Naira reshape: Any attempt to reduce cash holdings will cripple economy | The Guardian Nigeria News

In this interview with GEOFF IYATSE, David Adonri, Economist and Vice Chairman of Highcap Securities Limited, examines the prospects and challenges facing the economy as Nigeria heads into a crucial election year. He also discusses the naira redesign, which will ensure the demonetization of the old higher denomination notes in January, and warns that any attempt by the Central Bank of Nigeria (CBN) to limit the amount of cash it holds will cripple the economy.

What do you think about the economy? Are we better now than we were at the beginning of the year?
Nigeria’s economy has deteriorated significantly compared to earlier this year. All macroeconomic indicators have deteriorated. Nigeria’s inflation rate was 15.6 percent at the end of 2021. It has increased to about 21 percent. The key interest rate was around 11.5 percent at the end of 2021. It has risen to around 16.5 percent. The year-end 2021 GDP growth rate of 3.98 percent (yoy) has slowed to 2.25 percent. Unemployment is 33.3 percent, driving some 133 million Nigerians into abject poverty.

The FX rate in the window for investors and exporters, which started at N434/$ in January this year, has risen to N445/$. On the parallel market, it has gone from N570/$ to around N770/$. The economy is mired in nagging currency and energy crises, food shortages and public sector debt crises.

What would you describe as the most influential economic topics of the year?
The economy was hit hard by runaway inflation, an energy crisis, low crude oil sales, dwindling remittances of crude oil earnings to the Federation Account Allocation Committee (FAAC), tight foreign exchange and rising unemployment. The tightening monetary policy of the Central Bank of Nigeria (CBN) makes equities gasp.

Inflation is decelerating in some advanced economies. Do you think Nigeria’s inflation has peaked?
Unlike in advanced economies, so far rising inflation has not responded to CBN rate hikes. Where politics has worked, economic structures are internally productive, in contrast to Nigeria, which is import-dependent amid a crippling foreign exchange shortage. Unless the Nigerian causes of inflation are addressed, further use of monetary policy tools may be in vain. It does not appear that Nigerian inflation will peak any time soon given that insecurity, food and energy crises continue with unabated intensity. Recent flood disasters across the country have made recovery a difficult task.

With an MPR currently at 16.5 percent, are you worried about growth prospects?
Nigeria faces the dilemma of tightening monetary policy to curb inflation and the damage of such a policy to economic growth. If left unchecked, inflation is such a deadly economic malaise that it can cripple an economy. It’s like a house on fire. The fire must be extinguished first to save the properties.

There was so much uncertainty at the beginning of the year. Is 2023 more predictable?
The economy opened up fully in 2021 following the COVID-19 lockdown. Economic activity was therefore expected to increase in 2022, but the sudden armed conflict between Russia and Ukraine threw the world economy into chaos. The conflict could continue into 2023 and when one adds to the uncertainties surrounding the 2023 general election, it will be difficult to predict the economic events that will unfold in 2023.
Is the 2023 election a positive variable that puts our political history and current macroeconomic indices into context?
Nigeria will face the 2023 general election with a battered economy. Election spending can also increase the money supply, which it usually does, and thus exacerbate inflation. If election results do not reflect the aspirations of a largely disaffected electorate, interest group confidence may not rise enough to elicit a positive response.

The CBN hopes to demonstrate the old N200, N500 and N1000 banknotes on January 31st. In the meantime, only a tiny part of the N2.7 trillion is said to have been given outside of the banking system. How can we prevent a possible asset bubble? ?
The decision to redesign banknotes with higher denominations is reasonable in terms of reducing counterfeiting. I disagree with the notion that the bulk of cash in the economy should be held in banks, as the reason banknotes are made is to effect an exchange of value in informal and petty transactions that take place on a daily basis. Nigeria is still largely a cash economy and any attempt by CBN to restrict cash ownership, resulting in cash shortages, can cripple the economy. The small amount of cash returned to banks so far is due to the lack of their replacement. People need cash for daily transactions. Anyone who thinks that politics can reduce the money supply in the economy enough to curb inflation must be dreaming.

How can around N3 trillion cash in circulation out of over N45 trillion total money supply in the economy affect inflation? Nigeria’s inflation is driven by the public sector, supported by imported inflation and uncertainty. Aside from the CBN intending to confiscate people’s money, I believe the new bills will be in circulation in the same quantity before the policy is formulated. At the end of the day, politics can only be a movement without a movement.

Public debt is a serious concern, but the 2023 budget deficit is over 52 percent. Do we have room for further debt accumulation?
The free debt capacity is indeed exhausted. With a debt service ratio of over 100 percent, FGN has exceeded its sustainable debt limit. Don’t be fooled by claims that debt is below the threat threshold at less than 40 percent of GDP.

Unfortunately, debt is repaid from revenue, not GDP. Now all of FG’s sales are lost to debt. The debt crisis that has hit the country could lead to financial embarrassment if no remedial action is taken. Most critical is the external debt component, which has now risen above the suffocating level President Obasanjo rid the country of. You cannot appreciate the extent of Nigeria’s dire situation now unless you imagine the credit strangulation that followed the debt crises of the 1980s and 1990s. The opportunity to queue for essential supplies may not be far away. The stubborn inflation now ravaging the economy and the paralysis of production due to foreign exchange shortages, now complicated by rural uncertainty, are indications of a rapid deterioration in the era of the credit crunch and the queuing of essential commodities.

The higher the debt in an organization’s financial composition, the higher the risk of failure. Therefore, overusing debt as a financing tool is dangerous. There are also projects for which external financing is a mistake. Nothing prevents the government from using stocks to fund greenfield projects themselves. FG’s equity investment in the mega-refinery Dangote is a case in point. The government can initiate the construction of several critical economic projects and offer them for sale to the investing public upon completion, just as real estate developers do. Through this method, the revenues generated can be invested by the government to repeatedly initiate other projects.

The Nigerian government has not demonstrated any competency in running commercial companies. In contrast, many public companies in China are success stories. Given the Nigerian factor, all state-owned companies should be privatized and the economy should be fully deregulated to allow market mechanisms to shape competition. The government’s failure to fully deregulate and privatize the energy and power industries continues to make them inefficient. If Nigeria’s National Development Plan (NDP 2021-2025) funding strategy which expects private sector involvement to provide a lion’s share of N298.3 trillion out of the budget plan of N348.1 trillion is something to orientate means This Equity financing will gradually become the focus of public project financing. The government has financing instruments such as crowd funds and investment trust funds as tools to mobilize project funds.