How to overcome recession, by Boyo
The past week in Nigeria has been awash with bad news from dismal October inflation figures to weakening investor confidence in the NSE to the 2.24 per cent GDP contraction in Q3 but where does the economy go from here? Acclaimed Economist Henry Boyo, joins CNBC Africa Onyi’s to give his perspective on this.
What do you make of what’s happening at the moment. A lot of solutions have been bandied about over time from resolving the issue of the FX market to diversifying the economy, but what do you say? Where does the economy go from here? What should be the focus of the government and policy makers at this point in time?
BOYO: With deference to the amount of time that is available, it is appropriate to immediately say that the reality that we are not respecting the indices that should drive any economy has been responsible for the state in which we find ourselves, not only presently but certainly over the last 20 or more years. It’s undeniable that over the last two decades or so we have had a bumper harvest in terms of forex, but no one can confidently or honestly tell you that the amount of forex that we earned from crude oil sales improved the economy in any manner. Inflation was never brought down to two per cent and monetary policy was never brought down to four or five per cent as happened in successful economies elsewhere. I’ve always maintained that if you aspire to be an eagle it would be totally inappropriate for you to start comparing yourself to ducks like in some African countries where the inflation rate is as high as 36 per cent .
For someone to say that’s a reference point whereas best practice says two per cent or maybe even less. For a monetary policy rate that is at 14 per cent and invariably drives higher cost of funds to the real sector and ensures that the real sector will never grow, you surreptitiously come back and say that since the real sector cannot access loans at four or five per cent give them intervention funds and you create additional new funds when you are simultaneously crying that there is an excess supply of money in the system. The excess supply of money we have in the system has been there for maybe three decades or so. Only, no one has asked where the money comes from. No matter how CBN knocks up the interest rates the excess liquidity in the system remains. And what is inflation? Too much money chasing too few goods. It shouldn’t surprise you that inflation is trending towards 18.3 percent and will probably exceed 20 per cent so long as you are unable to control the level of excess liquidity but the so called media experts tell you that we have to spend our way out of recession, and I really wonder if these people are experts.
I admire the courage of the Central Bank Governor for sticking at 18.3 per cent but I do not admire his good sense in ensuring that the monetary policy rate remains at 14 per cent because in the first place monetary policy rate in a developing country that aspires to be an eagle economy should never be anywhere near 14 per cent. We should be talking of one percent or two per cent or so. The fact that we are distracted by all these gymnastics from the reality and we’re not able to ask the central bank, “why can’t we bring the monetary policy rate to one or two per cent?” So that we don’t have to come out with intervention funds which only exacerbate the issue of money supply and you go back after putting the intervention funds in place to borrow it at 15 per cent. Why would the banks want to lend to anybody? Why would the banks want to pay attention to the real sector when they have this father christmas who puts money in their hands one minute and then goes back and borrows it at 15per cent not because they want to put the money to the development of infrastructure but because they want to warehouse and hoard the money. The Central bank is the main hoarder of foreign exchange, and it’s also the main hoarder of money supply so if you are looking for the villain, you better point to the central bank.
Talking about pointing to the Central Bank there have been questions asked about their handling of the situation. One of the questions after the MPC meeting was, “has there been any fundamental change in economic policies this year?” And even with the policies that exist, do you think that they are properly targeted towards reflating the economy today?
BOYO: You see the reality of course, is that when you look at the situation closely as I have done for the past 15 years or so it is clear that it isn’t as if these people don’t recognise common sense but it seems more like their hands are tied. For example, if the CBN does not mop up liquidity at 15 per cent, the banks will not make the kinds of profits they are making, and they’ll be forced whether they like it or not to immediately start looking at the real sector because after all they have to make some money. If the CBN continues to pamper them – for example, remember when the TSA came into being, it was rumoured that the banks would not have a lot of cash in their hands and that would probably mean that the CBN didn’t have to mop up excess liquidity. What did the CBN do? It reduced the cash reserve ratio to 20 per cent or something like that and suddenly the bank managers and directors came out and said, “we don’t have any problem with cash because the CBN has conveniently lowered the cash reserve ratio so we have more money.” The very next day or so, the CBN who had made this excess money possible was busy borrowing the money back from the banks at 15 per cent.
I mean is this real? I think we need to be able to call ourselves out, and tell ourselves very sensible truths. If anybody expects that we would ever get out of the woods, in terms of foreign exchange shortage or real economic indices that would drive the economy the monetary policy rate and the inflation rate have to go together. The two have to work in tandem. If you have a situation where the monetary policy rate is continuously at 14 per cent and is under pressure to remain at 14 per cent when if anything the indications are that it should have gone up. And if it goes up what happens? Inflation goes up and of course your salary whether you like it or not, without you knowing anything about it, has been cut in half, both in terms of inflation at 20 per cent and an exchange rate that took away 50 per cent of your income.
I’m not going to let you go without asking you this question. We’ve already painted the picture of what is really happening in this economy. My question to you now is, what should be done to revive confidence in this economy?
BOYO: First of all you have to ensure you don’t practice the voodoo monetary policies of ensuring that you continuously mop up excess liquidity at 15 per cent. You need to explain to the public that when the CBN says that they are mopping up excess liquidity they are maintaining that there’s surplus money in the system and they borrow it not to use it for anything. So when the CBN itself is complaining that government debts are killing the economy I laugh. A year ago the central bank decided that it was going to borrow N6 trillion from the economy. What do you think would happen if N6 trillion is taken from the economy? It won’t be available to the real sector, and the person who holding and hoarding this money including the forex comes back to sell rations of those dollars in a market that is suffocated with Naira. It’s a no brainer! The naira is finished. The economy is finished. Let’s be honest with ourselves. We have been deceiving ourselves by not recognising this truth for so long. If we don’t I’m afraid we’ll be talking about inflation at over 20 percent and an exchange rate of over N1,000 to the dollar ultimately.
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