Recession: Sustainable solutions and long-lasting recovery
Three stages are involved in fighting economic recession. The first stage is the Rescue Stage which, usually attracts heavy doses of fiscal injection into the economy. Fiscal injection too little and too late is not sustainable and could lead to delay in full recovery. At this stage, monetary policies are also necessary but must be properly aligned to produce the desired result. The second is the Reform Stage, which is about putting necessary reforms (innovations) in place that will lead to rebalancing of the economy and creation of jobs. The third is the Recovery Stage, which is when we start looking beyond austerity to prosperity. I believe Nigerians are anxiously waiting for this stage. Reconstructing a basterdised economy is quite demanding and an uphill task and needs the support and cooperation of every citizen to enable the government get to stage 3 (prosperity).
Unless we critically examine some of the mistakes we made in the past, we will not be able to fix the future in a sustainable manner. I will, therefore, commence this write-up with a brief overview on our past mistakes before I proceed with the rest of the article. I will start with the management of the naira exchange rate from 1994 to 2013. The journey of the naira from 1994 to 2013 is shown in the table below (source: IMF)
From the table it can be seen that the naira started an upward movement (appreciation) from 1995. The upward movement was driven by favourable market sentiment that greeted the financial market when FID was taken on the NLNG base project (trains 1 & 2) in 1995. Even some project partners and high ranking Nigerians somehow were in doubt that the project would progress to FID stage but thank God it happened. We on the project expected a favourable impact on the naira at FID of a multi-billion US dollar project and went ahead to make a provision of $139 million for naira escalation (appreciation) to hedge against the expected upward movement during the construction and early production phases. Unfortunately, our dream for the naira was cut short as in 1999, the CBN devalued the naira by over 320% to 92.34/$ despite the fact that crude oil price was on the rise.
The pertinent question is why was the naira devalued? If it was devalued to attract foreign investors, how many of them arrived to help diversify our economy? The devaluation continued non-stop through to 2013 and beyond. How can such a large scale devaluation be undertaken without any lasting economic value such as diversification of the economy, construction of the Brass NLNG, construction of OK LNG, construction of new refineries, rehabilitation/upgrading of the old refineries by the original construction companies, Ogoniland and the rest of Niger Delta clean-up, infrastructure development, and so on.
We missed a golden opportunity and the current government now has an uphill task to commence diversification and reconstruction of the economy in a low oil price environment worsened by the fact that the economy is in a recession. The Buhari government is now forced to commence sourcing for debt (loan) on a weak bargaining platform that could attract difficult or humiliating conditionalities especially, considering that lenders are aware that our options may be limited or our bargaining power is weak now.
Privatisation and market driven economy are good economic tools. However, I will continue to emphasise the fact that the way we do it in Africa is like children who are forced to grow up before they are ready (before their time). Developed economies started liberalisation after reaching a certain level of wealth and stability, and mostly only well into the 1980s and 1990s. Austria fully liberalised its capital control in 1991 when it was already one of the wealthiest and most stable economies in the world. Its capital account was liberalised only when its GDP per capita reached some US$24,000.
The naira unabating devaluation has been the most disastrous policy the past governments adopted. In 2007, the CBN started flying the naira redenomination kite. One of the reasons advocated by the apex bank was to reduce the cost of printing the naira. The idea was overwhelmingly opposed as it was seen as a hoax, but I see it as an attempt to shield the history of the naira from 1999 and beyond. I have seen some articles recently on naira redenomination. The Buhari administration should be cautious in buying into the idea of naira redenomination. Our children and grandchildren should be given the opportunity to follow the history of the naira and understand that there was a time when the naira exchanged at yearly rate of 0.71/$ in 1960 (source: IMF) i.e. 71kobo to 1 dollar.
When an economy is in recession, efficient alignment of interest rate and inflation could be key to driving recovery. I still believe it is unwise to continue to maintain a high interest rate regime to address the current downturn. The economy is challenged by both demand-pull and cost-push inflation. The floating of the naira has no doubt fueled the cost-push inflation which can be reversed through a combination of actions such as investment in new refineries and rehabilitation of the old refineries to put a stop on petroleum products imports and work towards the appreciation of the naira. In addition, current diversification and local sourcing policy if successfully implemented will address both the cost-push inflation and demand-pull inflation (frequently referred to as “too much money chasing too few goods”).
CBN needs to develop a good feel for the psychology of the market by distinguishing between actual inflation, nominal interest rate and real interest rate. I will continue to register my disapproval of the current high interest rate of 14%, as it will only attract “hot money” without lasting economic value as it is currently discouraging local investments at this critical time. High interest rate regime is not a sustainable route to dealing with recession. Developed economies do avoid the route of high interest rate regime during economic downturn. In 1999, Brazil made the same mistake by raising interest rate during economic downturn and the Real (Brazilian currency) suffered its worst devaluation. The CBN is currently following the familiar route of IMF for emerging economies.
The IMF is currently flying the zero interest rate kite for its funds. Federal Government must be weary of the terms and conditionalities. Federal Government should dig deep into the story behind the headlines of zero interest rate. I would rather go the route of the World Bank using development finance institutions, commercial lenders (debt), etc. The government must take pains to explore successful large infrastructure financing models. There are varieties of structured financiers both on debt and equity side. The Boot (build-own-operate-transfer) model for large infrastructure finance is cheap with Federal Government playing a role in equity contribution which could even be in kind rather than cash, based on previous development work. The Boot is a modern project financing model. It involves sponsor(s) willing to commit to a long-term investment in Nigeria. The project sponsor(s) will form a project company based on long-term concession to develop and operate the project.
• Koko is a chartered accountant
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