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Economy: Do not sidetrack the solution – Part 2

By Editorial Board
02 July 2020   |   3:39 am
Pathetically, that call on federal authorities (to breach fiscal responsibility law) actually amounts to preaching to a dyed-in-the-wool violator of selected laws.

Pathetically, that call on federal authorities (to breach fiscal responsibility law) actually amounts to preaching to a dyed-in-the-wool violator of selected laws.

Disobedience to laws has become a trait in the Nigerian character no thanks to the military regimes of yore, which routinely suspended the constitution and did as they pleased. Tinubu cannot be unaware that the unsatisfactory state of the Federal Government-run national economy arose from persistent disobedience to the CBN Act and FRA and Appropriation Act provisions.

The Federal Government has been breaching the FRA through the incurrence of deficit expenditure in excess of the FRA ceiling of 3 per cent GDP in normal times and 5 per cent of GDP in emergencies by way of deficit monetisation of Federation Account oil proceeds in disobedience to the established (conventional) best-practice monetary procedure of converting export earnings to domestic currency.

Consequently, the inappropriate action annually subjects the economy to an actual fiscal deficit of about 10 per cent. The end product includes double-digit inflation with the accompaniment of high-interest rates, grossly devalued naira currency, rising poverty level, etc, which therefore cannot be cured by further raising the fiscal deficit level. The foregoing proves concretely that to sextuple the FRA deficit ceiling of 5 per cent of GDP as proposed by Tinubu will plunge the economy into pulverizing hyperinflation. To be sure, the Nigerian people deserve a better-managed economy.
Furthermore, Tinubu wants the CBN to decree low-interest rates into existence. Instructively, low lending rates are the norm in economies that adhere to the rules of the Maastricht Treaty, the document after which Tinubu averred that FRA is modelled. But the low-interest rates in those economies evolved. It is necessary to show how interest rates took root there. The contains a fact sheet titled, “Five things you need to know about the Maastricht Treaty.” It informs inter alia that the Maastricht Treaty on European Union came into force on 1/11/93 and with that, the European Union was established. It also states, “The Maastricht Treaty paved the way for the creation of a single European currency—the euro… The Treaty also established the European Central Bank (ECB)… The main objective for the ECB is to maintain price stability, i.e. to safeguard the value of the euro.” Elsewhere, in a finance journal, the ECB has defined price stability as inflation rates below, but close to, 2 per cent over the medium term. The major developed countries have adopted the definition. Accordingly, for Nigeria, the provisions of the CBN Act (inclusive of the earlier versions) and the FRA deficit ceiling as modified annually in the Appropriation Act make price stability as inflation rates below 3 per cent over the medium term. It is such inflation level that is consistent with the low-interest rates being demanded by the former governor of Lagos State.

As regards the official pathway to managing the economy, the prospects, going forward, maybe gleaned substantially from the report of the CBN governor’s online discussions with heads of industrial conglomerates on 20/5/2020 and another report of a member of the Presidential Economic Advisory Council (PEAC). From both reports, the economic situation looks bleak. First, the CBN governor who has a mandate of ensuring monetary and price stability lamented the low crude oil prices. The CBN governor wished industrial conglomerates would seek forex from their parent companies abroad in foreign direct investment to help diversify the economy.
Yet as the CBN governor spoke, the apex bank continued to operate its decades-long incorrect monetary policies of multiple exchange rates and multiple currencies, which thereby made the country’s forex available for importation of services and final products leading to avoidable undermining of domestic agricultural and industrial production at the expense of local jobs. CBN’s inappropriate handling of forex, for example, killed off the Nigeria Industrial Revolution Plan (2014), the bold effort albeit belatedly to make amends and boost domestic manufacturing. While the CBN governor pretentiously bemoaned the low oil prices, some 50 per cent of the country’s available forex nestled beyond official use for maintaining the true value of the naira and providing conducive production environment both in non-legal tender domiciliary dollar accounts in disobedience to section 2(b) of the CBN Act 2007 and outside formal channels at the disposal of currency speculators angling for further devaluation of the naira to the aggravated detriment of the economy.

Second, the EAC member confessed that under the present managers of the economy, stagflation has marooned the economy in a dilemma. In his words, “If you lower interest rates, you will push up inflation. If you keep interest rates tight, you kick people out of work”. Trapped in such a dilemma, the present economic managers fatalistically do not expect the economy to escape the miserable projected IMF GDP growth rates that trail the population growth rate and so make Nigeria to wax as the poverty capital of the world.
Third, in the reports, both the CBN governor and PEAC member yearned for the recovery of the crude oil prices to rescue the economy. Even the latter stressed that Federal Government would continue to depend on oil proceeds and explained that the Federal Government required $200 billion for nurturing investment in other sectors of the economy as a means of reducing poverty. But he did not give any time frame to achieve that end nor indicate if the sum would be complemented with external borrowing. Without doubt, this option is doomed for two main reasons, namely, (a) the glut in world crude oil supplies would keep crude prices in the moderate range in the medium term, and (b) Nigeria’s OPEC production quota required to prop up the moderate prices would prune oil export volume far below 2 million barrels per day with resultant far lower oil export proceeds than during the heyday of high oil prices.

However, the saving grace is that Nigeria has a mixed economy. So, the Government does not need to directly invest $200 billion (N72 trillion) in the economy. Government should concentrate on fulfilling its exclusive responsibilities such as (i) direct CBN to operate a single forex market system, maintain the value of the naira and guarantee price stability of below 3 per cent inflation and thereby bring about internationally competitive lending rates across the board; and (ii) direct the Budget Office, National Planning Commission and the Ministry of Industry, Trade and Investment to draw up comprehensive discriminatory tariffs complemented by a variable forex access tax regime. Given such a protected and conducive domestic production environment, businesses will access a vast amount of cheap bank credit to invest in various sectors of the economy and satisfy the large domestic market. In this process, jobs will be created, poverty will reduce and government non-oil revenue will swell. Additionally, the government should open up the economy for private sector establishments to invest in profitable infrastructural projects.
In the above scenario, the expected reduction in crude oil export volumes and receipts from crude oil would be more than compensated for by soaring non-oil revenue generated by the expanding economy that would also consume significantly increased volumes of crude oil and natural gas.
Therefore, as a solution the long-festering economic difficulties, it is long overdue for the Federal Government to tread the number one pathway by adopting conventional fiscal and monetary procedures as outlined in this newspaper’s editorial of 11-13 May 2020 titled “Economy: Token measures will not do.”  

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