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Recession is not the end for Nigeria, says Otunuga

By Chijioke Nelson
28 September 2016   |   3:45 am
Lukman Otunuga is a research analyst at Cyprus-based FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance ...


Lukman Otunuga is a research analyst at Cyprus-based FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is versed in currency and commodity markets. He is often quoted by leading international media like The Guardian (Nigeria), Yahoo. MarketWatch, CNBC, NASDAQ, Reuters and AFP.

Lukman has a degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers and acquisitions and the role of international financial institutions. Prior to joining FXTM, he spent years as a research analyst with FXCM, focusing on technical and fundamental analysis of the global currency, commodity and stock markets. Lukman was also responsible for leading educational seminars for international and local high net worth individuals, and has published a series of educational articles on forex trading with City A.M. In this interview with CHIJIOKE NELSON, he expresses optimism that the current recession can be fought with transparency, long-term policy option, consistency and real diversification.

Why are we still having the inflow challenge?
It all revolves about transparency and trust. Trust is something that takes time to return once it is lost. Yes, it will take time for the country to retrieve all the goodwill it enjoyed from foreign investors, especially now that the currency has weakened drastically. Perhaps, we may not see anything substantial until 2017. But in any case, it is still not long. So, far since the currency floating, it has recorded over $1 billion and it can only get better. This is from those that are beginning to trust the country and the Central Bank of Nigeria’s policies.

How do you explain the $1 billion inflow?
We have seen how much the Naira has depreciated at the official and parallel markets. So, investors will want to jump in to take the opportunities. It is just a matter of time and gradual return of the lost confidence.

What is your take on the last rate decision?
I think CBN did the right thing. Before the decision, it was all over that the Finance Minister’s disposition is towards rate cut, maybe, 12 per cent, to boost lending and growth. But at the same, others were thinking that the rates should be raised once again, because inflation notched up to 17.6 per cent in August. So, it was a battle between inflation and growth. I think they did the right, at least, wait till October and November to see how things turn up.

Do you see their differing positions as a clash of ideas?
No. The minister has her opinion, which she expressed. But the CBN chose to do what it felt was the right thing and not being influenced by the minister’s suggestion. It is CBN’s job to maintain price stability in the economy. Perhaps, they may have thought that way too, but realised that there is need to allow time. It was only in July that they raised the rate from 12 per cent to 14 per cent and with the rising inflation, it would not only be ridiculous, but inconsistent, to reverse it two months after. This would surely repel foreign investors because they don’t patronise highly unpredictable environment. It is good it maintained a solid stand. It got it right.

When do you see Nigeria exiting the recession?
Before thinking about exiting the recession, we must find out if things have really changed. But nothing seems to have changed in actual fact at the moment. The problem is twofold- internal and external. For the external factors, we know that the global growth problems have affected economies, especially commodities’ dependent ones like Nigeria. In a situation where 90 per cent to 95 per cent of revenues are cut by half, like oil prices that used to sell at $100 per barrel, but now between $40 and $50, you can understand where the country is presently. For the rest of 2016, Nigeria is going to be affected by these external factors, particularly the Federal Reserve rate policy, which still lingers to November. Of course, we know exactly what dollar does to the country. The internal factors are largely policies and assessed inactions.

Why is it that minimal rate adjustment in United affects our country?
This is what we are talking about credibility. It is difficult to compare the Federal Reserve with the Central Bank of Nigeria. They are two economies of differing sizes and the dollar is a powerful currency that affects everything. Even though it is a small rate hike, it exerts huge force on other economies. In fact the U.S. Fed rate hike is a symbolic thing. It dictates global markets’ directions.

What would you do differently to the economy?
For me, I will keep the rate and watch how the economy responds in the next two months. If the inflation continues upwards, then there is no alternative than to increase it to 15 per cent. In the long term, the country needs to up its game in technology and agriculture. In the short term, it is just to watch out how the fiscal stimulus (budget implementation) will turn out, particularly in terms of employment. Three things to watch are inflation, employment issues and the value of the currency for the rest of the year.

CBN is really tide down with its tools in the short term. But it is not only in Nigeria, many other central banks are on the edge- Bank of England, Bank of Japan, just to mention a few. The major issues in the economy now are inflation, which is about prices stability on the one hand and recession, which is about growth on the other hand. The solution to either side is opposed to either side. I can see that the CBN rate decision was to retain some investors that are still here and those beginning to think about coming back. Of course we need the foreign exchange. But we are really in tight situation now.

What would you say about Nigeria’s import profile?
To my knowledge, the country can be well described as import nation and we actually import anything and think only about self-sustainability. This is not good. But we can slowly start our way back to growth. We are blessed- more than 160 million people, youthful ones and fertile land. Surely, agriculture is the next big thing for us. Even if we succeed in feeding ourselves, the pressure will lessen.

Where is Nigeria now in your assessment?
The whole world knows that it is in recession and I am not seeing any rebound this year, but maybe, next year. The sentiment may continue to be depressive, especially when oil volatility persists and this can only make the exchange rate to worsen. This is because Nigeria’s major source of foreign exchange is the crude oil. But we must begin to think long term. For now, we must focus on building investor confidence. Although the policies aimed at attracting foreign investors might bring a sort of punishment to ourselves, but in the long term, it would be beneficial. But in the short term, there must be transparency, just like CBN did in the rate decision. But this must be across board.