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Economy: From induced recession to rapid growth

By Editorial Board
12 November 2018   |   3:58 am
According to the NBS, Nigeria’s GDP grew at 1.95 per cent in the first quarter of 2018 and 1.50 per cent in the second quarter. The low and falling growth rates led the Central Bank of Nigeria (CBN) to chorus the IMF/World Bank’s long held disinformation about the country’s economic ....

IMF

According to the NBS, Nigeria’s GDP grew at 1.95 per cent in the first quarter of 2018 and 1.50 per cent in the second quarter. The low and falling growth rates led the Central Bank of Nigeria (CBN) to chorus the IMF/World Bank’s long held disinformation about the country’s economic vulnerabilities and fragilities posing the risk of a relapse after the economy exited the avoidable five-quarter-long recession in the second quarter 2017. But the hyped vulnerabilities appear to be self-induced more than real considering that in the first half of 2018, price of Brent crude oil, which is similar to Nigeria’s sweet crude, averaged $70.75 per barrel compared with $52.18 per barrel in the corresponding period of 2017. Also, crude output volumes have been more robust in 2018 till date.

However, entrapping the Federal Government firmer under its spell, the IMF/World Bank last October lassoed the Ministers of Finance and Budget and National Planning as well as the CBN governor to a meeting in Bali, Indonesia and handed to them the IMF World Economic Outlook containing projected GDP growth rates of 3.1 per cent and 3.8 per cent in 2018 and 2019 respectively that had ostensibly been carved on stone for sub-Saharan Africa (SSA), with the exception of Nigeria where the policy makers have willfully been conditioned into believing that Nigeria’s GDP cannot and should not attain the SSA growth rates. That kowtowing mindset suffuses the pages of the consultative 2019/21 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF/ FSP).

Nonetheless, the public should not be deceived. Note from the outset that it is a fallacy to claim in the MTEF/FSP that the country currently enjoys macroeconomic stability. Belying the claim are persistent excess liquidity, double digit inflation, uncompetitive lending rates and Appropriation Act exchange rate (AAR) that cohabit with unilaterally devalued naira exchange rates in forex market segments among other adverse features, all of which signify a wonky economy. The economic solution has been spurned by the Federal Government for decades notwithstanding the fact that at the core of the economic problem are self-induced excess liquidity and high inflation.

For example, the double digit year-on inflation figures in July 2017 (16.0 per cent) through June 2018 (11.2 per cent) are attributable to the following major factors. Firstly, the tiers of government incurred actual fiscal deficit amounting to 1.9 per cent of GDP. The attendant inflation expectation of 1.9 per cent was within the conventionally safe inflation range of 0-3 per cent. Given this level of inflation, accommodative monetary policy would be pursued to the benefit of all economic operators. Secondly, analysis of FAAC disbursements of “13 per cent Derivation Funds and FGN share of Derivation and Ecology” for July 2017 through June 2018 shows oil proceeds accounted for N4.35 trillion. Note instructively that the N4.35 trillion was not derived from proper conversion via the expected single forex market (SFM) at the AAR.

Instead the amount was wrongfully printed by fiat following CBN’s improper withholding of the purported covering Federation Account dollar accruals. Hence, the amount of N4.35 trillion (which as a proportion of GDP estimates for July 2017 through June 2018 stood at 3.7 per cent) not only represents an addition to aggregate money supply volume (MSV) but also ultra vires expansion by CBN of the fiscal deficit by extra 3.7 per cent. Results? The self-induced swollen aggregate MSV begot excess liquidity (the source of sterilised domestic debt) and pushed inflation expectation beyond the safe inflation ceiling. Over the years the recurring faulty action gave birth to ineffectual counter-policies such as monetary policy tightening which shot interest rates to double digit level, constricted economic activities, reduced economic growth and even induced the 2016/17 economic recession. But the long spurned economic solution happens to be intuitively unassailable.

Where FA beneficiaries transact dollar allocations in order to directly and correctly obtain N4.35 trillion via the SFM at the AAR in exchange for naira funds of eligible forex end-users, there should be no increase in the pre-existing aggregate MSV just as there would be no macroeconomic instability. Rather, the situation would require accommodative monetary policy stance with interest rates based on the low inflation expectation which is consistent with overall fiscal deficit below 3.0 per cent of GDP. As a result, investors would borrow at competitive lending rates, invest in the various sectors of the economy, expand employment opportunities and ultimately bring about rapid economic growth. That is the foundation for a diversified private sector-led economy which has proved elusive since the 1980s.

Thirdly, the CBN largely subverts the AAR by unilaterally devaluing the naira in several forex market segments. For instance, relative to the AAR, the Importers’ and Exporters’ forex segment (I&E) rate of N360/$1 denotes 15 per cent illegal devaluation of the naira. The wrongful step inflicts exchange rate pass through inflationary effects, which in turn intensify the pressures that push the inflation level beyond the safe margin. The fourth factor that feeds high inflation is the steady and elevated cost of production arising from unrelieved monetary tightening. Doubtless, it is counter-productive for CBN to raise the monetary policy rate in the guise of attempting to tame and reduce inflation.

Next is the latest false double-barrelled cliché that the Federal Government on the one hand has no debt problem (it is sustained by the misperceived low debt to GDP ratio) but on the other hand reels from a revenue problem because of the high debt service to revenue ratio now touted to be approaching 70 per cent. The proponents of the cliché are victims of self-deceit perpetrated by playing the ostrich since the 1970s. The earlier noted CBN’s fiat-printed naira funds being substituted for improperly withheld FA dollar accruals represent veritable national debt which as a ratio of GDP cumulatively from inception exceeds 100 per cent. The economy wears the resultant negative economic features which ostrich-minded policy making cannot wish away. The use of scarce revenue to service the high interest cost of sterilised domestic debt has its roots in the self-deludingly unrecognised national domestic debt.

But it suffices to educate that proper management of the naira exchange rate in tune with the CBN Act and the Appropriation Act would release humongous revenue. The Federal Government should exercise the sovereign right to impose forex access tax (FAT), continue to levy import tariffs and collect excise duty. These do not constitute multiple taxation. As a matter of fact, FAT is the pay dirt and revenue source that should be tapped for national development. Forex sales and forex purchases fall under national currency management and should ordinarily be transacted through commission-earning forex-broker banks as against the present anomalous middleman-forex dealer outfits, which make unworked-for supernormal profit thereby not only undermining competitiveness of domestic production in order to foster rapid growth but also intercepting the revenue which the exclusive monetary authority (government) requires to provide needed infrastructure and various socio-economic services that are lacking.

For instance, this newspaper has repeatedly shown that forex transacted via the I&E window alone from July 2017 through June 2018 accrued at least 2.9 trillion naira of FAT which CBN-designated forex outlets or brokers should remit to the public kitty. Fortuitously, pending urgent rationalisation of the entire national domestic debt stock, duly collected FAT accruals would completely eliminate the government’s current debt service deadweight. Moreover, as economic and monetary management tool, FAT has salutary impact as it reduces aggregate disposable income, moderates aggregate demand and damps inflation.

The foregoing discourse shows Nigeria’s self-induced economic misery as well as provides a glimpse of the economic advantages that would be brought about by the adoption of reforms and implementation of global best-practice fiscal and monetary procedures by the Federal Government without further delay. That development would put an end to the culture of lamentation over failures by top government functionaries and also make Nigeria to join China and India as the fastest growing economies among the emerging market and development economies.

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