I had meant to write an article to explain recent economic decisions that are surely on their way to creating a new economy and helping the citizens with relief from the harsh economic climate. Nigerians are passing through what is called a cost-of-living crisis, akin to what citizens of European countries and the USA had seen about two years ago, even into last year. Inflation is the major culprit here, as it gallops in bounds in the face of stalled productivity. And so, all hands are on deck to wrestle it down.
I am compelled to now push out this article because of another one that has gone viral titled ‘Edun and Cardoso – A Case of Ikoyi-bred Economists Trying to Operate a Fadeyi Economy’, by one Ope Banwo, who admits to not being an economist, but to being a certified Fadeyi brought-up. I am neither an Ikoyi nor Fadeyi brought up, but I am an economist.
The upshot of Banwo’s viral article was to say that raising interest rates by 4% as the Monetary Policy Committee did on February 27, 2024, did not slow down inflation and is therefore counterproductive. The quick fact here is that no official or certified index has come out to confirm or deny this, and so Ope Banwo was rather too hasty to dismiss the CBN’s policy accuracy, for now. Also, such policies are not meant to produce immediate reaction but to act in concert with other policies.
Banwo wrote further that in Fadeyi (a suburb of Lagos where he lived) if someone tried to increase prices and exploit customers back in the day, the residents would either burn down his/her shop or threaten his/her family. I reckon that he proposes unorthodox strong-arm tactics by the government to curb ruinous inflation, perhaps because the Nigerian economy is still evolving, and some textbook solutions may not work here. I need to quickly state that those running the economy are aware of the need to go the extra mile, but certainly not to be arm-twisting people or embarking on criminal acts just to curb inflation. When, for example, the Economic and Financial Crimes Commission started chasing currency hawkers off the road, the same Nigerians questioned why that was necessary, after all the hawkers who stood by roadsides were ‘serving a market’.
Believers in pure market economics have also wagered that the CBN should allow every form of market to flourish – legal or illegal. Also, when the Ministry of Agriculture complained about hoarding, many Nigerians shunned them for trying to interfere in what they deemed a normal business practice – buying commodities to keep until prices skyrocket. Now, Banwo is suggesting that mafia tactics be deployed by the government. And I was surprised by the number of people who shared the article, liked it, forwarded it, and hailed it. Even Professor Kingsley Moghalu referred to the article in his recent speech, showing how far it went. And that is how Nigerians create economic theories of their own.
So, first to explain all that is going on. Surely, we know that not all of our inflation in Nigeria is explained by excess money in circulation, and when the CBN speaks about excess money being mopped, they are more interested in the huge monies that our banks may be sitting on. When the CBN increases the base rate as they have, yes, one of the incentives is that people will deposit their monies in banks for higher interest earnings. Another is to disincentivise folks from borrowing from the banks. The central bank is solely concerned with its use of monetary policy instruments to curb inflation. And so, by increasing rates from 18.75% to 22.75%, the intention is to make Nigeria into a depository of funds. Banks – local and foreign – with excess money will keep the same in Nigerian bonds and other instruments.
There is an asymmetric window around that rate of 22.75%, which is +1-7. What this means is that when a bank is illiquid and intends to borrow from the CBN, the applicable rate will be 22.75+1=23.75%. But if a bank wishes to merely deposit money with the CBN, they will only get 22.75%-7%=15.75%. This relatively low rate is meant to discourage banks from parking their liquidity for quick interest earnings from the CBN rather than to lend to the real sector and bear the risk that some loans may go back. The excess money supply may therefore not necessarily be such monies as may belong to individuals, but to banks, and other institutions.
The many memos that have emanated from the CBN are still very much on point. The CBN under Cardoso is following the crucial path to economic recovery from a strictly monetary point of view. Some of the achievements of these crucial steps of late include getting Nigerian banks to sell over $2 billion to their customers from what they had hitherto sat upon as Net Open Position. A corporate treasurer with whom I was on an X-space discussion confirmed that the amount of liquidity that the Nigerian foreign exchange market had seen in the last three weeks had never been seen in three years! The CBN has also sold close to $300 million – including $27.46 million to Bureaux de Change at N1,300 for the first time in 3 years! Before this intervention, the CBN had not engaged in the FX market at all for more than five months. But now, the bank is showing capacity, having systemised some of its operations, especially around foreign exchange management.
With the new rule that business and personal travel allowances be loaded on cards and not disbursed in cash, the central bank is ensuring that there will be less fraud. And given the experiences with the last regime which became so slack, there is a very low probability that the usual games will be played when allocating foreign exchange to legitimate importers. Under Cardoso, I am certain that roundtripping will tend to $0.00! It is however not yet uhuru, but Banwo is wrong to write that there has been no achievement – the black-market rate hovers around N1500 today, and not the N2000 that some evil naysayers who were behind the speculative attack on the naira had ‘predicted’.
Of course, alongside the other law enforcement agents, something is being done to clean up the so-called black market. And now we hear that Binance, that cryptocurrency repository where many young Nigerians like to play, has upped and left Nigeria. Nigeria will be the 20th or so country to fine the company and give it the boot.
Further actions that will calm the markets and bring control back to the CBN include delisting 4,173 BDCs from the list of almost 6,000, for several infractions, including non-submission of returns. Now we are talking! By the time the new capital requirements for BDCs are enforced, we may not have more than 100 BDCs that will then be able to transact even more businesses (aside from credit creation) like a bank. I am in the advocacy that properly structured BDCs be allowed to do local and international money transfer businesses as is done abroad. I understand that in Kenya, the BDCs are plugged into their CBK (Central Bank of Kenya’s) reserve management system, thus allowing the bank to capture data on the informal market and invisible trade.
One of the criticisms of the strategy adopted by CBN is that the formal economy is so small in Nigeria and that a policy dealing with interest rates could only be relevant in the formal sector which accesses bank credits. Well, the countervailing point to that is that the strategies around BDCs are meant to help the informal sector, by bringing more players on stream. And the banks don’t do a lot of lending these days anyway. I think we should also encourage the CBN to mandate banks to increase deposit rates (to close the margin between lending and deposit rates) so that their depositing and investing customers will have something to gain as well. Increasing deposit rates also helps to mop up excess liquidity in the hands of the few Nigerians that have cash – monies that would have otherwise chased the dollar for a store of value. All these strategies work together.
Enough of CBN policy reforms which are coming out almost in torrents for now. What about the fiscal side? Wale Edun, the minister for finance, was mentioned as well. It is worth noting that Nigeria’s national oil company, NNPC Ltd, has been instructed to submit its invoices and receipts to the central bank for audit purposes. Also, the international oil companies have been told to leave a float of 50% of their sales for some time so that Nigeria may enjoy some stability in reserve management. To this extent, Nigeria’s foreign reserves have risen by almost $2 billion in the last couple of months. Mr Edun, last December, laid new rules around the treasury single account which will ensure that 100% of what is due to the federation is captured from government-owned enterprises in a systemised fashion using technology.
The Federal Inland Revenue is poised to almost triple its revenue collections for this year from last year’s numbers, and we are already performing very positively in the oil and gas sector, which gave our GDP growth a bump in January. Production nudges 1.6 million barrels a day. Non-oil sector is also performing above expectations. Even the National Bureau for Statistics is working on a rebasing of both the GDP figures and inflation – the former from 2014 when it was last done to 2024, and the latter from 2009 when it was last done, to 2023. Our GDP will certainly be larger in naira terms as new industries and an increased population plus a new stock of infrastructure are a plus.
At the same time, inflation is likely to recede because the 2009 index was heavily skewed towards food, but a 2023 index will consider new choices and habits of Nigerians. For example, Nigerians now buy more internet data than we ever did in 2003, our youth population has increased further and that comes with more psychedelic choices rather than food. Many sectors need to be better captured in our GDP, such as the role of e-commerce and our FINTECHs. Also worth estimating is the explosion of skits, pranks, and comedies. These activities employ hundreds of thousands of our youths and even generate foreign currency.
As I have been emphasising for some time now, it is not only hikes in interest rates that will tamp down inflation towards the single-digit region that we desire. The new understanding of inflation, new surveillance and awareness around the subject, and even the resistance to exploitation by citizens, will also help. We are in this together. The case of the Niger state government comes to mind. The governor spoke up because his people were complaining of hunger, in the state with the largest landmass in Nigeria. So, the man perked up and swore to produce food in record quantity in 2024. He also instructed that the purposes of bulk purchasers be checked. Lagos state governor, Babajide Sanwoolu went to Niger state to sign a memorandum of understanding, ensuring that Lagos state gets food directly under the supervision of both governments. That is cheaper food than if left to middlemen to play games with. That points to a reduction in inflation. In the same Lagos state, neighbourhood food/farmers markets have been established where cheaper food is accessible to Lagosians. That is proactive governance, which has its place in managing inflation. I have warned some people who believe that it is over for Nigeria because of present challenges, that they should also understand that some people are thinking and working assiduously to ensure that Nigeria emerges glorious from present hiccups.
To Mr Banwo, I will say he should allow CBN to do its work, which is a very complex one. Maybe by the time Messrs Cardoso and Edun succeed, the Ikoyi gang would have emerged over their less-fortunate Fadeyi counterparts. From antecedents, capacity, ambience, sheer value, and what-have-you, I will personally vote for Ikoyi to trump Fadeyi. But we can be more positive in our criticism. I think that if CBN can achieve positive interest rates soon (where the rate that investors can obtain on government bonds and treasuries exceed inflation, chiefly because inflation starts to recede faster than whatever increases is desired on policy – and by extension lending – rates), we will be home and dry, and would not have to push rates to the 50% region like Ghana, or 70% like Turkey, much less three digits like Argentina. We have seen the way Egypt is being asked to devalue and increase interest rates at once because of her quest for loans from the IMF. African countries are being passed through shock therapy. I think because of the vocal advocacy of people like Mr Banwo, we will escape the worst. But he and other concerned Nigerians should also engage with middlemen and retailers who try to exploit the misfortune of fellow citizens by arbitrarily increasing the prices of everything.
I will close by expressing my profound desire to see a memo going to the banks to increase deposit/investment rates for people who want to park some money in the banks, and also for savings rates. We shouldn’t let go of that opportunity. I will also look forward to a quick resolution of salaries and wages issues in the civil service. Even the private sector should be visibly encouraged to adjust wages so that our people can survive, and public sector entities should adjust their contracting fees etc so that companies that work for them should earn more. The reforms call for a total rejig of the economy and create opportunities for more jobs and contracts as well as innovative ideas. It is certainly not the end of the world for Nigeria. It’s the very beginning.
May the Ikoyi team win, via Lagos Island and Bourdillon. I say no to the Igbobi/Onipanu/Fadeyi tactics. They won’t work in this milieu.
Dr. Tope Fasua is Special Adviser to The Presidency, Office of the Vice President