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Naira redesign: Any attempt to reduce cash holding will cripple economy

By Geoff Iyatse
05 December 2022   |   4:20 am
The Nigerian economy has deteriorated considerably when compared to the beginning of this year. All macroeconomic indicators have worsened.


In this interview with GEOFF IYATSE, David Adonri, an economist and Vice Chairman of Highcap Securities Limited, x-rays the prospects and challenges of the economy as Nigeria heads into a crucial election year. He also speaks on naira redesign, which will see to demonetisation of the old higher banknotes in January, warning that any attempt by the Central Bank of Nigeria (CBN) to restrict the level of cash holding will cripple the economy.

What are your thoughts about the economy? Are we better now than at the beginning of the year?
The Nigerian economy has deteriorated considerably when compared to the beginning of this year. All macroeconomic indicators have worsened. Nigeria’s inflation rate at the end of 2021 was 15.6 per cent. It has risen to about 21 per cent. The benchmark interest rate at the end of 2021 was about 11.5 per cent. It has risen to about 16.5 per cent. GDP growth rate at year-end 2021 of 3.98 per cent (year on year) has slowed down to 2.25 per cent. Unemployment is 33.3 per cent, sending about 133 million Nigerians into abject poverty.

The Foreign exchange rate at the Investors and Exporters window, which started at N434/$ in January this year has increased to N445/$. At the parallel market, it has increased from N570/$ to about N770/$. The economy is enmeshed in excruciating FX and energy crises, food shortage and public sector debt crisis.

What would you consider the most impactful economic issues in the year?
The economy has been badly impacted by galloping inflation, energy crisis, low crude oil sale, dwindling remittances of crude oil revenue to the Federation Account Allocation Committee (FAAC), FX scarcity and rising unemployment. The tight monetary policy embarked upon by the Central Bank of Nigeria (CBN) has sent equities gasping for breath.

In some advanced economies, inflation is decelerating. Do you think Nigeria’s inflation has peaked?
So far, rising inflation has failed to respond to interest rate hikes by the CBN unlike in advanced economies. Where the policy has worked, the economic structures are internally productive unlike in Nigeria, which is import dependent amidst crippling FX shortage. Unless the root causes of inflation, that are peculiar to Nigeria, are addressed, further deployment of monetary policy tools may be in vain. It does not appear that Nigeria’s inflation will peak soon considering the continuation of insecurity, food and energy crises with undiminished intensity. Recent flood disasters across the country have made recovery a difficult task.

With MPR currently at 16.5 per cent, are you worried about the growth prospect?
Nigeria is faced with the dilemma of tightening monetary policy to curb inflation and the damage of such policy to economic growth. If unchecked, inflation is such a deadly economic malaise that can cripple an economy. It is like a house on fire. The fire must first be extinguished to salvage the properties.

There was so much uncertainty at the start of the year. Is 2023 more predictable?
The economy opened fully in 2021 after the COVID-19 lockdown. Economic activities were therefore expected to increase in 2022 but the sudden armed conflict between Russia and Ukraine threw the global economy into disarray. The conflict may continue into 2023 and when added to the uncertainties surrounding the 2023 general elections, it will be difficult to predict economic events that will unfold in 2023.
Is the 2023 election a positive variable, putting into context our political history and the current macroeconomic indices?
Nigeria will be facing the 2023 general elections with a battered economy. Election expenses may also heighten the money supply as is usually the case thus exacerbating inflation. If the results of the election do not reflect the aspirations of a largely disillusioned electorate, stakeholders’ confidence may not improve to the point of generating a positive response.

The CBN hopes to demonetise the old N200, N500 and N1000 bank notes on January 31. Meanwhile, only a tiny portion of the N2.7 trillion outside the banking system is reported to have been turned in. How do we prevent a possible asset bubble?
The decision to redesign higher denomination currency notes is justifiable as far as curbing counterfeiting is concerned. I differ from the notion that the majority of cash in the economy should be kept in banks because the reason for producing currency notes is to engender an exchange of value in informal and petty transactions that occur daily. Nigeria is still largely a cash economy and any attempt by the CBN to restrict the holding of cash, which causes cash shortage can cripple the economy. The low level of cash returned to banks so far is because of absence of their replacement. People require cash for daily transactions. Whoever thinks that the policy can reduce the money supply in the economy to the extent of curbing inflation must be dreaming.

Out of over N45 trillion total money supply in the economy, how can about N3 trillion currency in circulation influence inflation? Nigeria’s inflation is public sector-driven assisted by imported inflation and insecurity. Except the CBN intends to seize people’s money, I believe the new currency notes will be in circulation at the same quantum level before the formulation of the policy. At the end of the day, the policy may just be a motion without movement.

Public debt stock is a serious concern, yet the deficit in the 2023 budget is over 52 per cent. Do we have any headroom for more debt accumulation?
The spare debt capacity has indeed been exhausted. At over 100 per cent debt service ratio, FGN has surpassed its sustainable debt limit. Do not be deceived by the claim that because the debt is less than 40 per cent of GDP, it is below the threat threshold.

Unfortunately, debt is repaid from revenue and not GDP. Now, FG’s entire revenue is lost to debt. The debt crisis that has befallen the country can lead to financial embarrassment if remedial measures are not taken. Most critical is the component of foreign debt, which has now risen beyond the suffocating level from where President Obasanjo extricated the country. You may not appreciate the enormity of Nigeria’s dire situation now except if the credit strangulation that followed the debt crises in the 1980s – 1990s is visualized. The possibility of lining up for essential commodities may not be far off. The intractable inflation now ravaging the economy and crippling of production due to forex scarcity, now complicated by rural insecurity, are pointers to a fast deterioration to the era of the credit squeeze and queue for essential commodities.

The higher the debt in the financial composition of an organisation, the higher the risk of failure. Therefore, the excessive use of debt as a financing tool is dangerous. There are also projects for which debt finance is an aberration. Nothing stops the government from targeting equities to finance even Greenfield projects. The equity participation of FG in the Dangote mega refinery is a case in point. Government can seed the establishment of several critical economic projects and upon completion, offer them for sale to the investing public, the way estate developers do. By this method, the sales generated can be invested by the government to seed other projects repeatedly.

The Nigerian government has not demonstrated any competence in managing commercial enterprises. In contrast, many public enterprises in China are success stories. Considering the Nigerian factor, all State enterprises should be privatised and the economy fully deregulated to enable market mechanisms to shape competition. The failure of the government to fully deregulate and privatize the energy and electric power industries continues to make them inefficient. If the financing strategy of Nigeria’s National Development Plan (NDP 2021-2025), which expects private sector participation to provide a lion share of N298.3 trillion out of the N348.1 trillion budget plan, is something to go by, it means that equity finance will gradually take central stage in public project finance. Government has financing tools like crowd funds and investment trust funds as instruments for use in mobilisation of project funds.