In responding to a question in an interview about the rejection of an IMF advice on currency devaluation, two years ago, Mallam Sanusi Lamido Sanusi said the advice was rejected based on sound economic theory. IMF’s advice was based on the economic theory which suggests that currency devaluation is good for an economy which is export oriented; meaning, goods and services produced in such countries will be cheaper and thus competitive on the international market, while revenues generated will be able to buy more things in the local economy when converted. However, SLS’s argument was that Nigeria’s main export was oil of which its price was determined by international market forces and had nothing to do with the Naira. He further explained that Nigeria’s economy was largely import dependent and as such devaluation of the Naira would translate into expensive commodities which will in turn hurt Nigerians.
This issue of Nigeria’s import dependent economy is what brings me to the macro-economic policy direction of the current administration since its inception. SLS was right in his rebuff of the IMF but there is a bigger issue at the heart of his argument which is that the import dependent economy appears to be the reason for the current tight monetary policy regime of the CBN.
The development of a nation’s economy rests on the ability of its policy makers to adequately harness all the instruments of politics and economics in fostering an inclusive development. The macroeconomic policies of a country largely determine the direction of growth and development. By macroeconomic policy, in simple terms, I mean government fiscal (expenditure and revenue) policies on one hand and the monetary policy (inflation management, interest rate policy and foreign exchange management) on the other hand.
Several analysts have continually criticised, and rightly so, the current monetary policy of the CBN.
This is because the MPR is continuously set at a high rate of between 11-12 percent which translates to interest rates in the real sector of above 20 per cent. For SLS, I believe it is a case of the devil and the deep blue sea as he has an option of choosing between price stability or the risk of completely throwing the Naira to the whims of the market. He has obviously and categorically stated several times that he is in favour of price stability, hence, the tight monetary policy. Recently (27th of May), SLS categorically stated at the meeting of the African Development Bank; “rate reductions will depend on whether the government can control spending . . . The central bank shouldn’t rush into cutting rates and then raising. How much room we have to cut depends on what happens in the fiscal space.” However, the coordinating minister of the economy, NOI, who is in charge of the fiscal side, has always called for fiscal prudence and blocking of leakages. What appears is that, even with all the prudence rhetoric, according to SLS, government fiscal prudence is not prudent enough. Obviously, there seems to be a disconnect between our fiscal and monetary policy coordination but that is a discussion for another day.
The Lagos chamber of commerce has continuously criticised Sanusi’s high MPR methodology in tackling inflation as they insist that mopping up excess cash in the system results in business credit inaccessibility. This view has also been echoed by Henry Boyo, an economist. Sanusi’s primary concern is price stability, which means low inflation and the only way to do this, in the view of the CBN, is tight monetary policy. He has surely done well in pushing inflation to single digit. But, is inflation really a devil in every economy?
Economic research has shown that, in principle, inflation rate when below 40 per cent has no real bearing on economic growth of a country. This research was published in 1995 and interestingly by neo-liberal economists, Michael Bruno, a former World Bank chief economist and William Easterly, also of the World Bank. It was further argued by them that below 20 percent, higher inflation is often associated with higher growth. It is therefore not surprising to note that South Korea, during its miracle growth years of the 1960s and 1970s, had inflation rates of between 17.5 per cent and 20 per cent. This is not to say that inflation is good, no! But, moderate inflation CAN be good for the economy if it is induced by higher productive spending which spurs economic activities and growth. I believe it is from this perspective others have suggested that the current tight monetary policy should be eased and obsession with inflation should be given way for expansionary policies – increased government spending – to stimulate development.
This view appears to be correct in principle and also theoretically grounded in the context of Keynesian economics. However, development and economic theory have to be put into the local context when postulating policies - thinking globally, acting locally - let us look at this scenario.
If monetary policy is eased, cheaper money should be available on the market, coupled with government spending and therefore enough liquidity in the system which should propel economic growth. The assumption here is that a relaxed monetary policy will enable producers borrow and enhance banks lend to the real sector of the economy. However, in the context of the local reality – import dependent economy- excess Naira would chase the dollar and also chase lesser goods which will consequently lead to inflation and a run on the value of the Naira as well as needless depletion of the foreign reserves. The problem of weaker Naira emerges. A contrary argument by a segment of the economy – manufacturers - might be that cheaper credit to them will enable growth of the sector and job creation to tackle pervasive unemployment in the economy, hence, the benefit outweighs the cost or harm.
This is one side of the story; a closer look will be to compare the percentage of manufacturing in the nations GDP to the percentage of trades of foreign finished goods which dominates the informal economy outside tax bands and revenue collection. Manufacturing only represents 0.5 per cent of Nigeria’s GDP. If one takes out the 20 odd percent oil share of the GDP, the remaining 70 odd percent which includes agriculture, services, plus the informal economy is wholly dependent on foreign produced inputs.
Moreover, most manufacturers have to still import inputs for their industry. Thus, a weaker Naira would translate into higher cost of production which will ultimately be transferred to the Nigerian consumers. Another contrary argument could be that this is a sacrifice that will pay off in the long run as it will help develop Nigeria’s productive and industrial capability. I completely agree with this view, and this sacrifice is what propelled the East Asian economies to success; however, it is only correct in theory and not within the CURRENT Nigerian context.
A sacrifice will only pay off if corresponding import restriction is used to ward off external competition and the idea of ‘free trade’ is rightly relegated to the background in Nigeria’s economic planning. Again, this is also only one side of the story as I don’t believe the reason for banks’ low lending to the productive sectors of the economy is solely as a result of the high MPR and CBN’s monetary policy. Banks run a business with the sole drive being profit; as an economist, one knows that the easiest way to change economic behaviour is the use of incentives and sanctions. Currently as it stands, several businesses cannot compete with external manufacturers due to the power problem. What sense will it make to banks to grant loans to such companies? Banks find it easier to engage in speculative businesses with high returns as well simple low risk trading businesses - importation.
This is a market failure that requires government intervention through guided cheap credit to critical sectors of the economy, I am aware this is being done by the CBN in relation to agriculture but accessibility and penetration is still low and national impact minimal. The Bank of industry has to be aggressively re-focused as a development bank offering cheap credit to the SMEs, and minimal concentration should be given to the bank’s sponsor of investment shows abroad, searching for elusive foreign investors. Furthermore, each state or region should have its own development bank , funded by government , with the sole aim of directing cheap credit of less than 3 percent to productive sectors of the state’s economy as it deems fit. This might require amendments of CBN’s laws with regards to bank establishment because without decentralisation of credit allocation in a complex country like Nigeria, the impact of development banks will not be felt at the local levels.
By and large, lending to the productive sectors of the economy extends beyond monetary policies, it also transcends fiscal policies. There are systemic structural and infrastructural problems in Nigeria that has to be tackled. This problem has to be solved holistically as expansionary policies good as it is will only be fruitful in an economy with efficient and guided import restrictions. Import restrictions in turn can only be maximised in an environment with stable power and infrastructure because local industries whom are beneficiaries of import restrictions, can only flourish with the availability of essential infrastructure. Transportation infrastructure such as inland waterways and cargo trains is very crucial here. Even in the presence of infrastructure, government might have to take the lead in developing critical industries by actively investing in them while such industries are run by competent management professionals like every private industry. Government does not solely refer to the federal government but all the 36 state governments must aggressively pursue structural changes that can collectively lead to the targeted development of human resource and surgical provision of essential infrastructures to aid economic activities.
Jamal Akinade is a chartered chemical engineer; he has an MSc in Development Planning and Administration from the University College London and an MPA in Public Policy from the University of Nottingham. He wrote in from the UK and can be reached at [email protected]
The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of SaharaReporters