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‘We must rethink policies now to avert the bigger problem’

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Charles Chukwuma Soludo

Charles Chukwuma Soludo

Prof. Chukwuma Soludo is the founder of the African Heritage Institute, an organisation modeled after the United States Brookings for Applied Economics. The former Governor of the Central Bank of Nigeria spoke to journalists on the economy and the need for proactive policies in the country. CHIJIOKE NELSON was there.

How are the activities of the African Heritage Institute?
It is getting stronger by the day. We now have a new leadership team. It is an institute for Applied Economics. The vision of it is about the African Brookings institution model. You know I spent about two years at the Brookings and we had the vision to replicate the model then. We have broadened the reason for the change of name to go beyond Applied Economics to governance, politics and strategic studies. We are now ready to be actively involved in thinking the future, not just for Nigeria, but Africa and that for me is the kind of things I have passion for. The institute is on course. It is now training people who are teaching Applied Economics. It is sort of training the trainers.

You made a presentation at the last International Monetary Fund/World Bank Group meetings. What was it about?
The focus of the presentation was actually on monetary policy under uncertainty and they asked me to speak on the Brexit, because among governors of central bank of the 53 Commonwealth countries, some are directly involved. The concern was about the possible implications of the Brexit on the economies of the Commonwealth and being governors of central bank, what this could mean for monetary policy. The major hypothesis there was that Brexit can only be seen as just one of the many sources of uncertainties in the global economy today.

In worse case scenario, Brexit can only heighten the state of uncertainties. There is an uptick in the level of uncertainties in the global economy.
We haven’t gotten over the legacy issues as a result of the 2008-2009 global financial crisis. You can see that Europe and America still have tepid and sluggish recovery. There is a potential of China having a hard landing and there are fears about that, which could unravel quite a lot of things in the global economy. You can see the price shocks on primary commodities for dependent economies, such as Nigeria and so on. Several of them are in trouble. And they are in trouble as a result of the oil price shock, as well as wrong policy choices in response to the shock. As a result of the old shock, many countries have reached the limit of the policy squeeze that they have. Many have accumulated huge public debts because they ran excessive deficits.

For monetary policy, interest rates are almost at very low end and many of these countries now have negative real interest rates. So, there isn’t much. Where again are you to go to stimulate these economies? Some have raised interest rates in order to attract portfolio flows, but how far are you going to raise it without compromising growth? So, they have reached much of the policy handles. So, the emphasis of my message to these governors is that this is the time to take preemptive, proactive contingency planning, in anticipation of the next global crisis.

There is a whole lot of uncertainty and risks everywhere. It just takes one major crisis in some place and it will snowball into another crisis. So, what are the contingency plans that countries are putting in place? Otherwise, what you find is that people are going to be perennially reacting to the shocks as if they were not anticipated.

Just like in the case of Nigeria, in 2010, I wrote a piece, where I drew attention to the fact that we were having an unprecedented oil boom and we were actually saving nothing. We were actually depleting the reserves even at the peak of the oil boom. Like I always say, I met $10 billion when oil prices were around $30 per barrel. By the end of the year, oil prices was still around $30 per barrel, but we grew reserves by more than 50 per cent and kept growing it until we reached about $60 billion. I had an average monthly oil price of $59 per barrel throughout my 60 months in office and we were building reserves, almost doubling it every year. So, it is this kind of preemptive policies that you need before it comes, you don’t do it when it comes. You need to anticipate that the global economic and financial system, given the globalisation, is inherently unstable and it is inherently crisis prone.

How do you look at the global economy?
The global economic system is inherently crisis prone, even now.
IMF is pledged to begin zero interest rate loans to countries facing challenges. Does that tarry with what you’re saying?
Well, the IMF can give, after all they’ve got all kinds of concessionary lending facilities. They can give whether it is zero or it is at whatever rate. What does that really mean for many of these countries. The fundamental thing is to have a healthy balance sheet that is sustainable. Otherwise, if you are in an unsustainable path, whether it is zero or whatever thing, it remains unsustainable. You get one today and you need another one tomorrow, but you still have to pay back the principal.

The fundamental thing is the adjustment that gets you on a sustainable path, and that is where I think the central banks need to re-examine their instruments. I’m talking about the Central Bank of the Commonwealth. We talked about the instruments that they are using, and also called on the need for supra-national coordination. What needs to happen at the Group of 20 countries that account for about 80 per cent of the world GDP. Coordination of monetary and fiscal stimulus package in these countries could actually help to avert or at least postpone the crisis that we are talking about.

How would you have coped if you were elected the state governor, given the situation of now?
We would have coped, extremely very well. Even though at the state level, much of what you have is that people get to face the same shock. The Federal Government is a major constraint to the states, and that is why some of us believe that the current structure that we have is for a time that we no longer live in.

The current structure was designed to share and consume the oil rent, and I have argued that the structure that is designed for consumption cannot be efficient for production. But if that had happened, by now, I should be finishing my second term. So, at first term, when things were still going, I’m sure we would have used it well. We did it at the aggregate level, we would have been able to do it back in my state.

We prepared Nigeria to weather through the worst financial and economic crisis since the great depression. Nigerians took it for granted, but we still recorded over six per cent growth at the end of the year. We did it at the national level, we would have also done it at my state. The key word is seeing beyond today. When we were doing consolidation, people called it impossible. Then, when the global crisis came, every country was then recapitalising, but we had done that several years before. The key thing is that we should be able to see beyond today, and that is the message I delivered to the governors of the central banks.

While they are pre-occupied today, running in circles, the major thing is coming. That contingency planning, or future mapping is all about “what if this happens, how can we react?” It is the kind of things that help you stress test the system, and you then know the “how”. At such, if anyone crystallises, it doesn’t come to you as a shock, because you anticipated it and you have prepared the instrument to respond.

The items marked as ineligible for foreign exchange are now being produced. Isn’t that a positive effect?
Still, what will make those items not to come in is not that they are tagged ineligible for access to official foreign exchange. But if it is cheaper to import them, no matter what you do, they will come in. That is why we use two things- exchange rate and tariff, not eligibility criteria. If you import under the market-determined exchange rate and it is not feasible in price consideration, then it will be obvious that the importer will switch over to the locally produced one. But if the domestic cost structure is such that producers can produce at far cheaper price relative to the imported one then it goes that way. Take as an instance, where a bag of rice is produced at a cost of N5000 and somebody sells it at between N10,000 and N15,000, while the imported one is going for N20,000, nobody is needed to teach the basic economics that people should go for the locally produced one. You will see huge demand and because local ones are producing at N5000 and selling at that margin, they would massively expand domestic production. This is not a preaching matter. Go and check the history of banning things in Nigeria and see what has been the outcome.

But it was also expected that government would have supported with fiscal policy. Would that not have been right?
No. The first one is patently wrong, because once you have done that prohibition, the exchange rate has totally become misaligned and that distortion of the premium between the official and the parallel market is going to drive everything else in the macroeconomy. The harm that it has caused through the premium is more than anything you are going to gain from any other thing. Nothing else will happen when you have that level of distortion in the macroeconomy. It stops everything, because even the man you are giving incentive to produce is finding it better to trade in foreign exchange due to what has been created. What is the fiscal incentive that will create more than 30 per cent return in a week? None. This is why you have greater demand at the official window because everybody wants to get huge allocation so that you can round-trip some. It is a road to nowhere.


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