The Diaspora takes on the Federal Government Management of the Nigerian Monetary Policies. One on One with Dr. Jones Oshof Edobor
The Diaspora takes on the Federal Government Management of the Nigerian Monetary Policies. One on One with Dr. Jones Oshof Edobo – Emeka Emmanuel G. (Chief International Editor African Heritage Magazine)
Dr. Jones is the CEO of a consultant firm based in Austria. He is a Diaspora household name, especially if one have been a member of NIDO worldwide family in the past 10 years. He studied economics and business science in Austria and was a former senior manager at Siemen. In an exclusive and explosive interview with the African Heritage magazine, he X-rayed the current economic situation in Nigeria; inflation, recession, naira fluctuation and the failure of the Federal Government to set its financial policies priority right. He went on to proffered solution to how to subdue the high rate of unemployment in Nigeria. He hailed Nigeria in Diaspora Organization Europe for their excellence in area of communication and networking amongst Nigerians in diaspora but lambasts its failure to meet its many objectives in a changing Nigeria. We invite you to enjoy this explosive, exclusive interview.
“The point I was making at the meeting was that expansionary fiscal policy in times of recession, also called anticyclical economic policy, should be combined with other sets of policies such as tax and monetary policies to complement each other. Ideally, the policy mix should not be in the way of each other. Currently the CBN’s monetary policy appears contractionary, anti-inflationary and anti-growth in approach while the government’s expansionary fiscal policy is demand oriented that thrives to stimulate consumption and growth. To be effective in combating recession, expansionary budgetary policies must be complemented with monetary policies with regards to liquidity to maximize impacts”
AH: Sir for those that do not know you, could you kindly introduce yourself to our worldwide readers?
Hello, I am Jones Oshof Edobor, Ph.D, an economist from Delta State. I am the CEO of Global Consulting and some other ventures. I studied economics and business sciences in the foremost economic university in Austria. I was a senior manager with Siemens for several years before starting my own consultancy company. I moved to Austria some 40 years ago, have done numerous publications and several high profile work on Nigeria’s and the world’s economy. I have membership in several professional organizations and am passionate reader and writer.
AH: Sir, you are one of the founding members of NIDOE, and the founding father of NIDOE Austria. Has the organization at both Chapter and continental level met its objectives?
Indeed, you are right that I am one of the founding members of NIDOE and the founding father of NIDOE Austria. I was one of those who embraced the idea in 2000 when it was conceived and saw it as a veritable vehicle to engage government and take development to Nigeria. I thought an organization to harness the expertise of Nigerians scattered around the world towards the development of Nigeria was a very good thing to have. Expectations were very high on both government and Diaspora side. After all, there were good examples of other Diaspora organizations in other countries to emulate.
Unfortunately, like all Nigeria’s organizations, we began investing too much energy in internal disputes caused by indiscipline and disregard for our own rules. In addition, the organization was slowed down as it began to attract people who see the organization as a platform for achieving their personal objectives rather than the patriotic vision for which it was created.
As to whether NIDOE has fulfilled its objectives, I think it is a bit mixed. Let us look at three of its main objectives at creation. I think NIDOE has done well, in encouraging partnership working, and networking amongst Nigerians living in Europe, the Americas and elsewhere and with government departments …
Indeed, NIDO has been a good platform for networking amongst Nigerians. Many Nigerians, who probably never would have met, have been brought together by the platform.
The second objective, which was “to participate in the process of visioning, planning and the promotion of democracy, social, economic, educational, training, industrial and cultural development and good governance of Nigeria”. Frankly, I do not think it can be said without reservation that NIDOE has achieved this objective. Firstly, NIDOE was invited to participate in the development of Nigeria’s Vision 20:2020. As in most cases, we put forward those without technical capacity and capability to represent us in such an enormous task, which made our contribution negligible. Secondly, the inability of NIDOE to achieve this important objective can probably be traced to its structure. In retrospect, the ideal structure of NIDOE should have been to organize along professionals’ lines – a kind of think-tank or sub groups that are populated mainly by experts in the respective areas. I think this would have given NIDO the right structure to focus its various experts to deliver results and effectively engage the respective government agencies on the best way forward. The current structure has not been effective in furthering professionalism and quality service delivery. NIDOE could have medical wing to organize missions, economists’ wing, IT expert wing, lawyers’ wing, Engineers wings, etc.
I suppose NIDOE hasn’t done well with the third objective either which is “to serve as technical advisers, partners and act as catalysts with Nigerian government agencies, charities, and Non-Governmental Organisation, and other interested parties with respect to development of policies, organisation and implementation of social and economic programmes”. I think it is unfortunate, because with the resource persons available at various times in the organization, if NIDO leaders had been less self-promoting and had positioned it to be offering technical supports to government, it would have distinguished itself from all other Nigerian Organizations, in a most remarkable way.
Frankly, I think some of the problems have also been about honesty, accountability and the apparent inability to clearly separate personal agenda from that of the organisation. When elected leaders promote their organisations and not primarily their personal agendas, members would follow them in unity and their organizations will prosper and achieve great things. Well, there is a new leadership team, under the leadership of Hon. Kenneth Gbandi, let us hope they learn from past errors.
AH: You were at the recent Nigeria Diaspora Day. What is your assessment of the events so far?
Actually, I was not at the last Diaspora Day because I was tired of attending Diaspora Day that was producing nothing substantial. The Diaspora Day has increasingly become a yearly jamboree without any positive impact. I think if the event is to become more relevant, it should be moving from one state to the other with focus on the challenges of the respective states. At the beginning of each year, the challenges of the hosting state should be made known to the diaspora who have six months to come up with concrete proposals. If we were honest, we would see that nobody seems interested in what the Nigerians in Diaspora have to say. The reason I stopped attending is that the venue is full on the opening day, as it offers an opportunity for government officials to be on the media. They all leave as soon as the camera operators have left and we from the Diaspora are left to discuss with one another. The point is, it is cheaper for all parties to have a chat elsewhere and we do not necessarily have to travel yearly to Nigeria to chat with one another over things hardly anyone is interested in.
AH: Do you think the efforts of the Federal Government to engage the Diaspora are enough, viewed especially from the Diaspora commission, Diaspora voting, Right?
I suppose, Diaspora Commission and Diaspora voting Rights are development in the right direction. However, I am doubtful whether having a Diaspora Commission and Diaspora voting Rights without a change of attitude on government’s side will be enough to fully engage Diaspora participation in Nigeria’s development. The policy makers in Nigeria need a paradigm shift to fully harness the enormous human resources available amongst Nigerians in the Diaspora. The problem with Nigeria is that most politicians are not patriotic and see the diaspora as threats instead of the resource pool that we are, from which can be drawn to fix deficits. A good example is while they are looting and transferring the money abroad, Nigerians in Diaspora are transferring their hard-earned money to Nigeria. Meanwhile, we know that without these transfers (forex) the Nigerian economy would have long crumbled. If we are really serious, we have a lot of catch up work to do to attain the diaspora engagement of such countries as Israel, India and Canada, Ireland, Georgia and Serbia, Bangladesh and Syria, to mention a few. These countries have federal ministries for diaspora affairs that are charged with interacting with the nation’s emigrants and expatriates citizens living abroad. These countries support their diaspora when they relocate home.
Given the large number of Nigerians living abroad, creating a ministry for Diaspora Affairs that represent the interests of the diaspora at cabinet level would be the right paradigm shift that is now required.
AH: During the meeting between President Muhammad Buhari and Nigerian Professionals, on Friday, 14th October 2016, in Berlin, Germany you introduced an important topic on the present Nigerian monetary policy and CBN that caught the attentions of many Diaspora and the international media. Could you give an elaborate analysis and this can help pull Nigeria out of the current recession?
Thank you for taking us back to that meeting. Frankly, such events should be an opportunity for government officials to listen to what Diasporas have to say, instead of them talking all the time.
The point I was making at the meeting was that expansionary fiscal policy in times of recession, also called anticyclical economic policy, should be combined with other sets of policies such as tax and monetary policies to complement each other. Ideally, the policy mix should not be in the way of each other. Currently the CBN’s monetary policy appears contractionary, anti-inflationary and anti-growth in approach while the government’s expansionary fiscal policy is demand oriented that thrives to stimulate consumption and growth. To be effective in combating recession, expansionary budgetary policies must be complemented with monetary policies with regards to liquidity to maximize impacts.
At the beginning of the year 2016, it was already apparent that the economy was ailing critically and we were getting into a recession, yet we went on to implement policies that have aggravated the ailment. To some extent, the depth of the crisis has been self-inflicted. In fact, some of the major policies of the current administration since beginning of 2016 have contributed to the current situation.
Some of the policies that have fueled inflation and got Nigeria into a state of stagflation include the:
- Increase in electricity tariff in February 2016 from ₦5/kwH to ₦19.6/kwH (45%)
- Increase in fuel price in May 2016 from ₦5/L to ₦145/L (68%)
- Devaluation of the Naira in June 2016 from ₦197/$ to ₦283 and then to ₦305 (54.82%)
The long public debate on the imminent devaluation of the Naira and several not well thought through policies were pre warnings that led to many foreign investors taking their money out of Nigeria that increased the pressure on the Naira.
Around June 2016, the CBN announced a single and unified exchange rate policy and a flotation of the naira, only to realize that these were no workable policies for the time being and returned to hard pegging with parallel currency markets just a few weeks later. Interestingly, some of those who were pressurizing the CBN to adopt free floatation are now saying the Naira is undervalued. In fact, if the CBN had not reversed the policy, the Naira/$ rate would probably now be in the neighborhood of ₦700/$, worsening the recession. These swinging policies have not instilled credibility and confidence in the handling and management of the monetary policies and economy in general. The introduction of these policies that began in February when inflation was already around 9,6%, now around 18.48% and still rising, maneuvered Nigeria into its current peculiar state of stagflation; a state whereby there is a rising inflation, while at the same time the economy is contracting with a rising unemployment level. A rare phenomenon in economics that is caused by the simultaneous increases in vital prices (price shocks). This cost-push inflation slows the economy by making production more costly and less profitable as against demand-pull inflation caused by excess aggregate demand. Normally, inflation and recession seldom happen at the same time. The dilemma of a proper response in times of stagflation is that actions designed to lower inflation may exacerbate unemployment and slow down growth and vice versa.
Irrespective that Nigeria’s current state of stagflation makes adequate response very challenging, a balance has to be found between fighting inflation on the one hand and fighting unemployment and a declining economy on the other. I am conscious of the impacts of negative interest rate situation that could deter savings and cause harmful offshore capital flight that could cause crisis in the financial sector. And that uncontrolled monetary policy tools that could overheat consumption and further impact negatively on inflation and cause too much money chasing too few goods. And that we should not lose sight of the possible spiral effects on wage. However, since we cannot fight the one and totally ignore the other evil; with unemployment level at over 13.3% and rising, the economy with a contraction of over -5% since the third quarter of 2015 (+2.84%) and third quarter of 2016 (-2.24%), and given that this is a cost push inflation, a controlled monetary policy that allows inflation to rise slightly up to 5% above interest rate level is recommended. This is because the interest rate levels in Nigeria are already comparatively very high and local investors are unlikely to find many places with better yields. It appears for the CBN to focus more on the stability of the exchange rate, for two reasons, firstly, so that the negative impacts of imported inflations are reduced to minimum and secondly so that comparative advantage in high interest rate is not lost to falling exchange rate.
I should think that during stagflation, the issue of negative interest rates is inevitable and it is generally more beneficial to have a few more inflation digits for a manageable period than to have a situation with rising unemployment and contracting economy.
Actually, under normal recession, the most influential tool Central Banks have in their arsenals to combat contracting economy is to increase or decrease the discount rate, called MPR in Nigeria. The Central Bank could reduce the discount rate, as this rate has a drastic effect on the macro economy of a country, and affects investment, consumer spending and borrowing.
For example, following the financial crisis of 2008 and the impending recession, the European Central Bank (ECB) decided in 2009, to increase liquidity by purchasing bonds from the primary and secondary markets with a targeted nominal amount of EUR 60 billion. In 2010, the ECB came up with another programme that is still running to purchase marketable debt instruments issued by the central governments or public entities and even private entities incorporated in the euro area. As we speak, the discount rate of the European Central Bank stands at 0.25%. The objective of these policies was to increase money supply or liquidity base. When the Japanese economy slipped into recession a few years ago, the Bank of Japan began increasing the monetary base at an annual pace of about 80 trillion yen. As you know, the current discount rate is even at -0.1 percent. To complement this policy the annual exchange-traded equity funds purchase target has been increased to JPY 6.0 trillion from the previous JPY 3.3 trillion. The Bank of England follows a similar strategy. The discount rate of the Bank of England stands at 0.25%, while USA is at 0.5%. These are monetary policies of the four major traded currencies of the world. These countries would not be pursuing this similar policy if there were no wisdom in it. In contrast, the discount rate of the CBN is around 14%. The liquidity ratio has been at 30% since December 2015, I think this rate could be increased through accelerated disbursement of some targeted interventions to SMEs.
Well, I suppose that despite better prospects for 2017, due to rising crude oil price and increase in production following pipeline repairs, things are likely to worsen, if the Niger Delta Avengers continue their disruptions and concrete steps are not taken to address domestic consumption and growth.
The apparent CBN policy to attract capital inflow with high interest rate ($1.82 billion in third quarter of 2016), is a double edge thing. There is no doubting the benefit of attracting foreign equity investors, however, the benefits of such a policy pursued to the extreme in an uncompromising way has to be weighed against the negative impact high interest rate could be having on the domestic economy. The relevance of equity investments in developing countries lured with exorbitant interest rates are often overrated, as often the return on investment favors the investors far more than the benefit of the capital importation to the economy. I am therefore of the view that a good monetary policy should be more inward oriented, directed at promoting local manufacturing and small businesses. In fact, because it is in the best interest of both the CBN and the government to have a buoyant economy, both have to find ways to develop a common strategy to combat the current stagflation, so the expansionary fiscal policies of government are not rendered ineffective by CBN contractionary policy. To avoid overheating, excess liquidity can be gradually withdrawn from the economy when the economy has recovered beyond certain critical points, say for example +2.5%.
AH: Sir, you have many publications on monetary policies, what do you think of the current exchange rate policy?
Frankly, our Forex market that is now operating four different rates is currently a bit chaotic. Since mid-2016, we have the following rates: CBN/Official rate at ₦305/$, then the Interbank rate at ₦315/$ (₦10 premium), the BDC rate at ₦385/$ (₦80 premium), and black market rate at ₦500/$ (₦195 premium). A comparison shows that in 2014, the official rate was ₦168/$ and in 2015, ₦197/$ and in 2016 the rate is ₦305/$. This is a devaluation of 81.5% of the official rate within two years. At the same time the parallel/black market that is often used as the basis for the calculation of import prices have moved from ₦199/$ in 2014, then ₦264/$ in 2015 and to ₦500/$ at the end of 2016. This devaluation of over 151% in two years has created an unhealthy premium of 64% between parallel/black market and official/CBN rate. This problem is further exacerbated by crediting exporters with the lower official rate. The huge premium between official and parallel market has created all sorts of problems, including those with access to the official rate sourcing allocations and selling them at the parallel market instead of using them for imports for which they were granted. Frankly, the CBN should have no business selling forex to consumers and should only make transfers to suppliers abroad after all import documents through the banks have been scrutinized. Selling of forex to end consumers should only be done by commercial banks and BDC.
Meanwhile, we have to find ways to bring sanity to the system, for example, by granting more licenses for Bureau de Change (BDC) operations and requiring them to buy and sell within a bandwidth of regulated rates. Only commercial banks and licensed BDC should legally transact forex businesses and it should become illegal to buy and sell forex on the streets. Furthermore, a centralized registration/monitoring data base system that monitors the activities of all licensed forex dealers without exemption should be implemented. The database should contain the source of the forex and grounds for the transactions with identities of purchasers and sellers alike. This could provide data for better forex policies. Furthermore, as dollar is not a legal tender in Nigeria, it should be unlawful for anyone/household to hold any cash amount of forex beyond say $3000 for any period beyond say four weeks, except such individuals are licensed forex dealers. Foreign currency accounts should remain permissible for anyone to deposit his foreign currencies. Despite the dollar being the conversion currency of the world, it is in a way an unpatriotic act to hoard dollars as this weakens the naira.
AH: Sir, how did the Dollar become the leading and conversion currency of the world?
To understand how these things work, particularly for your non-economists readers, let us go back to the creation of the Bretton Woods system, named after the place where the conference took place. After the Second World War, the US economy the only major economy in good shape/intact, with the rest of the industrialized nations in tatters. Delegates from 44 countries that included John Keynes met to design a new universal system with a vision to ensure exchange rate stability, prevent competitive devaluations and promote economic growth amongst all countries of the world. The system created an international basis for exchanging one currency for another and freezing the agreed upon rates to the dollar. This system would also later be known as the gold standard because the value of the dollar was pegged to gold. In exchange, the dollar was accepted as a promissory note whose value of $1 was equal to 35 oz of gold in US bullion. And the agreement was that the dollar could be redeemed in gold anytime. Initially, the system worked very well and dollar began spreading across the world. The shortfall of the system was that it allowed the US to expend a few cents to print a $100 note and foreign countries were obliged to earn it through the delivery of goods worth $100. Problems started because of a growing negative balance of payments, growing public debt and monetary inflation in the USA that was exacerbated by over minting of dollar to execute the Vietnam War efforts. Over time, monetary inflation in the US meant a devaluation of the dollar held outside the USA as trading partners with the USA were receiving less value for the money they held, yet were required to hold a certain percentage of dollar to keep their currencies within 1% of the fixed rate. As the monetary inflation in the USA worsens, some countries holding huge dollar reserves eventually began demanding redemption of their dollar in gold, the US having only about a third of the gold bullion necessary to redeem the dollars in foreign hands (more liabilities than assets) and fearing a run on Fox Knox, unilaterally suspended the convertibility of the dollar to gold – later referred to as the Nixon shock. This default and breach of the agreement by the USA led to the collapse of the system in 1971 and abandonment in 1976 following the Jamaican accord. At the conference, given that the USA was the largest economy and so much dollar was already in circulation, it was agreed upon that the dollar remains defacto the main conversion currency (dollar standard), with pegging, dollarization and floating exchange rates as viable options. Following this development, some developing countries immediately adopted the dollar as their local currency to avoid the volatility of floating against the dollar. Other developing countries continued pegging their currencies to the dollar for stability considerations, not minding that the dollar was no longer pegged to gold or anything. The stronger economies adopted the floating exchange rate concept, which is more or less hinged on the theory of demand and supply. Unfortunately, this came with the option to devalue ones currency to gain competitive advantage over the trading partners. The floating exchange rate concept was initially intended solely for the exchange of goods in a perfect market environment where through market forces, price elasticities through quantity effects would automatically create a new equilibrium that eradicates all distortions. With the passage of time, all kinds of financial services, capital movements, stock exchange markets and currency trading as commodity found their way into the basket, which have consistently shifted the equation in favor of the stronger economies with traded currencies. We have to note that to determine the value of a currency, the global demand for that currency is weighted against the global demand of the dollar. The problem is further exacerbated by the dollarization of essential commodities, including crude oil (petro-dollar) and other essential commodities produced in emerging economies that have continued to keep a constant global demand for the dollar, which has been detrimental to the value of the currencies of these countries. In fact, because the dollar enjoys “exorbitant privilege”, floating exchange rate system, irrespective of how appealing it may seem to many who hardly understand the intricacies and depth of the subject, floating exchange rate by a developing country against the dollar is simply a fruitless endeavor. It is crucial that when operating the system you do not promote other currencies, otherwise you actually help to create the global demands that strengthen the other currency against your currency. It is important to note that currently the dollar and consequently the USA benefits from all transactions quoted in dollar not minding it was not a party to the transaction and it does not matter whether you are exporter or importer. With the passage of time, the constant pressure created by the dynamics of this system has evidently become a source through which cheap transfer of resources from developing to developed economies is taking place.
In fact, empirical observations from around the world are showing that since 1976 floating exchange rates system often do not lead to trade deficits disappearing but rather causing them to grow faster in developing countries, caused by a negative correlation between exchange rate and economic growth. This is widening the inequality amongst nations and placing the terms of trade of the smaller economies under permanent siege and the negative overall inflationary impacts on non-traded domestic goods have been causing such downward pressures on the economies that they eventually lead to the next devaluations.
Furthermore, it does seem many economists from developing countries tend to overlook the benefit of seigniorage the dollar enjoys, hence the USA can continue to increase its liabilities through the monetization of its debts without any immediate consequences for the dollar. Indeed, it is naïve of small economies to float against the dollar and expect to come out strong on the long term.
Lastly, it is unfortunate that the Bretton Woods system collapsed because the vision was very laudable. Undoubtedly, pegging, as was operated under the Bretton Woods system had its limitations with regards to growth, but the system envisaged a stable terms of trade for all trading partners. I suppose that two major errors of the time were firstly, missing the opportunity to introduce a single global currency. Secondly, in 1944-45, the IMF and the World Bank should have been created as one institution with expanded mandate to promote stable exchange rate across the world and not primarily to monitor and function as a bank, to grant loans to countries running trade deficits and the latter for reconstruction and development alone. Such unified institution could probably have developed into a real World Bank similar to the current European Central Bank.
By the way, the rise of China to the second largest economy of the world has been only possible due to its strict policy of pegging the Yuan to the Dollar. If China, despite now being the second largest economy has continued its pegging policy, why should a small economy as Nigeria’s assume it can fair better floating against the dollar.
Finally, the truth is that the current system is a fragile one that theoretically can be collapsed by the same USA or by only China, Hong Kong and Russia through a massive call in or of the redemption of the debts (notes and security) they hold in dollar. Such a massive call in or redemption could cause an enormous disruptions of international markets that could collapse the system. We do not need to wait for this to happen before we do something. Therefore, it is about time there is an international summit to revisit the current system to devise a new global financial order that does not seek the exploitation of each other. A system that freezes the exchange rates of all countries to one another – as envisaged in the Bretton Woods concept and now in the European Union. A concept that eradicates currency volatility amongst nations. The world needs a just and fair economic system that guarantees prosperity for us and for all people of the world. Let us get to work to do this not for ourselves but for the world that will follow after.
Further explanations are contained in one of my recent essays “Floating Exchange Rate Model and Its Discontent for Emerging Economies” published in May, 2016.
AH: Sir, you mentioned the dilemma of the current fiscal policy, what exactly do you mean and what are your proposals?
As already mentioned, I suppose the dilemma of the current fiscal policy in Nigeria is how to get the Central Bank and the government to agree on how to tackle inflation, drive growth and reduce unemployment. As stagflation is the worst kind of recession, for the economy to overcome it, government need to work hand-in-hand with the central bank. From the point of view of combating only inflation, there is no doubting the correctness of the CBN approach, which is to pursue contractionary monetary policy and keeping interest rates high. On the other hand, from the point of view of aggregate demand management approach, government is doing the right thing with its expansionary fiscal policy. But both policies are in the way of each other.
Now, let us go deeper in our debate, there are two schools of thoughts on how to combat recession. The one school of thoughts approaches the problem from aggregate demand-management perspectives, while the other approaches it from aggregate supply management perspectives. The demand management approach, emphasis expansionary fiscal and monetary policies to raise aggregate demand to pull the economy out of recession and reduce unemployment. On the other hand, the aggregate supply management approach concentrates on both labor and corporate tax incentives to pull the economy out of recession. The problem with aggregate demand approach is that while a contractionary monetary policy will be effective to reduce inflation, it leads to higher unemployment and worsens the recession. In fact, demand management tools alone are often not enough to get out of stagflation as they can only solve one particular aspect of stagflation at a time. To get out of stagflation a combination of demand and supply policies are therefore required. But before going further in the analysis, let‘s look at some of the facts on ground.
In 2015, the volume of the Nigeria’s budget was around ₦4 trillion, in 2016, to combat the contracting economy the volume was expanded to around ₦6 trillion. The proposed budget for 2017 has been further expanded to a volume of about of ₦7 trillion, with expected revenues of only about ₦4 trillion – A deficit of about ₦3 trillion. These are demand management measures to tackle the worsening recession. There is no doubting the wisdom of financing certain aspects of a budget through debts in economic hard times. However, the budget structure must be such that there are prospects that the loan will produce enough multiplier effects that will lead to an overall growth large enough to offset the loan within a reasonable time. In 2016, Nigeria already had a debt-servicing share of around 23% of the total budget and still growing. Although the ratio between deficits to GDP may still be within international prudent level but the rising share of financing the deficits through external borrowing (46%), when the 2017 budget has 70% of its expenditures allocated to recurrent and only 30% to capital expenditures, should give us reasons to be cautious. These growing deficits portend risks for the future. In fact, the nominal volume of the recurrent expenditures has continued to grow, instead of reducing, which is not good for the future of Nigeria.
A further detailed analysis shows that in 2015, Nigeria’s total foreign reserve was $33.1 billion and this amount has been depreciating since then ($28.9 billion by mid-2016) a decline of 13%. This is despite CBN intervention to curtail the importation of several non-essential products. Meanwhile, Nigeria’s public debt stock as at June 2016 was $61.5 billon; broken down to external debt stock of $11.26 billion, domestic debt stock $37.5 billion and domestic debt of States $12.7 billion. We understand that the FGN is making efforts to borrow another $30 billion to finance certain projects that should include sharing a part to the states.
The problem with the current situation is the rising volume of the debt to over $91 billion. In 1970, Nigeria had less than US$1 billion in debt and many considered Nigeria under borrowed, but by 2000, the debt had quickly risen to about US$28.27 billion and by the end of 2004 to about US$35.94 billion. Most of the debts were accumulations of arrears, interest and penalties with a principal balance of only 7% and principal arrears of 40% of the debt volume. The rest were interest and penalties because we were unable to service the debts when due. That debt crisis barely over a decade ago also started just as now, with a massive external borrowing to offset the collapse in oil prices of the 1980s. The debt volume was smaller, yet we ran into problems. I suppose by now, we should know that there is something that looks like a cycle of crude oil price collapsing every decade or so and so we should be very cautious with our long term prognosis. This is because; debts in foreign currencies have a way of swelling when confronted with a volatile currency, as the Naira. The problems of the 80s were partly due to the overestimation of our productivity and the underestimation of the dynamics of our volatile source of income to service the debts. At the peak of the crisis, the debt to GDP ratio rose to 88% that put enormous constraints on Nigeria’s budgets for years. We even lost the overview of the debt profile. Those who say Nigeria is under borrowed appear ignorant of the errors of the 80s through the 90s. Ideally, the volume of a loan to finance deficits should be defined/limited by the interest on the debt which should be less than the annual increase in nominal GDP, as anything above that level, will require future refinancing that shall mortgage future budgets and growth, and should be avoided.
Back to the discus on approach, since we know that demand management approach alone is often insufficient to get out of stagflation; it is therefore advisable to supplement this with some supply side measures. Essentially, we could consider doing the following:
- Cutting down on tax rates
- Slowing down the growth of Government expenditure through restructuring
- Better management of regulations and curtailing them
- Reducing the growth of money supply
- Underground Economy
Cutting down on tax rates:
Reducing taxes, in times of recession may appear counterproductive, but it is an important measure to increases aggregate supply and yield higher growth in productivity that leads to growth of real GDP and lower both rates of inflation and unemployment. Therefore, cuts in taxes should be considered. Low tax rates promote incentives to work, save, invest, and thereby increase aggregate supply of output. The coefficient of the marginal propensity to consume will rise. The policy should include a higher depreciation allowance to business firms to cover the cost of machinery and equipment installed. By making available more investable funds from within the internal resources of the companies, we increase their incentives to invest and boost investment. This would encourage businesses to demand and employ more labor. Thus, reduction in marginal tax rates on incomes will increase both the supply of labor and demand for it. Reducing costs of production will have a downward pressure on prices and inflation. In market economies, investment depends largely on the marginal efficiency of the investment so companies are more likely to increase investments where there is a good return on investments.
Slowing down the growth of Government expenditure through restructuring
Over time, the only effort that can put Nigeria on the pathway to sustainable development is a structural reform that reverses the budget structure from spending about 69 percent of its expenditures on approximately 2-3% of those governing it. And allocating only about 31 percent to doing things that could affect the lives of about 97 – 98% of the population governed. If Nigeria is not to break down or apart and even trigger a violent revolution at some point in the not distant future, the ratio between capital and recurrent expenditures must be reversed through restructuring of the country and significantly downsizing of its overhead to release funds for increased capital expenditures. Instead of expanding the budgets and deficits from year to year, supply management approach demands slowing down government spending and moving away from larger budgets and deficits. Public-Private-Partnership to finance certain vital infrastructures with allowance to recoup investments should become part of the financing mix. For example, an agency to coordinate and finance federal roads should be created. Its mandate should include seeking finance, building and maintaining federal roads. Its main revenue should come from a moderate toll on Federal roads. It is more effective and beneficial to growth to grant say a total ₦1 billion tax reduction to workers and cut the budget by 1 billion naira. By combining tax cuts with reduction in Government expenditures of the right magnitude aggregate demand could be held constant which would make it possible to retain the favorable impact of tax cuts on aggregate supply, without it generating inflationary pressures on the economy
Better management of regulations and curtailing them:
Government should look at regulations that are creating monopolies and oligopolies, or are protecting them from competition and deregulate them to increase productivity and efficiency. In the absence of competition, these monopolistic firms created through Government regulations become inefficient which raise the cost of production in the regulated industries. As already mentioned, the bureaucratic process encountered with Ministry officials in Nigeria – which have been obstacles and great impediments needs urgent reform in numerous areas to make doing business in Nigeria easier, cheaper and a desired investors’ destination.
Curtailing the growth of money supply.
As this point has already been discussed in detail earlier, I shall be brief here. In fact, while the CBN should slacken its monetary policies a bit, it should continue to keep an eye on the development of inflation by not letting the lid off the money supply.
The government has to find ways to get the black/parallel economy through lower tax rates into the taxation system by discouraging people from evading taxes and from operating in the underground economy. Efforts should be made to bring more people into the tax system and remove barriers for legal business start-ups, reduce costs of starting and running businesses.
Finally, to overhaul the economy, the following should be given adequate considerations:
- A bad bank to buy some of the bad and non-performing loans from commercial banks should be considered to get the bad loans off the books of the banks to enable them give loans to SMEs. Alternatively, the banks should be allowed to write off these bad loans within a period of say five to ten years.
- Special programs for skill acquisition, such as the Austrian/German dual training system for training artisans should be considered. In addition, a clear policy to encourage local manufacturing by financing research centers and production clusters to improve on standards, quality and productivity should be considered.
- To attract investments into the refinery sector, incentives such as granting discounts on crude oil price and tax holiday for a period of say 10 years should be implemented. This would not only lead to job creation, labor development, but shall also be more beneficial to government as government could reduce pressure on the exchange rate of the naira through reduced importation of refined petroleum products. In addition, government could immediately begin recouping its investment through taxes from spillovers and increased activities of affiliated sectors. In fact, it makes better economic sense to subsidize local refiners than subsidizing foreign economies through imports. The refusal to explore approach that is more creative is to effectively continue a path that has evidently not taken the sector forward. For further elaboration, you may refer to my essay on the subject “The Nigerian Downstream Crisis – Challenges and Prospects in the Global Economy”, presented at the 7th Diaspora Day Conference, held in Abuja, on July 26, 2013.
- Electricity: Without sufficient electricity, Nigeria is never going to be able to achieve its full economic potentials; hence, Nigeria has to direct sufficient resources to substantially improving on the current low generating and distribution capacity of electricity. For further elaboration, I recommend your reading “The Nigerian Electricity Crisis – Analysis, Projections and some Specific Solutions”, published in May 2008.
- Administrative & Political Structure: Actually, Nigeria’s most daunting challenge and perhaps greatest impediment to development is its administrative & political structure. Nigeria is undoubtedly expending much too much resource on recurrent expenditures, leaving too little for developmental initiatives. Fact is, with dwindling national revenue, Nigeria should not be maintaining 36 States unviable states with overblown administrative structures, with most of them fully fiscally dependent on federal funding. While local government areas could be kept, the administrative structure of Nigeria has to be downsized to about 12 or maximum 18 States. Alternatively, Nigeria could return to its pre-civil war structure that gave room for healthy competitions within the regions. The need for downsizing and restructuring is becoming not a matter of choice but survival and necessity. As this is a constitutional matter, I am aware this is not going to be an easy thing to do, but without this being adequately addressed, most future efforts are unlikely to yield satisfactory results and Nigeria is going to nowhere.
- Globalization & African Currency: There can be no fair global trade or concept of globalization that will not be exploitive of the weaker economies, without a single global currency that is not under the indirect currency manipulations and economic warfare of current controlling nations. A currency that is free of the self-interests and politics of the industrialized nations.
Meanwhile, if the African continent were to compete more favorably with the rest of the world, it would have to accelerate work towards achieving an integrated economy and a single currency. Let no one tell you it is not necessary. If this were the case, there would be no European Union and no Euro as currency. No country or continent has risen to economic prowess without some forms of protectionism of some sorts of their critical sectors, at least at their initial and formative phases. African nations should devise smart measures to protect their critical sectors.
- Privatization: While privatization of certain government assets for productivity reasons may make sense, the big scale selling off the common wealth to finance individual budgets should be avoided. Privatization in Nigeria has often simply meant the transfer of ownership of important infrastructure to friends of those in power at far below the market value of the assets, without the buyers having the capacity to add any value to the sector. Government collects taxes and has responsibilities to provide certain services that include utilities. The privatization of NICOM has been catastrophic to Nigeria, making it one of the few countries in the world without fixed telephone lines. Meanwhile, we know that in the digital age, fixed lines are essential for cheap internet connections. The so-called privatization of NEPA is yet another example that has not added any value to the sector.
- Diversification: As the demand for e-vehicles and renewable energy sources is increasing, the overall demand for our oil is going to slacken in the years to come; hence, more efforts have to be put into diversifying the economy into adding value to non-oil products before they are exported. The hospitality sector has great potentials for Nigeria, if well harnessed, Nigeria with its rich cultural heritage, with game parks and long coastline along the Atlantic Ocean can become competitive and attract a sizable share of the growing tourism industry from across the world. This sector has the potential to generate sustainable income (forex) and quality employment for many young Nigerians. According to the statistics of the World Travel and Tourism Council Data, 2016, the contribution of tourism to Nigeria’s GDP 2015 was just 4.2%. This is the smallest amongst all OPEC countries. In fact, Nigeria ranks 12th of countries benefitting least from all countries of the world, only surpassing such countries as Sierra Leone (4%), Chad (3.9), Kirgizstan (3.8%), Burkina Faso (3.6%), Niger (3.3%, Uzbekistan (3.2%), Republic of Moldova (3.1%), Surinam (2.9%), Gabon (2.7%), Papua New Guinea (1.7%) and Democratic of Congo (1.6%).
AH: In which areas, do you think the Diaspora can be very useful for Nigeria and what do you think both sides – govt and Diaspora Nigerians, must do?
As you know, Nigerians in Diaspora are already making enormous contributions through money transfers to Nigeria. According to some reports, the total transfers in 2016 will be around $35 billion. This amount already surpasses the total foreign reserve of Nigeria that was somewhere in the neighbourhood of $28 billion in June and declining. It goes that without the diaspora transfers the economy would immediately break down and the Naira become a junk currency. However, money transfers without knowledge transfers are not going to get Nigeria anywhere. Nigeria needs brain gain; this is because brain gain brings with it creativity and sustainability that has a higher multiplier effect. The Diaspora could thus be particularly helpful in the following sectors:
Education and Training: The Diaspora should be more bothered about education, training and Knowledge transfer than any other thing. When you train a people, you equip them with the requisite tools to build a sustainable development and to take care of their future. Training could concentrate on professional work force development, with focus on practical skill acquisitions.
Medicine: With some concerted efforts on improvement of remuneration and the working environment of the medical profession, the numerous highly trained medical personnel that are scattered around the world could be attracted to come fix the deficits in the sector. This could be made possible by proper and effective collaboration between the Federal Ministry of Health and the Nigerian Diaspora Medical Associations in the United Kingdom and the United States. Though some years back, memoranda of association were signed between the Federal Ministry of Health and these diaspora groups, more should be done on the part of the Federal Government to make things work. Apart from improving general health care delivery, this would also reduce the number of Nigerians flown out yearly to spend forex on medical services abroad.
Foreign Investors: The Diaspora could become more engaged in facilitating foreign direct Investments into Nigeria. It is important that diaspora gain the respect and confidence of their host countries and not engage in activities, which could damage the image of the country. Gaining the respect of the business community will enable those with investment proposals to trust them and want to do business with them. Another challenge is the bureaucratic process encountered with Ministry officials in Nigeria – which have been obstacles and great impediments. Nigeria needs to reform in numerous areas to make doing business in Nigeria easier, cheaper and a desired investors’ destination.
Energy: As already indicated above, infrastructure is one of the major hurdles to industrialization in the country; among this is inadequate access to energy supply. With the privatization of the sector, it was thought that the nightmare was going to be over but unfortunately, the small businesses continue to suffer and go into extinction in the face of limited energy supply. The Federal Government will need to carry out an in depth analysis of the sector and fully understand why things are not working effectively. There are many diaspora out here with expertise in the sector, who the Government could call upon to help carry out the review and propose a lasting solution.
With the passage of the Petroleum Bill, the Oil & gas sectors shall offer great opportunities that shall require Diaspora expertise.
Agriculture: Agricultural value-chain is an area where much is being spoken about and the Government is doing a lot to diversify the economy. This is also one of Government priority sectors in which diaspora could consider investing in.
AH: What projects are you undertaking presently, will you make yourself available at this difficult time to bring your know-how to bear in Nigeria?
I am currently working on numerous projects, including a book on how to get the African economy on a sustainable development track.
Regarding availability, well, I suppose it depends. Although I have been out of Nigeria for some 40 years, I have always followed events in Nigeria closely, have continued to contribute, and would be glad to offer and share my knowledge, should it be required.
AH: Your message to Nigerians in the Diaspora?
Try to be law abiding and pursue excellence in whatever you do, and always do more than is necessary. Never forget that Nigeria is the only country you truly have and whether you live in Nigeria or abroad, Nigeria’s image is a valuable asset that affects us all. Nobody has a right to loot our resources and deprive our people what belongs to them. Remember always, that you are an equal stakeholder in the Nigerian construct just as any other person, whether that person is in government or not. Stand up and demand for accountability. Let us rewrite the script, let us continue to try, again and again, and not relent until the desired change becomes the way of life. Remain hopeful, do not give up on Nigeria, you must be the change that you want in Nigeria and be the one to ignite that consciousness and revolution that will bring the desired paradigm shift. The ordinary folks in Nigeria are looking up to us to rescue them from the claws of unpatriotic people and leaders.
AH: Thank you Sir for your time
– Emeka Emmanuel G. (Chief International Editor African Heritage Magazine)