Adebayo Solomon Odeyemi is the vice-president of CITITRUST ADVISORY LIMITED. In this interview with BENJAMIN UMUTEME, he says rather than rake up debts, the government should engage in responsible borrowing. He also speaks on other economic issues.
How is the money market playing out especially with the business climate as it is at the moment?
Presently, the business environment is currently beset by; high Inflation rate, devaluation of the Naira, high unemployment rate, and slow economic growth. The Nigerian economic climate is very challenging; however, data released on the economy indicated that we are sliding out of the quagmire, albeit we are not completely out of the woods. A combination of the data released and deliberate policies of the government have jolted the market back to life. What we are witnessing right now is an upward trend in returns for some categories of money market products such as commercial papers, mutual funds and longer maturity treasury bills (364 days). However, fixed deposit though increased month-on-month is yet to keep pace with other products in the money market data from the CBN on fixed deposit from April-June 2021 indicates that the market expects recovery of the economy, albeit slowly.
How has CITITRUST been able to weather the storm in the midst of all this?
Most Nigerians are now embracing alternate investment such as Commercial Papers, mutual funds, etc, as against a more classic fixed deposit because of lower rates being offered. This led some of them to move to asset management companies to get higher returns. We witnessed this too in credit. Some banks were unwilling to lend to certain critical projects or sectors fearing economic downturn – even when the projects or sector were low to medium risk. This creates a huge gap which further deepens the Private Equity and Venture Capital space. In that they were well-positioned and experienced to undertake these projects and businesses by correctly appraising the risk and return. Obviously, these have led to improved performance. CTITRUST is a beneficiary of these because we have diversified our business offerings to take advantage of the gaps.
Nigeria’s debt is continually on the rise, yet the DMO keeps telling us it is at a sustainable level. What is the implication of this viz-a-viz Nigeria’s declining revenue?
According to the IMF a country’s public debt is considered sustainable if the government is able to meet all its current and future payment obligations without exceptional financial assistance or going into default. There is nothing wrong with public debt because the government must raise money to perform its functions and roles, particularly for the provision of infrastructure and economic development. The key take is that Nigeria can borrow without jeopardizing her growth and stability or even threatening her existence. So, the DMO is saying that our debt carrying capacity can sustain the current level of indebtedness. In other words we can meet all our obligations without defaulting. I am sure they know the implication of a default. It can cause the country to lose market access and suffer higher borrowing costs as a result of negative rating, in addition to harming growth and investment. This will apply to both the public and private sector.
Of course, there are other ways to mobilise financing, such as by raising domestic revenue, improving the efficiency of spending, reducing wastages, and improving the business environment to encourage future investment. It may take time for these to provide tractions and the volume may not be sufficient. The government is currently exploring the choice of improving the efficiency of spending by concession of some of her assets. It will not be surprising if more assets are privatised. Also, the government is trying to reduce wastage by fighting corruption (some might argue that she is not doing enough). The government reserves the right to increase revenue by way of increased taxation. But this is the worst-case scenario. Instead of focusing on the absolute value of our debt, emphasis should be on responsible borrowing, which is a condition where debts are taken to finance productive social and infrastructure which can in turn lead to higher income that may ultimately offset the cost of debt service.
Coming to the PIA, there are fears, and I suppose they are real, that the government has abandoned its development duties to host communities to oil companies as it gives them the liberty to not only set up the fund, but also to appoint the implementation committee members for the trust fund. Where does this leave the host communities?
For me the best arrangement will be collaboration between the government, host communities and the private sector towards the development of the host communities. In this country, we have a record to show that the government has not done too well in managing growth and development of the host communities. Also, when you leave the communities alone; someone hijacks the entire thing leaving the ordinary people of the area in abject poverty. We cannot keep doing things the same way and expect to get a different result. It appears the government has taken lessons from the past and studied what has worked or at least fairly worked for the development of the communities. I believe the approach will closely mirror that of the Rivers State Sustainable Development Agency (RSSDA) which is a collaboration between the government, the private company and the communities having a say in their development through social engagement of the people.
Inflation figures continue to come down, but the same can’t be said of the prices of goods and services. What is the overall impact of this on households and the economy?
The impact of reduction in inflation rate will not be significant at this instance. The core inflation and the headline inflation only reduce marginally, while the food inflation increases. So, it is natural for households not to immediately feel the impact. Too much inflation is generally considered bad for an economy, while too little inflation is also considered harmful. Most economists agreed on low to moderate inflation, of around 2% per year. The ECB, for example, aspires to maintain an inflation rate of about 2% to keep the economy stable. This is because inflation is an incentive for production. Every organisation loves the feel of increased accounting profits even if in real terms they are worse off. The challenge for Nigeria is that we need to bring it down significantly because of the welfare of people. To address it then you have to review the fundamentals that caused it in the first instance. The main one is the devaluation of naira which allows all imported goods to be expensive. The country is significantly impacted because of our heavy reliance on importation.
Another major cause is insecurity. This drove up prices of goods and services as farmers and the whole agricultural chain are significantly being affected. We have a cost pull inflation resulting from certain faults within our system. Similarly, the rising cost of imported goods has led to production of local alternatives and provision of substitutes. That is expected and lots of entrepreneurs are filling the gaps right now. If the condition persists, we are expected to witness the revival of critical industries such as textile and agricultural finished products etc. My prediction is that in the long run, the Nigerian economy will be expanded but in the short run people welfare may suffer.
The implementation of the Economic Recovery and Growth Plan (ERGP) ended in December 2020, without the federal government meeting any of its milestones. What can the government do differently to see results as it is prepared to roll out another developmental plan by October?
Out of the strategic goals of the ERGP, Nigeria made strides in the provision of transport infrastructure. One might argue that is not enough. But if we look at it from the context of recent realities then we can better appreciate our conditions. Incidentally, our medium-term goals were severely affected by the Covid-19 epidemics that set whatever economic gains we have had in the last 3-5 years back significantly. And this is the same all-over the world. There is no way the plan would have been flexible enough to accommodate a crisis of that magnitude. In addition to that we deviated far from the plan with our current security situation which has defied solution, so far. One might be sympathetic to the government; however, modern plans are designed to be adaptive. Something like a guided long-range missile. And the drivers must be very tenacious. Instead of just jumping into another plan, it will be best to do some stock taking and use all the “lessons learnt” in the formulation and implementation of a new plan.
What would you tell any potential investors especially in these times?
I will tell potential investors to diversify your investment into different Asset classes. And you may consider further diversification along currency lines. But specific advice will depend on other factors such as the age of the investor, his risk preference, experience and knowledge of financial products, emerging data from the economy etc.