In this interview, Bismarck Rewane, a member of the Presidential Economic Advisory Council, and Managing Director/Chief Executive Officer, Financial Derivatives, projects that Nigeria will likely achieve a higher economic growth of 2.3 percent in 2020. He, however stressed that this growth projection is subject to how the authorities respond to three major factors. These factors he said include investors’ concern about the current trend of negative real interest rates, external sector vulnerabilities and infrastructure.
WHAT is your GDP growth rate projection for 2020?
We projected 2.0 percent for 2019 and 2.3 on the upside for 2020.
In your presentation at the Lagos Business School (LBS), you stated that trade protectionism (TP) measures can undermine economic growth in 2020. Were you referring to the ongoing border closure?
Border closure is just part of it. TP is when you have an import structure that will protect domestic output. So the border closure is just one of those things. If for any reason you have tariff on cars, import duties on certain things, then you are giving incentives to local industries to produce. That is part of interventionist and trade protectionist measures. But in the final analysis, you can only protect people to grow up to a particular point. If you continue protecting them, then they become inefficient and they begin to pass on those costs . Look at the example of Made in Nigeria cars. There is no made in Nigeria cars anyway, it is a joke, but we are paying 70 percent duty. When you buy a car for $20,000, you are paying about $18,000, out of which only $9,000 goes to the government, the other part goes to automobile association, which everybody just come together and we dont know what happens to it. Meanwhile there are more tokunbo cars imported into this country than any other. Even though all of those things are being reviewed now but that is what I call interventionist and protectionist policies but you can’t just dump all of them in one day. But obviously somebody will be looking at it one day to see whether it is achieving the desired impact.
Do you believe the impact of trade protectionism will outweigh the possible positive impact of improved credit conditions in 2020?
Not necessarily. We are looking for growth and as long as people are not investing, then growth will be constrained. And then you have to look at what are the constraints to growth, what are the constraints to investments? Then it becomes easier for you to achieve the desired objectives. So some of these policies will be reviewed, but generally 2020 will be a year in which we are going to be getting out of the bottom; even if we grow at 2.3 percent in 2020, it is a big leap even from 2.0 percent in 2019, because you are talking of a bigger economy. So when we talk about nine percent growth in small economies; growth is relative to your starting size. So it will be much better than the previous years. But it could be better; we could have done a better job. And we have to address some of those major constraints; we have to address them at one point or the other. But the fact that we are talking about it, it is a big leap because we never talk about it. We just say, “you know what, it will solve itself”, or that we could wish it away.
You opined that CBN will continue to defend the naira and that there will be more forex restrictions?
The objective will be to keep the naira stable initially as long as the external sector vulnerabilities are not too daunting. But if the external sector becomes too daunting, then they will have to look for alternative ways or you have to accept the reality that adjustments may be necessary. But at this point in time, it is premature to start talking about adjustments. So at this point in time, we envisage that there will be restrictions and administrative measures to intervene to keep the currency stable and predictable, at this time. However if the external sector vulnerabilities begin to increase, it may call for a review of that policy; because that cannot be a policy, that is a strategy, the policy goal is, if because of currency measures, growth begins to get impaired, because growth is the most important variable in the equation right now; if for example, growth is impeded, growth falls below the level we desire, then we would have no choice but to look at what are the constraints to growth and see how we can address them. But at the junction I will say the external sector activity will depend to a large extent on what happens to the price of oil, and what happens to inflation within Nigeria; because those are the two things that are driving exchange rate level. Inflation, the oil price can mask it for some time, but after a while, as long as inflation is high, then we may have to figure it out.
What should investors be most concerned or worried about in 2020?
All that they should be concerned about is the fact that we must have rate of interest that are not lower than the rate of inflation because if you go and get sucked into this low interest rate environment; For example, if I invest N100 now, if I invest in treasury bills, at the end of the year, I will get N104. But the inflation, the value of my N104 will be about, even after adding my interest; I will end up with N92 instead of N100. If I leave the naira alone under my mattress, I will be worth N88 at the end of the year. So investors after a while may manage that, but for all I care, because money serve two purposes; the first is as a medium of exchange for transactions, I want to buy your Vanguard, I give you N200, you give me your Vanguard, that is medium of transaction. But at the end of the day, the most important thing is that money serve as a store of value. The store of value characteristics of money is the opposite of inflation, once there is inflation, value erodes. So if I leave my money in naira and I invest it, and at the end of the year I end up less than where I started. That is investors. Manufacturers on the other hand will say, maybe it is cheap to borrow money, but after a while, they too will know that that rate of interest is artificial. So we have to resolve that contradiction. You can bring down interest rate, but you can’t bring it down from 14 percent to four percent in three months. Any such movement will lead to reaction which you will not be able to withstand and those reactions are building right now.
Apart from crude oil price, what do you consider will be the Game Changer for Nigeria’s economy in 2020?
Infrastructure, rail, roads, power; While you are not going to go from 3,000 MW to 10,000MW in a year, but by having a much more efficient structure, by reviving the Discos, you can easily bring a lot of the idle power which is stranded into the grid, by that you can increase productivity significantly. That is one. Two the rail transportation especially the rail to Apapa, it will immediately decongest Apapa, because the containers will be put on train instead of waiting to come on trailers. That will alter the economy of Apapa and the ports significantly. It will also alter residential logistics within Lagos. A lot of people will move to where you can catch the train to go and come, rather than going through traffic. So rail, power and to a large extent roads, completed roads. That is, the roads that can be completed, not the roads that are just going to be started. Anything that will increase productivity and output will push the economy in the right direction. Apart from that, yes, some of the structural problem will still remain because some of them have political implications. So I am not expecting any magic wand but these three things I have told you, cost effective tariffs, releasing idle power into the system is a game changer. So investors’ concern about negative rate of returns on interest, external sector vulnerabilities, which if they are mild, we would still maintain the current exchange rate structure but if they become intense, then we have to take another look at that whole thing again. But for now, at $52 per barrel, oil production at this level, we may be able to coast for some time. Generally speaking if we maintain the same trajectory and do these things our GDP growth will go to 2.3 percent and for the following year, it will go above 3.0 percent, and once we grow above 3.0 percent, our income per capital will begin to increase. So we are cautiously optimistic. – VANGUARD