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Price of improper fiscal and monetary procedures

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Despite identifying the need for the banking system to accelerate credit growth to the economy, the Monetary Policy Committee at its May 2018 meeting waffled on reducing the monetary policy rate as it settled for the timeworn ‘‘non-conventional ways to aid credit flow to vulnerable and growth enhancing sectors of the economy.’’ Over four decades of inseparable wedding to improper fiscal and monetary procedures known to be inconsistent with international best practice have resulted in unfavourable high lending rates which in turn have bred the conjoined twins of aversion to lend by pampered banks on the one hand and reluctance to borrow by productive-sector investors on the other. While the CBN unconvincingly attributed the induced credit drought to the country’s shallow pool of loanable funds (the banks hold over N12 trillion private depositors’ funds), the over one dozen non-conventional funds so far rolled out for selected economic sectors at single digit rates have generally not attracted appreciable patronage.

Doubtless, the economy requires international competitive low lending real interest rate across-the-board. It is noteworthy that such interest rates had begun to evolve in the past as CBN data show. The weighted average prime lending rate (PLR) was 7.0 per cent from 1961 to 1974 and 6.0 per cent in 1975-77. However, upon discontinuation of the Bretton Woods system of fixed exchange rate in 1971, the then military regime took the economy misstep of according de facto primacy to oil dollar proceeds (alien currency) over the national naira currency by directing the CBN to withhold the Federation Account dollar allocations and to substitute freshly printed naira funds for budgetary spending by the tiers of government. That procedure does not represent monetization of FA oil receipts as has been purported for 47 years running but improper and illegal substitution of apex bank deficit funds procured at artificial exchange rates to the volume of public oil proceeds.

Consequently, the economy has over that long duration been running excessive annual fiscal deficits. The economic price includes the following. Firstly, the associated excess liquidity and high inflation and macroeconomic instability over the first 30 years were discussed by CBN Governor J.O. Sanusi in a lecture titled, ‘‘The Nigerian Economy: Growth, Productivity and the Role of Monetary Policy.’’ (See The Bullion Vol.25 No.4, 2001). Sanusi offered no solution and so the lingering improper procedures have rendered the naira literally valueless and left the generality of the people impoverished regardless of the numerous experimented, dropped and readopted exchange rate fixing methods which caught the fancy of the apex bank. The 1980 average naira exchange rate of N0.5464/US$1 has monotonically depreciated (or been devalued) by 2018 to N360/$1 in the Importers and Exporters forex market segment which the CBN unilaterally adopted in defiance of the official Appropriation Act rate of N305/$1.

Secondly, the lagged effects of the improper procedures broke the earlier noted falling trend of lending rates. In 1979-80, the PLR rose to 7.5 per cent, then 7.75 percent in 1981 and thereafter to double digit levels from 1982 except in 1985 when it slipped to 9.25 per cent. The PLR notched 13.54 per cent in 1997 while settling above 15.0 per cent since 1988. The PLR peaked at 29.80 per cent in 1992 just as the weighted maximum lending rate also peaked at 36.09 per cent in 1993. Thirdly, average manufacturing capacity utilization (MCU) rate, which began to be compiled in 1975, expectedly moved inversely to the PLR. In the period of single digit PLR, the MCU reached its peak of 78.7 per cent in 1977 when the PLR was at its lowest level of 6.0 percent. The MCU slackened to 70.1 percent in 1980 as the PLR rose to 7.5 percent. When the PLR assumed double digit levels, the MCU plummeted: it ranged from 29.3 percent in 1995 to 63.8 percent in 1982.

In the democratic era, the MCU has fluctuated at levels below 58.0 percent. The closely related Manufacturing Purchasing Managers Index (PMI) recorded 56.7 percent in March 2018. In effect, suitably lower PLR could have pushed the MCU close to the maximum available capacity over the years thereby necessitating continual further capacity expansion such that surplus local output would have been exported with resultant reduced dependence on crude oil earnings. Such a course of action would have ensured increased employment, inclusive growth and rapid development.

Fourthly, the IMF/World Bank exploited the absence of rational response to the self-caused macroeconomic instability, excess liquidity, high inflation and unfavourable PLR. So in 2003, the Bretton Woods institutions seconded to the Federal Ministry of Finance an economic hitwoman who concretised the Debt Management Office. Whereas central banks ordinarily sweep excess liquidity from the system at negligible interest rates of under 0.01 per cent, the unquestioning CBN was suborned to mop parts of the excess liquidity with treasury bills at PLR- linked charge. The TBs proved irredeemable and were rolled over, restructured into longer-term debt instruments such as treasury bonds and FGN Bonds, which have steadily been extended to 20-year (and soon to be 30-year) tenor FGN Bonds.

Fifthly, the IMF/WB-suborned metamorphosis from 90-day mopped and sterilized excess liquidity funds to long-term fake domestic debt FGN Bonds was contemporary with well-sequenced negotiations that culminated in the exit from the largely false mother external debt at a ransom of $12 billion in 2006. Choreographed to supplant the extinguished debt that was made up of mainly trumped-up commercial transactions fobbed off on FG, the fake NDD is a revenue guzzler at double digit PLR interest cost. By 2017, the ballooning fake NDD (at N12.6 trillion) had become a Frankenstein monster. Its service cost alone devoured the bulk of FG revenue to the neglect of building needed infrastructure and other projects. The double-dealing IMF/WB had long prepared for such eventuality as it schemed to ensnare the country in a fresh external debt trap. In 2011, the IMF/WB prompted the economic hitwoman to issue $500 million Eurobond in the international capital market (the origin of the earlier extinguished external debt) at roughly 7.0 per cent coupon rate as low-interest benchmark option to the local high PLR for future loans.

In 2017, the Buhari administration, bereft of economic rationality and forgetful of history, was again successfully suborned by IMF/WB into accepting to reduce domestic borrowing owing to its high PLR cost in favour of issuance of fresh Eurobonds and refinancing $3.5 billion tranche of the fake NDD at 7.0 percent interest preparatory to refinancing the entire NDD. Lo, full circle of fake external debt trap looms before the unthinking black people’s country! Corroboratively, the MPC which should facilitate low lending rates, at its meeting in April 2018, purveyed unsound economics by “urging FG to strongly exercise restraint on domestic borrowing in order to lower the cost of credit to the private sector”.

Fellow Nigerians, recall the mid-single digit PLR beginning in the 1960s. The PLR climbed rapidly after 1977 to settle permanently at high double digit levels owing to government mishandling of oil receipts. It is therefore unacceptable for Federal Government to cite its self-created high PLR as justification to plunge the country into another undeserved external debt trap comprising fake and non-invested and sterilized excess liquidity funds. The misstep of 1971 has evidently exacted the very high price of unfavourable macroeconomic environment where the IMF/WB engage in unmitigated negative manipulation and corrupt vested interests hold sway. The way forward? There is a crying need to mend the economy by adopting fiscal and monetary reforms which are anchored on the primacy of the national currency in order to quickly evolve internationally competitive low lending real interest rates of 4-7 per cent across-the-board for catalyzing self-sustained rapid inclusive growth and development.


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