By Henry Boyo
President Buhari launched his government’s Economic Recovery and Growth plan, last week. The ERGP is in many ways similar to Obasanjo’s government National Economic Empowerment and Development Strategy (NEEDS 2004), which was also designed to re-invent the economy to sustain inclusive growth, upgrade our infrastructure, also reduce unemployment. Sadly, over a decade later, the promises of NEEDS remain a mirage. Unfortunately, however,the factors that induced the failure of NEEDS seem to be also inadvertently embedded in Buhari’s ERGP.
The above title was first published in Vanguard Newspapers on February 14th 2005. A summary of that piece follows hereafter. Please read on…
“The Governor of Central Bank of Nigeria, Professor Chukwuma Soludo, formally presented “The monetary, Credit, Foreign Trade and Exchange Rates” Policy Guidelines for Fiscal Year 2004/ 2005 to the media recently.
The implications of the guidelines, published in CBN’s Monetary Policy Circular No.37” of February 14th 2005, will be evaluated, in this article, in relation to the potential impact on the following economic variables, i.e. inflation, interest rates, excess liquidity, exchange rates and external reserves. Invariably, the expected impact of the implementation of the guidelines is presumed to align with the goals identified in the NEEDS document.
Although, NEEDS projected inflation rate below 10%, CBN’s latest report however, notes that year on year inflation rate has now fallen to 9.5%, from the self-destructive 23.8% rate that prevailed in 2003-Q4; nonetheless, the MPC’s Circular No.37, however, admits that the former bench mark of “12-month moving average inflation rate, was actually 15%”! It is unusual that year on year inflation index of 9.5% would be as much as 5.5 percentage points below the discarded moving average inflation index of 15%, especially, with the significant increases in domestic fuel price and a sliding naira rate, that have continuously instigated a severe inflationary pressure on the economy. Thus, although, the statistical indices, reported by CBN, may seem progressive, clearly, the increasing pangs of hunger and desperation continue to be real-life experiences for most Nigerians.
Nigeria’s monetary authorities also undeniably recognise that money borrowed with over 20% interest rate, and further compounded with, arbitrary and oppressive charges by lending banks, can only spell doom for ‘Industrial and economic growth’! Consequently, Government’s NEEDS blueprint therefore, sensibly adopted single digit lending interest rates as a prime objective.
Incidentally the MPC Circular No. 37, under review, also carries a comparative statistical table of key macroeconomic indicators projected in ‘NEEDS 2004’ against the ‘actuals’ for the same year. The indices seem to portray ‘excellent actual results against the targets! The curious thing about the excellent results sheet, however, is that the pivotal subject of interest rate hovering around 25%, against the single digit benchmark projected in NEEDS was not addressed.
Nonetheless, even if, the monetary authorities made no reference to the unduly high level of interest rate, the MPC obviously recognised the need for urgent remedial action. Consequently, the Minimum Rediscount Rate (MRR) ( i.e. CBN’s base rate, to commercial banks), was reduced to 13.5% from 15%, so that, banks could then add the permissible 4 percentage points and lend to customers at 17.5%, plus the usual additional bank charges which could push lending rates well above 20%, and discourage productive enterprise and job creation.
The MPC circular No. 37 also seeks to explain how the lower MRR of 13.5% was made possible by the fresh adoption of a year on year inflation index of 9.5%, instead of the former moving average inflation index of 15% for determining MRR. It is undeniable, nonetheless, that with MRR still as high as 13.5%, domestic cost of lending cannot be competitive against those successful economies, where policy rates below 3%, sustain low inflation rates and reduce both industrial and agricultural production costs to stimulate investments and increasing rate of job creation.
Furthermore, the latest MPC Guidelines have also identified the main villains that will threaten macroeconomic stability in 2005 as, the decision to share part of the ‘excess’ crude accruals from 2004, with the invariably higher, State Government budgets from the increasing export revenue from a ‘crude oil premium price of $30 per barrel (compared to $25 for 2004). According to the MPC’s calculation, the resultant increase in fiscal expenditure will challenge the achievement of inflation and exchange rate stability in 2005. But, we need ask, why should increasing export revenue, create such a big headache for the monetary authorities? Every business corporation would normally celebrate seasons of increasing sales revenue and higher profits, as this will provide surpluses to fund retooling, expansion and increase in working capital. In such event, one therefore finds the CBN’s fears of ‘an imminent expansionary fiscal policy stance in 2005’ rather intriguing, particularly, when evident severe deprivations in specific sectors like education, health, energy and transportation clearly persist.
It becomes more confusing when government also still goes cap-in-hand to borrow or seek foreign investments for infrastructural remediation, simultaneously with CBN’s concern on the ‘horrendous’ expectation of increasing government revenue surplus at ‘NIL’ cost. The explanation for CBN’s ambivalence and fear is obviously deep rooted in the process/mechanism, for infusing foreign exchange earned from crude oil into the monetary system.
The current mechanism is for CBN to consolidate the monthly distributable pool of foreign exchange and then unilaterally determine a rate of exchange for converting the dollar denominated revenue to naira. Incidentally, CBN’s adopted exchange rate is notably, generally lower than the auction rate offered in the open market by up to 25%! Thus, critics might suggest that the three tiers of government are shortchanged by CBN by up to N25 on every dollar allocation.
The monthly currency substitution requires humongous naira cover for the billions of distributable dollars shared. The three main sources of funding the naira cover, are direct printing of fresh naira notes, borrowing back government funds from the capital market by sale of Treasury Bills at interest rates of up to 15% and also through the direct auctions of dollar rations against undeniable surplus Naira liquidity. Invariably, the three modes of providing naira cover for the distributable dollars will spike an inflationary spiral which is distortional and socially destabilizing and will ultimately make single digit inflation rates particularly difficult to achieve!
Indeed, whenever, the dollar component of monthly distributable revenue is unilaterally substituted with Naira allocations, the resultant huge Naira liquidity that results in the banking sector would predictably encourage liberal advances, which are not predicated on any direct productive activity, and will therefore further fuel a systemic and destructive inflationary spiral. Ultimately the CBN would embark on a regular mopping up operation to reduce the huge liquidity base of commercial banks to reduce lending, even if this means borrowing back government money with double digit interest rates! This destabilising cycle is repeated every month, whenever the federation pool is shared and the inflationary outcome clearly depicts CBN’s dilemma on the challenge to macroeconomic stability, whenever we are blessed with increasing crude oil revenue!
Thus, the larger the dollar revenue to be shared, the greater also is the problem of excess liquidity and the greater need for the adoption of anti industry and anti people policies to hold back spiraling inflation and its serious social and economical distortions! From the foregoing consequences, our monetary authorities would rather pray that providence would reduce our export revenue in order to minimize the liquidity problem, notwithstanding the oppressive cost of the government simultaneously borrowing to fund its budgets.”
Fast forward to April 2017, sadly, the inflation rate currently exceeds 17%, while cost of funds remains well above 20%, and the naira exchange rate is also in dire straits. Next week in part 2 we will discuss Naira exchange rate and Nigerians foreign reserves as against the projections in NEEDS.
SAVE THE NAIRA! SAVE NIGERIANS!!