Monetary policies can’t tame rising inflation — Omotunde

Chief Investment Officer of Afrinvest Management Company, Robert Omotunde,  in this interview with Uthman Salami, sheds light on some policies that are hurting the Nigerian economy
All the deposit money banks fared better in their recent financial statements. Why do you think the sector is doing well?
Well, I think that Nigerian banks are resilient. We know how they have come in the last 17 years. There has been recapitalisation from as low as N2bn to N25bn. We have seen the worst of times, and we have seen how these banks have been able to circumnavigate the difficulty to deliver on their numbers. We saw when banks were having low adequacy in terms of capital, and we have seen more prudent approaches that the central bank has to put in place.
Today, we are talking about the capital adequacy ratio for banks. Whether you’re a regional bank, national bank, or international bank, the threshold that has been set by the Central Bank of Nigeria is higher than the global benchmark.

The minimum for any bank in Nigeria today is 10 per cent. If you are an international bank, you are expected to hold as much as 15 per cent. Then, if you’re a systemically important bank as some are designated like Access Bank, First Bank or UBA, you are meant to hold at least 16 per cent capital adequacy ratio that has also supported the resilience of these banks in a difficult time. The banks have gone through periods of high non-performing loans. It has taken out some of the banks. They have had to either merge or be acquired, but a lot of the banks are still surviving today.
Nigerian banks are highly resilient and many of them have their footprints across other countries of the world.
All efforts by the Central Bank of Nigeria to tame the rising inflation have remained futile. What exactly is the appropriate way to control high inflation rates?
Traditionally, from a monetary policy perspective, if you’re going to put a rein on inflation, there is a transmission between exchange rates, market rates, and inflation. The policy rate and inflation are two extreme monetary policy rates.  The transmission is basically what monetary policy authorities try to work on each time they are trying to guide inflation.
Nigerian inflationary pressure is largely cost-push. By cost-push, we mean that there are supply-side factors that contribute to Nigeria’s headline inflation.
For instance, there is a full crisis that leads to higher oil prices and then translates into pump price that affects inflation. There is an increase in electricity tariffs which affect inflation, and recently talking about food prices, for example, which accounts for about 50.3 per cent or so of the consumer price index.
Now, the consumer price index is the basis for estimating inflation. So, if food is volatile in terms of prices, you would expect that as food prices are going up, headline inflation will also go up because it accounts for almost more than half of what the food basket is.
If there is an increase in inflation because farmers could not go to the farm for their produce, the implication is short supply and higher prices. So, once there is an increase in price, headline inflation will rise. How do you tackle that sort of inflation, knowing the source?
Should it be a monetary policy measure or a fiscal policy measure? Don’t forget how food prices went up because farmers could not farm. This is because there is insecurity that has led farmers not to farm. A farmer that will churn out one million metric tons of output is now churning out barely under-10000 output turnover. How do you tackle supply-side-induced inflation using monetary policy? That is always the problem. And that is the situation we have in the country.
In a normal economy, people do studies to find out the cause of a problem.  We have quite several doctorate degree holders who are sitting in the central bank. These are the kinds of studies they should begin to conduct. What cause of inflation should be meted with monetary policy actions? Until we have facts, by way of research, to prove that to us, I think we should be guided.
Nigeria’s currency has become weaker against the dollar. How can the country’s currency be made stronger?
There are no easy fixes to strengthening the naira. I think the first thing we have to accept is that the naira’s weakness cannot be defended outside of market principles. The only defense we can do for the naira is to follow the market principles.
If we do not follow the markets, the result is the massive spread that you will find between the parallel market and the official markets. Once upon a time in this country, the spread between official and parallel markets was not higher than N2 or N3, at most, N5. Now, I am talking about even as early as 2013-2014.
The whole crisis started in the second half of 2014 when oil prices crashed from $120-$130 per barrel to below $50 a barrel. That was when the whole crisis started and we could not manage it.
The only thing that can stop the exchange rate from weakening is if the demand for the exchange rate is lower. It’s a demand or supply thing.
You can encourage domestic production but not at the expense of the market. Most times, what we do is when we need local production of rice, we ban importation of rice. Meanwhile, you have not developed the capacity for the local production of rice.
The quality is not even there, you know, but you want to force people to eat it. It is not done that way.  The way to do it is to follow market principles. If you’re going to develop a local alternative for what people import, make sure that that alternative is good enough to compete with what they import. Let us work towards making our local industries competitive and compete with whatever is obtainable out there.
The way to save the naira is for us to embrace market principles in their entirety, not partially.  Typically, in other countries where things are normal, if you suffer any shortage in terms of supply of forex, what you do is adjust your price so that the huge demand that you have can still be met by the little supply by the adjustment of price.
We don’t have a price adjustment mechanism put in place. We fix the exchange rate and we just say that’s what it is. And the result is now N430 to N800.
Let us put in policies that will encourage foreign investment into the country. Most of the time, we say we don’t care about foreign investors, but we should care about them. For capital importation alone in this country between 2017- 2018, the country imported over $16bn from it alone. So, if we care about foreign investors this year, we should have received the same amount. How much have we got? We must care about them. Our policies must support them.
New naira notes are coming. What effect do you think they will have on Nigeria’s economy in 2023?
I don’t think that we will see any impact on the economy. I think we have aired this opinion over and over again. For us, it’s just a change of paper from what it used to be. Let’s just say that we redesigned our currency to improve security on it. That’s the only thing. Beyond that, there is nothing more. There is nothing more because there are another argument that the currency redesign is because there are so many currencies outside of banks.
Today, if you want to send N2m to someone, you cannot collect cash from the bank to pay, rather you pick up your phone and transfer N2m to the person.
If you take cash, why do you think you’re taking cash? It’s because you need something physical, maybe you are going to Abeokuta or somewhere you cannot see an ATM and you need to pay somebody in cash. That’s why you collect cash. So, by design, cash is meant to be collected.  If cash is printed and is within the banking system, you have wasted money. If everything is digital, why do I need to print? I print because I need to spend, so if I have printed and I have spent money to print, but that printed money is sitting in the vault of the bank, so I have wasted it.
The Intention for printing cash is because I must hold cash. If I print it and it’s sitting in the bank’s vault, we have wasted money. That’s the logic. In any case, what is the proportion of currency in circulation relative to the money supply?
 The currency outside of banks relative to money in circulation is less than 3 per cent. So, what are we talking about? The only good thing is that we have improved the security features on our currency. Now, the other negative thing it did was to crash the parallel market rates. This is because one of the security measures is to ensure that those with large volume of cash will never take to the bank. If you have bullion van full of cash, and you drag it over to the bank, and you are not a financial institution, then you have to explain how you got that large amount of cash.
Those are the ones that are using it to pay ransom for kidnapping, terrorism and others. Now, they already know that come January 31, whatever cash they had before would no longer be working.
What they do is to save themselves. They will take those naira notes and buy dollars. They buy USD in cash and wait. When you are done with your redesign and the new currency is flowing, they start selling the USD. It has a negative impact on the currency and that’s why you will notice that shortly after it was announced, there was significant movement in the parallel market rate.

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