Monthly Archives: July 2016

CBN should focus on its primary mandate

By Rafiq Raji, PhD

Make transparent data-dependent decisions, let the naira be
I do not suppose the Central Bank of Nigeria (CBN) faces a dilemma in the real sense at its monetary policy committee (MPC) meeting this week (25-26 July). True, the economy would probably contract this year – by 2.7 percent is my reckoning – and annual inflation may be as high as 18 percent by year-end. But in the recent past when the CBN tried to spur growth by easing monetary policy, it failed. It was not because it was not diligent enough. Not at all. There were just bigger factors at play, most of which were (and are still) not within its control. There was uncertainty on the fiscal front. This has not abated. Now, officials say revenue targets could be missed by as much as half, albeit better non-oil receipts in recently shared federal revenue suggest things could improve. Revenue would probably be volatile. Pipeline vandalization (by resource control agitators in the Niger Delta region) disrupting crude oil production compound woes from continued low prices. And then foreign portfolio and capital flows that were much looked forward to, after the supposedly free floating of the naira, have not been quick to materialize.

There may actually come a time when the CBN is able to implement measures that succeed in motivating the type of bank lending that boosts the real economy. Not yet: that would only come after pertinent structural reforms. The cost of running a business remains high in Nigeria. Banks have to factor in the ideally unnecessary cost of generating their own electricity, almost permanently via supposedly standby generators. Inflation at above 16 percent also means they cannot lend below that price risk threshold. It matters little how much incentives they are proffered. What policy tightening does, which one advocates (my expectation for this meeting is a 1 percent rate hike to 13 percent), is signal the CBN’s commitment to its primary mandate: price stability; which despite the many inefficiencies in the Nigerian economic system, it has a bizarrely consistent success record in ensuring, when it wants to. So, it is not entirely correct that a balanced tightening stance would not be helpful – some economists have been suggesting the CBN needs to support growth by keeping rates unchanged at this meeting and in the foreseeable future. One is not being dismissive. Banks, not necessarily unhealthy ones, do rely a great deal on borrowings from the central bank. And when the monetary policy rate (MPR) is relatively accommodative, they get some relief. Unfortunately, the hope that such accommodation would incentivize increased lending to the real economy is often – if not always – dashed. Add to that: about 15 percent of total loans outstanding is either currently bad or non-performing. And these are loans given to supposely good borrowers hitherto. Naturally, banks are now very cautious. Still, at current inflation levels, the CBN has to act.

What market participants want is for the naira to trade freely and for policy to be data-dependent and fundamentals-driven. It is not so much the choices that a central bank makes that matter but the rationale and transparency with which they are made. That is where the CBN has faltered hitherto. There is a lot now known about how the CBN operates, especially the almost overbearing influence of the country’s president on policy-making. It is probably now fruitless for the CBN to make pretensions to independence. But with the CBN finally allowing the naira to trade more freely in the week preceding this month’s meeting, committee members may at least get the opportunity to simply focus on discussing a balanced tightening move that signals they are concerned about inflation, but at just the pace that won’t hurt growth materially. Even so, it would help if deliberations result in a formal declaration that it is best if the CBN intervenes less in the foreign exchange market. It simply does not make sense to have a supposedly flexible FX regime and then continue to haemorrhage scarce hard currency, aiding speculators. Best to simply let the naira be. If the exchange rate is determined by market forces, demand would slow. But when the CBN interferes intermittently, the policy becomes even more wasteful than the previous one.

Be decisive with the banks
It is very unhelpful if the CBN has to continually make statements that banks are healthy. It says so and then the deposit insurer, a typically conservative and taciturn institution, comes out to warn about non-performing insider loans. It is well known that problematic loans in Nigeria tend to be insider-related. And such is the influence of these insiders that they rarely get hounded by bankers. When not insiders, bad borrowers tend to be politically connected or active politicians themselves: you only hear about the errant ones in the news when they are either unrepentant critics of the government of the day or have run out of favour with the powers that be. The CBN needs to talk less and act more. Identify the toxic assets on banks’ books, sterilize and park them with the government’s bad bank, sanction and fire irresponsible management teams, and provide liquidity and capital where necessary. But when the problem is not tackled head on and rumours abound, it persists. And by the way, these rumours are not entirely just gossip. Bank treasurers know which banks are in trouble. Because banks lend to (and borrow from) each other on a daily basis, it is easy for treasurers to know which banks are having sustained liquidity issues: they tend to be net borrowers and never have money to lend to other banks. So it is an open secret which banks are having liquidity problems. The CBN should be decisive.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz.

SARB & CBK may hold rates

By Rafiq Raji, PhD

Divergent South African and Kenyan central banks to both hold fire

Lower, but still high inflation expectations, allow room for SARB tightening pause
The South African Reserve Bank (SARB) holds it monetary policy committee (MPC) meeting this week (19-21 July). It is likely to keep its repo rate unchanged at 7 percent. Not that it is about to give up its tightening stance. Far from it. However, inflation has eased somewhat – monthly pace was 0.2 percent in May from almost 1 percent on average since January. The most recent headline – to be released on 20 July – before it announces its decision, may border on the upper-end of its target range (3-6 percent): my June inflation forecast is 6 percent. I reckon the headline would be below 6 percent in July and just about 6 percent or lower in August. From September onwards, the SARB’s target would probably be breached, with inflation likely ending the year at above 7 percent. Above-inflation wage expectations – as mineworkers’ union demands in ongoing negotiations suggest – are certainly concerning for the SARB. And the rand, though now below the 15.0 psychological level to the US dollar, remains extremely sensitive to increasingly negative global headlines. Then there are those potentially troubling local elections in August. Food imports may also not be adequate – due to potential short supply abroad – to fill expected drought-induced domestic production shortfalls, white maize in particular. So food prices may rise still. All these suggest inflation expectations would remain high. In public commentary, SARB officials have been very hawkish, albeit they have allowed room for the possibility that inflation may have begun to steady. As there is yet a sustained trend to suggest that this is the case, they are understandably cautious. Even so, committee members have another opportunity to not make a rate move. At the last meeting, it wasn’t so clear cut. Notwithstanding, the committee would likely adopt a similarly hawkish tone. Still, MPC members would no doubt be encouraged by recent manufacturing and retail sales data, both of which surprised to the upside. Manufacturing production expanded by 4 percent year-on-year in May, from 3.1 percent in April. In spite of being highly indebted, consumers did not hold back on spending. Retail sales expanded by 4.5 percent year-on-year in May, from 1.6 percent a month earlier. Mining remains problematic: production contracted by 4.4 percent in May, though slower than an upwardly revised contraction of 7.7 percent in April. Troubles in the mining sector would probably remain, as commodity prices remain lower for longer and disproportionate wage demands continue to weigh on performance.

There is suggestion that the economy might have begun to turn the corner. Not so fast, if the IMF’s July 2016 country report is anything to go by – released prior to recent positive data. I am sceptical as well. The IMF sees the economy growing by 0.1 percent in 2016, a half-percent cut from its earlier forecast. I think it would be slower; a 0.2 percent contraction is my reckoning. There is some justification for this. Structural imbalances – infrastructure bottlenecks, skill mismatches, governance concerns, and policy uncertainty are some the IMF identifies – would take time to rectify. External factors – China’s slowdown and rebalancing, continued weak commodity prices and still likely tighter global financial conditions – also weigh. There is also worry that finance minister Pravin Gordhan may not get the political support he needs to implement cogent reforms. To his credit, he has made some progress. Avoiding a credit ratings downgrade to junk status in June was no small feat. But now the ruling African National Congress (ANC) party needs to win elections, especially as polls suggest it might lose key strongholds, in the capital city, Pretoria, no less. Populism by the ruling party is almost inevitable. An antsy ANC would be little swayed by Mr Gordhan’s call for restraint. More worrying is that there seem to be no new ideas about how to spur growth. And it is not unreasonable to be sceptical about this being addressed in the period to December when the most hawkish of the rating agencies, SPGlobal Ratings, next assesses the creditworthiness of the country.

The SARB would certainly seize any opportunity it gets to not be the reason growth flounders more than necessary. But it would loathe discovering later that inflation got out of control because of the slightest accommodation it allowed; and hurting its credibility consequently. Still, if it ever desired allowing even the tiniest room for growth, a window has opened at this meeting. Quite naturally, there is overwhelming consensus that it would hold rates. My expectation is that at the only other MPC meeting this quarter, in September that is, it would need to tighten rates further, on likely continued rand volatility, renewed US Fed rate hike expectations, and likely above 7 percent inflation by year-end. Brexit would also feature prominently amongst its considerations. It remains my view that while there are risks in this regard, they have been somewhat overblown. And now it is increasingly clear that the European Union would itself not be immune from Brexit risks. Then there is the bizarrely intermittent political incident that makes things go awry every now and again.

Resurgent upside inflation risks to prompt CBK easing pause
Fuel prices rose in mid-July. Security concerns have re-emerged. Already – in early July – the American government has issued a travel warning. There are also concerns about the health of Kenyan banks, judging from the recent disproportionate non-performing loans’ (NPLs) provisions made by some of the country’s biggest banks. The supervisory capacity of the Central Bank of Kenya (CBK) has been questioned. There is also worry about Kenya’s increasing foreign debt profile, albeit this remains less than half of total public debt. Such concerns motivated the downgrade of the shilling by Fitch Ratings in mid-July. Even so, inflation would probably remain below the upper-end of the CBK’s target range (2.5-7.5 percent) for the remainder of the year. Still, resurgent upside inflation risks – even if potentially one-off, like the road maintenance levy-induced July fuel price hike – are sufficient motivations for a pause in the CBK’s easing stance when its MPC meets on 25 July. The higher than expected annual June inflation headline of 5.8 percent, almost 1 percent higher than that a month earlier, is certainly instructive. Nonetheless, the 100 basis point rate cut to 10.5 percent at the meeting in May, means keeping the benchmark rate unchanged this time, would be both accommodative and balanced. And in regard of another power tariff hike in the near future, considering the most recent hike request by KenGen, the power utility provider, was cut quite significantly by the regulator, there are indications there might not be a need for one. In early July, KenGen announced it would discontinue its costly emergency power arrangement with Aggreko, a private provider, as the 30MW Muhoroni gas turbine to make up for it is ready. There are other risks worthy of consideration, which although not within the control of the CBK, could potentially throw its inflation forecasts off-balance. The risk of political violence is all too real. Effects are likely to be seen in intermittent food and transportation price hikes, when or if it comes about. Additionally, there has not been as much fiscal discipline as planned. President Uhuru Kenyatta has not shown the needed sobriety in this regard. Mr Kenyatta’s office and that of his deputy reportedly spent one billion shillings each on hospitality in the first three quarters of the 2015/16 fiscal year. And with control of the budget now squarely under the president’s purview, more spending overruns are likely as he campaigns harder and tries to finish infrastructure projects ahead of elections next year. There are indications that even after this, some projects may still not be completed in time for his testimonials during campaigns – already under way, by both sides actually. These considerations may not weigh significantly, if at all, on the CBK decision this month, however. And in any case, there is still time for the magnitude of the highlighted risks to become clearer or in fact diminish.

In sum, credible upside risks to the inflation outlook emanate from likely election-motivated fiscal spending overruns, potential shilling volatility – a scenario the CBK is amply prepared for – and probable intermittently volatile food and transportation prices. Even so, my inflation forecasts still put end-2016 inflation below the CBK’s upper-bound target. Nonetheless, the CBK would probably not be able to ease rates further before the end of the year. Thus, what would probably be looked forward to at this meeting is commentary on the state of Kenyan banks. Although the CBK would likely try to allay fears, it would be wise to use the opportunity to clear the air on the extent of the problem. Significant bad loan provisions by some of the country’s biggest banks are almost certainly symptomatic of a deeper malaise, one the CBK would do well to address head on.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). 

Diversity is necessary for change leadership

By Rafiq Raji, PhD

Reforms succeed when leaders are trusted, open-minded
Fuel prices have risen. The naira now trades freely, almost. All government revenue now goes into a single account at the central bank. And this is Nigeria. A country where lesser sins would have been unforgivable. And yet Muhammadu Buhari, Nigeria’s president, has done all these without so much as a whisper – so to speak. Even as labour unionists smell blood, they face an unusual adversary this time: a popular president. Problem; he may have begun to get carried away. Otherwise, how do you explain his increasingly flagrant disregard for diversity in his government? Oh wait a minute, we Nigerians call it ‘federal character.’ I have heard such surprising arguments like it does not matter where a government functionary comes from, insofar as services get delivered: constant and reliable power supply, potable water, good roads, etc. That is short-sighted. Actually, ‘federal character’ is a borrowed concept. From the private sector no less. And there is probably nowhere else where merit carries the day like in business. An overwhelming amount of research studies show businesses do better if they have a diverse staff pool. And these are studies that rely on observations of globalised international firms. In any case, government is the most important entity in any country, more so in Nigeria. The folly in President Buhari’s disregard for the federal character of Nigeria is becoming palpable. Who can he send to the southeast to pacify agitators? Certainly not anyone that commands the reverence of people from that part of the country. And the Niger Delta? Even if militants disagree with one of theirs if in government, they are likely to allow him audience if he is highly regarded in their community. Not that one reckons ministers do not have much clout, but Nigerians, an extremely intelligent people, can tell when a functionary does not have real power.

Increasing Buhari insularity would cost country more
As Nigerians are emotionally invested in Mr Buhari, a betrayal would be shattering. Hardened citizens would be hard-pressed to believe in “changee” after that. Mr Buhari has to succeed. For if he fails, the costs to him would pale in comparison to that on the mismanaged but wholesome country that was handed over to him. Nigeria has held in spite of everything because unconsciously we have learnt to pull our resources together as a people. No better place to see that in action like in our local markets. I don’t know that I have ever met a Hausa or Fulani automobile spare parts dealer. Have you? And it would be a rarity indeed to find an Igbo man selling beef. You are likely to find the textiles section of our markets dominated by Nigerians of Hausa or Yoruba extraction. It is not the government that does this. There is an economic rationale. Cattle is mostly bred and slaughtered by northerners. Others who try do not have to fear for their safety. They simply won’t succeed. Northerners simply have the comparative advantage in that business. Of course, that could change as the need for pasture, more abundant in the south, may lead to voluntary synergies. For automobile spare parts, well when they are not imported, they are made in the southeastern parts of the country. If others tried to do that business, they would fail as well. Same reasons. What is the point one is trying to make? Nigeria is great and would be greater only if its diversity is harnessed for the betterment of the whole. President Buhari does himself and the nation a great disservice by relying only on advice from his kinsfolk. Northerners are trained to guard their dignity, revere their leaders, and never show weakness. Because most northerners grow up in polygamous homes, they learn early to be politically savvy, and thus do well in politics, the civil service and business. Southwesterners are trained to be diplomatic, self-preserving, and respectful. They thus do well in the diplomatic service, academia and commerce. Southeasterners have a reputation for being street and book smart. When not traders, they are to be found in the intelligentsia. To reach the great heights we seek as a country, we must harness our diversity. And if there is any place where that diversity should be writ large, it should be in government.

Nigeria belongs to all of us
When that which is in the full glare of citizens is not representative of what we are, it creates dissatisfaction. It feeds the narrative of marginalisation, dissent, and those other extremes too extreme to mention. In a fast-paced and smaller world, insularity and peace rarely flock together. If you must be insular, then you had better have the power of coercion. Or may be you are insular because you believe you do. Well, power is given by the people and belongs to the people. And it is not possible now to simply point a gun at a people and expect they would just forward march. These are not the days of ‘NTA network news at 9,’ ‘Radio Nigeria at 7,’ and ‘Tales by Moonlight.’ True, President Buhari is under tremendous pressure from his kinsmen. Every northerner is always wary of being able to return to his village and live safely. And Mr Buhari must really loathe the possibility that he could return home after his service an unpopular man. Even so, he needs to apply wisdom. If you have the army, spy, police and paramilitary chiefs hailing from just a section of the country, it does not require a stroke of genius to deduce that the commander-in-chief does not trust anyone else to secure him. If Nigeria were his family business, we probably would not care. Alas for him, it is not. Change must start with him.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays).

Judiciary must guard our democracy

By Rafiq Raji, PhD

Misuse of judiciary to enervate legislature is concerning
The Senate, “the chamber that can most often frustrate presidents,” Adrian Wooldridge – a British columnist – wrote once. That is, even in that bastion of democracy: America. Barack Obama has endured much grief. At least, he needn’t worry that any other person could bask in the privilege of having a title almost similar to that of his office. Not in Nigeria. The president of its Senate, Bukola Saraki – whose official title must rile that eminence living between the hills in the country’s capital with the actual privileges of the honour of ‘president’ being put before his name – has accused the central government of being under the undue influence of a few people. Something about a ‘government within the government’ of President Muhammadu Buhari. The embattled senate president – who is facing senate rules forgery court charges against him by the country’s attorney-general, Abubakar Malami, who doubles as justice minister – did not mention names. Mr Saraki’s deputy, Ike Ekweremadu, was charged in tandem. As a country, we have been here before. Umaru Musa Yar’Adua, the deceased former Nigerian president – whose death allowed for the emergence of the incumbent’s predecessor, Goodluck Jonathan – it turned out, relied on his wife and a few functionaries to exercise the powers of his office, as his capacity to do so waned due to ill health. Ironically, Mr Saraki was a close ally of that Nigerian president. Let’s just say, the territory is familiar to him. Only this time, he is on the outside. Not surprisingly, the executive branch chose not to hold back. Top government scribe, Babachir Lawal, in unusual form, hit back at the embattled lawmaker. Typically, a response by the presidential spokesman suffices.

President’s men need more supervision
Mr Buhari is not Mr Yar’Adua certainly. The latter couldn’t supervise his men even if he wanted to. The incumbent, a retired military general, though an old man, is in better form. Though also with health problems of his own, he is still able to keep tabs on his officials. Thing is, a president is not often able to do everything that he wants. And because this one abides by certain well-known strictures, it is possible for his officials to take certain actions that though he may consider unwise, he would not necessarily overrule. True, Mr Buhari is probably still irritated by the emergence of Mr Saraki as the third most senior leader in the land. And he would probably not mind if someone more ‘trusting’ emerges. Even so, I doubt very much that he would get involved in tactics. That is the job of the so-called ‘government within the government.’ Every presidency has one.

At a strategic level, however, he is certainly in control. But he relies on a small group of trusted advisors. And once sure of their loyalty – built over the long period of his relative irrelevance hitherto – it is believed he allows them certain freedoms. With his frequent travels and health issues – Mr Buhari only recently returned from a health vacation abroad, he has probably allowed them too much room. Some key officials of his administration have reportedly been doling out the type of patronage Mr Buhari promised to discourage. For instance, recent recruitment exercises by the central bank and prison service were probably unfair, with positions reportedly going to relatives and kinsmen of ruling party members; especially from the north. It could be said that they were following the lead of their principal, whose appointments to influential government positions – the security services in particular – have mostly been from the northern parts of the country; where he hails from.

Third branch on trial?
More fundamentally, is it appropriate to prosecute lawmakers for privileged activities within the hallowed chamber of the Senate? Legal opinions I am privy to suggest it is not. It seems now Mr Saraki and co. may not so much be those on trial as would be the Nigerian judiciary. In times past, the third branch stood firmly on the right side.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays).