In this article, YOMI AKINDE, an economist and international technologist consultant, predicts economic growth after the corruption bubbles are sieved out from the economy.
For some of us of certain age bracket, we have gone through many cycles of hope and despair in this country. Growing up in the sixties, the country was not terribly rich but the basics were there and people were fairly contented, you turn the tap, water was there, you flip the switch more often than not, light was there.
If there would be no light, ECN (Electricity Corporation of Nigeria) would announce in advance when such events would take place. We did not have that many roads back then, as a matter of fact there was only one bridge (Carter Bridge) to the mainland and we did manage very well with it until the oil boom of the 70s came along.
Most of our earnings came from produce such as Cocoa, groundnuts, rubber and palm kernels among others and the quality of life was reasonably ok. If you were rich, the first thing people would start inquiring about is “how did he or she make it?” There was an inherent skepticism about unknown wealth and hence discouraged, it did not mean there were no people of dubious wealth, they just go to extreme length to avoid being discovered because people would talk and bad mouth that family severely.
The 70s after the civil war was when the oil boom really began in earnest and created its own economic dislocations. If you can believe it, the government of the day felt there was more money than they could spend, the idea of investing for a rainy day via some kind of sovereign funds (while countries like Norway and Kuwait have had sovereign funds for decades and have reaped great rewards from such prudent and wise management of their resources) never crossed their minds. Instead, we embarked on senseless phantom projects such as FESTAC, National Theatre, National Stadium and foreign exchange controls to prop up the naira value artificially.
We did a few wise including scholarships for students to study abroad (you could argue we should have spent that money developing our own educational system), built more bridges and roads all over the country. But again, with the resources at our disposal, we did not make the transformational change necessary to take the country to another level. The real problem was corruption and it had begun to rear its head big time in the country, especially with successive military rules and the non-accountability that such rule entails.
The various military regimes of the 70s, 80s (including the short-lived civilian rule experiment) and the 90s finally entrenched corruption, lack of planning and strategy, impunity and zero accountability in the running of the country.
Let us face the truth! The military was not exactly a breeding ground for the best and the brightest (no doubt, there were a few there), but the preponderance of probability of such guaranteed we were headed to the oblivion.
They were more interested in entrenching themselves in power and lining their pockets with the loot of office at both the state and national levels. Missing in all this, is any kind of long term plan that would have ensured we did not end up where we are today in 2016, mired in serious economic recession of our own making (not due to drop in oil prices but dues to our own lack of planning, avarice, corruption, lack of foresight to diversify the economy when history has shown us again and again that the good times (high oil prices) would not last forever and not only that we did not save for the rainy day. Instead, the economy was looted from every conceivable corner with impunity and thereby created a corruption bubbled economy that gave an appearance that all was well economically, because of the deceptive indices that our super economy minister was touting all over the place.
A basic economics student could have pointed out to us that the economic aggregates did not add up to much despite becoming the so-called ‘largest economy” in Africa.
From the advent of the political dispensation in 1999, it was clear this was going to be a continuation of military rule by other means whether the next president is from the military or not because we have all acquired all the mien of the military, whether consciously or not, it is difficult to avoid after almost 30 years of military rule on and off.
The Obasanjo-led government had many opportunities to set the right tone, especially for a man who had had the opportunity of ruling this country previously as a military strong man, unfortunately as he’s wont to do, he arrogated all knowledge, intelligence, power and wisdom to himself and inevitably he set about to deconstruct everything he had built up in the first couple of years in office and then reverted to type, trying to cling on to power via his third term agenda.
He blew billions on power generation and had nothing to show for it. He setup EFFC with good intentions but quickly set about using it against his real and perceived enemies and in the process totally undermined the NuhuRibadu led EFCC.
After eight years of Obasanjo, our democracy was weaker not stronger. To make things worse, he set about once again to decide who succeeded him after failing to get the unconstitutional third term. By this time, we had begun to see the emerging corrupt plutocrats masquerading as genuine businessmen, skilled politicians and bureaucrats, the vultures have begun to circle around to inherit the spoils of politics.
The high oil prices of the last six years to 2015 and even the earlier, ones fueled the economy with illicit liquidity and stolen funds that led to inflated prices for everything from real estate, imported goods and services, more kids going abroad for schooling, cars and foreign properties among others.
This was the beginning of the corruption bubbled economy, a phenomenon that can be described as a process of illicit transfer of ill-gotten wealth from the public sector into private hands and becoming a dominating part of the economy as a whole, this has had serious implications for inflation, pricing distortion, exchange rate, interest rate and liquidity of our economy on the long run.
How? I would explain as follows:
Inflation
All you have to do is to imagine all the stolen funds by governors, ministers, bureaucrats, presidents and presidential aides and staffers from the public coffers being channeled into the real sectors buying equities, real estate, flight tickets and luxury goods such as cars. The impact of this is to bid up the prices of goods and services in the economy and that is exactly what has happened between 1999 and 2015.
The impact has been astronomical on things like land, properties, equities, flight tickets or finding seats on airlines, cars especially luxury brands. In doing so, ill-gotten wealth has had profound effect in driving prices up for all Nigerians whether we like it or not, in the process, driving lots of goods & services beyond the reach of the average Nigerian middle-class.
Price distortion
Because of the way most of this wealth came about, it has succeeded in distorting the prices of goods and services. Take for instance, take for example a man that borrowed to build a block of flats, who upon completion of the construction has to pay off his loan and avoid the huge impact of the interest element on his ability to service the loan, he would typically want to either quickly rent the properties to pay down the loan and if that is not enough, sell some of the units to pay off the loan.
Now, consider a public plutocrat who has managed to siphone funds from the public coffer, he would get a big construction firm to build a high rise in Ikoyi, Victoria Island or Abuja and upon completion, insist on being paid a certain rent in dollars and if it is not forthcoming, would be willing to shutter the building for years until he/she gets the desired rent. There is no economic pressure to accept what the market has to offer in the time being, that is a serious case of price distortion and inefficient allocation of resources.
Also imagine a public sector plutocrat and an average normal income earning guy trying to buy the same piece of land/property you can be sure the public plutocrat would be more than willing to bid up the price of the land or property to get it because his are not hard earned money & could afford to pay extra to get what he wants, he or she has essentially distorted the real price of the land/property. The same thing applies to foreign exchange.
Foreign exchange
There has been a lot of talk as to how we ended where we are in terms of the current value of naira to the dollar, as anyone who understands the price theory in economics will tell you, there are many determinants of price of a good or service. It is simply a matter of demand and supply as exemplified by liquidity. The naira is our local currency and under an ideal scenario, we should be able to manipulate the currency to get equilibrium with the dollar. Unfortunately, we do not have an ideal scenario because we are a mono-product economy, totally dependent on oil export and have done absolutely nothing significantly in the last 30 years to diversify the economy or become less import dependent.
Therefore, we have left ourselves with very little or no room to maneuver in respect of our policy options with the naira. If we have a viable non-oil export sector, a devaluation of the naira as we are currently witnessing, it would not necessarily be a bad policy option, it would start driving the non-oil export business to the extent that it would minimise the loss from revenue from crude. In the absence of that policy option, the next best thing is to allow local interest rate on naira to rise in order to attract inflow especially from the Diaspora and foreign investment funds but this is with a caveat that they see stability in the exchange rate to the extent that it becomes predictable, making it easier to calculate your risk reward in investing in naira but that’s not what we have right now.
One of the greatest impact on foreign exchange has been the fact that dollar has become the preferred currency of the looters of the economy as represented by the public plutocrats.
With dollars, they can hold large sums in cash undetected. They can afford to buy dollars for transfer at any rate since this is not their hard-earned money. They can hold dollars in the full knowledge that they are more likely than not to experience capital gain against naira within a reasonable period of time. This ability to mop up huge dollar liquidity from illicit stolen funds has done a lot to drive up the rate of dollars, Sterling etc. while creating shortages and continuous vicious cycles in the local foreign exchange market for the productive sectors.
Interest rate and liquidity
As anyone who knows their economic analysis very well, the relationship between exchange rate and interest rate is typically inverse, meaning, when your local currency is weak, your interest rate should be higher to make up for the deficiency and vice versa. Currently we have a scenario where the naira is very weak whilst we are also trying to keep interest rate simultaneously low, essentially making naira unattractive for those who may wish to convert and invest in the naira.
With corruption bubbled economy, clearly, the greatest liquidity is in the hands of the public plutocrats who have managed to loot huge sums of money from the public sector and manage to launder it with the assistance of their acolytes in the banking sector.
Instead of improving liquidity in the local economy, because of the illicit nature of these funds, the focus was on how to launder them very quickly into assets such as real estate, foreign currency either as cash or transfers to safe havens, investments in stocks and bonds but the overall impact is for this to drive down Naira rates in search of dollars/ foreign currency or distort pricing in terms of goods and services especially real estate & other holdings thereby creating more inflationary pressure.
While clearly the government of the day needs to get its act together quickly in articulating a clear economic vision, direction and strategy, it also needs to fully appreciate the dynamics involve in making key decision such as foreign exchange policy rather than be adamant and dogmatic in saying we would not devalue the naira at all cost, when for all intents and purposes, the naira is already devalued. What we should be working on is how to stabilise the exchange rate going forward and how to take the fullest advantage of the devaluation by coming up with liberal policies that would encourage non-oil export diversification, growth and ease of such processes. It is clear that the war on corruption has to continue and this process can only serve us well on the long run. In the short term, all the corrupt bubble in the economy are being squeezed out and this is bound to cause a lot of pain due to the contraction effect on the economy but l believe as genuine business imperatives start to take effect, we would see the economy begin to grow again and this time in a sustainable and healthy fashion.
Yomi Akinade, an economist, ex-banker and international technology consultant, writes from in Lagos.