Obinna Chima reckons that beyond fiscal and monetary policies, restoring confidence would play a vital role in Nigeria’s quest for economic recovery
Exactly two years after President Muhammadu Buhari was elected as Nigeria’s President, there appears to be no end in sight to the country’s economic woes. With contraction in the country’s Gross Domestic Product (GDP), rising unemployment and job losses, declining capacity utilisation, and perennial foreign exchange shortage, the rate of poverty in the country has no doubt continued to escalate.
In addition, some other economic indicators that have worsened in the last two years include the market capitalisation of the Nigerian Stock Exchange, which fell from N11 trillion, two years ago, to about N8.65 trillion and business confidence, which has dropped significantly.
That was why the economy was the focus of the recently held Vanguard Economic Summit titled: “The Hard Facts to Rescue the Nigerian Economy,” organised by Vanguard Newspapers in Lagos. The event had economic experts as well as past and serving public officers who shared their thoughts about the best therapy for the economy.
In his presentation, a former Central Bank of Nigeria (CBN) Governor, Prof. Chukwuma Charles Soludo faulted the federal government’s recently launched Economic Recovery and Growth Plan (ERGP), which was expected to help get the economy on track.
The ERGP, which was unveiled recently, targets a gross domestic product (GDP) growth rate of seven per cent by 2020. The four-year plan (2017-2020), which unveils a roadmap for Nigeria’s economic recovery, growth and sustainable development, was made public by the Ministry of Budget and National Planning. Some other highlights of the plan include the government’s target to increase oil production from 2.2 million barrels per day (mbpd) to 2.5mbpd by 2020.
The government, through the Central Bank of Nigeria also aims to implement a market-determined exchange rate regime to build confidence and encourage foreign exchange (FX) inflows. Real GDP under the plan is also projected to grow by 4.62 per cent on average over the plan period of 2017-2020, from an estimated contraction of 1.54 per cent in 2016. However, real GDP growth is projected to improve significantly to 2.19 per cent in 2017, reaching 7 per cent at the end of the plan period.
To this end, the former CBN governor sought to know: “Is this the plan for a post-oil economy that Nigerians had been waiting for? Will it (the ERGP) finally do it? First we must commend the federal government for this effort. But let me raise two or three questions. Whose plan is it? Ownership would determine whether the plan is just a public relations document or whether it would be implemented.
“More fundamentally, to what extent is the ERGP consistent with the All Progressives Congress’ (APC) manifesto? People make promises, produce fantastic manifestos and after the election nobody opens the page anymore. But we must hold every government accountable. If only they implement 25 per cent of what they promised us, we would be on the road to Eldorado.
“The APC manifesto promised “a conscious plan for a post-oil economy.” So, is this plan that plan? The APC manifesto promised to halt Nigeria’s drift to a failed state with a conscious plan for a post-oil economy for Nigeria and it promised to restructure the country to achieve that. All previous plans since 1960 promised to diversify away from oil.
“So how is the ERGP different? Where is the new structure in the country to deliver the new plan as promised by APC? How would you translate to a post-oil economy when the plan was designed to depend on it? Or are we trying to repeat the same thing?
“The plan as packaged is a good effort. But in terms of our expectations, as a plan for transition to a post-oil economy as promised by the APC, it is a missed opportunity. It is a generic plan and in several aspects resembles the NEEDS document that was designed for a different era.
“It is a plan to consumer the oil and commodity rent, and not one to restructure in other to replace them. With rising oil prices, the economy would recover, not because of the plan. I am willing to bet that no much would happen to the structure of the economy at the end of the plan.”
Continuing, he pointed out that the economy is in crisis and requires all hands to be on the deck to be able to come out of the present situation.
But, Soludo acknowledged that the present government inherited a bad economy, saying that the previous government had an unprecedented rate of debt accumulation, even at a time of unprecedented oil boom and was even depleting the foreign reserves instead of doubling it. Furthermore, he noted that then, insecurity, especially in the north-east was very high, and corruption was pervasive. According to Soludo, the situation then called for a state of emergency with a progress responsive plan to lay the foundation for a post-oil economy.
He said the foreign exchange controls had wreaked havoc on business confidence and private investments, with massive capital flight that drove the macro economy into recession.
Soludo also reiterated that most macro-economic variables have worsened in the last two years under the present government
He added: “Paradoxically, Nigeria’s rank on the corruption index remains unchanged at 136th position, while its ranking on the Fragile States Index has worsened. We are now in the red alert category of fragile states. Many economic agents have lost count of how many exchange rates operates.
“On fiscal policy, the federal government has continued to spend over 100 per cent of its revenue on recurrent expenditure, just exactly as it was done by the government. There remains half-hearted commitment to the deregulation of the petroleum pricing as well as privatisation of refineries. The budgeting framework remains largely the same with all the institutionalised inefficiencies.
“Let me make a point. In domestic currency terms, the Nigerian economy is in a recession. But in the US dollar terms, the economy has suffered a massive compression. The size of Nigeria’s GDP has shrunk from about $575 billion to about $354 billion, if you use the official rate, to $232 if you use the parallel market.
“’In the previous 16 years, Nigeria’s GDP more than doubled in US dollar terms. But in less than two years, depending on the exchange rate you use, we have more than reduced the value to less than 50 per cent of what we met, in less than two years, in US dollar terms.
“We would get out of recession any moment from now, with oil price increasing. But it would be a miracle if the government is able to return the GDP in US dollar terms back to the level it met it, even by 2023.
“Let me congratulate the government for plucking some of the loopholes and stopping some of the bleeding. The challenge however is that much of these have focused on the micro. While trying to tie down the chicken, we are either stopping the cows from coming in or chasing them away.
“For example, while we are fixated on stopping the imports of toothpicks and stopping the petty traders from taking dollar cash away, we have created havoc that shutdown many factories as well as ignited massive capital flights and halted capital inflows. Put simply, we have missed the macro picture. While we are winning selected micro battles, we are losing the war on the macro economy.”
Continuing, he said: “Have we learnt any lessons from the experience so far? We ought to, but I am not sure we did. A lesson is that the claim to Nigeria’s economic exceptionalism is false. Nigerians, like economic agents everywhere, respond to incentives and sanctions. Furthermore, the pseudo-intellectualism framed around infantile but insular nationalism, does not offer a practical template for prosperity in the 21st century.
“It merely massages our emotions, offering no pragmatic action plan. Another lesson is that Nigeria has refused to learn from the history of the boom and bust cycles in the oil commodity prices. The current government is responding exactly like some did in the past, by treating oil price fall as temporary, while treating a rise as permanent or normal.
“Every government, except those that had been forced by external agencies such as the World Bank and IMF to take painful adjustments, have always skirted around the margin when faced with negative shocks and pass on the harsh decisions to the next government. Every government talks of diversification. Every government blames the previous one for “doing nothing” and promises to be the one “for the first time in Nigeria’s history, get the job done,” but nobody has got it done.”
No to Free-floating Naira
But a former Governor of Edo State, Mr. Adams Oshiomhole disagreed with Soludo’s criticism of the CBN’s foreign exchange policy. He however, advised the central bank not to bow to suggestions by some economists and financial market commentators that it should allow the naira to freely float in the forex market.
According to Oshiomhole, there is “’no such thing as a free market,” just as he opined that every nation has a central bank that manages their currencies.
“I have seen how the International Monetary Fund (IMF) lamented how China refused to allow its currency to float. Whether we like it or not, in spite of their outright rejection of IMF’s prescriptions by rigidly managing their exchange rates, the Chinese economy has enjoyed sustained growth. Now, if we resort to complete market tools, will that enhance supply in the forex market?
“The fact is that we also have to deal with the demand side. The truth is that you are dealing with speculative demand, not real demand. So, in my view, if you say the market should take charge, it won’t work,” he argued.
He faulted the position by some Nigerians that prevailing forex rate in terms of goods and services is the parallel market rate and not the official market and that the way out is to allow the official exchange rate to depreciate.
“But by common sense, the word parallel means biologically, things that can’t meet. So, for me it is insulting for people to say that the real exchange rate should be based on the parallel market rate. For me, it doesn’t do much to our credibility.
“Unless there is attitudinal change, policies in this country would not work. So, at the end of the day, our focus should be how to improve the welfare and purchasing power of the average person,” he added.
A labour leader and Vice President of the Nigeria Labour Congress, Issa Aremu, while stressing the need to continue capital controls, added: “Everywhere in the world, you have to find a way to control the allocation of capital. It is very important. You cannot have a free for all market.”’
According to him, the recent assault on the naira was as a result of the activities of speculators in the forex market.
“As the CBN moves right, they move left, if the CBN goes left, they move right. I think the CBN has done few things right, although it could do more. There are lots of few distortions they must overcome.
“But if you see the Anchor Borrowers’ Programme for rice production, today we are more or less building food security in terms of rice production. For me, the 41 items should be more than that. There are more things that should be banned, where we have productive capacity at home,” he added.
But in his reaction, the Minister of Solid Minerals Development, Dr. Kayode Fayemi, outlined the objectives of the ERGP, saying it did not come out of the blues. According to Fayemi, the ERGP focuses on how to restore the economy for sustainable growth.
Also speaking during the panel session, a former Deputy Governor of the CBN, Dr. Obadiah Mailafia, said there was need for a broad national consensus for the country to evolve. He described the ERGP as a fire-fighting framework to get the country out of recession.
“In the ERGP, the reference to the youths is very minimal, yet they are the majority. The young people of this country don’t have a voice and if we don’t plan for them, if we don’t build opportunities for them, definitely we would be sitting on a time bomb. There is need for civil service reform,” Mailafia said.
Promoting Private Sector Investments
On his part, the Director General of the Lagos Chamber of Commerce and Industry, Muda Yusuf, pointed out that in order to get the economy out of recession, there was need to bring in more private sector investments.
“We need to see how to activate the private sector to move this economy forward. But the key driver is confidence and the policy environment is a major driver of confidence,” he said.
To a former Chief Executive Officer of Diamond Bank Plc, Dr. Alex Otti, speculators would always operate when there are incentives for them to operate.
“We have done a few things right, but there are still a lot more to be done. Situation like this presents opportunity for people to look at things differently. I don’t agree that we need the type of presidential system that we are running currently.
“We can’t afford 109 Senators and with due respect most of them doing absolutely nothing! We can’t afford 360 House of Representatives members. We can’t afford 36 governors and 36 deputy governors, all of the taking fat security votes. I am aware that some state governors take over N1 billion as security vote and nobody ask questions. We cannot afford 1000 House of Assembly members all over the country and 774 idle local government chairmen and councils,” he argued.
The Chief Executive Officer of the Financial Derivatives Company Limited, Mr. Bismark Rewane stressed that if the government doesn’t reform the forex market, this economy would continue to underperform, saying that exchange rate is sensitive to signals and supply and demand.
In response to the criticism of his policies, CBN Governor, Mr. Godwin Emefiele explained that the reason the apex bank is opposed to the idea of unfettered float of the naira is because adopting such policy could hurt the nation’s currency.
Emefiele while commenting on the gap between the interbank and parallel market exchange rates, averred that a purchasing power parity analysis would confirm that the naira is not as weak as the rate in the parallel market suggests,.
He said the only logical explanation for the high rates in that market “is that a lot of illegal and criminal activities are being carried out there.”
Given this scenario, he said the CBN would not sit idly by and allow such faceless and criminally minded people to destroy the currency under the guise of a free float as is being canvassed by some experts.
“In fact, I have always had one simple question for this group of persons: name just one country in the whole world that practices a freely floating exchange rate regime? Just one. I have heard commentators suggest we should follow Egypt’s example and free the naira.
“What they do not tell you is that following their currency adjustments; inflation today in Egypt is over 30 percent. Is that what we want in Nigeria? As with most economic problems, we need to understand the kind of inflation we have in Nigeria. Is it demand-pull, where too much money is chasing few goods, or cost-push, where supply constraints lead to few goods in marketplace?”
Emefiele said: “In Nigeria, I believe we have cost- push inflation, exacerbated by supply shortages in food, fuels, and FX. And that is why the CBN is supporting farmers across the country through various schemes to increase food supply. We are also very responsive to the needs of fuel importers to ensure availability. And we continue to respond as much as possible to FX supply shortages in the market.
“In view of the fact that our current episode of inflationary pressure is coinciding with contracting economic growth, we have to recognise the dilemma it poses to policymaking. This is because no single macroeconomic policy can address rising inflation and slow growth simultaneously, because fighting inflation may require implementing policies that might, in the short term, be inimical to economic growth.”
Commenting on the exchange rate, the CBN governor noted that like every product, the exchange rate ought to be determined by the forces of demand and supply in a fair, competitive, and open market.
He however recalled that shortly before he assumed the position of Governor in June 2014, the monthly foreign exchange inflows into the CBN was about US$3.6 billion.
Emefiele explained: “For five straight years preceding June 2014, crude price averaged over $110 per barrel and indeed in September 2008 specifically, Nigeria’s external reserves stood at US$62 billion after the country had spent US$12 billion in settling the Paris club debt.
“It is quite surprising and disingenuous that some of the people talking today about how we can manage our exchange rate were the same persons who frittered away these reserves such that when I assumed office, I met only US$37 billion in FX reserves. To make matters worse, in the aftermath of the sharp drop in oil price, made worse by falling production volumes in Nigeria, the monthly FX inflows into the bank dropped precipitously to less than US$700 million per month. Yet, the demand for FX from the market has continued to be about US$4.8 billion monthly.
“Given this situation, the CBN dealt with the supply side of the problem by allowing commensurate depreciation of the currency several times. Having done this, and bearing in mind the devastating effects of significant depreciations on inflation, purchasing power, government debt service, financial system stability, fuels and energy prices, unbiased and reasonable people would agree that we also needed to do something with the demand side of the problem.
“Why exactly should we spend scarce FX resources paying for things we can produce here in Nigeria? I believe that only entrenched interests, who do not have the interests of ordinary Nigerians at heart, would want us to do so.”
Speaking on the rationale behind the continuous exclusion of 41 items from the FX market, Emefiele who said the policy was basically borne out of necessity to conserve FX, urged policymakers across the country to pay attention to global trends and ensure that they reflect upon their strategy and thinking. Furthermore, he pointed out that there were the new realities of nationalist and populist sentiments sweeping across the world.
“It is on record that variants of this policy have proven to be highly effective in other climes and even here in Nigeria. For example, throughout the early days of South Korea’s economic renaissance, the government intermittently used excessively stiff tariffs, quantitative restrictions and prohibitive inland taxes to effectively ban many items with potential for high imports, and simultaneously, offered generous and subsidized loans to firms for export promotion causes. In fact, at some point, about 93 percent of total imports into South Korea were subject to one or more such restrictions.”
Giving further explanation, the CBN governor said: “And here at home, this policy have been used to achieve significant sufficiency in cement, a product whose importation could have been costing us over US$3.2 billion in FX Reserves annually. In effect, therefore, this policy needs to be supported not just in response to the pressure on the naira but as an opportunity to change the economy’s structure, resuscitate local manufacturing, and expand job creation for our citizens.
“Take rice imports, for example: why should we keep allocating scarce FX to rice importers when vast amounts of paddy rice of comparable quality produced by poor hardworking local farmers across the rice belts of Nigeria are wasted, and farmers are falling deeper into poverty while we export their jobs and income to rice producing nations.”
Emefiele said CBN was acting in the best interests of ordinary Nigerians, regardless of the noise from the few entrenched interests whom the bank’s policies may be hurting.
“Let me also reiterate the central bank’s willingness, determination, and capacity to continue to meet all legitimate transaction-based FX demands in the market. I obviously cannot be of help to people or businesses who are into speculative FX demand. My promise instead to this group, whether foreign or local, is that the CBN will make sure they lose money!”
Emefiele therefore stressed the need for Nigerians, especially policy makers, to develop a sense of national consciousness in carrying out their duties.