Mr. Johnson Chukwu is the Managing Director of Cowry Assets Management Limited. In this interview with our correspondent in Lagos bares his mind on post-election Nigeria, planned increase of the Value Added Tax, Cut in MPR by 5o basis point by the MPC, Treasury Single Account and so much more. Excerpt;
Post-election Nigeria, can you tell us what the economy is like now that the elections are over?
The economy in terms of investor confidence when we say that political intrigues have to some extent been addressed, one of the concerns that the investing public had before the election was whether Nigeria was going to conduct a successful election or whether the election was going to lead to a political crisis. One can comfortably say now that there is not going to be post-election political crisis. So, on that note, one would say that some of the concerns in the political environment have been addressed.
The second factor in terms of policy environment, it is safe to say that the policy environment is still relatively uncertain. We should expect the government to dissolve the cabinet in the near future, probably around the end of the first term of the government and to reconstitute the cabinet. It is when the new cabinet is considered can investors begin to have ideas about what the policies of the government would look like. So, in terms of policy environment, one would say that we are still uncertain about the economic decisions the government will take as a result of the conclusion of the election or inauguration of the new government. So, that one is still an uncertain quantity but in terms of political risks, one would say that that has to a great extent regulated after the conclusion of the national election.
Some persons have gone to the tribunal to contest the outcome of the elections, Atiku Abubakar inclusive. What impact will these cases pending before the tribunal have on the economy as it is as many believed that investors would still be skeptical about the outcome of the tribunal especially as it affects presidential election?
What I think would happen is that the outcome of the cases at the tribunal should be the court implying the change of government, that is when we should talk of the effect on the economic environment. The simple reason is that currently, we are dealing with the continuation of an existing government, so, one could at best say that one is not expecting any major change as it stands today because it is the same government, the same economic philosophy. But achieve certainty will be after the inauguration of the new cabinet, you now see the orientation of those who were brought into the government after the expiration of this current tenure.
But the fact that they are in court, because we are dealing with an existing government which is continuing should not cause any major panic, in fact even if the court judgement comes and the court judgement is against the current government, it will not create panic because at least, we have gone through an election and the election is where the concerns were. Whatever is the outcome of the legal contest whether it is in favour or against the current government, I don’t expect it to lead to any major political upheaval.
You told me in one of your interviews with me that we should expect governance in this country this as from the third quarter of this year owing to the fact that politics will dominate the affairs of the country. Are you still maintaining that position or are you shifting from that now that elections have come and gone?
We have dealt with the first quarter, first quarter was actually an electioneering period, elections and then we are now going into the second quarter, tribunal will start sitting in the second quarter. Depending on the outcome of the tribunal, we will still see some level of uncertainty. And then, beyond the tribunal sitting, it also has to do with the dissolution of the current cabinet at the state and federal levels and appointment of the new members of the state and federal executive councils and then, we also know that political actors will be hustling for political appointments at the conclusion of the election which we think is already going on now.
So, the president and the Governors-elect will now have their energy and attentions channeled on who to appoint. We are also seeing a lot of hustling and horse trading going on in the national assembly for those who want to occupy leadership positions in the national assembly. These are factors that are going to engage the attention of the political leaders and take them away from the economic management and we know that the inauguration of the national assembly will be in June, so, clearly, the hustling and the horse trading will continue up till the end of May. When the leadership of the national assembly will be elected in June, then you are almost talking about the end of the second quarter, remember that the second quarter ends in June. I mean, it is when the NASS is inaugurated that the president can send the list of Ministers and the Governors will send the list of Commissioners. So, the earliest the list will come up will be in June before they are appraised and approved by different legislative houses, I mean for the federal executive council, the senate, for the states, the state house of assembly, will be by the end of June.
So, inauguration and resumption of duty will be earliest July or late June. So, you can always agree with me that the second quarter would have passed. Then they need to come up with their own policies and you could possibly witness a situation where they will also seek for supplementary budget or for the review of the budget. So, that would have taken up to the third quarter of this year. Policy formulation before we start implementation will take almost a whole of third quarter. So, in effect, governance will start at the earliest, towards the end of the third quarter or early part of the fourth quarter.
We are in the second quarter and the national budget is not yet ready. Is there the possibility of the present national assembly passing the budget before the end of their tenure?
Well, they can pass it possibly before the end of their tenure depending on the back and forth movement that we will see. But in any case, even if they pass it before the end of the 8th assembly, you will be talking of towards the tail end of their tenure. But even if they passed it, I don’t expect any serious implementation by Ministers who will be leaving on the 29th of May. So, even if the budget is passed towards the end of this month and assuming that the President signs it into lawn and he has no objection to whatever they passed, then, implementation will actually be by the next cabinet. So, head or tail, budget implementation this will start by the third quarter of this year.
Buhari has mooted the idea of reversing the Nigeria budget cycle from what is obtainable now to start from January to December each. How can this be possible?
There is nothing that impossible if they set their mind on it but we have dealt with these promises from the time of Obasanjo when we passed the Fiscal Responsibility Act but it has been observed in abeyance. So, until they implement it, then we will now know the budget will now run from January to December. I mean, if we can run a budget that starts from June, that the President start implementation by June, we can also reverse that and go back and start from January, all we just need is start the process much earlier than we do and hope that the level of engagement at the point of generating the input in the budget is higher so that the national assembly members will have to lobby for whatever project that they want to lobby from the executive so that it comes from the executive during budget presentation and not the national assembly members inputing their own items into the budget.
So, the key thing is that there must be high level of engagement. I hope that by the time the members of the national assembly leadership is elected into office, that there is a rapport between the national assembly and the executive unlike what we used to have in the past when the national assembly was actually the opposition party.
Late last month, we were greeted with the plans by the federal government to initiate a 50% increment in VAT to fund the new minimum, a development which many well-meaning Nigerians including the former Lagos State Governor, Bola, Tinubu have kicked against. What is your take on this planned increment in VAT?
In the first place, we have to look at the fact that the comment was made by the Chairman of the Federal Inland Revenue Service and that comment was not a categorical statement. It was an indication that he was making a suggestion. It is the Minister that can vary the VAT rate according to the VAT Act but I think that before that will even happen, because VAT as it stands today was contained in the enabling law, so I want to believe that they have to go to the national assembly for a change in VAT rate.
But should the government want to take that route, a couple of things will happen. One, it will help government bolster its tax revenue because the Value Added Tax is the easiest tax to collect but aside from that, on the flip side, it could reduce the level of consumption because I will increase the cost of goods and services and therefore reduce the level of aggregate consumption and cut off the aggregate demand which will further slowdown the rate of economic recovery or economic growth. So, it has a dampening effect on the level of productive activity because it will reduce the level of aggregate demand. But on the positive side of it, it has the potential of increasing the government revenue and helping the government moderate its deficit.
Looking at the recent reduction in the MPR by the Central Bank of Nigeria, what do you make of it and what impact will it have on the economy as a whole?
The reality of the Nigerian economy is that there is a disconnect between the Monetary Policy Rate and the Economic Growth Rate. The simple reason is because the transition channel on which monetary policy rate works on in the economy is weakened because they don’t have consumer credit. So, if we are expecting that that will lead to massive improvement in consumer credit which will lead to higher level of consumption which will in turn lead to higher level of productive activities, it doesn’t really…
But what the Monetary Policy Committee has done is to send a clear message; they have sent a message on the policy orientation of the monetary authorities to say that we are shifting from contractionary monetary policy to expansionary or accommodative monetary policy, even if the outcome is at the expense of the increase in the inflation rate. So, once you have that position, clearly, it gives economic managers or economic agents an indication that the government will be pushing for lower cost of fund and that they are ready to support the real sector. So, you will see that the shift in policy orientation or policy direction will have a positive effect and it gives some level of confidence in economic agents that right now, the monetary authorities are pushing for lower cost of fund even if that is not likely achieved.
Would that translate to the lending rate of the commercial banks tilting downwards?
It may not necessarily but it will lead to banks trying to rebrand their deposit base to push for lower interest rates and deposits. Then for large ticket borrowers, those who have strong bargaining powers, they could also renegotiate their borrowing rate but for the Small and Medium scale entrepreneurs who have very weak bargaining powers, they may not still get lower rate unless there is a general drop in the interest rate in the economy and for that to happen, then government borrowing must come down so that the bank will have excess liquidity. That is the only thing that will compel bank to consider soft prime credit. But as long as government’s borrowing is still quite high, I do not see how that drop in MPR of 50 basis points will have material effect on lending to the small and medium scale entrepreneurs.
Do you believe that the TSA policy of the federal government was responsible for the commercial banks’ inability to have available funds to lend to the business community?
You will not blame it squarely on the Treasury Single Account which has been there for the last four years or thereabout but we have to realize that look, the Treasury Single Account summed up the level of liquidity in the economy and overtly reduced the level of loanable funds available to the banks. But the other factor that constrained the banks from lending, one is the general high cost of doing business in the country. If you look at how a bank arrived at its all in wasted average cost of fund, it will add the direct cost of fund which is the deposit rate and add it up to overhead cost to arrive at what you call the All in Wasted Average Cost of fund. We call it All in WAC. It is the All in WAC that the bank must recover, so, that becomes its minimum cost of fund and it must pass it on to the consumers, the borrowers.
And then, you also have to look at the growth of the economy has been very sluggish, so, because of this sluggish growth of the economy and the high incidences of the non-performing loans which has gotten to more than 18%, so, the banks have to factor in the cost of delinquency in arriving at their All in Wasted lending rate and these are the factors the banks have to consider. There will be improvement in the level of risk in the economy if the economy is growing at a faster rate because economic operators will be able to generate more revenue and be able to do their obligations and that is where the level of the non-performing loans is going to decline and banks will increase their own lending.
So, there are several factors; porosity in the circulation of money, if borrowers are able to pay back their loan on time, the banks are able to recycle those funds to new borrowers but if the credit becomes sticky, the banks are not able to recover those money and lend to new borrowers. So, these are factors that are contributing to the slow growth of credit in the economy particularly to the private sector. If you cast you mind back, from the CBN figure as announced by the Central Bank Governor during the MPC meeting, he reported that credit growth to the economy was about 10.6% but the growth of credit to the public sector was more than 26% while the growth to the private sector was less than 15%. So, the growth we are seeing in credit must have been going to the public sector and therefore, we could actually say that the public sector dominated the…
So, are of the opinion that the money in the TSA account be returned to the commercial banks so that they can have loanable fund to the public?
It wouldn’t be a straight forward yes or no but I think we should continue to tweak with the model of the Single Treasury Account so that the funds are not completely stabilized, they are productive in the economy and there are several ways the funds can be made productive in the economy without necessarily having them sitting idle in the commercial banks and the government keeps paying interests on borrowing of its own money.
Finally sir, this CBN policy withdrawing access to FOREX to textile importers, what do you make of this policy?
The first question we should ask ourselves is do we have enough raw material? Are we self-sufficient? So, if we are not self-sufficient, I think that answers the question. Are we close to self-sufficient that the restriction of access to FOREX will easily compel businesses to right now start production of raw material? The key thing is, do we have comparative advantage, what are the challenges we have been having in that sector.
I know that the government has provided lots of soft credits to operators in that sector and it doesn’t seems to have make any material gain in the fortunes of that sector. We need to address holistically, the challenges we are having so that we will have an idea of how to solve their problem. It may just go beyond restriction of access to FOREX because you realize that even if you restrict access to official window of the Foreign Exchange market, they will still be able to access FOREX from the parallel market and they will still land at cost that are above the production cost of the local manufacturers.
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