‘FX scarcity triggers inflation, stifles investment’

Prof Ken Ife is a renowned Macro-economic and Public Policy Analyst, and the Lead Consultant to several international organisations on private sector development. Speaking on the Q2 GDP report in this interview with the Managing Editor, Sustainable Economy, Clara Nwachukwu, he insists that structural economic challenges continue to dampen Nigeria’s economic growth. Excerpts:

What is your opinion of the 5.01% gross domestic product (GDP) growth rate recorded in the Q2?

What happened was that all the service sectors recovered completely. If you look at transportation for example, this was like -37%, Aviation was -45% and subsequent quarters -20+ and all of a sudden, they’re now in positive territory at very high levels.

Even Trade, which had suffered so much over the years due to the supply chain disruptions and FX scarcity, and suddenly trade also jumped from heavy negative territory to over 22%.

Although performance was terrible in agriculture 1.31% against 2.2% in the last quarter, 3.6% in December, exceeding the population growth rate, but because it is 24% of the GDP, it still helped to beef up the figures.

Trade grew in proportion to the GDP and went down to about 15% but now came up to about 17%. Trade was overtaken by ICT in Q2 2020, it moved to 15% of the GDP, but right now dropped to about 12% of the GDP, and growth rate also dropped to 5.5%.

The most shocking was financial services, especially insurance; they were high performers last year at 22%, but now went into negative territory, the banks; while insurance had double-digit growth. Finance was over 80% of that particular sector so the negative growth in banks dragged down their contribution to -1.86%. Also, the capital market, the portfolio investors who were the biggest contributors have all gone. If you look at the capital importation report, over 70% of the inflows are portfolio investment, but by February last year they all disappeared. In the past, Nigeria used to get about $8billion/quarter or more but has now gone down to a few hundreds of millions because of very meagre volumes of FDIs.

Oil contribution continues to drop, isn’t that worrisome being the highest contributor to the foreign exchange (FX) earnings?

Oil is less than 50% of the government’s revenue, but like you said, it is over 80% of the FX revenue that is why it is worrisome, added to the impact of inflation because the economy is not diversified, which is the challenge. The oil industry is very small and about 7.4% of the GDP, which is very small because it used to be around 10%, so it’s not a big player in the economy.

Trade is twice bigger than oil in terms of size of the economy, but the foreign exchange comes from oil. FX is scarce and anytime there is a production cut or drop in the price of crude there is a crisis, because the economy is heavily dependent on imports; over 80% of the manufacturing capacity depends on imported raw materials. Once there is a small constriction on FX supply, it triggers inflation, because they source for their FX either through the parallel market or export and import window, or SMEs window and whatever they buy at high price, they pass on straight to the consumer.

Amid high FX, high inflation, 3rd wave of COVID-19 and others, do you think the current growth rate is sustainable?

Remember this rate is year-on-year so because the corresponding period last year was -6% because of the COVID lockdowns, the growth now is magnified. The recovery that we have now is from all the sectors that were heavily affected by the lockdowns. For example, aviation has recovered and posted growth for the first time at 4.98%, which means that the airlines are back in action and expanding as more airlines are coming on board and more travellers are being recorded. But it’s not just expansion, travel fare has also doubled; you now pay N50,000 for a ticket that previously cost N20,000, which contributed in boosting the output.

Again, the shock was that Transportation itself, was -20% suddenly jumped to +76%, which is phenomenal and unexplainable unless they are looking at the entire investment in the airlines that is infrastructure and services and if they purchased or manufactured thousands of buses. What exactly did they measure because transport had been so subdued but now very huge even though the contribution of transport to the GDP is just under 5%.

When you have this kind of rate; if you look at all the indices, manufacturing 3.4% against 3.49% in the last quarter, although it is in the positive zone, industry as a whole has been negative because manufacturing is one aspect of industry; there is petroleum, power and those ones are not doing well at.

Trade is twice bigger than oil in terms of size of the economy, but the foreign exchange comes from oil. FX is scarce and anytime there is a production cut or drop in the price of crude there is a crisis, because the economy is heavily dependent on imports.

How come the growth rate exceeded both local and international projections?

The fact is that when you are down, for instance, you lost some money from N1000 and you have N500 left, you will have a drop of 50% in your income. From this N500 level, if it increases to N600, that is 20% and this looks large even though it is just N100 more, whereas, if you had N1000 and got the N100 more this will be only 10% increase. 

Passengers’ traffic is returning, even food and accommodation also posted positive, 1.9%, but they had collapsed alongside aviation. Aviation brings hospitality, supports the hotels, restaurants all of which collapsed are now in the positive territory.

What can the government and economic managers do to sustain growth even if not at the current level?

GDP looks at output and investment, so whatever increases output increases the GDP, same thing with investments. Definitely we are having investments by borrowing through our nose, and GDP doesn’t know where the money is coming from. The GDP can still be increasing even when you are having fiscal stress and you are unable to pay salaries and all.

However, investment is a function of infrastructure. If you want to diversify the economy you have to provide infrastructure in those areas you want to diversify to. For instance, if you want to diversify to housing you must provide the infrastructure – land, mortgage, so finance and infrastructure is the livewire of diversification. You also need to go back to other bottlenecks impeding rapid growth.

Technology has played a major role because it has been able to support the banking sector and the digital economy and improved efficiencies in many factors of production. Also, inefficiencies in government’s expenditure caused a lot of leakages and that is why technology has been helping through IPPS, TSA, the use of BVN and the use of other technologies which are helping to improve our competitiveness and productive efficiencies.

When you look at Finance, which used to be No.1, now it is at -1.86, we need to find out what has gone wrong in the sector and this is because the portfolio investors have all gone. Even the diaspora remittances don’t feature much again, FDIs are gone because capital importation was about $800+ million, and inflation is still high. Who will invest in a country with high inflation at 17.38%, so there is a negative interest rate right now.

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