Obadiah Mailafia, a former Deputy Governor, Central Bank of Nigeria (CBN) and member, Board of Directors, Nigeria Breweries Plc, in this interview with Biodun-Thomas Davids, talks about 2018 budget and other issues. Excerpts:
WHAT are the socio-economic circumstances that normally occasion economic recession? An economic recession refers to the continuous fall in output or gross domestic product (GDP) for more than two consecutive quarters. Falling output forces firms to lay off employees; this leads to increased unemployment, which in turn leads to falling aggregate demand, which also reinforces the downward spiral. Before long, all sectors are affected. Economists often make a distinction between a recession and a stagflation. A stagflation is a scenario whereby falling output and slowing growth is accompanied by rising prices and high inflation. The situation as currently obtains in Nigeria has been more of a stagflation.
There is no one single factor responsible for economic recessions. For commodity rentier economies such as ours, falling oil prices can trigger a recession. Dwindling foreign exchange leads to inability to import essential raw materials; this impacts negatively on manufacturing output. A slowdown in manufacturing orders due to changes in local or foreign markets, difficulty of importing raw materials due to foreign exchange constraints or other factors could trigger falling output and mass layoffs. These could in turn drive down incomes and, on their part, overall aggregate demand.
High interest rates can also contribute to triggering a recession. When interest rates rise, they have a tendency to reduce liquidity in the economy, thereby limiting the quantum of funds available to invest. Central banks sometimes raise interest rates in the hope of protecting the value of the national currency. But this can lead to a liquidity crunch, which could then harm investment and long-term growth.
Banking and financial crises are often major factors accounting for economic recessions. The American economist Hyman Minsky, with his famous Financial Instability Hypothesis, argued that instability is inherent to our global capitalist financial system itself. A stock market crash could trigger loss of confidence in the capital markets, leading to a recession. The ensuing bear market drives capital out of the economy, leading to recession. On the other hand, asset bubbles linked to over-optimism about share prices and property prices could also trigger massive speculation which has a way of increasing risks for investors. Once things begin to deteriorate, there will be a mass race to safety, thereby leading to a recession.
There is also what one might term the contagion effect. We live in an increasingly integrated global economy. A crisis in one part of the world could send shockwaves to another. Although African countries — with their low level of participation in world trade and investments are relatively insulated from the vagaries of global meltdowns, we are not entirely immune.
In the case of Nigeria, what factors do you think led to the recession that the country is wading out from?
I believe fraud and corruption were major causative factors. Economic recessions can be triggered by rent-seeking behaviour on the part of key economic actors, including bankers and financiers. The situation could be made worse by poor regulation and indeed corruption on the part of regulators who lack the drive and capacity to regulate banks and the financial sector as required. During the years 2011-2015, oil theft was costing our treasury more than US$1 billion on a monthly basis. It was also a case of bad luck, because falling oil prices in an atmosphere of grand corruption coincided with an electoral-political cycle that was exceptionally pregnant with tension and geopolitical uncertainty. This triggered a massive capital flight. The rich took cover by moving their assets into dollar domiciliary accounts. Massive dollarization of the economy imposed more pressures on the naira exchange rate. We were just waiting to implode.
Does printing more money strengthen any legal tender during recession?
During the years of the Great Recession in the Organisation for Economic Cooperation and Development (OECD) countries, the US Federal Reserve, the Bank of England, Bank of Japan and, to a lesser extent, the European Central Bank (ECB) engaged in what has come to be known as Quantitative Easing (QE). It entailed the printing of dollars, sterling, yen and Euros on a gargantuan scale to purchase assets as a means of re-injecting liquidity and driving recovery and growth. It was an act of desperation. Quantitative Easing has entered the lexicon of high finance as one of the exceptional tools of monetary policy under extreme conditions. It actually worked. There were real fears that it would trigger hyperinflation. Such fears have proved to be groundless. We in Nigeria have also gone into our own binge of Quantitative Easing. Unfortunately, we have not been as transparent about the process as other more civilised central banks have been. I also do not get the impression that we have set a time-limit to the use of such instruments. The greatest danger is to deploy it for a much longer time than necessary. That would not only defeat the purpose, it could prolong the recovery process while triggering hyperinflation.
From 1959, Nigerian legal tender face-value was changed about six times, what does such move portend for the economy and naira in Foreign Exchange Market?
We need to clarify some confusion here. Some commentators used to comment that “the Naira has been devalued since 1960”. Well, the truth is, there was no naira in 1960. We had the Nigerian pound from 1960 until 1973 when the naira legal tender currency was introduced. Between 1960 and 1973 the Nigerian pound was pegged to the British pound sterling and exchanged on a one-to-one basis. Our currency was thus tied to the vagaries of sterling. The devaluation of pound sterling deriving from unprecedented balance of payments crisis had its negative repercussions on Commonwealth currencies that were pegged to sterling. It made sense that we detached ourselves from those colonial apron strings. The late Obafemi Awolowo, as Finance Minister, spearheaded the introduction of the new legal tender. He actually invented the very name Naira. We were emerging from the prosecution of a tragic war during the years of 1967-1970. The great Awolowo managed the economy so well that during that tragic civil war we did not borrow a dime from the international capital markets or the Bretton Woods institutions. During the post-war years, we were becoming a more self-confident nation. Oil production was rising. Economic reconstruction was being pursued in earnest. It was the best of times and the worst of times, if I may echo the Victorian English novelist Charles Dickens. The sad part is that after Awolowo left the government and Gen Yakubu Gowon eventually fell from power we had poor economic managers who did not know their right hand from their left. The naira began to deteriorate from N1/US$2, to N4/US$1, reaching almost N500/US$1 before moderating to the current N367/US$1. How indeed are the mighty fallen!
A devalued currency is, of course, not a good thing. I am all for a market-determined exchange rate. But that should be a genuine and transparent market-clearing exchange rate devoid of speculation and all sorts of iniquitous manipulations by the money-changers. A situation where we had up to half a dozen exchange rates only served to promote rent-seeking behaviour. And this, coupled with massive dollarization of the economy, weakened our legal tender currency. There are some improvements of late, but we are not yet where we ought to be. We need to restore confidence in the system. We must restore the glory and dignity of the naira not only as our legal tender but also as a symbol of our national honour.
Will reverting to spending naira and kobo bring any change to Nigeria economy?
I’m sorry, but I’m not exactly sure what you mean by this. If you mean reversing the current trends of dollarization, I would say a capital Yes. If you go to a country like South Africa, you cannot just walk into a shop and buy anything with dollars. The shop manager will advise you to go to the nearest bank and change your dollars into rand before you can do a purchase. It’s as simple as that. The South Africans are proud of their rand and they do not allow it to be overshadowed by any other currency. A banking magnate in Lagos recently built an expensive architectural edifice. Those who reviewed the piece of real estate not only praised its impressive qualities; they openly declared that it’s so good that the rent is to be collected only in dollars. It did not occur to anyone that this simple statement was in breach of the law. The CBN has passed a circular reaffirming that the naira is our legal tender currency and that all transactions within our jurisdiction must be in that currency. Perhaps the only exception would be the major oil companies, given the 1970s Kissinger-Nixon diktat that forced the whole world to trade oil only in dollars. Beyond this, let me tell you, a country of our size and potential must valorise our legal tender currency not only as a powerful tool of our financial and banking system, but also a veritable symbol of our national honour. If you are only good at bastardizing your country you will soon become a banana republic fit to occupy a place of dishonour in world economics and politics.
What is your view on National Bureau of Statistics projection about economic recession status in Nigeria?
The recent report by the National Bureau of Statistics (NBS) that growth during the last quarter stood at 0.55% was a welcome piece of news. It has meant that, technically, we are now out of recession. But I need to caution that we are only seeing the first green shoots of recovery. Economic history shows that recoveries from economic recessions are a delicate process. They are by no means guaranteed to be irreversible. They can indeed relapse by a combination of folly or intellectual laziness. Japan was in a state of suspended animation for a decade. And the lessons of the Euro land area are still fresh with us. What we need to build the momentum that will sustain the recovery by making the right mix of investment decisions; fiscal spending to stimulate growth; and restoring confidence. The recent news that Brent crude is now hovering above US$60 per barrel on the wake of the Saudi anti-corruption crusade is a welcome development. This can only serve to consolidate the recovery of the Nigerian economy. But we would be the biggest fools to return to doing things in the old way. It would be like a dog returning to its own vomit. We must learn and imbibe the capital lessons of our recent economic tragedy. We need the mindset of the Biblical character Joseph who advised Pharaoh to save for the rainy day. We need to build a strong and resilient economy based on the foundations of prudence.
Any economic risk factors in FG pumping S9.96bn in the economy in a bid to strengthen naira?
Let me say that pumping US$9.96 billion into the economy was a good thing. According to some estimates, the infrastructure financing needs of this country amount to something of the order of US$30 billion per annum. As you know, the previous administration put in place an Integrated Infrastructure Master Plan covering the years 2014-2043. I have studied the document in all its minutiae. It is an ambitious plan, although rather vague on how it will be funded. Our major failings in this country are that we have never modelled our infrastructure plans within the framework of population. Infrastructure projects take time to be executed. By the time you are planning to build a power-generating plant, the population would have increased algebraically. We therefore need to plan way ahead. By today, we should be building power plants for when our population would have virtually doubled to about 360 million within the span of a generation. So, we need massive infusion of capital. But there are risks. There is the real risk that it could fuel more inflation. The solution is to spend judiciously and in a manner that there will be sterilisation of some of the funds in order to avoid inflationary spirals.
What will borrowing more money and taking from foreign reserves spell for the country at a time like this?
I think you are asking two separate questions in one sentence. You are asking about our borrowing and debt situation on the one hand, and on the other, the efficacy of deploying external reserves for intervention in the foreign exchange market. These are two separate issues.
Yes, I am of the view that they are mutually related.
With regard to borrowing, as you are aware, the administration recently presented to parliament a request to borrow an additional US$5.5 billion. I was a bit taken aback when the government said that the loan will be used to settle some domestic debts that are now due for settlement. The government argued that given low interest rates abroad it makes sense to borrow from abroad to settle local debts. We must view it askance. I have only one criterion for borrowing from abroad: it must be for and only for projects that guarantee an economic and financial return in excess of capital. I definitely do not accept that we should ever borrow from the international financial markets for social or consumption programmes. When Awolowo did not borrow from abroad during our entire civil war, why are we engaging in such massive external borrowing just to prosecute the insurgency in the North East? It really means we are far from being careful executors of economic projects.
The second part of your question relates to deploying some of our external reserves to shoring up the naira. You know, this also worries me. I am yet to be convinced that a lot of this money is really going into import of genuine raw materials and so on. Whilst it is true that external reserves are part of the war chest to defend a national currency, world markets know that you can only do it for so long. There reaches a limit where it backfires. By the time you start eating into the reserves beyond a certain threshold, speculators will call your bluff and before you know, you will be in tears. The problem we have here is one of a deficit of transparency, integrity and trust. Let’s address those behavioural-institutional issues and clean up our act. This is even more important than spending reserves in a so-called effort to defend our naira.
What factors led to the recession in Nigeria?
I’m not one of those who believe in condemning everything and everybody to score a personal advantage. No. If President Buhari had not won the elections and stemmed the tide of grand corruption, the Nigerian economy would have collapsed by now. No doubts about it. The Buhari factor has restored hope and confidence. Of course, Nigerians are impatient because recovery is coming too painfully slowly. Some of us criticised the government for not having a sound economic policy framework. They not only came up with the Economic Recovery and Growth Plan (ERGP); they invited some of us to participate in designing that new policy. It had a powerful signalling effect. The Anchor-Borrowers Programme has been hailed as a great boon for agriculture. The CBN is cleaning up some of its own act, although I believe far more work needs to be done than is actually being acknowledged or even understood. These things have helped the recovery process. But some would say what really turned the tide is the sheer luck of recovery of global oil prices.
What measures can be put in place to forestall such recession?
Well, I earlier said that economic recessions are a fact of life. They are inherent in the cyclical nature of our integrated global capitalist economy. What matters is to build resilient economies that withstand the storms when they come. This means, first, ensuring fiscal discipline in our public finances; building strong accountability systems; building up adequate financial buffers to insure against the bad times; making prudence a way of life in economic and political governance; and, ultimately, diversifying the economy away from dependence on oil. These days we pay a lot of lip service to economic diversification but nobody is really doing what it takes to achieve that. We need mass agriculture-based industrial revolution in this country. Anyone who loves our country and its people will preach this gospel of an industrial-technological revolution. We cannot achieve it without overcoming the binding constraints of energy, electricity, infrastructures and human capital. And without peace and stability, nothing of enduring value can be achieved. Above all, we need to inculcate deeper mindfulness in economic policy; mindfulness about destiny and potential as a country; mindfulness about leadership and responsibility; and mindfulness about compassion for our suffering people and our desperate youth who have been robbed of an entire future. This, to my mind, is the task and vocation of leadership for the next 30 years.
What is your reaction to the policy of refinancing Treasury Bills by the Ministry of Finance?
There is nothing wrong with refinancing Treasury Bills per se. I have, however, two issues of concern. The first relates to the need to deepen our capital markets. We are still operating at shallow levels. We do not as yet have a robust secondary market, not to talk of a thriving derivatives industry. There is also the argument that we can borrow in dollars to refinance local debt on the ostensible logic that dollar interest rates are low. Consummate folly, if you ask me! Yes, interest rates are low today, but they will not continue to be so. With recovery in America and the OECD countries, advanced country central banks will soon begin to increase interest rates. This will simply translate to higher debt obligations for us in the future. If someone wanted to re-enslave and re-colonise our country, there could be no better way to do it than by this nonsense on stilts.
Is using an oil benchmark of US$45 per barrel and N305 to the dollar for 2018 budget in order?
In the light of recent happenstances, I would say yes.
What will early submission and passage of 2018 budget offer the economy in the coming year?
Well, from past experiences, I am not particularly optimistic. In our context, early submission of the budget proposals has never meant early conclusion and passing of the appropriation bill. We need to exorcise the same old demons of budget padding and playing politics with budget. I wish to God we could summon the wisdom and grace to pass the budget in December so that we begin the New Year with the budget. This is the first aspect of the problem. The other is the question of implementation. In a situation where we are able to implement the budget by a mere 50 percent by December is totally unacceptable. Even as we speak, I’m not sure we have implemented up to 50 percent of Budget 2017. If we understood the enormity of the suffering of our people the sheer desperation among our youths we would face this task with an exceptional sense of urgency. Nigerians deserve nothing less.
