With the credit crunch biting Nigerians very hard, the debate everywhere is whether President Muhammadu Buhari’s formula can turn around the economic fortunes of the country. Ibrahim Apekhade Yusuf examines the issues
Six months ago when President Muhhamdu Buhari took the oath of office, a lot of Nigerians looked forward with hope and optimism to a bright future. But that hope is fast receding into frustration as many are seeking answers to a myriad of questions.
Too little, too late
To many observers, measures so far taken by the government are largely cosmetic and not solid enough to make much impact.
So far, some of the policy initiatives of the Buhari government created a lot of bad blood and ill-will, analysts have said.
Even the recent cut in benchmark interest rate to 11 percent from 13 percent has not helped much to convince analysts that the administration has mapped out a clear cut strategy to turn around the economy for good.
In the week preceding the Central Bank of Nigeria (CBN) announcement, Nigerian equities bled profusely as a combination of foreign exchange crisis, policy uncertainties and weak corporate earnings sustained pressure on the share prices of most quoted companies. Most transactions at the Nigerian stock market highlighted investors’ concerns and lack of appetites for aggressive risk-taking.
The skepticisms come from the fact that not much has been done to address other challenges that stifle growth in the nation’s economy.
The CBN governor, Godwin Emefiele said that the decision to cut both the policy rate and the harmonised cash reserve ratio was to engineer growth by increasing the flow of lending to critical sectors of the economy like agriculture, solid minerals, critical social infrastructure and manufacturing.
However, analysts remain cynical, wondering how such initiatives, though commendable can drive economic growth in the absence of critical infrastructures and amenities, especially power and recurring fuel scarcity, which businesses still have to provide for themselves, cutting deep into available resources.
In the view of analysts, the policy pronouncements of the APC-led administration including the CBN policy on import restriction, forex restriction and fixed exchange rate, among others, which were expected to bring succour have resulted in regulatory headwinds.
During the last MPC meeting, Emefiele claimed he reduced the benchmark interest rate by two percent to 11 percent and lowered the cash reserve ratio to 20 percent to help support an economy struggling to cope with falling oil revenue.
But with importers blocked from accessing dollars, the liquidity boost may do little to increase output in manufacturing and other industries, while fueling inflation economic watchers have argued.
“It is difficult to overstate the degree to which this is a highly unorthodox move,” John Ashbourne, an economist at Capital Economics in London, said in a note to clients.
“Nigeria faces high inflation, pressure on its currency, and it desperately needs to attract foreign capital to fund the current account deficit created by low oil prices. It is, in short, in exactly the sort of situation in which economists would generally expect – and recommend – tighter monetary policy.”
Nigeria is bucking the trend across Africa as central banks from Ghana to Zambia and South Africa raise interest rates to curb inflation threats stemming from weak currencies.
But policymakers in Nigeria have moved in the opposite direction, imposing foreign-exchange controls to stabilise the naira, in contrast to other major oil-selling nations, including Russia, Colombia and Kazakhstan that have let their currencies fall.
The naira has remained virtually fixed at 198 to 199 per dollar since the central bank imposed the foreign-exchange restrictions in February. It lost a fifth of its value from June 2014, after oil prices began sliding, until the currency controls were implemented.
“It’s hard to see this set of policies succeeding in the long run,” Charles Robertson, chief economist at Renaissance Capital Ltd., said by phone from London. “These are policy choices that have a finite lifespan. Unless Nigeria is saved by a much higher oil price, it is going to carry a lot of costs for the economy.”
Monetary policy easing signals the central bank has no intention of devaluing the naira yet, according to Razia Khan, Head of Africa Economic Research at Standard Chartered Plc in London.
“The message that the Central Bank of Nigeria is undoubtedly sending to everyone with its policy easing is that it assumes a fixed-exchange regime remains in place,” she said by phone.
“If it were thinking about a foreign-exchange market liberalisation, which in all likelihood would lead to more foreign exchange weakness, it would have been more difficult to follow through with these stimulus measures in this format.”
Lower interest rates may add to pressure on inflation, which slowed for the first time in almost a year in October to 9.3 percent. The central bank’s goal is to keep inflation in a range of 6 percent to 9 percent.
The prevailing macro-economic indicators point to an economy irretrievably headed for more troubles in days ahead. Last month, inflation rate soared to 9.4 per cent from 9.3 per cent in August. It was the highest inflation rate in two years, a National Bureau of Statistics (NBS) report said.
A recent World Bank report has classified Nigeria, with about 170 million people, among countries with extreme poverty. The bank says more than 70 per cent of Nigeria’s population lives on $1.25 (abot N250) or even less per day. Specifically, the report revealed that seven per cent of the 1.2 billion people living below poverty line in the world are Nigerians. An increasing number of Nigerians are said to be daily losing their access to basic social and public infrastructure; potable water, sanitation and healthcare.
The economic growth rate has been on the decline, a development, which experts identify as a direct consequence of falling oil prices and subsequent depreciation of the naira. The economy, which recorded a Gross Domestic Product (GDP) growth of 6.54 per cent in the second quarter of last year, has dropped to 2.35 per cent this year, the NBS said. The 2.35 per cent GDP growth recorded in the second quarter of this year marked the second quarter in a row that the economy will record a GDP below its anticipated performance. According to experts’ interpretation, an average Nigerian is getting poorer when a 2.35 per cent growth is recorded at a time the population growth is close to 2.85 per cent.
The final projection for the year, according to the Bureau, is expected to be 2.63 per cent, compared to last year’s 6.22 per cent. The projection is less than half of the budgeted growth rate.
Industry watchers are worried that the third quarter has ended without any visible economic stimulus to raise the GDP growth from the abysmal 2.35 per cent recorded in the second quarter. They argue the focus of the President Buhari led-administration has been more on the fight against corruption and Boko Haram insurgency.
“The economy has been in its lowest ebb because President Buhari is focusing on the fight against corruption, which has been with us for a very long time,” the Registrar/Chief Executive Officer of the Institute of Business Development (IBD), Mr. Paul Ikele, observed. According to him, the economy should run alongside the anti-corruption war.
“There is a trade off,” Lanre Buluro, head of research at Primera Africa Securities Ltd., said by phone from Lagos. “In the short term, the central bank wants to trade off inflation and if the economy picks up it will tighten again.”
Ololade Ososami, a tax and financial analyst in Lagos, said the bid to stabilise exchange rate using forex restrictions appears to have failed as the real value of the currency is seen at the black market where it continues to fall against the dollar.
She warned of dire consequences for the economy.
“The implications of this change in monetary policy is that businesses will end up generating lower taxable profits, which will ultimately lead to the payment of less tax and reduced government revenue,” Ososami asserted.
The country’s debt profile has been climbing. According to a report by the Debt Management Office (DMO), Nigeria’s domestic debt has hit N11 trillion; external debt ($11 billion). However, DMO’s Director-General, Dr. Abraham Nwankwo, who spoke at a function in Kaduna said the huge debts remain sustainable.
“I want to assure you that Nigeria’s debt remains sustainable,” he said, noting that the size of the debt was not as important as the resources deployed to stimulate economic growth, development, generate employment and reduce poverty.
A critique of Buhari’s economic blueprint
In the view of the former Central Bank of Nigeria (CBN) Governor, Prof. Charles Soludo, the economy is literally prostrate, no thanks to the inability of the current administration to get its economic management formula right.
The erstwhile boss of the nation’s Bourse, who spoke at a public forum recently, was unsparing of the economic policies of the federal government, saying their implementation won’t take the economy anywhere.
Specifically, he said the Treasury Single Account (TSA), the CBN’s foreign exchange (forex) policy, and bailout funds for state governments are all in bad taste.
Besides, he believes the removal of fuel subsidy should be done without further delay just as he argued that the capital controls policy of the apex bank has continued to chase away investors.
Soludo who spoke on the theme: ‘It’s the Nigerian Economy, Stupid” at the third anniversary lecture of Realnews held in Lagos, said the CBN’s forex policies are not in the best interest of the economy, arguing that fixed exchange rate is a disincentive to investors.
“The economy has always done worse in fixed exchange rate regime. Capital will fly out. Such policies do more harm than good. Capital flight in a country that is in dire need of capital is bad. Private capital is on the run,” he said.
Going down memory lane, Soludo said, “In my five years at the CBN, we maintained undervalued real effective exchange rate. Delayed adjustment of the naira value is dangerous because investors don’t wait.”
He said the forex policy of the CBN has triggered massive lobbying for the greenback. “Lobbying for forex is the new trend now. Why must people get forex to pay for school fees, medical bills and mortgages abroad? Such expenses cost the economy billions of dollars and are creating briefcase millionaires. It is creating instant millionaires,” he said.
He also condemned capital control policy of the CBN, saying it does nothing good to the reserves. “CBN thinks capital control saves reserves. But that is not true. Capital flow works on reverse psychology. If you make it so difficult for investors to take out their money, it will be difficult for them to invest,” he said.
He challenged the CBN to explain why it pegged the naira at N197 to a dollar, saying it was wrong to arbitrarily pick numbers. “The policy will continue to make a bad situation worse. The forex policy will complicate issues,” he said.
Soludo called on the government to quickly remove fuel subsidy before it is too late. “If government does not deal with fuel subsidy removal now, I don’t know when he can do that. It is a waste that should be checked. Government should come up with credible agenda on fuel subsidy. It should have been done yesterday,” he said.
He also faulted the implementation of the Treasury Single Account (TSA), saying it does not add positive value to an economy that is in urgent need for re-fueling. For him, TSA is not sound economics.
He advised that government adopt a hub and spoke strategy, where the CBN acts as the hub and banks act as spoke in galvanising the economy.
However, he admitted that the CBN cannot do much without the collaboration of the Presidency. “The market will react if investors find out that the Presidency controls the CBN. There should be independence of the CBN,” he said.
Speaking further, he said CBN’s bailout fund to states was a mistake that should not be repeated arguing that the Fiscal Responsibility Act should be implemented fully.
Soludo said a sitting governor can decide to bankrupt his successor and will be applauded at the moment. It is the next government that feels the pain of the bailout fund.
“We must watch the balance sheet of the CBN and banks very carefully,” he said.
The former CBN boss said the proposed N5, 000 welfare package for the unemployed is a good idea, but not for this time. He explained that although promises have been made, the welfare payment cannot be sustained, unless government wants to overtax the private sector.
“Corporate taxes should go down. This is not a good time to raise taxes,” he said.
Soludo said the GDP handed over to the APC should be doubled in the next eight years as such would help to reduce poverty.
He said the last PDP government left only $30 billion in foreign reserves, instead of estimated $100 billion based on the level of revenues that accrued to government’s coffers in the last five years of the administration. He said the current government must succeed and that failure is not an option.
Christopher Kiwamu, a former banker with the Bank of Industry (BoI), Lagos, shares the same sentiments with Soludo.
As far as he is concerned, everybody is at a quandary and searching for answers, which are not forthcoming.
“An economy does not improve based on sloganeering, name-calling or engaging in blame games and searching for scapegoats, but rather painstaking and determined efforts focused on tested solutions. What is on ground right now does not give room to cheer,” he said.
In the opinion of Mr. Peter Folikwe, Managing Director/Chief Executive, Berger Paints Nigeria Plc, manufacturers are finding it pretty difficult to carry out production because of the regulatory headwinds.
Most of the manufacturers, he stressed, find it hard to establish Letters of Credit because of the CBN policy on forex restriction.
How Buhari can rekindle economy
In the view of the former Minister of Information, Dr Walter Ofonogoro, Nigeria needs to reduce dependence on oil and diversify the economy.
Speaking in an interview with The Nation, Ofonagoro said the time was right for the government of President Buhari to pursue its vision of providing a multi-sectoral economy, with emphasis on making each sector generate money substantially to grow the economy.
He said the nation’s oil reserves are shrinking due to the downturn in the global market, thereby making it difficult for the federal government to mobilise enough revenue for growth.
In the opinion of Dr Akinola Adebosin, an economic consultant with the Nigerian Indigenous Economic Development Alliance (NIEDA), the best way to revamp Nigeria’s dwindling fortunes is to tinker with the current policies.
