As the Federal Government remains firm on the removal of oil subsidy, analysts hold divergent views on the proposed removal. The Managing Director, Meristem Wealth Management Limited, Mr. Sulaiman Adedokun, speaks with ADEMOLA ALAWIYE on this and other current issues in the financial market.Recently, the National Bureau of Statistics said that the inflation rate in the country rose to 10.3 per cent in September from 9.3 per cent in August. In your view, how can we address the problem of inflation and keep it at a single digit'The largest contributors to the rise in Consumer Price Index for the month of September were the high prices of electricity and food items. Globally, inflation targeting is addressed through the use of fiscal policies, majorly through tax and monetary tightening by adjusting interest rates. Given our lax tax environment and the percentage of unbanked cash in the economy, the ability of economic policy makers in curbing inflation is called to question. The transitory mechanism of the Monetary Policy Rate which is a major tool used in inflation targeting has been raised to 12 per cent and the negative correlation between rising interest rate and economic growth is well documented.In my opinion, inflation would yet soar high, as the proposed subsidy removal would fuel inflation. Curbing inflationary threats would include curtailing imported inflation by empowering local production of consumer goods, infrastructural developments, which would reduce the cost of power and seeking to bring more of the unbanked funds into the purview of the banking/financial system.For a while now, the Central Bank of Nigeria has been struggling to control the high demand of dollars. How do you think the excess dollar demand can be resolved'In answering that question, it is pertinent to identify the factors that engender such high demand in dollar. The combination of factors that will trigger dollar demand at any point in time differs. At present, some of the factors include the structural imbalance of the Nigerian economy with a high inelastic net-import position, high liquidity in the system that can give fillip to speculative activity, low real interest rate environment that lowers the attraction of Nigeria as an investment destination and exiting by those already in the country, the economic challenge in Europe and America that is making fund managers pull their funds out of emerging and frontier countries, among others.Having said that, the countrys high import dependence is an imbalance, whose solution lies in the medium to long term, and I think it should start from a reduction in our food import bill, which stands at N1.5tn per year. With the large expanse of arable land, I see no reason for Nigeria to be a net importer of food. A follow up to this is our high oil import, which I believe will be adequately addressed by an optimally functioning downstream sector that attains self-sufficiency in domestic refinery.Secondly, when liquidity in the system exceeds the support level of real or financial investment, the incentive to engage idle funds in speculative activities increase, such as round tripping. Hence, tightening the noose on liquidity might be a temporary solution but a more permanent step might be to stimulate real investment as well as deepen the financial system with numerous financial products into which idle funds can flow.While the economic challenge prevailing in Europe and America might be responsible for the fragile confidence in emerging and frontier markets on the basis of which funds are flowing out of these economies at present, the longer term strategy of attracting fund inflow into a country is to have relatively higher real interest rates, compared to other countries. Lastly, CBNs move of placing some of the reserves in the Chinese Yuan will necessarily reduce the demand for dollar for trades originated and consummated in China.The Monetary Policy Committee recently increased the Monetary Policy Rate, making it the sixth time this year that the MPR has been raised. Do you think it will address the various problems like inflation, high exchange rate, in the economy'Indeed, the key responsibility of the MPC remains the maintenance of stability of exchange rate, price level and stimulating economic growth. Fiscal activities of the government particularly in Nigeria will continue to fan the embers of inflation, and given the high import-dependent structure of the economy, the local currency will remain pressured. The key monetary tool available to the CBN is the MPR which it has obviously been using judiciously to some level with positive results. Take for example, inflation figure stood at a single digit (between 12.1 per cent in January, fell to 9.3 per cent in August just over a period) when the MPR was increased from 6.5 per cent to 12 per cent. However, based on the fact that there is a wide gap between monetary and fiscal measures and as long as the structural imbalances in the economy are not addressed, continuous and persistent hike in the MPR may not address the challenge of inflation and high exchange rate in the economy.How will the successive increases in the MPR affect investment tools, like bonds, shares and other investments'To this end, the implication of a contractive monetary policy will be felt by both equities and fixed income instruments. Bond holders prior to the increase in MPR will experience capital losses as bond prices are expected to decline as yield rises. From the performance at the FGN bond market a day after the MPR hike, bonds across all tenors witnessed a significant rise in yields in line with expectation. The tightening measure, on the other hand, also makes it attractive for new investors to purchase bonds because it is now trading at lower prices (higher yield).On the equities front, returns in recent times have not been attractive and the negative sentiments fuelling capital outflow from emerging markets might not be in favour of holding risky asset like stocks. There is a negative correlation between MPR hikes and performance of the stock market, although with a time lag.As for real estate, as the MPR rises, interest rates required by the banks for loans also rises. Cost of funds will rise as interest rate rises, making it more expensive for property developers to access funds. Another view is the impact it will have on mortgages.The government recently unveiled a four-year fiscal plan, which showed spending in the 2012 budget will increase from this year, although the fiscal deficit would decline. It also announced the forthcoming removal of fuel subsidies, which the government said cost the country N1.2tn ($7.5bn) this year. Do you think fuel subsidy should be removed'Subsidy is globally viewed as a medium for redistribution of the nations wealth and is used by governments to provide support for the masses in the areas of social services such as transport, energy and agriculture sector. However the cost of subsidy of over N1.2tn per annum is significantly high, and in a bid to adjust to higher oil prices, the oil subsidy encourages wasteful consumption and discourages socially profitable importation of refined oil. In our opinion, a deregulated energy sector in a populous nation like Nigeria is an economic magnet to foreign investments, and the removal of the inefficiently managed subsidy would bode well for the economy in the long run, as it is expected that the N1.2tn anticipated savings to the government from the subsidy removal could be channelled to more productive avenues, and encourage foreign participation in the downstream sector.The issue of sincerity of purpose and the negative precedence of the government comes to play, as agreeably, the in-efficiencies of the subsidy programme and the loopholes associated create wealth for a few, without a full pass-through to the masses. Its proposed plan for implementation might be a cart before the horse move as the potential benefit might come far too late to ameliorate the immediate hardship. In our opinion, a staggered removal of fuel subsidy or the repair of the four refineries to full capacity would be a better ground-laying step before the eventual subsidy removal. We however acknowledge that a removal of fuel subsidy would have an almost direct impact on price level as increase in transportation cost would be impounded into commodity prices. In light of this we expect further monetary tightening to prevent the erosion of value of the Nigerian Naira.Some people have said that the restrictive measures adopted by the CBN in tackling excess demand of dollars will only work in the short-run, saying that depreciation of the naira will be the permanent solution. Do you think depreciation of the naira will end the problems in the foreign exchange market'One of the major objectives of the monetary authority in every country is to ensure price and currency stability. This is usually achieved through the use of various monetary tools such as interest rates, money supply and open market operation.We need to consider the reasons why the naira is always under pressure. On the face, the import-dependent structure of the economy allows for continuous demand for foreign currency. A devaluation of the naira may in the interim provide stability, but in the long run, as long as the structural imbalance problem of the economy is not resolved, the forces of demand and supply will continue to pressurise the naira. For instance, at various times in the past naira was devalued, the last one being 18 per cent in 2009 and yet dollar demand did not abate because the real problem has not been addressed. Nigeria remains an import dependent economy.Do you think Nigerians are well enlightened in the area of investments'You could say yes but that would have to depend on the sophistication of the investment. We are a growing economy and with growth comes knowledge and advancement. The Nigerian capital market is still developing. There are various investment instruments that are yet to be introduced to the market because we are still growing and learning along the way. But I assure you that our market will blossom soon enough.Are there enough investment tools in our financial markets'The tools are there but not adequate. For instance, our derivative market is still unorganised. As part of our wealth management service in Meristem Wealth, we believe that sustaining wealth beyond a generation, is very important as it addresses core issues such as the successful transfer of wealth through generations as well as preservation of values, goals and the security of the business or family. This is why we have decided to make this topical issue the theme of our annual Centre of Influence Seminar for this year.
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