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‘My take on FG’s economy recovery plan’

By Esther Awoniyi   |   17 February 2017   |   4:08 am

Kalu Idika Kalu

Nigeria’s economic recovery plan seeks to restore growth, invest in human capital, and build a globally competitive economy, it also seeks to achieve a seven per cent GDP growth by the year 2020. Kalu Idika Kalu, economist and former finance minister joined CNBC Africa’s Esther Awoniyi to share his perspective on the government’s new economic recovery plan.

It’s a much talked about document and it highlights so many things in terms of the growth plan, a blueprint about how this government is going to bring the economy out of the recession. It intends to restore growth in two ways. The first is by restoring macro-economic stability and the second is by improving economic diversification. It identifies three immediate policy requirements to improve the country’s macroeconomic situation and these are, fiscal stimulus, monetary stability and external balance. For the government their going to start with investing in businesses and diversifying the economy and this is going to lead to growth. What are your thoughts?
Looking at where we are, those are obvious macro targets. But what we need to underscore is that we need everybody working together. When I say everybody I mean the public sector, the private sector both domestic and external. The key issue is how we restore macro-economic stability because that is how we will be able to mobilise others without chasing anybody around. You create the environment that enables the participants to make their decisions independently, so macro-economic stability is very very important. Of course taking a lead in mobilising resources.

At this point in time we have we have a plethora of issues that the government has to directly give a lead on even though it may not be the investment agencies as such. All the displaced persons, all of these issues on the polity, all these issues on the anything to do with governance, the legal framework, the certainty rule of law and the political process. A lot of people are talking about the absolute need to restructure the economy, these are areas where the government has to give leadership. It doesn’t have to be so absolutely involved but it has to give leadership. But in the area of macroeconomic stability the issue of the foreign exchange rate management, restoring market oriented exchange rates, and allowing prices to determine the cost of investment both from the standpoint of domestic players and foreign investors: these are areas that the government also needs to focus on.

Do you see what the government is doing, because that has been a sticking point. Here in the growth plan for monetary stability it says by curbing inflation, reducing domestic interest rates, strengthening the financial system and continuing implementation of a flexible foreign exchange regime . Right now we have a managed float of the naira. So do you see the government coming through on that?
The divergence from market rates is so wide that it is actually ridiculous, so it is not enough to just say these things we have to take measures. We have to review our whole conceptual framework as to how you determine the exchange rate because that affects everything else, both the interest rates and the prices.

What would you recommend?
I’ve been on this problem a couple of times, I’ve been in finance a couple of times. Some of those things one has talked about. You see, we’ve lost time. Virtually, the whole timing of this regime, we should really have gotten on to this very very quickly. The central bank manages monetary policy by allowing flexibility to be the proper guiding principle. The fiscal side is where the government goes out there to mobilise resources that also amplify the supply side, and that’s what determines that rate. We’re talking about a differential of over a hundred naira. That’s absurd. That’s not done anywhere. You have to face this thing head on. So let the resources flow in from your lending partners, let the private sector bring in as much as possible but they have to be guided by the fact that the exchange rate is working.

In your opinion will that be a good way to go?
It is not a good way to go, it is the only way to go. The plan sounds very nice but it doesn’t mean much in concrete terms until you take specific measures to elicit the right flow of resources. Those resources are flowing in relation to the prices of those resources. People are not going to bring in lots of money when the pricing is so bifurcated. Right now there is an inexcusable bifurcation of the exchange rate. I hear we have about 6 different rates.

For the fiscal stimulus the government is talking about increasing revenue base, boosting oil production. We know that there’s been a slight increase in the reserves and the oil price is a bit higher right now.

Yes. There’s been a substantial increase in the reserves. I know that.

So is that direction the government is going in; boosting reserves, boosting government revenues, and maybe when we get to a comfortable place the CBN can say you know what, the exchange rate is going to be flexible?
Boosting reserves is really a private sector operation. You know, the government doesn’t go producing oil. They have to create the framework in which the oil sector feels a little bit more comfortable with the future as they see it: the short and medium term. We need to create a competitive position. We have to give the incentives to diversify even within the oil sector. Remarkably I understand that we’re almost getting to two million barrels a day if you go by the reports that were given but beyond that I also know that there are other revenue sources that government has to look at. You have to look at a whole broad nexus. I saw some comment about how I introduced VAT in 1994 at 5 per cent. Most countries are way over 10 per cent. There’s nothing wrong with also tinkering with that. We’ll say that it’s going to harm the poor, but some of the other measures that we’re trying to implement are the things that are quite oppressive to the poorer segments of the populace.

When you were finance minister back then, were you faced with a similar scenario?
No.

If you were finance minister now, how would you handle this situation?
I’ve gone over this several times. In those days the dollar price was $8/$9 per barrel. We never faced a situation where you were talking about 40, 50 or 60 not to talk of 100. Of course during at these times you expected proper savings- public savings, and proper growth in terms of inducing growth through appropriate macro-economic policies, so that our savings rate should be way over what we have now. In the documents it talks about 13 or 14 per cent. We should have about double that or maybe two and a half times that. Before this time I had worked on some of the South East Asian countries like Korea. I mean they talk about 30-35 per cent savings rate.

But in times like these when we still on the other hand have to spend massively on infrastructure, we don’t even have the money. We’re borrowing and then you talk about the doubling of savings. How do we balance the two?
For instance, when I said we shouldn’t be where we are now, we are about two years too late. The program should have called for accessing the funds that make sense. We talk about financial institutions like the World bank, the ADB, the IMF, and other institutions. We seem to be incapable of reversing our conceptual frame work about this. That’s how you amplify your resources. That’s how Egypt, Ghana, and Botswana did it. I recall listening to our eloquent finance minister talking about the fact that Nigeria is not in the basket of where you talk about IMF or so on. Now, I don’t know how you can say that because that is one source you can run to. Because right now, because of what has happened to other countries, they’ve dropped their interest rate to zero. So that is the softest step and these are the people who can lend you substantial amounts of money.

We know that the government has said that they’ve been in talks with financial institutions.
Yes. For about two years. Lagarde was here very early in the administration and by that time, that’s when the agreement should have been signed. And we have some brilliant Nigerians who advised that. That we should raise financing line of credit to about $25 billion from the IMF just to see how that can amplify our resources. And when you do that, what happens is that you’re able to steady the exchange rate. It doesn’t depreciate that much. That also impacts inflation. That improves your interest rate, because this is zero interest on so much money. You see, that solves so many of the problems.

But doesn’t that come with conditions that are not too palatable?
Yes, let me explain that because as I said I’ve been here before. The conditions are derived from what are supposed to be your own problems. The conditions have nothing to do with the International Monetary Fund or the World Bank. The conditions have to do with the things you need to do in the economy.

Okay. So when they tell you narrow your deficit by x amount which sounds unrealisable during a certain time frame…
No it’s not unrealisable. That is how the countries that have done well have done well. It is the discipline to understand that these are prescriptions for the economy not prescriptions for the fund. They are prescriptions for the economy. You bring in the experts with your own experts and you discuss all your problems in terms of resource mobilisation, maintaining stability, seeking out new areas of profitable investment and so on. They give you these things and then you negotiate. And it is on the basis that you are going to implement what will benefit you that they can support you. That is what is what it is. But we seem to have a lot of problems understanding these basic principles compared to so many other African countries. After 30 years you can understand why I’m not so excited about giving anybody any pass mark on these long phrases that we put in our plans and we think that’s what going to do it

Are there policies you’ve seen by this government that tell you that we are on the right path towards recovery?
I think we’ve made some improvement on the security. I’m glad that we’re still continuing to seek help on security. Governance is still a problem. I mean you can see how things are going on in the national assembly. There’s still a major bifurcation between the federal and the states. You see, for a party, whether you are APC or PDP, you should be interested in what is happening at the various states, because this all contributes to the economic performance. Rule of law… You know we have issues that the courts adjudicate and so on and all these things are not implemented. For the investor, these things are very important because they take these things as indications of the business climate and you know we’ve done very poorly on the business climate.

But the government could argue otherwise. We just heard the Acting President say yesterday that the successful outing of the Eurobond speaks volumes of the interest in Nigeria?
For a country of Nigeria’s size a $1 billion Eurobond is really not very impressive. And we talked about it for over a year before we got there. We should be going into much larger denominations in terms of whether it’s agriculture or manufacturing which provide something like five per cent of GDP when they should be 25 per cent of GDP so we should stop giving ourselves such top marks. We should be looking at countries like South Africa, and other medium income countries as targets in the kinds of resources they are raising. A $1 billion Eurobond at which we are more or less giving away at the price, and we say it’s over subscribed because we are giving away a lot of money raising one billion dollars and we should be raising a lot more money than what we have raised. So we should begin to set tighter standards for ourselves, in terms of where we belong as a country with so many resources, so much economic size, and therefore almost limitless investment capacity.

Would you say that you’re not optimistic about the plan?
I am not optimistic until I see a more professionally determined stance on some of these key issues. We’ve taken far too much time in stabilising our exchange rate. It’s inexcusable. It’s unheard of. It’s primitive management when you are allocating to different uses by fiat. It’s no longer done. Nobody does that. You set the exchange rate right, you mobilise maximally and you let the price set its tone

So going forward are you saying we should just wait and see in terms of implementation. The budget office says it’s going to oversee implementation. There’s going to be a special unit set up to monitor targets and progress. Should we give this document a chance?

I would not be doing you any good by giving kudos. We’ve had this over and over again. I think we need to be looking at the policies very strictly. I just got this document, otherwise I’d be pulling out more details to show you precisely what I’m talking about. We should look at the personnel. We should look at the economic management team. You know, you’ve got to bring in professional input into setting these things. We should be doing a little bit more comparative analysis on the progress that we’re making. We are too complacent.

The government says this time it’s been a broader consultation. The private sector, civic society organisations, NGAs everybody was called to the table for this.

Well I heard that over a year ago that they were having consultations and so on but we who work from the outside, who with all due respect should be able to give immediate analysis on these things we’re hoping that these things can improve but I wouldn’t say by looking at the economic growth plan that I’ll be satisfied. and I wasn’t suggesting that we should just wait. We should continue to review this. We should continue to seek advice. We should sublimate our preferences. Preferences that are not in consonance with our economic direction.




  • Olisa Maduka

    “The key issue is how we restore macro-economic stability because that is how we will be able to mobilise others without chasing anybody around. You create the environment that enables the participants to make their decisions independently, so macro-economic stability is very very important.”

    Well said; the govt should focus on setting up the right environments that encourages all players to play. We’re too accustomed to the ‘brute force’ approach and what that only does is provide short term benefits at best and long term disasters at worst. Obviously, politicians favor this approach because they are too tenure-minded; Why would they invest in long term initiatives whose benefits will not be realized during their tenures in office? But perhaps things are changing because the harder things get the fewer the options and decisions we have.

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