Renowned economist and Chief Executive Officer of Financial Derivatives Company Limited, FDC,
Bismarck Rewane, in this interview shares his outlook for the economy in 2025. Among other things he explains why Nigerians can’t have inflation that is lower than 25% in 2025. He also highlights factors that will help the Naira appreciate to N1,550/$ and the imperative of power sector reforms to achieve the 4.6% economic growth rate assumption contained in the proposed 2025 budget of the Federal Government. By Babajide Komolafe, Economy Editor
Nigerians hope for very low inflation in 2025. But you have projected 25 percent inflation for the year, meaning significant increases in prices will persist this year. So what is the basis for your projection and why do you think Nigerians can have much lower inflation next year?
First and foremost we are dealing with historical inflation here. The latest inflation figure is for November, the one for 34.6%. We think that in December, it will increase marginally. The rate of increase in inflation has been slowing while the nominal inflation rate has been rising. The other thing is that what Nigerians want is different from what they need.
What we want is, everybody wants a good time, everybody wants an improved quality of life. But quality of life depends on productivity. If your GDP is not growing fast, your output is not growing fast, you cannot you can’t bring prices down. Because the definition of inflation is that the goods being produced is too little than the amount of money in circulation. The money in circulation, the CBN is mopping up so that too much cash is not chasing goods.
So the way I look at it is that inflation is beginning to moderate, moderation, then easing, which means it begins to decelerate. Then it begins to get to a point, very close to what we call the natural rate of inflation.
So I think the expectation of 15 per cent in the budget is too optimistic. Our position is 25 percent, which means it can go from 35 per cent to 25 percent within one year, which means it will be easing itself by almost 0.8 percent every month.
If that happens, the MPR today is 27.5 per cent. Assuming or let us say that inflation goes down by 10 per cent, and the MPR reduces by equal proportion, let us say 8.0 percent for example. So if we have an MPR of 20 percent, inflation of about 25 percent, and you have the Cash Reserve Ratio, CRR of banks reduced by 50%, you will find out that the monetary environment will be much more conducive for growth than what it is today.
You projected the Naira exchange rate of N1,550/$. What informed this projection?
We believe that the closer an economy is closer to what is called dynamic equilibrium, misalignment of values and misalignment of prices will be reduced. Why did I say so? First, the difference between the parallel market exchange rate and the official market exchange rate has been reduced to an acceptable level. Also the difference between our interest rate and our rate of inflation has reduced.
The difference between the price of our petroleum products and the price of petroleum products across the border has reduced. So it means therefore that the economy is getting to equilibrium. In that case, the market value of the Naira today is about N1,670/$, the official rate is about N1,530/$ or something like that. Now the purchasing power parity is much lower than that.
We think the currency is undervalued, and if the price of oil is relatively stable at about $70, the price of cocoa is record high now, it is about $12,000 per ton, and then the price of NLG, we should begin to see that Naira appreciation. But we are being very very cautiously optimistic, so we say let’s assume the currency appreciates by about 10% in spite of the uncertainty because there is an uncertainty premium that is involved.
So you take the fair value of the Naira, which is the PPP, and add the uncertainty and the illegality premium of 25%, it gives you something like N1,400/$. So making room for 10 percent between that, so that 10% appreciation is what we are talking about. So 10% of N1,650, is about N165, and if you take away N165 from N1,650, you will be at the N1,550 level.
So we actually derived this estimate based on the fact that the Naira will appreciate between January and February to that level. This is because, one, interest rate remains high, two, that productivity increases, three, that the inflation factor begins to reduce. Those are the assumptions under which we made that projection.
Is it likely that it will happen? Very likely. Also it can go the other way. Forecasting is not an exact science, it is just an art.
What are your projections for the banking industry in 2025?
The banking industry made extraordinary profit this year due to exchange rate gains. We have not seen that the exchange rate gains will be sustained. As a matter of fact, the exchange rate gains of 2024 will become exchange rate losses in 2025.
The number of shares offered for recapitalisation, which increases the share price. Three, there is fierce competition, very fierce competition in the banking industry from both industry participants and non industry participants.
So looking at the banking industry, it is becoming relatively less attractive than it was a year or two, three years ago.
The banks are going to make money, the industry is going to be much more competitive, the intensity of rivalry is going to be much higher. The need to become creative, to maintain their competitive advantage becomes pretty urgent.
I think the banks will be a significant part of economic activities in Nigeria but their relative importance is going to decline in 2025 and 2026.
One of the assumptions of the proposed 2025 Budget, is GDP growth rate of 4.6%. What is your assessment of this assumption and what is your projection for GDP growth rate in 2025?
We think the 4.6 percent growth rate projected by the President is achievable, it is realistic.
I think that if we carry out urgent reforms of the power sector, if we do something urgent about power, the 4.6 percent will even be pale compared to what we can achieve.
We can easily get to 6% but it will not happen until we do something about the power sector. And that power sector reforms include forbearance, conversion of debt to equity and actually sanitizing the Discos. If that happens the growth rate of 5% to 6% can be achieved.
Having said that, the vision of getting to a $1 trillion economy in 2030, I don’t think is achievable because that means we have to grow at about 40 or 42 percent every year for the next five years. With all the reforms in the world, we will get to 6% or 7%, and that is magical if we get to a 7% growth rate. And if you did 7% for the next five years, you will not get to that figure, $1 trillion GDP.
So one, the purpose of my conversation with you is to bring us down to reality check. And that we will grow, our growth will increase appreciably based on reforms in the power sector, that is institutional reforms in the power sector. And then we will get solid growth of about 6% to 7% per cent on a good side. But if we do nothing and we allow certain things to continue to happen in terms of leakages in the system then our growth will stay at 2.5%. And can Nigeria afford a 2.5% growth which is equal to its population growth, no. Nigeria needs to grow, even the President’s projection of 4.6% as good as it sounds, we will struggle to achieve it. And if we sweeten that with power reforms and we get to 6 to 7 percent, then 2025 will be a much better year for all of us than 2024.
What factors do you see springing positive or negative surprises in 2025?
I think there is a big difference between growth and development. Development talks about various things including infrastructure. We think that physical infrastructure which leads to productive output and institutional infrastructure which helps to stop bad practice, those two must go together.
So in 2025, I am looking for institutional infrastructure. This includes reform of the judicial system, the police system, the banking system, the educational system. Institutional infrastructure is key.
If you don’t have institutional infrastructure, and all we have is physical infrastructure, we just build roads, bridges, we will go nowhere. The two have to go hand in hand. And there should be internal discipline, internal vigilance and there must be checks and balances. People must be held to be accountable.
Accountability goes beyond financial accountability, it means there is a moral accountability, and there is goal accountability.
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