The delay by President Muhammadu Buhari’s administration to make key appointments since assumption of office has continued to cause anxiety in the economy particularly with unprecedented decline in foreign and domestic investments.
Mr. Johnson Chukwu is the Managing Director/CEO, Cowry Assets Management Limited, an investment bank and key player in the capital market with specialisation in oil and gas, bonds and equity and other financial instruments. In this interview, he speaks on the cost of the vacuum created by the absence of an economic team as well as the fundamental things to be done in order to rescue the economy from collapse. Excerpts: However, the government, after a long wait, has sent a 21-man list of ministerial nominees to the Senate for screening, maintaining that it set out to do things methodically to bring about probity in public financing.
By Akoma Chinweoke
How do you assess the performance of the country’s economy so far under the leadership of President Muhammadu Buhari?
What I think is that Mr. President has been focusing more on the issue of corruption and insurgency and, if one has to fairly assess him, it has to be on these areas. We have seen some progress in the security situation in the North- East. On the anti-corruption fight, so far, we have seen some reduction in reckless impunity with people trying to avoid any fragrant action that could make them the first culprits of the anti-corruption war.
On the effectiveness of the anti-corruption fight, we are yet to see any effective prosecution. For the fight to be successful, we need a legal system that makes it difficult for corrupt people to walk away free. We also need to eliminate the avenues for corruption in our system which corrupt people exploit to achieve their nefarious acts.
On the economy, there is presently no economic clear cut economic policy. In the absence of defined policies, we have seen a lot of turns and twist in the economic space with several changes in Central Bank’s policies. The CBN has moved beyond monetary policies into the realm of fiscal policies because of the vacuum created by absence of a substantive Finance Minister and an economic management team
Although some of the challenges in the economy are exogenous like the issue of falling price of crude oil but with an economic management team in place, they would probably have developed an appropriate response which could have stabilized the economy. The cost of this vacuum is already manifesting in our macroeconomic variables such as inflation rate which recorded an up-tick to 9.3 percent in August, GDP growth of 2.35percent which is one of the lowest in recent times.
Although the exchange rate seem to have moderated, it was at a cost of fencing off a lot of legitimate demands. I believe that certain fundamental things need to be done such as defining the economic policy orientation of the government, eliminating unproductive subsidies, and selling off moribund government assets.
We have heard sound bites of a socialist economic orientation. We heard the vice President talk about feeding of school children, which in itself is not bad but is basically a socialist policy. We have also heard that the government is not ready to remove subsidy, government wants to build new refineries, rebuild Nigerian Airways, etc. These are indicative of a socialist economic policy orientation.
What do you think about the introduction of the single treasury account system by this government particularly as some agencies are now jittery over its enforcement?
The Treasury Single Account is an efficient cash management tool that the government can use for effective management of its finances, banking and cash position. Prior to the implementation of the TSA what used to obtain was that different agencies of government would have different balance, some may be positive and others negative.
While those with positive balancing were receiving peanuts as interest income, those with negative balancing were paying great cost in form of interest charge to the banks. So, with the single treasury account, at the end of the day, It would be a very efficient way of managing the cash position of the government. Embedded in the efficient cash management is the additional benefit of reducing corruption tendencies in the management of government financial resources.
Many investors have continued to express serious concerns over JP Moran’s recent de-listing of Nigeria from its Government Bond Index Emerging Market, GBI-EM. How in your view would this impact on the country’s economy?
Well, it all depends on our policy response. What JP Morgan has done was that they have de-listed Nigeria from the government bond emerging market which means they took Nigeria out from the list of Emerging market government bonds that they track. In effect, fund managers who use the JP Morgan GBI-EM as criteria for inclusion of any particular government’s bond into their portfolio would no longer be interested in buying Nigerian government bonds.
The economic implication is that the level of fund that are pursing Nigerian bond instruments will go down . That should have a direct impact on yield because if the demand is slows down while the supply is still on at the same time, the price would go down and the yield would go up. I however, believe that the exit has already being priced into the yield hence the 15 percent range.
Such high yield may however not last for long as local fund managers, particularly the Pension Funds Administrators with their assets under management of about N4.6trillion would likely take up the oversold position left by foreign portfolio investors. The major impact of this exit would be on foreign exchange inflows as well as the constrain it will impose on the Monetary Policy’s ability to use yield on local currency debt instruments to stabilize the exchange rate.
Your company,Cowry Asset Management Limited paid N3bn in fulfilment of its underwriting commitment under the N7bn Zamfara State Government Bond. How did this happened?
Well, basically we underwrote Zamfara State Government to the tune of N3bn. As the underwriter, our obligations was to take up whatever investors fail to buy. So, what we did was basically to buy that portion of the bond that was not taken up by investors. Fundamentally, we support any state government that wants to develop its state and if anybody approaches us with the intention of raising fund and we are convinced that it is for the development of that state, we would support that person to raise funds from the capital market particularly if the borrowing is for capital development .
What the state government has done is to fast track development that would now catalyse economic growth in that state. If you look at what happened in Dubai, the government borrowed to build infrastructure and as the whole world is coming to invest in Dubai, they are now recovering the cost of their investment.
They are also able to pay off the debt and at the same time create full employment for their citizens. So, that is the beauty of borrowing. The key thing is that you should be able to borrow wisely and invest wisely particularly in those projects that would generate economic returns which would not only pay off the cost of borrowing but also help in expanding economic space.
How best do you think the government can tackle the alarming rate of unemployment in the country?
I think one of the things the government must do is to give priority to employment creation. If that becomes the number one priority of the government, then issues of maintaining exchange rate stability and inflation will be secondary. So, if our objective is to grow the economy, then we need to bring down the interest rate. We need to review downwards the Monetary policy ratio and the cash reserve ratio to the extent that it would allow banks lend to invest in these sectors to the real sector of the economy.
As the the sector begins to access funding, they would be able to go into productive activities. At the current cash reserve ratio for banks to recover their cost of funds, they must lend at above 20 percent interest rate but there are very few productive activities that would borrow at 20 percent and still be able to service the interest, make profit and pay back the loan.
But if we have lower interest rates like other countries who are driving economic recovery such as USA which have maintained zero interest rate for almost ten years and with that they have been able to grow their economy. The American economy has been able to grow at more than 2.9 percent per annum and we are seeing a drop in unemployment by about 250,000 every month. I think that’s the direction the government should follow . Lets drop the cash reserve ratio and monetary policy, the inflationary impact would moderate as productivity improves.
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