The untapped solution to our economic crisis part 1
With the fall in oil prices and consequent economic crisis we are facing, there are calls for the convocation of an economic summit to proffer solutions to our myriad of economic problems. Flame to this demand came from our Nobel Laureate, Prof. Wole Soyinka which led the media assistant to the Vice President to state that a summit is in the pipeline. Whereas, the National Economic Council recently held an economic retreat, it remains unclear if a wider national economic summit is being planned. While some people have even called for the sack of the CBN governor due to his perceived ineffectiveness, there are debates for and against Naira devaluation.
All these calls and demands are flawed and clearly derive from our reactive approach to all our socio-economic problems. The most surprising is the demand for further devaluation of the Naira especially by our so-called erudite economists, obviously ‘neo-liberal text book economists.’ If a currency that is officially exchanging at N199 to the $1 (the global currency) is not devalued, I am at a loss on what further devaluation will achieve in a mono-economy such as ours. If we cannot achieve a higher export at this rate, even a further 100% devaluation will not create the ‘miracle.’ USA, UK and Germany with the most valued currencies have continued to maintain their global export competiveness.
What President Buhari needs at this time is to quickly assemble a competent economic team made up of some members of his cabinet and others selected purely on merit. A suggestion will be to include all past CBN governors, six renowned academic economists chosen from one top university from each of the six geo-political zones and three members from the Organised Private Sector (OPS). It can be described as a Council of Economic Advisers and headed by a thorough-bred economist with an unconvincing inclination for home-grown solutions. Just as our problems are clear, the solutions are not farfetched. All that is required is a courageous, committed economic team and leadership with proactive, innovative solutions to our problems.
In the 2016 World Bank Ease of Doing Business Report, Nigeria was ranked 169th out of 189 countries surveyed while Mauritius was 32nd, Rwanda 62nd and South Africa 73rd. This was not caused by a fall in oil prices or by the CBN governor. Neither are they responsible for our very high interest rates of above 20% while only 7% of Nigerian adults and 5% of firms have loans with the banks and access to credit remains a major problem to over 80% of Small and Medium Scale Enterprises (SMEs). With all the banking reforms over these years, only about 40 million people have accounts with the formal banking sector in a country of about 180 million people. Instead of lending to the real economy, our banks prefer to generate profits through all kinds of nefarious and irreconcilable charges. How can we be talking of further devaluation when inflation is above 11% and unemployment above 20% and these problems have remained a major challenge for both the CBN and fiscal policy providers for the last 45 years.
In the UK with the most valued currency and whose policies we often adopt, inflation is below 2%, the unemployment rate is 4.8% and interest rate is 0.5% from the Bank of England and below 5% from the UK commercial banks.
While the fall in oil prices have contributed to our foreign exchange problems, the more significant issue is the way the CBN (not started by Emefiele) has managed our foreign exchange earnings. In the current Federal Allocation approach, the CBN substitutes the accrued dollars with printed naira which are then allocated to states and other beneficiaries in line with the agreed sharing formula.
As the Naira-substituted Dollars form our so-called external reserves, this approach is inherently faulty and counter-productive as it contributes significantly to our exchange rate problems. Given our high import dependence and other factors such as corruption, this approach creates and sustains a kind of internal pressure on the Naira due to the exchange of most of the allocated Naira back to foreign currencies (Dollars) by the initial beneficiaries. It is this internally-created problem that the CBN then tries to address by selling back some of the withheld dollars (foreign reserves). Through this flawed process, the CBN therefore creates an economy that will continuously under-perform with persistent excessive fiscal deficits and inflation. We are, therefore, more or less creating and sustaining our problems.
One of the real solutions to our foreign exchange management is the need to adopt and quickly implement the Managed Float Naira Exchange System (MFS) through which the dollar-bearing Federation Account will be better managed. It is more proactive and more appropriate to our situation. This will help address another major monetary problem of the CBN which is the persistent excess liquidity in the system. It will stimulate the banks to rightly intermediate the economy rather than their current rent-seeking and dis-intermediation contribution.
Both inflation and interest rate will reduce while the banking sector credit to the private sector will increase. There will be no need for CBN’s regular manipulation of interest rates especially the cash reserve ratio and monetary policy rate which it recently increased. Interestingly, this MFS which has been advocated by many is contained in the Federal Appropriation Act (FAA) but for reasons not properly explained, it is yet to be properly implemented.
Although I appreciate that the CBN main mandate is to protect and defend our legal tender, the Naira, our exchange rate and economic situation require some innovation which sometimes might sound unpopular. To address the problem, it might be better for the CBN through a carefully managed system to allocate dollars directly to the concerned beneficiaries (federal, state and local governments) through their special accounts either with the CBN or banks. While some might argue that this will be illegal as it will amount to dollarisation of the economy, the truth is that our economy is already dollarised, and possibly ‘poundanised’ and ‘euronised.’
It is a matter of being practical or merging theory with reality to achieve a better and sustainable outcome. If legislation is required, it should be sought and received to effectively jumpstart the process. As they say, special situations require special solutions. To test its workability, it can be agreed that all beneficiaries of the Federation Account should get their allocations 50% in dollars and 50% in Naira for at least one year for a start. Moreover, if we are truly practising a federal system of government, I do not think that the states will not be allowed to generate foreign exchange through the export of their products.
The benefits of this approach are immense.
• To be continued tomorrow.
• Dr. Ngwu (PhD), is an Assistant Professor of Finance in a UK University.