“If you are building your economy, you wouldn’t worry about exchange rate” Prof Ekpo

Akpan Hogan Ekpo is a Nigerian Economist and Professor. He is currently the Director General of the West African Institute for Financial and Economic Management in Lagos, Nigeria. In this interview,  He touches on a number of economic issues contentious exchange rate debate. Except

Do you think the Nigerian economy is headed in the right direction?
It depends on how you want to look at it. The recent numbers are not that good. The recent numbers just came out of the NBS in terms of the growth trajectory. But again, it is not that bad if you are just coming out of a recession. For the first time, the non-oil exports showed some positive growth. But why I say the economy is not performing satisfactorily is that unemployment is still very high. Inflation, double digits; Lending rates, 25%., poverty is increasing heavily. The human capital index is very bad. The misery index is still rising. So, we cannot say we are doing well at the macro side, even though we just came out of a recession.

At the sectoral level, there are some challenges. Manufacturing is not doing well, the service sector which they claim is doing well is misleading. Because you look at how an economy performs, you move from primary to secondary industry to services. The index that services contribute 5% to GDP is not correct because our service sector is very rudimentary. Normally, if the service is doing well like in the US, Germany, Japan, you will say you have arrived. The numbers might probably be so because the new way of calculating the GDP has so many services in each category.

Should there be a fear of another recession?
Every time I see oil price going up, I get worried, because once it goes up, we just relax. I once said that I wish the oil price was zero, maybe we will be forced to do what we have to do. Now our reserves are rising compared to what it used to be but I hope they stay on course in the reforms. You know in Nigeria, our problem is that it is an election year and politics dominates, they will no longer be concerned with how to build the economy.

Which should come first, currency or economy?
If you are building your economy and changing the structure of your economy, you don’t worry about the exchange rate, productivity will determine the value. One time the Nigerian naira was very strong; how come we are not developed? So, the main thing is to develop your economy, industrialise and then the economy will find its value.

What are your comments on foreign reserve management?
We don’t need the IMF to tell us that we should manage our reserves very well because first of all, what is the source of the reserve? It is an outside source of revenue. We have no control. So when your revenue is increasing from that kind of source, you have to manage it very well because oil revenue is a windfall, we have seen that for years. Norway used its oil revenue to build infrastructure. Our own foreign reserve is used to intervene every week in the market yet rate is not changing much. So, we need to use most of it to build infrastructure and reduce our borrowing.

Foreign reserves is money in dollars, or pounds sterling or Yuan. So, instead of you going to negotiate debt, you take a part of it and sterilise it. In order for you to manage it, you need to know to what proportion. They say you need reserves to finance three months of imports. Now we have finance of up to like twenty something months. Is that necessary, is that something to be proud of? You can have reserves to finance six months of import then the other months, use it. There are countries which don’t have reserves to finance one month. I am not saying it is right. So, instead of three months, make it six months. Even the three months is provisional because the currency is not yours. Even if you think you have enough, you don’t have enough.

What can be done to slow down the decline in foreign reserves?
You can’t help it. I don’t know what they are using the reserves for domestically. But in terms of the fluctuation, you don’t have a choice, it is based on the global oil prices. That is why we say don’t forget to build other sectors of the economy-build agriculture, industrialise. When we say diversify our economy, we mean earn foreign exchange from other sources.

Do you not think that our problem is prioritization of infrastructure?
Let me define infrastructure, you have two types-hard and soft. When we talk of hard infrastructure, we are talking of power. Power is infrastructure. If you look at this country, we have so much gas yet we have power problems. By now. Nigeria should have a mass transit system in the big cities links up the major towns. I read a story recently that what made the north a little bit mordenised was the railway system. As they build the railway, development started on both sides, what we call the pool effect. That is what I call infrastructure. Not something fanciful.  We go to the soft part of it. By the time you build all these things, you also need people to man.

The private sector is the engine of growth, but not an engine of development because they invest for a purpose. we need a government that is strategic in thinking. Go to Singapore, they have no oil but have refineries. The drift it, come and refine the oil and pay us. These things were built on developmental state philosophy. They were sensible, they didn’t want to call it socialism so they don’t have a problem from the west. Development is a struggle. As you are trying to bring people out of poverty, others are saying leave them there, that is how we make our money.
What is our own philosophy? We get confused all the time. What we have is state capture. The elites have captured the state for their own interest. So even if you have individuals who intend development, they are so inconsequential that they can’t make a difference.

I have been advocating developmental state philosophy in the context of market socialism like China. In any country in the world, those that are rich are very few but a large middle class like the United States. In US, the middle class determine who governs. If you bribe them, you are wasting your time. They can take your bribe and won’t vote for you because they have all the basics of life. But when you have the rich there and the rest are poor, there is a problem.

Is Nigeria responding appropriately to the AfCTA issue?
I think eventually, we should sign it, for several reasons. We should sign it not because it may work, but as Nigeria, you want to be like the leader. You show by example and say OK, let’s try this one. In Africa, the trade thing is to create at least maybe a larger market as Africans but each country must look at its own interest. In our case, I think the fear is that SMEs are making progress and this might over cloud it. It is not necessarily so. It might only become more competitive and produce quality products. There are some countries you will go and see shirts made in South Africa, Kenya and Ghana; because of the competition, they take their time and do something well. In our case, we are always in hurry. It might make them become serious. When they signed then, we should have just signed like South Africa did.

On the side of ongoing Brexit negotiations, what would you advise that the federal government negotiate in the Commonwealth moves being carried out by the UK?
What Britain is doing is normal, they exit Europe and strengthen markets across. What do we export? It is oil. If you look at the data, 80% of what we import is from the OECD countries. All the goods on the street of Lagos they are from China. The only export is crude oil. As at last year, I don’t think any goes to Britain. So even our trade with Britain is one sided. We import their finished goods and services and now they are leaving Europe, they are looking for a large market. Brexit, Trumpism, we should be thinking of what will be the adverse effect on us. Like China and US now, they are fighting. Are we thinking ahead what will happen? China is a very smart country, what they will lose from the US, they will make sure they gain from other countries. Are they going to increase the price of goods that people are buying in Nigeria that are made in China? Of course, they are going to. So what steps are we taking as a country? If free trade is what the text book says, there will be no negotiation. So, Nigeria should start thinking ahead of what will happen with this China-US fight, Brexit. Are we doing this, I don’t know. In Nigeria, when they are doing this, they rely on foreign affairs. Our foreign affairs in Nigeria, unlike other countries, they don’t have the expertise to look at some of these things. And at times, they do it in isolation of the relevant ministries.

Do you think that Nigeria’s relationship with China will suffer in case of a loan repayment default?
Yes, anytime you are dealing with the Chinese, you have to worry cos their aid package is always so complicated. The will tell you that there is always a 20% grant element. If you don’t have good negotiators, they can sell your country.
So, they are smart. China has, as we speak, over 434 state companies. The people building your road in Nigeria are state companies so they send them to work in Africa. So, with the Chinese, we need very good negotiators. I don’t think Nigeria can go through what Zambia experienced.

What are your comments on debt to GDP ratio vs debt service to revenue ratio?
Debt to GDP ratio is very good because you elevated your GDP so the denominator is now large so when you now divide it, of course you will not get to the benchmark but that does not give you the licence to keep borrowing.
I prefer the debt to revenue ratio cos GDP does not pay debt, revenue pays debt. If you watch, they are very silent on that. If they show the debt to revenue ratio, the economy is in trouble.
Let’s take the debt to GDP ratio, even if you have not gotten to the benchmark, it is not a licence to keep borrowing, more so debt servicing. What are we borrowing for? If we are borrowing to pay Nigeria Airways their salaries, then it is very dangerous. No country does that. You may borrow to finance capital expenditure which has a positive multiplier effect. My argument has been that why Eurobonds all the time when you have concessionary rates with the ADB and the World Bank with a long period of payment. There are a lot of reasons why you go there because you can put shadow items when it comes to Eurobond. Eurobond will be faster but with a high interest rate. And if you go to AfDB, Nigeria has a trust fund which we can leverage with If you go to AFDB and say look, we want money, negotiate and say we have a trust fund otherwise we withdraw the trust fund, they will release it. Why not go there? Why not go to World Bank where they will give you a lot of time. If you default in those ones, you can renegotiate.

Do you think the federal government can sustain salary payment with the new minimum wage being considered?
They have no choice; the minimum wage increase is long overdue. Minimum wage is even a constitutional requirement. How those who are working survive on N18,000 a month, only God knows. The problem with Nigeria is that once they adjust minimum wage, those at the top think they should also adjust theirs at the same rate.
Having said that, the entire Nigeria service incentive structure is warped. the structure is very bad in terms of salary, those at the bottom is terrible, those at the top, for example, a perm sec earns N1.5 million a month, a director earns less than N300,000, he will collect bribe to sustain his livelihood, the graduates, everything put together maybe N80,000. The whole thing is crazy, I pity this Government, how do you fix it? Something has to be done at some point. The MDAs are earning different salaries despite being in the same public sector. So how do you encourage civil servants to take the work seriously?
If you go back to history, you will understand this so called negotiation, is what I called ‘a bureaucratic wage making process’, it is not based on productivity.
Even the Nigeria minimum wage, when it’s agreed upon, only government and few companies pay it. I won’t blame Buhari government but they should have taken it as a matter of urgency when they came in.

Do you think a change in CBN’s leadership can affect the economy?
The way CBN is structured, even if a new person comes, there will be continuity. In most countries, the central bank governors are to be seen not to be heard, it’s a conservative institution. A lot of things will continue based on the data that they have. In terms of arms of the Nigerian government they are the most with the expertise. The problem is that they have that monetary side expertise but the government side does not have the same expertise. In most cases, the two must coordinate. A lot of times, CBN is doing government’s work. They also do fiscal policy which they should not be doing.