-
Renowned Economist, Dr. BIODUN ADEDIPE
Dr. Biodun Adedipe is a renowned economist. He was the keynote speaker at the recently held Real Estate Outlook 2024, an annual seminar organised by Wemabod, a topmost real estate company in Nigeria. He is the founder and Chief Consultant of B. Adedipe Associates Limited.
Adedipe prides in his over 4 decades of post-graduate work and professional experience that cuts across university teaching, investment building, project finance, management and financial consulting. He has served in various capacities in government, including Member of the Presidential Committee on Experts on the Redenomination of Naira (November, 2008), Member of the Federal Government Communities of Experts on Expenditure Review (October, 2010 to March, 2011) and Special Special Assistant to the President (Financial Sector Development) in the Office of the Chief Economic Adviser (2011).
The highly experienced and well vast Adedipe gave a top-notch presentation that was very thought provoking at the seminar looking at the theme: “Navigating Volatility in the Real Estate Market: Opportunities and Threats”. He therefore went further to dissect the reason why naira is losing its value day by day as he advised President Bola Tinubu on what his administration needs to do to salvage the situation which has put the entire country in hardship. Below are excerpts:
Fuel subsidy removal, for me, is not debatable because spending 10.7 billion dollars annually to pay for a subsidy that you are not even sure about where it goes to. Of course, in conceptual economics, there is nothing wrong with subsidies. But subsidy that doesn’t incentivize production, obviously is to be misdirected. A subsidy scheme where there are leakages points to the fact that the benefits are not getting to the target beneficiaries. So that needed to be dealt with.
But when it comes to the exchange rates unification, in my own position as a professional economist and with every sense of responsibility, I don’t think that is the way Nigeria should go. And my reason is very simple. I have been privileged to intervene in policy advocacy on exchange rate management in Nigeria for close to 25 years now. And I remember vividly sounding a note of warning to the management of the Central Bank of Nigeria in November, 2002. This is the 22nd year after the note of warning. I said that when you look at our data right from independence up until November, 2002, the warning I sounded to the Central Bank was that 3 major prices that are central to economic planning in the world are Inflation rate, exchange rate and interest rate. And I said looking at the data clearly, there was a particular one among them that everything in Nigeria reacts to. And it was very easy to pick out the exchange rate.
When we unified the exchange rate in June, 2023, I saw it as ill-advised and I made that very clear because data and historical occasions have proven one thing. One, that Nigeria is an import dependent economy. That’s the truth of it. Some analysts may tell you that we are not even importing enough relative to our population and relative to our GDP. That is a matter of playing with numbers because any ratio we talk about is playing 2 things against each other; the numerator and the denominator. If any of them changes, the ratio will change. And Comparing ratios can be misleading. If you compare Ghana with Nigeria, you are looking for bases that are bigger in Nigeria. And if the top is bigger than the top in Ghana, but the relative terms is smaller, you will assume that Nigeria is not importing enough. For me and let me stay with those in academics, we call it dubious analysis. That is working from answer back to the question instead of question to the answer.
The reality is there are different factors that move the exchange rate. Then we begin to ask ourselves, where is the place of those factors today in Nigeria? Now also we look at the big place of external reserves. And we interrogate them and ask how much do we have in our pockets? When you allow market forces, the intermingling of demand and supply, which is just one of the many factors that move the exchange value of a currency to now be a matter of will buy, will sell, what we would largely get is perennial loss of value by the local policy. Why I said that is very simple, the currency of any country plays 4 basic roles; use money to make purchases, use money to pay expenses, use money to insure security, and we also invest money.
When you look at our economy today, unfortunately naira is a legal tender but we have dollarized the economy in such a way that the US dollar plays far beyond the 4 traditional roles of money. So now we not only use Dollars in making purchase or pricing assets, we also use it now as an edge. But as an edge, it’s also playing several different roles; edge against inflation, edge against the exchange value of the Naira, and edge against insecurity. So, It has even gone beyond the 4 traditional roles money should play. Unfortunately it is playing that role in a jurisdiction that doesn’t belong to it.
I will always cite China as an example. When you check the external reserves of countries around the world, China is number 1. At the time China had over 3 Trillion Dollars as their external reserve, then they never floated their currency. The US doesn’t need big external reserves because we all use their currency for everything we do. Go and check the data. External reserves of the US are always between 160, 170, 180 billion Dollars to maybe 222 billion at the maximum. So they don’t need a deep pocket of external reserves because the rest of us in the world use the US dollars in international trade. And the aberration in Nigeria now, where we have Dollarized our economy. So for me, that is the big elephant in the room.
No doubt, our inflation rate is inching towards 30%. And we have projected that we will probably hit 33.4% at the end of the year. But unless we make some hard decisions.
Courage is what the President needs at this point in time to look at the particular policy that is not working and have enough courage to say we need to correct this. Governments all around the world make corrections to policies that are not working. If the outcome of a policy is giving you what you did not expect, you go back to it and conduct what we call regulatory impact analysis, RIA, which means that anytime you introduces a regulation and you observe that it is not producing right result you intended, you analyse the impact and then you make adjustments. I think it is time for us to adjust our policy on exchange rate management.
The question is if you don’t have sufficient reserves in your pocket to pay our import bills which according to data available is 1.88trillion Naira per month, 2.03billion Dollars that we need to pay for imports.
The other area I think policy needs to be corrected to deal with and this will affect prices of all commodities is reference exchange rate for continuity import duties. This year alone, and this is just February, the Central Bank has advised the Customs changes to that rate 4 times already. This is mid-February. So this means that for an import dependent economy where we keep marking up for import duties, you are adding more cost to anything imported. And whether you like it or not it will pass through to the final consumers. And that is what is creating the inflationary pressure and the heat we are feeling all over the place.
So, for me the Governor of the Central Bank of Nigeria has the most difficult job in the world. One of the factors that cause the exchange rate to move is what we call capital flows. Recent data shows that there is an upturn in capital flows in Nigeria. Of course, more money came into Nigeria but when you now compare it, you find out that 59% of the inflows is actually used. This means it is not as much as the preferred FDIs. And even the ones that can bail out in the time of emergency like this, portfolio investment is not so big in number. So that means there are still some things to change in our policy environment to make portfolio investments to come. And my own recommendation is that we need to fix the exchange rate officially within a defined band. If we continue with the present practice of floating the naira, we can see that it will float to the heavens.
