Ifeanyi Uddin

Ifeanyi Uddin is a manager in a first generation bank in Lagos. He constantly intervenes in the media on how to make the economy better

The devaluation debate was another waste of national time, because, when you say you want to devalue something, you presume that there is a valuation that is lower than the current one, which we know, and once we take it to that place, the problem will be solved. Unfortunately, there is no such number.

The better argument was a very simple one. The domestic exchange rate had been at US$1/N197 -N199 because the CBN had enough dollars to meet domestic demand. At some point when the central bank was bleeding the external reserves supporting the US$1/N197 -N199 peg, a huge arbitrage window opened between the official exchange rate and the parallel market. There were suspicions that people who were obtaining FX at the official rate may have been going to offload it at the parallel rate and making a fortune. If this was true, then a government that was having difficulty meeting naira obligations was shooting itself in the foot in several ways because if it had allowed the naira to sell at the market clearing rate, it would have earned a lot more naira to every dollar it sold. But by keeping this rate at the fixed peg, it was passing on a subsidy technically to anybody who had access to the official rate.

So much of the conversation was simple. Remove this subsidy that was allegedly going to preferred sectors of the economy, but was not translating into net gains because the truth is by that time most operators had marked their prices to the black market, there was nobody who marked their price to the official one even though there were persons getting the money at the official rate. So it was a practical solution too. But the fear was that if you allowed the official market to merge at the parallel market rate you will drive inflation up. Legitimate fear. Except that at the time this argument was being put out, prices were already quoted at the black market rate and inflation was already going up.

Ifeanyi Uddin

In the period since the CBN adopted the flexible exchange rate most economic indices have worsened, because we have seen the naira touch almost 400 to the dollar at the parallel market. At this point I am persuaded that the naira is considerably undervalued, but again, we always knew it was going to overshoot, after which a new equilibrium higher than the US$1/N197 -N199, but arguably not more than US$1/N360 will emerge.

The difficulty, however, is that in the period in which it took the CBN to move from the fixed peg to a flexible exchange rate regime, the market lost confidence in the CBN’s ability to intervene meaningfully in the economy. So it will take some time for the markets to be reassured that the CBN knows what it means for an exchange rate regime to be flexible. We are going to wait a while to be sure, what it means to be flexible.

Unfortunately, that waiting period may hurt as indicated by the recent downgrade by Standards and Poor’s of the country’s ratings, because that makes our ability to attract autonomous sources of FX much more difficult. We are also going to face problems from the outlook for the benchmark rate in the U.S. Everybody is looking to where the Federal Reserve goes on this. it didn’t move its benchmark rate at the last meeting although it did suggest that we could have a rate increase before the year runs out.

So, after the November elections, we should see the Fed raise rates. If it does, then the yield on U.S. dollar-based assets will go up, diverting much of the traffic that has come here back into the U.S. at a time when the rating downgrade seems to suggest that this is a particularly healthy economy to invest in. If you look at the rating downgrade and our exclusion from JPMorgan emerging markets indices, a large part of the argument was the way the CBN handled what you call the devaluation. And so it is not so much that the CBN has allowed the flexible exchange rate regime, it is the way and manner it came to that conclusion.

How do we fix the problem in the power sector?

What we have not seen in the power sector is the distribution companies investing as much in new processes, infrastructure and capacity as one would have thought. You hear today that most of them financed their acquisitions of these power assets with bank debts, short term largely and that not too many of them have the wherewithal for longer-term investment spending.

That’s the problem. There is a need for retrofitting and upgrading infrastructure. Without that, it’s going to be difficult to get the levels of service that we desire. But, of course, could we consider distributed generation, so that we have the generators located a lot closer to the consumers in order that the loss power that happens along long transmission lines is removed? Maybe. We will however need further reforms sector especially in aid of the clear financing shortage plaguing the current structure.

Ahh! We are not a low rate economy that is the truth. And how do I mean? Look at the costs. I know the banks have their problems. But the cost of that loan, which besides non-interest income is banks’ main revenue source, is distributed over things like the large branch network, and for every branch, you have to provide security, they have to provide their own boreholes, then increasingly too, as they have boosted their online offerings, the ATM does not just feed off the generating capacity of the branch. Each ATM must have a battery of inverters so that it is available 24/7. Of course maintaining those inverters is pretty expensive.

These costs are borne across every location where banks have branches. These are costs that have to be recovered somehow, and the lending rate reflects all of these. Would a more competitive banking environment do the trick? Theoretically, more banks should lead to lower rates. But then the other side of that conversation is that if you talk to business people, the so-called high interest rate is a cost. But there are other impediments to doing business here. There is a gentleman who has a dairy firm in Kano and can get his products to Paris from Kano long before they get to Lagos.

There is also the problem that for internal freight, every local government collects a tax on the goods when they travel from point to point. All these costs are there. Those costs too feed into the cost of banks doing business, and until you attend to these costs we are not going to be a low interest rate economy. You know there is inflation too, pretty high inflation, we are not a single digit interest rate economy, not yet.

In the past our crude output was high, yet the life of an average man was not better. The matter is worse now that there is low output and low per barrel sales. With the example of the FX deal that you just gave, the rich people are still cheating the country. What do you think?

I was reading some article recently and it says that elsewhere the rural urban migration was as a result of two processes. First, was increased productivity in the rural areas, mechanisation and irrigation, so rural agriculture did not need as many hands, which then had to move. Secondly, industrialisation was also going on in the cities and the new factories required hands, newly released from agriculture.

In our case, the main driver of the rural-urban migration process appears to by the result of excess or free money, rent being generated and spent in the cities so the guy leaves a miserable life eking out a living in the rural areas in search of his own share of the rent; hoping that one day he will be governor.

What we have is a subsistence economy. We sell crude oil. Pay salaries off it. 70 per cent of salaries and employment in Nigeria comes off the public sector. Nigeria is technically a huge social security arrangement. On the back of excess crude, we pay salaries that guarantee a basic minimum way of life and then the leaders take what’s left over as management fees. That seems to be what we have been doing since 1960.