Trump’s low interest rate policy may not aid FDI flow to Nigeria, emerging markets
February 3, 2025405 views0 comments
Marcel Okeke is a practising economist and consultant in Business Strategy & Sustainability. His experience and sound analysis of the Nigerian and global markets have propelled him to the top of his field, cementing his reputation as a trusted authority on economic matters.
In an interview with Business A.M’s BAMIDELE FAMOOFO and ONOME AMUGE, the former chief economist of Zenith Bank Plc discussed domestic economic issues as well as the impact of geopolitical tensions on the global market. EXCERPTS:
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Some analysts have recommended that the CBN halt further monetary policy tightening and interest rate hikes. Do you foresee any unintended consequences or risks associated with this proposed policy change, and if so, what specific measures would you suggest mitigating these risks?
The CBN says it has been raising the monetary policy rate consistently as a way of fighting inflation. The big question is, how far or what result has this fighting achieved in the past over one year? Interest rates had been skyrocketing. As we speak, it ended the year (2024) at 34.80 per cent.
However, it has caused a lot of problems in the economy. So much so that many small and medium-scale businesses were not able to access credit anymore because of the level of interest rates in the economy. The MPR dictates interest rate, and so once the CBN raises it, banks respond by raising their interest rate.
What I recommend is that they start going down gradually. It is not only monetary policies that could be applied to kick start the economy or to achieve growth and development in the economy. The CBN must do everything to harmonise its policies with the fiscal policies. It shouldn’t be deluded into believing that it is going to fight inflation by merely hiking interest rates. Inflation is a product of so many factors and many of them are beyond the control of the CBN. The CBN is not going to achieve much by raising interest rates continuously and that’s what we have seen in the past year or so. It makes sense for the CBN to give up raising the MPR further. This time around, it has to look at some other monetary policy instruments to apply and then collaborate and cooperate with the fiscal authorities in trying to achieve some of these objectives.
You mentioned that some other monetary policy instruments are there for the CBN to use to curb inflation and to make sure that the rates also come down. Which other policies, apart from tightening, do you think or do you propose CBN use to achieve this goal?
Well, I am looking at what the CBN normally gives as reasons for that monetary policy or monetary tightening. It says it is fighting inflation. So let us look at the factors that cause or drive inflation. A part of it is what we call imported inflation which comes by way of the exchange rate. Because of the high exchange rate, people deploy so much naira to procure the dollar to import. Of course, our economy is largely import-dependent. So when they spend so much naira to procure so many dollars to import raw materials, machinery and other inputs. Then, when you come here locally, you have poor infrastructure. If you want to move around anything you have produced, it practically costs you an arm and a leg in terms of transport costs because of fuel subsidy removal and this impacts the cost of transportation. Then you talk about energy in terms of how you power your system and you know, tariff has been removed from all of this, so everything is sky high. As it stands, the CBN cannot use monetary policy instruments alone to fight inflation. It now means it has to be creative in terms of how to not only stabilise the exchange rate but also strengthen the naira. Once the naira is strengthened, it means you don’t have to deploy so many volumes of naira to get so little of the dollar. That will also reflect in the cost of operation and cost of or price of your final product. By doing so, what I’m saying is that CBN should be creative enough to find ways of increasing the supply of Forex to the market. That also means it has to find ways of increasing the inflow of foreign exchange. On the other hand, the government should seriously face the issue of infrastructure to address the challenges hindering local manufacturing and related productions.
The government needs to do everything to see that, rather than depending on the importation of PMS, we should have functional local refineries that are not only viable but are doing well. But you and I know the controversy that is going around the issue of local refining and all that. That’s an area the government should do everything to ensure that as much as possible, we minimise the volume or fraction of local need of PMS that is imported. The more we refine those things locally here, the better for this economy.
When you put all these in totality, you can now see that, instead of CBN manipulating only some of these variables to fight inflation, these things when all of them are put together, will bring inflation down. Another major element that drives the inflation we are talking about is food. If there is a blueprint, it means that the major element, which is food insecurity, has to be tackled head-on, and the CBN through whatever policies has to be encouraged. I’m not saying you should go back to the Anchor Borrowers’ Scheme, but it can, and should come up with something that will encourage farmers. This policy of waiving tariffs and all that for the government to start importing is not a solution to food insecurity. It is a very temporary phenomenon that would even have a lot of negative impact. The truth is that once we have improved the supply (local production) of food here, it is going to bring down that food inflation component of the consumer price index. Once all this happens, it will no longer be the CBN doing the Yeoman job with the monetary policy rate. So somehow, the CBN should be encouraging all of these things I have mentioned and in the medium to long term, the tail-end objective of driving down inflation and stabilising the macro economy will be attended to a very large extent.
One of the measures you mentioned talked about increasing local refining of PMS and it is widely believed that unless the government does something significant about the fuel price, we may not get anywhere in this country, because almost everything we do here depends on energy. Dangote refinery has commenced operations and the government has announced that two local refineries, one in Warri, and one in Port Harcourt are also functional. Despite these developments, Nigerians have not seen any significant change. What do you think is wrong or what do you think should be done differently?
Economic outcomes are products of policies. In other words, the results we are getting are policy-driven. As it is now, how many of these refineries are working, and the ones the government told us are now refurbished and are working, are they working, and to what level of installed capacity? Also, whatever Dangote refinery is doing or not doing is usually in response to existing policies. Since the Dangote refinery has been allowed to be connected to the international community, they are established in the export processing zone and can decide to operate as a local concern or to operate as a global concern. Unfortunately, the Nigerian government that is supposed to be supplying the Dangote refinery with the crude oil here in naira is not doing that effectively. So, Dangote refinery is compelled to now be importing crude. Once that happens, it distorts whatever plan it has to feed the local market and so, is responding to the realities of the time.
We have entered the Trump era part two. So once the man moved in, he made a statement that the US should do everything to have more crude produced and then that OPEC must bring down its price. Let us hope that with Trump’s pronouncement, the price of oil will come down. But you know it is a hydro-headed challenge for Nigeria. If the price of oil goes down, we have a problem. If it goes up, we have a challenge. Dangote refinery responded to the going up. Now that it is likely coming down, Dangote refinery will respond to it and come down accordingly. All those things are variables that are beyond the control of Nigeria and the Nigerian government. Meanwhile, the Nigerian government has pegged this year’s budget at $75 per barrel of crude. So supposing it goes below that, it becomes another challenge.
If Dangote refinery could go through all the intrigues, through the sabotage that is alleged for it to even come into operation, who else in Nigeria that runs a refinery could go through that kind of challenge and situation? It has become scary that even investors who are there somehow become afraid because of what Dangote went through. Dangote refinery is alive because it enjoys dual citizenship. It is a local company that is also operating as a foreign company. Now if you’re talking about modular refineries that are purely local companies, can they go through what Dangote went through and survive? Currently, there are about 10 to 11 of them (modular refineries) existing in various places. But how many of them are producing? How many of them are working? At the end of the day, it’s left for the government to use policy to drive these things to start working and in the best interest of the economy in the long term that they work, so that we detach ourselves from the vicissitudes of oil pricing.
The other leg of it is that so much of the crude oil being produced here has been mortgaged. They have been sold upfront and used to raise loans and all that. I mean, that’s an obvious fact. So because of that, NNPC is also constrained in terms of the volume and quality of crude oil it can supply to these local refineries. At the end of the day, is it not the government that mortgaged these things? So it is still within the purview of government to see what it can do to detach us from such entanglement.
Let’s look at the government’s tax reform. Tax reform is going on, and there’s a lot of restructuring in that aspect because the government is looking for revenue from other sources other than oil. How does this impact investment inflow into the country? How does it impact job creation as well?
When they talk about the tax bills, I don’t want to dismiss them as punitive, but my recommendation is that the government should seriously focus on tax administration, efficiency in tax administration and expanding the tax net. What that means is that there have always been a lot of leakages (a lot of fraudulent activities) when it comes to tax administration, and I believe one of the tax bills before the National Assembly is meant to address that. In that regard, yes, I’m an advocate for tax reform, but let it not be a hypothetical thing. At the end of the day, it is still the same Nigerians who are soaked in frustration that are going to implement these things. We have to purge ourselves of that tendency to defraud or mess up any arrangement put into place. So, if the government goes into making efficient tax administration, that will go a long way so that the leakages are taken care of and we get more money. There is also a lot of tax avoidance and evasion within the system. People do all kinds of things to either evade tax or minimise what they are going to pay. The government should focus on that and bring so many people who are even today hiding in the informal sector into the formal net. I want to believe that those are the intentions of those bills. So it’s not going to be punitive in any way. It’s not going to constrain business. If what I’m saying now is the entailments of those tax bills, and the human beings who are going to implement them, purge themselves of the poison of corruption that has been hindering the processes over the years. So these are the issues. It is one thing to say we want to reform. If you reform on paper, have you reformed the human beings who are going to implement these things? That’s where the government should pay more attention to. But I fear that as long as it’s the same people who are going to implement this thing that’s on paper (a very good document), we are not likely to achieve the intended objective.
There is also harmonisation of taxes within those bills. It means that when they are harmonised, the multiplicity of taxes we are talking about will drastically reduce. When they are reduced, you won’t have businesses being taxed, levied here and there by local government, by communities and so on. If all that works out as intended, it will be for the good of the economy in the short to long term.
There are speculations of Trump maintaining a loose monetary policy, which could lead to lower interest rates. What does the U.S. decision to cut rates to break down inflation hold for emerging markets like Nigeria?
Nigeria is part of the global village and every country competes against the rest of the world. So, if the U.S. brings down the interest rate, what that signals is that investors are likely to move to other emerging or frontier markets where the interest rate is higher like here in Nigeria. The foreign reserves that the government has been parading here in recent times as having gone up is a product of that kind of situation because one of the gains of the increase in MPR in Nigeria is this high interest rate we are talking about. As I said earlier, the world is a global village, so both foreign and local investors have seen that, and the CBN has packaged government securities. That is why we have had a huge inflow of foreign portfolio investment. So, people who have money across the globe have been coming here to explore and exploit this high level of returns, or high level of interest rate. That is one leg of it. But the other leg is that you won’t get foreign direct investment because of the bad situation on the ground. Many of the foreign portfolio investments which we have been drawing now are what we call ‘hot money’, meaning that those people who are bringing the money here, are majorly ‘short-termists’. The interest rate coming down in the US may not necessarily translate into improvement of anything for countries like Nigeria and others. Not directly. Maybe indirectly and maybe over time, and depending on the level of the drop in the US rates.
The IMF and the World Bank recently projected growth rates for Nigeria’s economy in 2025 at 3.2% and 3.6%, respectively. What specific economic sectors or industries do you believe will be driving this growth and how do you expect the Nigerian government to approach economic policymaking in 2025?
When you decompose the GDP report that was recently released, you see that Services account for a huge chunk, but our main problem here is food scarcity. So if I’m in a leadership position, what I will do is to come up with initiatives that bring agriculture to the front burner. Agriculture needs holistic attention and a blueprint. You are talking about mechanisation, you are talking about incentivising human beings, especially younger elements to go into agriculture. Agriculture is a place to go to achieve the kind of growth we are talking about. Manufacturing is another place to go so that we minimise our importation propensity and have local substitutes and alternatives for many of the things that we are importing. So, I would recommend that we focus our attention on agriculture and manufacturing.
The manufacturers have been crying for quite some time now, especially because of this high interest rate. Many of them could no longer access credit in the volume and quantity that they would have gotten. If you look at the financial results they have been churning out in the past one or two years, there has been a downturn in returns. That is why some of them have been opting to leave the Nigerian economy. So, the government should do everything possible to reverse that kind of situation by encouraging manufacturing and agriculture. The ICT sector should also be encouraged as well because it is an enabler to whatever you are doing. You need ICT enablement to become more efficient and effective. However, the traction of all these is insecurity. Once it is there at the base, a lot of things will not work. People have to be alive to do whatever they want to do.
Trump has directed the U.S. to increase its oil production. What this implies is that countries like Nigeria that want to sell their crude to the U.S. will not find the U.S. market favourable, while prices in the international market drop. In the Nigerian oil sector, we have local oil firms like Renaissance Africa Energy, Oando, Seplat etc buying the assets of multinationals that are leaving the country. How do you think Trump’s policy on oil production will affect the local operators?
Oil also known as hydrocarbon business is a global concern. The US is a major oil producer. With Trump’s directive, if the US goes ahead to produce so much and then even stops the importation of crude completely, it means Nigeria will lose a part of its market. What that will do in the global arena is to bring down the price of crude. What OPEC and OPEC+ have been doing is finding a way to suppress or curtail supply in price management. If Trump jumps in now and gets the market stuffed, the price will come down, and if the price comes down, the cost of production of oil refineries here in Nigeria will also come down. But it remains to say, to what extent that comes out. Our budget for this year is couched on the assumption of $75 per barrel and the price of our Brent crude is now hovering around $80. It exceeded $80 per barrel at one point but because of Trump’s pronouncement among other issues, it has come down and is hanging between 78 to 80 dollars per barrel. So, it is not a straight-line projection. Trump himself, knowing who he is, might change his mind tomorrow. But if we follow the scenario of the US producing more, certainly the price will come down and the price coming down has a lot of implications. We may not begin to panic, because it might not go down below $75 which is our assumption in our budget. But if it goes down below that, we already have a challenge of borrowing and the borrowing spree will go on. But also, thank God that the tax bills are likely to scale through. And if they do, it also means that much more revenue could be generated internally. So these are the things to work out over time. It is not a question of panicking, but to have scenarios. In economics, you have to do scenario planning, because you are dealing with human beings, and you deal with so many variables.
Okonjo Iweala raised a concern that there is going to be a crack in between countries based on what the US is saying regarding its protectionist trade policy. She also warned against counter-tariffs as witnessed in the 1930s, noting that it could cause a worse catastrophe than the one recorded during the Great Depression era. Do you share her sentiment?
I share her worry because, in President Donald Trump’s first statement, he had to mention some countries that he is going to fight with the tariffs including China, Canada, Mexico and others. And he was saying if they want to deal with the US, they should come to the US and set up their companies, but as long as they are producing somewhere else and bringing it in, he is going to hike the tariff. That is him (Trump) saying that in the interest of the US alone this means unilateralism and nationalism as opposed to globalisation and multilateralism. So if the US does that, there will be retaliation by those countries and it will result in tariff war. And you know what is normally said: “When two big elephants fight the grass suffers.” Nigeria and other developing countries constitute the grass because these major economies are their major trading partners, and so whatever happens in them or to them, will affect the rest of the world, including Nigeria. What the US is saying will apply to the rest of the countries, whether you are importing or exporting to certain degrees. When that happens so suddenly like this and so unexpectedly, it will not be for the good of the economy.
The equities market in Nigeria has performed very well in the last two years. Last year, about 37% of returns year to date were recorded. It was ranked as one of the best in Sub-Saharan Africa. What are the drivers? Do you see this continuing in 2025?
Well, it is still part of what I was saying before. People want to play in the capital market rather than going out to put their money into setting up structures in terms of operating the productive sector, like going into agriculture or going to manufacturing. For example, the banks are now going through capital raising. Some shrewd investors would rather put their money in the banks. Because one thing I do tell people is that, as far as banks are concerned, no matter the state of the economy, there must be banking and they must be thriving because the lifeblood of our existence is money. You can’t do without money. So investors will be investing in the banks. The other one is the government securities we are talking about. So rather than coming to foreign direct investment. They patronise government securities. That’s part of the market timing. And then, many companies, instead of going to the bank to borrow because of the high interest rate, will rather take the route of raising equity through the market. When you put these things together, you can now see that it is this sentiment that is driving the market and opportunities in it. Because even if the CBN doesn’t raise the MPR, it is already high at 27.5 per cent. When the banks factor in the cost of funds and everything they are doing, you see that their interest rate goes over 30 per cent. So if you are a business or in business, are you going to borrow at that level? Are you going to make returns? Are you going to be profitable when you factor in so many other things? So, in trying to get new money for you to operate, you could decide to go through the stock market. Many organisations have decided to do that, and many are not quoted, in defence of what we are saying, have decided to get quoted, so you have new issues. That is a cheaper and easier route to getting money than the other side. It is all these things that will be driving the market. The market will keep doing well if no other government policy disrupts it.
What’s your projection for the Nigerian economy in 2025, and to what extent do you think that the recent market economic force is present, has contributed or will be contributing to the long-term economic stability?
I wrote about this in a widely publicised titled 2025 Economy: A Leap into the Dark for Nigeria.
Let’s start with the economic plan for this year. The economic plan of the government every year is a budget. As we speak, there is no budget. This month is gone and there is no budget. It is easy to say that you are rolling over last year’s budget. But the truth is that the assumptions of the parliament or the conditions under which you produced the budget for 2024 are not the same things as the assumptions and conditions that we have today.
Then, if you come to this year’s budget, do you know that the Fiscal Responsibility Act 2007 says that the budget for the next year must be brought before the National Assembly not later than September 30th of the year, meaning that the budget for 2025 ought to have been submitted to National Assembly not later than September last year. But when was it presented? On the 18th of December 2024, meaning exactly two weeks to the end of the year. So what time has the National Assembly to now do their legislative oversight and consideration of the budget? They are still at it now and you are hearing all kinds of stories. This means that when they will be through is indeterminate. You don’t know when they are going to be through with the budget. And so there is no plan for this year in existence yet. That’s on one hand. The other hand is for us to now discuss the budget itself that will guide government actions.
Then you come to the assumption. Do you know the government says that the prevailing inflation rate this year will be 15 per cent? That was what it assumed in the budget. How do you move from 35 per cent which ended in 2024 to 15 per cent? The government did not explain or enlighten us on how this is going to happen. With that, you can say that the budget is unrealistic. The volume of oil is another variable. The government is assuming in the budget that it is going to be producing 2.06 million barrels per day. When you look at the historical record, at no time has it produced that in recent years. It ended the year at 1.45 million barrels per day, which was a significant improvement. You keep getting these figures. If OPEC gives its figure now, it is even below that. But when they give you locally here, whether, including condensate or not, you can see, it becomes a self-idolatry kind of thing that they are doing well. But when you look at the environment of the oil production in Nigeria, you see it is carrying a lot of challenges.
The insecurity we are talking about is more in the production zones, including oil theft, organised sabotage and vandalism being visited on facilities and assets of these oil companies, which accounts for why some of the International Oil Companies (IOCs)are leaving. It has become an existential threat to some of them. And so in line with their energy transition, they rather leave Nigeria on land, at least to move offshore. When you look at all this in totality, how will you jump from this 1.5 to two to over two million barrels per day within the question of weeks or months? It is unrealistic. And even if there have been new investments, investment has a time lag. It is not something you put in today and get the output in the next month.
So when you look at all these things and these assumptions in the budget, you can now see it is neither here nor there. So what do you hold on to? Even the tax bill we are talking about is still in the National Assembly. If and when it is approved by the National Assembly, when will it take effect? Nobody knows yet, and all those things will determine what happens this year or what does not happen. So, all these things being considered, I will say we have to live on hope. We’re hoping that the insecurity situation goes down. Because the government said it is doing something in that regard. The government is also doing something to deal with the oil theft and insecurity. All these things are ongoing. So if they achieve something substantial in addressing the situation within the year, things will begin to work out better.
Let me also warn at this point that what is called rebasing of GDP that they want to do quickly and come up with figures, maybe within February or end of January, let it not be just to have figures that will sound nice. The situation on the ground in terms of hunger and anger is terrible. Nobody is immune. People are suffering, and that’s why the government has been (sorry to say) the government of palliatives. The palliative means that the government has seen that people are suffering. It means that it sees that some of his policies are failing. It means that there are a lot of unintended consequences. It means that it is doing things to find ways of saving people’s lives in the face of the reality of its policies. And palliatives at the end of the day are crumbs.
It doesn’t go anywhere. Moreso, when it is politicised, whatever you are sending to the States or sub-national ends up being shared as political patronage and goes to party members who are not necessarily the intended target, especially in this economy where we don’t have reliable data.
Look at the issue of the unemployment rate the government had to adopt a new methodology. It now says rather than the thing that was headed toward 40 per cent, especially youth unemployment, that it has come down to four or five per cent. Has it removed the problem of youth unemployment? You have millions of people coming out of school without jobs, and that has led to the ‘japa’ phenomenon. They are going out in droves, running away. Millions of them are coming out, and there are no jobs. So, to have this escapist approach of finding a new method to bring down the figure doesn’t work. “Yes, we did rebase in 2014 and became the largest economy in Africa 10 years later, in 2024 let us rebase it again so that we begin to answer the largest economy in Africa” That is self-deceit and self-adulation. The reality is that the economy is bad. And if it is bad, do something to make it productive and bring it back to work. When it starts working well, we will all see and know. We will all feel it.
That is why talking about GDP and all that, the major thing is the Human Development Index (HDI). So when HDI starts to get all right, we will all know. We will all feel it. Let’s forget the photo thing of statistics.