A former Director-General of the Lagos Chamber of Commerce and Industry and Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, tells TUNDE AJAJA his thoughts on the real impact of the new naira policy, the state of the economy and what should be the priorities of the incoming government
From the outset, you said the redesign of the naira to, among other things, mop up the cash in circulation, was needless because the cash in circulation wasn’t too much. You also said Nigeria had one of the lowest cash to GDP ratio globally, could you expatiate on these?
In principle, currency redesign and the promotion of cashless policy are desirable aspirations for any modern society; but the issue was that the Central Bank of Nigeria’s version of these policies was underpinned by a number of fallacies, misconceptions and invalid assumptions. First, it is not true that currency redesign will in itself curb inflation, which was one of the reasons the CBN gave for the policy. In monetary economics, the key variable in inflation is money supply. Currency redesign has no bearing on money supply. It is therefore erroneous to claim that redesigning a currency will enhance monetary policy’s effectiveness. There is no relationship between these two variables. I submit that there is no compelling economic argument to justify the tortuous, painful and excruciating journey that the CBN had taken the country through over the currency redesign policy.
What about the other justifications for the currency redesign?
Yes, there were other justifications put forward by the CBN. There was the kidnapping and banditry argument and there was the corruption theory. My view is that none of these is part of the core functions of the CBN. We have more than enough government agencies to take on such responsibilities; be it economic crimes or criminality or national security. The point to emphasise is that there is division of labour in government. However, this is not to diminish the significance of collaboration among the agencies of government. The CBN cannot afford to be fighting too many fires and abandon its core functions.
The CBN insisted at the time that there was too much cash in the economy despite the disagreements by some economists, doesn’t the CBN know better since it has the statistics?
There are globally accepted metrics for determining the extent of cash dominance in any economy. First is to examine the Cash to Gross Domestic Product ratio. The amount of cash outside the banking system at the end of 2022 was N2.6tn. The size of the economy – in GDP – was N202tn in the same year. This implies a cash to GDP ratio in Nigeria of 1.3 per cent. This ratio is one of the lowest globally. Even in some advanced economies like the United States, cash to GDP ratio is as high as 10 per cent. There is another metric which is cash to money supply ratio. Total cash outside the system before the disruption caused by the CBN was N2.6tn. As at December 2022, total money in supply was N52.2tn, while the cash component was a mere N2.6tn.Thus Cash to Money Supply ratio was five per cent, which is also one of the lowest globally. What this means is that only five per cent of money in supply was outside the banking system, while 95 per cent was still within the banking system. Therefore, there is no justification for the claim by the CBN that we had too much cash outside the banking system or outside the banking vaults. Besides, cash is a payment instrument and should normally be largely outside the banks. The component of cash that is within the bank is to meet demand transactions as and when necessary. This is why currency in an economy is usually characterised as currency in circulation. It is therefore a serious misconception to contend that cash should largely be in bank vaults. Let me reiterate that cash of N2.6tn is not much for a N202tn economy. This explains the enormous disruption which the sudden mopping up of 70 per cent of cash in the country has caused the economy. Even more painful is the fact that the ordinary Nigerians are the biggest victims.
Another explanation the CBN gave for the naira redesign was to combat counterfeiting; do you think that was enough justification?
Yes, it is true that one of the objectives of a regular redesign of a currency is to check counterfeiting. But the irony is that the acute scarcity of new notes created by the CBN rather than diminish the prospects of counterfeiting, provided an even greater opportunity for counterfeiting. Indeed, there were several reports of fake new currency notes. The counterfeiters took advantage of the unprecedented scarcity of the currency notes. This meant that the outcome of the policy was a complete negation of one of the key objectives which the CBN claimed it wanted to achieve. However, the CBN seemed to have larger non-economic objectives that underpinned the currency redesign policy. These included the curbing of vote-buying, tackling criminality, stopping kidnapping and blocking banditry. The big question is whether the CBN should commit so much resources and time to an intervention activity which is outside its core responsibilities. The CBN Act is very clear about the core responsibilities of the apex bank. Besides, there are numerous agencies of government whose duties are to deal with matters of illicit financial flows and money laundering. Of course, the CBN can support these institutions, especially by providing information, but not to take over their responsibilities. Like I said, the scarcity of cash negates the whole objective of curbing currency counterfeiting through the redesign of currency notes. The cash crisis created a fertile ground for counterfeiting. Counterfeiters took advantage of the acute scarcity amid desperation by citizens.
The presidency said it didn’t ask the CBN and the Attorney General of the Federation to disobey the Supreme Court order on the naira issuance, do you think the CBN deliberately ignored the apex court ruling or the presidency was simply trying to save face, given that the buck stops with the President?
According to presidential spokesman, Garba Shehu, the President (Major General Muhammadu Buhari (retd.)) did not direct the CBN and the Attorney General not to obey the Supreme Court order. But the statement did not say whether the President gave instructions that the court order should be obeyed in line with the pronouncement of the Federal Government’s counsel at the hearing, Kanu Agabi (SAN). The spirit of the judgement was for the President to give directive on compliance since the currency redesign policy was at the instance of the President in the first place. The CBN Act actually vests the power for currency redesign in the President and not the CBN. The CBN can only act on the directive of the President.
To what extent has this lingering currency scarcity impacted the economy in your estimation?
The currency redesign policy inflicted unspeakable suffering on citizens. The trouble was not with the redesign, but the deliberate and unrestrained mopping up of cash in the economy. To date, the CBN had mopped up about N2tn cash from the economy, thereby paralysing the retail sector, crippling the informal economy, stifling the agricultural value chain, emasculating the transportation sector and disrupting the payment system in the economy. It has seriously impacted the welfare of the people, led to significant loss of jobs and worsened the poverty situation in the country. Our conservative estimate is that the economy has lost about N20tn to the economic disruptions caused by cash scarcity and the collapse of the payment system – both physical and digital modes. No economy can function optimally without an effective payment system. Cash is a payment instrument. Regrettably, the CBN arbitrarily mopped up 70 per cent of the cash in the economy, thus disrupting economic activities. The pressure on digital payment platforms crippled online payment transactions. No economy can survive with an ineffective payment system.
The digital platforms that should have served as a credible alternative indeed left many people disappointed and many lost money to failed transactions and have yet to be reimbursed. Was that an indictment on the banks or the network providers?
The trouble was that all manner of payment transactions were done online because of the acute shortage of cash. We saw situations where N200, N500 and N1,000 transactions were done online. There was tremendous pressure on the digital platforms which led to several instances of transaction failures. Those operating on the cashless platforms also became victims of the policy. The digital payment systems could not withstand the pressure.
There have been arguments around the policy infringing on the fundamental rights of citizens, what do you make of that?
It is true that the CBN has the right to redesign the currency, but it does not have the right to dispossess the citizens of their cash. The choice of the mode of store of value is a fundamental right of citizens. The CBN has no right to impose that choice on citizens. The CBN Act cannot be superior to the Nigerian constitution which provides guarantee for fundamental human rights. The CBN cannot request citizens to bring their cash for a swap, only to deprive them access to it. A swap presupposes that whatever old notes were received by the banks must be replaced with equivalent amount of new ones instantly. Otherwise, the period of the swap should have been extended until the CBN is in a position to do so. In many other climes, such swap is done over 12 to 24 months, or even more, to minimise disruption.
The CBN has declared the old notes as legal tender, but the impact and scarcity might not disappear overnight, as we have seen, how long do you think it will take for things to stabilise?
With the declaration by the CBN that old notes are still legal tender, we expect a marked improvement in the availability of cash in the economy. But that is if the CBN is sincerely committed to the compliance with the supreme court order. There are several administrative and regulatory obstacles that the apex bank could deploy to obstruct the expected easing of the cash crisis. Evidently, both the presidency and the CBN complied grudgingly with the Supreme Court judgment. This context is a major risk to the normalisation of the cash situation. However, if there are no administrative or regulatory obstacles to the release of cash, we expect that within a space of four weeks, we should see a normalisation of the cash situation
Are there things the outgoing government can still do to reflate the economy and set it on a more prosperous path for the incoming government and the benefit of the people?
I believe the current administration has done its best and we should not expect any dramatic change in its approach to economic management. We must however acknowledge some important constitution amendments which signpost the devolution of powers in some areas. States can now generate, transmit and distribute electricity. States can also now provide railway services to their citizens. But what is paramount at this time is to focus on what the incoming administration should do. The new administration should quickly set up a transition committee on the economy and ensure that the members of that committee are people who have a very good grasp of the economy, both from practical and theoretical perspectives. The administration should prioritise the implementation of very important reforms. These should include foreign exchange policy reform; the oil and gas sector reform, especially the implementation of the Petroleum Industry Act; budget reforms; tax reforms and commitment to sustainable fiscal consolidation. It is imperative to ensure trade and tariff policy reforms, including the reform of the Nigeria Customs Service. The international trade ecosystem needs urgent overhaul. To deepen legitimacy, the new administration must deliver impactful quick wins within its first 100 days.
At the moment, the inflation rate is about 21.91 per cent, what should the new government do to bring down the rate given how it has significantly eroded the value of the naira and hiked prices?
The key inflation drivers are partly global, others are domestic which includes structural and policy issues. These factors include the depreciating exchange rate, rising transportation costs, logistics challenges, forex market illiquidity, hike in diesel cost, climate change, insecurity in many farming communities and structural bottlenecks to production. These are largely supply side and policy concerns. Monetary policy tightening in most economies around the world, especially the leading economies, is also driving imported inflation and depreciation in the exchange rate. The growth in fiscal deficit financing by the CBN is intensifying liquidity in the economy with consequences for soaring inflation. Some of the consequences of high inflationary pressure include weakening of purchasing power of citizens as real incomes are eroded; increasing poverty incidence; escalation of production costs which negatively impacts profitability; erosion of shareholder value in many businesses; weakening of investors’ confidence and decline in manufacturing capacity utilisation.
How can the government tackle the high inflation?
Tackling inflation requires urgent government intervention to address the challenges bedeviling the supply side of the economy, addressing production and productivity constraints, fixing the dysfunctional forex policy, and institution of fiscal reforms to curb escalating deficit spending. CBN monetisation of fiscal deficit needs to be drastically cut down.
To give producers and citizens some relief, the government could tweak the tariff policies by granting concessionary import duty on intermediate products for industrialists, especially those in the food processing segments of the agriculture value chain.
The Manufacturers Association of Nigeria once said power alone gulps about 40 per cent of their production cost, how best can this perennial problem of poor electricity supply be tackled, since the Buhari regime also failed to solve the problem?
The power supply situation is one of the biggest challenges facing the manufacturing sector and economy as a whole. So, clearly there is a need to prioritise power sector reform as a matter of urgency. The current reform has not achieved much. We have not been able to attract the desired level of private sector investment into the sector. We still have issues with the tariff regime, we have issues with quality of corporate governance in some of the electricity firms, there are concerns about the technical and financial capacity of some of the companies in the sector, especially the Distribution Companies. Creation of a policy framework that would incentivise injection of private sector capital to scale up investment in infrastructure in the power sector is paramount. The starting point is to have a tariff regime that is cost reflective. Also, there should be a regulatory structure to ensure that consumers are not exploited and metering should be compulsory before any form of billing of electricity consumers. In addition to that, we should see a decentralisation of the transmission grid. We need more off-grid power solutions. Renewable energy solutions should be driven by robust fiscal incentives and all forms of import tariffs and taxes on renewable energy solutions should be removed.
What more needs to be done to support the manufacturing sector?
We need to ensure liquidity in the foreign exchange market to guarantee access to foreign exchange for the procurement of raw materials and machineries for industries; we need rapid investment in core industries to support backward integration aspirations of the government. Such core industries include iron and steel, petrochemicals, aluminum smelter, pulp and paper and refineries. We also need the creation of more industrial parks across the country and improvement in the facilities in existing ones. We need to strengthen current development finance to support the real sector with appropriate financing – single digit facility with a minimum of five years tenure.
The private sector is a main driver of the economy, what kind of support can the incoming government give that sector for improved productivity?
The incoming administration needs to create the right kind of macroeconomic environment characterised by low inflation, stable exchange rate, transparent foreign exchange regime and a conducive regulatory environment. There should be urgent reforms in the oil and gas sector to reduce leakages and attract more investment; reform of the foreign exchange regime should be high on the agenda of the administration. Utilisation of Government assets need to be better optimised to generate liquidity for the government. Additionally, it is imperative to ensure that state institutions that interface with the private sector are investment-friendly. The administration must prioritise reforms of the Nigeria Custom Service and create a credible dispute resolution system between the Nigeria Custom Service and the private sector. The current practice is that Customs is the accuser and the judge in such disputes. There should be regular dialogue between the private sector and the government, especially with key policy makers so that we can continually evaluate the effectiveness of government policies. Such reviews should cover fiscal policy, monetary policy, trade policy, tax policy etc.
You seem to be in support of a flexible exchange rate regime, could you tell us more about it?
A flexible exchange rate regime is adopted to cope with changing demand and supply conditions in the forex market. The benefits of a flexible exchange rate regime are many; it enhances liquidity in the foreign exchange market, it reduces uncertainty in the foreign exchange market and therefore enhances the confidence of investors. Additionally, it is more transparent as a mechanism for forex allocation, it minimises discretion in the allocation of forex and reduces opportunities for round tripping and other sharp practices.
What is wrong with the current I & E arrangement that is currently in operation?
The current model of allocation is essentially a fixed exchange rate regime. It is very dysfunctional and creates distortions in the following ways; widening gap between the official and parallel market exchange rates; collapse of liquidity in the foreign exchange market resulting in acute scarcity; mounting trade debts. Current framework has been increasing factory closure as many manufacturers are not able to access foreign exchange for raw materials and other inputs; many investors are not able to meet offshore obligations; mounting inflationary pressures and sharp drop in capital inflows are features of the current forex policy regime.
Many people have sought an end to the multiple exchange rate regime, which, among other ills, enriches a few persons. What do you think the incoming administration should do differently?
The new administration will need to adopt a flexible exchange rate regime. This would improve liquidity in the forex market, reduce uncertainty and enhance investors’ confidence. It will also need to deepen the autonomous foreign exchange market through the liberalisation of inflows from export proceeds, diaspora remittances, multinational companies, donor agencies, diplomatic missions, etc. Market rates should be allowed to prevail in the autonomous window.
Nigeria has the largest economy on the continent but the majority of its people are poor, how can that gap be bridged?
The size of the economy can be much bigger. GDP size is currently estimated at $450bn, and we are still the largest economy on the continent. However, there is still a lot of disconnect between our size as an economy and the living standards of our people. In the human development index, Nigeria is ranked number 35 in Africa, whereas on account of GDP, Nigeria is number one. That anomaly needs to be corrected.
How best can that be done?
Apart from growing the economy through increased opportunities for investment, we should ensure economic inclusion. The benefits of growth must impact the lives of the people, especially the most vulnerable. This could be achieved through more investment in the social sector – education and health. Scaling the development of small businesses is also very critical to the realisation of economic inclusion.
The President-elect, Asiwaju Bola Tinubu, said during the campaigns that he would remove fuel subsidy, how best can it be removed with minimal shock and consequential hardship on the people?
The fuel subsidy issue is very important but also contentious. The matter has been encapsulated in the Petroleum Industry Act. Effective implementation of that Act will provide an opportunity for a holistic reform of the oil and gas sector. Politically, it is likely to be a bit tricky because of the social cost of the removal of subsidy. Therefore, we can have a phased removal of subsidy. The model of dual pricing could be explored as a start. We could have social pricing which is subsidised reasonably and we could have alongside that a commercial pricing without any form of subsidy. For example, the Nigerian National Petroleum Company Limited retail stations, located all over the country, could be dedicated to the sale of fuel at a subsidised price, while all others would sell at market price. That could form a transition phase before full scale subsidy removal.
What kind of economic team should the incoming president shop for, given the peculiar economic challenges Nigeria is faced with?
The next president should set up a very credible economic advisory team which could possibly be non-partisan. He should create a very sound economic governance framework to ensure that there is not too much of political influence on economic policies and that the regulatory environment is conducive. Political economy should not overshadow the real economy. That is very important. We should avoid the phenomenon of state capture where a few powerful people in the private sector practically capture the apparatus of state. Such state capture poses a risk to quality policy formulation and implementation. Excessive monopoly dominance, which is not always in the best interest of any economy, could also be detrimental to the growth of the economy and the welfare of the people. Creating a competitive environment is very important because a market can be free, but may not be competitive. Also, government institutions that play technical roles should be headed by tested technocrats. There are a lot of reforms that need to take place in the maritime sector and that is very critical. There should be reforms in documentation, issues of corruption, bureaucracy and absence of technology at the ports. All those things need to happen in order to create a port structure that will support economic prosperity. Also, the petroleum ministry should have a full-fledged minister who is knowledgeable about the sector and committed to reforming the sector through the PIA. The idea of the President making himself the minister should be discontinued for transparency and accountability.
There have been issues around fiscal consolidation to boost government’s low revenue, what is your recommendation?
There is a need to reform the tax regime to ensure efficiency in tax administration, reduce tax evasion and tax avoidance and eliminate multiple taxation. The elimination of fuel subsidy will save an estimated N7tn annually and the elimination of foreign exchange subsidy will unlock a minimum of N3tn revenue annually from the sale of CBN forex at the official foreign exchange window. There is a need to unlock more income from revenue generating agencies through enhanced efficiency of their operations. We need to initiate budget reforms to ensure fiscal discipline, curb budget padding, curb duplication of projects and review the service wide votes to ensure transparency. The next president should ensure value for money in government expenditure and procurement, commit to reduction in the cost of governance and optimise the utilisation of national assets to unlock liquidity.
How can the incoming administration transform the agricultural sector for maximum returns given its potential?
The policy on agriculture must be holistic, focusing on the entire value chain. Due attention must be given to cost and availability of inputs, production and productivity, application of technology, processing and storage, logistics and marketing. There is an urgent need to transit from subsistence farming to mechanised and commercial agriculture driven by technology. We need to attract the youths into agriculture as the current farming population is rapidly ageing, but this will only happen if the sector is technology driven. Then, we need to strengthen the linkage between agriculture and industry within a sustainable backward integration framework. Agriculture policy should cover activities in crop production, poultry, livestock and forestry. There is a tendency among policy makers to focus disproportionately on crop farming to the neglect of other segments of agriculture.
By virtue of the constitution amendment bills the President signed into law a week ago, states are now empowered to legislate on and control railways, prisons and the power sector, what are your thoughts on this?
Power devolution to states is a welcome development. It marks an incremental shift towards true federalism and it is good for overall national development. It is also good for healthy competition among the sub-nationals. There are huge investment opportunities in the power sector as well as rail transport development in the states, so they can source for funds from investors if bankable project concepts can be developed. I am also aware that there is a proposal by the Revenue Mobilisation Allocation and Fiscal Commission to review the revenue allocation formula. This will strengthen the capacity of the sub-nationals to take on more responsibilities. Nigerians should ensure that in the spirit of true federalism, with more resources and powers devolved to the sub nationals, the states need to be held more accountable. Citizens are generally not subjecting the sub-nationals to quality and rigorous scrutiny, whereas there are series of interrogation of the Federal Government budgets. But in states, there is very little transparency around their finances.
