Professor Uche Uwaleke is Nigeria’s first Professor of capital market and the current Head of Banking and Finance Department at the Nasarawa State University Keffi. In this interview with our correspondent Sunday Ogwu, he argues that the relative stability in the macroeconomic environment is a vote of confidence on the monetary policy stance of the CBN. Excerpts:
Let us begin by getting your views on the outcome of the just concluded MPC meeting which was the first in the year. Why do you think the MPC has not reduced the policy rate since July 2016?
Permit me to start by pointing out that the unanimous decision of the Monetary Policy Committee this time did not come as a surprise to many for reasons i would speak to shortly. Of course, as you rightly mentioned, the benchmark interest rate, which is the Monetary Policy Rate, has been kept at 14 per cent since July 2016.
A rate cut, in the opinion of many, would improve credit delivery to the real sector, reduce cost of capital for firms leading to more job opportunities, spur the stock market and could help reduce the high non performing loans in banks. It is therefore expected to stimulate spending and buoy business confidence. And so, the question as to why the MPC is not making a cut in the base rate several months after it tightened monetary policy seems in order especially against the backdrop of weak economic growth. But let us examine it critically.
First, it is important to recognize that when it comes to setting monetary policy, the CBN like every other Central Bank, grapples with what is known as the ‘policy trilemma’ which expresses the limited tools available to it. In view of its primary mandate which is to maintain price stability, it will be near impossible for the apex bank to pursue lower inflation and interest rates, maintain exchange rate stability and shore up external reserves all at the same time. Therefore, a rate cut can only be at the expense of the progress already made in the area of exchange rate stability—which is itself a prerequisite for achieving lower inflation rate. It is vital to understand that inflation is partly driven upwards by the rising cost of imports on account of high exchange rate. A lower MPR would mean more liquidity in the system which could put pressure on the exchange rate and exacerbate inflationary pressure. Headline inflation at the current level 11.44 per cent is still in breach of the CBN’s upper reference band of 9 per cent.
Furthermore, a lower MPR is capable of instigating capital flows out of the country in search of higher yields abroad with adverse consequences for our external reserves. This is so because our foreign reserves is still vulnerable to external shocks and the bulk of capital imported into the country comes more from the highly volatile portfolio investment. What is more, for structurally weak economies like ours, there is a large body of research which supports the view that interest rates are sticky downwards. By implication, reduction in the benchmark interest rate by itself does not translate to increase in credit flow especially to the real sector due, in part, to infrastructural bottlenecks. In the past, the reduction of MPR failed to lower lending rates to the private sector not least because commercial banks had some other operating costs to grapple with. If you look at the present financial position of many Deposit Money Banks in Nigeria, chances are that the risk-averse banks, now dealing with high non-performing loans (well above the regulatory threshold of 5 per cent) as well as a rise in cost of operations (no thanks to epileptic power supply), would rather apply a lower MPR to cushion these costs than pass any basis-point cut to borrowers. So, this is the real challenge
There is no denying the fact that since the country’s exit from recession, some measure of macroeconomic stability has been achieved which can be traced to the effectiveness of monetary policy. Besides the recovery in the international crude oil price, the introduction of the Investors and Exporters window as well as the forex restriction by the CBN slammed on 42 items have gone a long way in boosting our external reserves position. These developments have enabled some degree of stability in exchange rates across all the segments of the foreign exchange market and helped to expand manufacturing activity as evidenced by the Purchasing Managers Index which is in excess of the 50 points threshold. What is more, inflationary pressure has moderated considerably from a high of 18.72 per cent in January 2017 to 11.44 as of December 2018. So, one can rightly conclude that the relative stability in the macroeconomic environment is a vote of confidence on the monetary policy stance of the CBN
You just said a lower policy rate will not necessarily transmit into lower retail lending rates by the Deposit Money Banks, could this have to do with the fact that a lot of money still circulates outside the banking system?
Absolutely. I mentioned the issue of rigidities in the system arising from insecurity and infrastructural deficits such as poor energy and transport infrastructure. It also has a lot to do with the fact that you have so much money outside the banking system which speaks to the challenge of financial inclusion. You will agree with me that the benefits of financial inclusion cannot be overstressed. There is research evidence to show that countries with high rate of financial inclusion experienced higher macroeconomic stability since monetary policies tend to be more responsive. It is heartening to note that the CBN is currently championing efforts aimed at dealing with this challenge. Recall that a few days ago, the CBN unveiled a revised National Financial Inclusion Strategy. The major goal of the revised NFIS is to reduce the proportion of adult Nigerians that are financially excluded to 20 per cent in the year 2020 from its baseline figure of about 46 per cent as of 2010.
In order to achieve this target, key barriers to financial inclusion must be dealt with. These include challenging macroeconomic environment characterized by poor infrastructure that makes the provision of financial services very costly and unprofitable to financial service providers, the insecurity situation in some parts of the country especially in the North East which has adversely affected livelihoods of smallholder farmers in the region who constitute the majority of the population and limited agent networks which is not sufficient to allow for expansion of financial services especially in rural areas. One can equally mention other key constraints such as insufficient national identity cards making it difficult for many adult Nigerians to access a full range of financial services, low financial literacy as well as high rate of unemployment.
While the government is working to create an enabling environment, the CBN should continue to promote branchless banking including through enabling the rapid growth of agent networks or the use of business correspondents to reach customers in rural and remote areas. It should equally scale-up efforts aimed at addressing the low levels of financial literacy in the country to get people aware of the benefits and risks of accessing financial services.
Still on monetary policy, a lot of people, including the IMF, have criticized the multiple exchange rates currently in operation preferring instead that the CBN should completely allow market forces to determine a single exchange rate for the naira. What is your take on this?
I have followed with keen interest the arguments for and against floating the naira, a situation, which is unlike the current managed-float regime, where the naira is left at the mercy of market forces. Proponents of naira float argue that by implementing a complete float, the true value of the naira will emerge leading to the convergence of the official and parallel market rates. Unfortunately, Nigeria has a peculiar case: even if floating solves the problem of multiple pricing and arbitrage; it does not address the liquidity challenge. Because the country imports fuel, raw materials, food and virtually everything, commodity prices will hit the roofs from pass-through effect of high exchange rate and the CBN will be compelled to further tighten monetary policy. Granted that government revenue will increase from the naira value of oil exports, but the cost of servicing government’s huge domestic debt will also surge following increased yields on government securities. What is more, don’t forget that huge sums will be needed to implement capital expenditure contained in the 2019 budget which is dollar-dependent.
So, a currency float comes with adverse consequences the severity of which depends on the state of a country’s economy. In the case of Egypt which did so in November 2016 to fulfill an IMF condition, its relatively diversified economy and the IMF support facility it received helped to cushion the destabilizing effects. The defective structure of the Nigerian economy and the fact that the country is not seeking any loan from the IMF should make floatation a scary option for the CBN. The Nigerian economy is import-dependent with very little non-oil exports. This is the crux of the matter and currency free float will not change this narrative. Therefore, in my view, any attempt to leave the exchange rate completely to market forces will spell doom for our Economy.
As a Professor of capital market, where do you see the stock market headed in 2019? Does monetary policy have any role to play in lifting the market?
As a financial Journalist, I am sure you must be aware that the Nigerian stock market performance in 2018 left little to cheer about as major indicators remained in the negative territory. The market lost about 18 per cent which is significant compared to a huge gain of over 42 per cent the previous year. Two major factors have been adduced for this dismal performance. The first is external, coming from the interest rate hike by the United States Federal Reserves, which increased yields in the US. The second is domestic, arising from perceived political uncertainty in Nigeria. These two factors, more than economic fundamentals, led to the exit of foreign investors and dampened the sentiments of domestic investors.
Be that as it may, I see the stock market headed in the positive direction this year. Going by assurances from the President, the new Inspector General of Police and INEC, I am optimistic that the coming general elections will be largely free, fair and credible. So, I expect foreign investors to return in full force about the third quarter of 2019; Ditto for domestic investors who have adopted a wait-and-see attitude. In 2019, investors in the stock market are likely going to exhibit positive sentiments as several factors will combine to shore up confidence and bring about a rebound in stock prices. These include reduced political risk, favourable crude oil price on the back of OPEC and allies output cut agreement, lower yields in the US following a slowdown in rate hike by the US Fed as well as good corporate results by listed firms in Nigeria.
The implementation of the capital component of the 2019 budget promises to enhance national output. Obviously, the increasing investment in infrastructure, especially power, roads and railways, is crucial to reducing cost of doing business and improving the attractiveness of Nigeria as an investment destination. It will have a direct impact on companies like Julius Berger and Dangote Cement where current valuations are still considered attractive. Also, the various intervention schemes of the CBN especially in agriculture and SMEs involving single-digit lending to the real sector, is expected to have a positive impact on the bottom-line of quoted companies. Stocks in the agriculture sector such as Presco Plc and Okomu Oil Palm promise to be the toast of investors in 2019 on the back of government’s favourable policies in agriculture. A likely rebound will equally come from more listings on the Nigerian Stock Exchange especially now that Telecommunication giant, MTN Nigeria, has resolved its dispute with the CBN.
Of course, monetary policy has a role to play by ensuring price and exchange rate stability consistent with the mandate of the CBN. But beyond helping to stabilize the macroeconomic environment through policies that engender stable exchange rate which is desirable to attract investment in the capital market, the CBN can play a more active role in the growth of the market. For example, with respect to the CBN intervention funds for SMEs, preferential treatment could be given to companies listed on the NSE. Also, the CBN’s Regulatory and Supervisory Guidelines for Microfinance Banks could be amended to include ‘’foreign exchange transactions’’ among permissible activities of only National Microfinance Banks that become listed on the stock exchange. These measures will encourage more listings thereby placing the stock market in a stronger position to mobilize long term funds for sustainable economic growth.
By and large, the stock market will fare better this year. So as my friend, I advise you to go and buy shares now that stock prices are low.
Thank you for your time
The pleasure is mine
