do you think the CBN should manage this?
I have just told you that the CBN should consider the possibility of implementing a dual, not multiple, exchange rate regime. A key success factor is that such is operated transparently, corrupt-free and does not enable round-tripping. The fact is that the monumental forex crisis we have on our hands today characterized by shallow supply amidst huge demand including FX backlogs and encumbered external reserves, cannot be fixed overnight. As you well know, exchange rate has to do with supply and demand. Whereas the CBN may attempt to control demand through further policy tightening, it does not print dollars to significantly affect the supply side. The current strategy of the government seems to focus on the supply side involving borrowing dollars to improve liquidity in the near term. But it may not record any significant success except the unbridled demand for FX is dealt with. To curb the demand pressure, I suggest the government should compel a change in consumption behaviour by enacting via the National Assembly, a Buy Nigeria law akin to the Buy America Act of 1933 and recently the Build America, Buy America Act of 2021. In the same vein, Nigeria import data support revisiting and scaling up the CBN’s currency swap deal with the Peoples Bank of China. Given that the bulk of Nigeria’s imports are from China, it stands to reason, therefore, to explore ways of bypassing the dollars and settling these transactions in the Yuan. This was the idea behind the currency swap with China which was largely inadequate in size. In order to increase the stock of Yuan in our external reserves, Nigeria can issue Panda bonds, which are bonds denominated in the Chinese Yuan and are considered cheaper than Eurobonds. The demand pressure will equally be impacted if our refineries can be up and running and an end is put to fuel importation. By and large, export-based diversification remains the only sustainable solution to the present FX crisis.
The FG has proposed to finance the N9 trillion deficit with new borrowings and proceeds from privatization. What is your view on this?
For me, what is more important is the mode of financing the over N9 trillion deficit in the 2024 budget considering its likely impact on cost of capital for firms and the stock market. Unlike in previous budgets where the amount voted for new borrowings were split fairly equally between domestic and foreign sources, this time around domestic borrowing is taking up a huge chunk at about 78 per cent, that is N6.1 trillion out of N7.8 trillion provisioned for new borrowings. This can have the effect of crowding out the private sector, hiking interest rates, increasing cost of funds and depressing the equities market as investors migrate to fixed income securities. The outcome will be a further weakening of the productive sector. In this regard, the government is advised to explore more opportunities for concessional project-tied loans from multilateral and bilateral sources. This will help to boost forex reserves and stabilize the exchange rate. With respect to borrowing domestically, it is important that emphasis should be placed on the use of the right instruments such as infrastructure bonds as opposed to FGN bonds that are inflationary.
The 2024 budget has an inflation target of 21.4 per cent. Do you consider this realistic given that the CBN Governor has announced plans to focus on inflation targeting going forward?
Well, it may be considered realistic that other factors remain constant. By other factors I am referring to the non-monetary factors which I shall talk about shortly. It is worth noting that whereas inflationary pressure is slowing in many parts of the world including the US, UK, EuroArea, South Africa and even Ghana, it is rising in Nigeria, reflecting the impact of the fuel subsidy removal and naira devaluation. The pressure point is on food which contributes over 50 per cent of the 27.73 per cent inflation rate, according to the NBS. This pressure is felt more in the urban than in rural areas possibly on account of high transport costs. The trend in the inflation rate is quite worrisome given its impact on the purchasing power of the naira and by extension on poverty level. It is equally partly to blame for the increasing dollarization of the Nigerian economy and the demand pressure in the forex market. In view of the supply-side factors driving inflation in Nigeria, including rising cost of transport, energy, flooding and insecurity, the government must play complementary roles to that of the CBN through tackling insecurity, massive investments in power and agriculture in partnership with the private sector as well as ensuring the speedy resuscitation of the refineries in order to bring down the cost of transport as well as help naira appreciation in the forex market when an end is put to import of petroleum products.
What is your take on the planned recapitalization of banks in Nigeria as recently announced by the CBN Governor?
The idea of recapitalization of banks is a welcome one. It goes without saying that capital is needed to finance big-ticket projects especially when the government is targeting a 1 trillion-dollar economy in a few years’ time. The devaluation of the naira has equally made this imperative especially for banks playing in the international space. You must have seen the recent stress test report by the CBN which says that many of the banks with international licenses failed to meet the Capital Adequacy Ratio of 15 per cent. Also, if the experience of 2005 is any guide, the recapitalization exercise is likely to rejuvenate the stock market. But I think the strategy should be somewhat different from the approach adopted in 2005. It should be more about incentives than coercion. Some DMBs, especially many in the FUGAZ category, are already making efforts to increase their capital base. The CBN can use prudential guidelines to strengthen the present tiered arrangements. The use of the CAR, the ratio of a Bank’s capital to risk weighted assets, is a good example. The apex bank can also use differential cash reserve requirements as well as preferential participation in the forex market for well-capitalized banks as some of the incentives. For whatever it is worth, smaller banks playing at the regional level should not be regulated out of existence.
The FG has proposed to raise $1 trillion in the next seven years. What should be the role of the capital market in this?
The capital market is the market for securities, where companies and governments can raise medium-to-long term funds. Therefore, the capital market can play a huge role in the process. No doubt, achieving a $1 trillion economy within this decade presents a formidable challenge to the government given Nigeria’s low revenue to GDP ratio of less than 10 per cent making inevitable the capital market route. It goes without saying that the short-term funding profile of the money market makes it unsuitable for capital formation to fast track economic growth and development. In order to unlock the potentials of the capital market in this direction, there must be a deliberate attempt to develop specific segments of the market. One sure war of realizing this dream is by establishing capital market-based infrastructure funds. As the experiences of Malaysia and India demonstrate, the government should utilize more infrastructure bonds when borrowing from the domestic market if it must achieve double-digit growth. Currently, infrastructure bonds represent an insignificant proportion of the country’s outstanding domestic debt instruments. Also, the privatization of government enterprises should be done through the capital market. Essentially, efforts to meet the current challenges of the Nigerian capital market will inevitably set the stage for it to play a prominent role in achieving the dream of a $1 trillion economy within the next seven years.
Most Nigerians seem to have lost interest in the stock market. Why is this so and how do you think this trend can be reversed?
Your observation is correct. Relative to Nigeria’s population of over 200 million people, retail investors’ participation at less than five million is low.The fact is that since the global financial crisis which also affected the Nigerian stock market resulting in huge financial losses for many investors, the confidence level in the market has yet to return in full. Be that as it may, some other factors are equally contributing to the weak investor sentiments and relatively low patronage of the stock market. The macroeconomic environment has not helped matters. For example, we know that investment is a function of savings. High unemployment and poverty rates manifest in low savings which have a negative impact on the stock market. Also, high rates of inflation discourage investments generally. Equally of concern is the low participation of youths in the capital market given that the average age of retail investors is about 53 years according to data obtained from the Central Securities Clearing System. This does not reflect the country’s demographics with a significant youth population. It must be noted, however, that the advent of cryptocurrency is partly to blame for the low participation of the youths. The way forward is for the market to continue to develop products that satisfy the needs of diverse investors and age groups. The government can equally play a role by incentivizing increased participation of investors in the market. For example, equities transactions in the Nigerian capital market should be exempted from capital gains tax as the current CGT regime discourages High Networth Individuals from participating in the market. The importance of capital market literacy in enhancing the growth of the capital market cannot be overemphasized. In this regard the efforts of the Securities and Exchange Commission, the Chartered Institute of Stockbrokers and the Association of Capital Market Academics of Nigeria are commendable and should be sustained.