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Published On: Tue, Nov 28th, 2017

Nigeria: Nursing a recovery

By SHITTA-BEY

God seems to love Nigeria. The reason for his preference is as mysterious as his choice of David, a shepherd boy, philanderer and consummate warrior, as a man after his own heart. For most humans Gods ways are inscrutable; understanding the creator’s ways is as complex as understanding the bond between a nursing mother and her child.

Nigeria has edged out of its first recession in over two and a half decades more for reasons that border on good fortune than on brilliant policy. At the heart of the recession in 2014 global oil prices tumbled like nine pins with crude oil prices falling from $104 in June to $33 at the beginning of 2016. By the time the administration of President Mohammadu Buhari took over office from erstwhile President Goodluck Jonathan in May of 2015 crude oil prices had rebounded to about $59. Between 2015 and the first half of 2017 the Nigerian economy has been stuck in a rut as lower fiscal revenues (N4.2trillion) and sticky recurrent expenditures squeezed the fiscal wallet by widening the budget deficit (estimated at 56 per cent of 2017 federal fiscal revenue) and raising debt servicing to about two thirds of the annual budget. Total national debt is currently put at a staggering N19.6 trillion and has been sprinting at a greasy annualized rate of 11 per cent per annum since 2007.

Recent figures released by the Bureau of Statistics (NBS) show that by the end of the third quarter of the year inflation rate had fallen to 15.91 per cent down from 15.98 per cent in September and 17.85 per cent in January 2017. Gross Domestic Product (GDP) as revised by government statisticians rose from 0.72 per cent in the second quarter (previously estimated at 0.55 per cent) to 1.40 per cent by the end of the third quarter of the year, suggesting a quarter-on-quarter growth rate of 94 per cent. This trend is not likely to repeat itself as it appears mainly to be the result of what analyst prefer to call a ‘low base’ effect meaning that growth was so low before that it was quite natural to see a spirited rise in domestic output as oil prices started to move up. By year end 2017 GDP growth should nestle somewhere between 1.7 and 1.8 per cent, resulting in a quarter-on-quarter growth of between 21.4 per cent and 28.6 per cent. A number of analysts have exuberantly predicted a final quarter growth of about 2.4 per cent by December but this seems rather farfetched.

If wishes were horses’ beggars would trot off in the sun. The local economy may still have to face critical speed bumps in months ahead.  A major problem would be the twin issues of towering interest rates and a looming budget deficit. Both problems are the devils perfect alchemy for slow growth and staggering unemployment. Why?

First, high interest rates lead to lower operating business margins after finance charges are taken into account but before tax, depreciation and amortization expenses are deducted. With high financing costs, manufacturers and wholesalers tend to push prices up in a usually unsuccessful bid to pass on these added costs. Rising prices trim down the quantity of goods demanded by consumers which in turn leads to higher stocks of unsold goods which also reduces manufacturers and traders liquidity and increases what economist call their business’s, ‘cost of carry’ or cost of holding unsold goods. Companies faced with these problems tend to reduce operating expenses by cutting back staff strength. This has been seen, rather disturbingly, even in the banking sector itself where staffs have been smugly laid off across different deposit money establishments.

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Second, the government’s fiscal looseness is a disingenuous means of living a lie. It is evident that the fiscal architecture cannot be supported by the sharply reduced external and internal fiscal revenues seen between 2014 and 2017; but rather than trim down its pork barrel budget as is normal with good housekeeping, the federal government has insisted on going on a borrowing binge to keep up appearances.  Like a probable scene from the television series, Lekki wives, Finance Minister, Kemi Adeosun, rather than agree to her husband’s suggestion to leave Lekki for some more modest accommodation in Yaba or perhaps Surulere in line with the family’s slimmer pockets insists that her spouse go to the bank and take a loan to augment recurrent income. For her, maintaining financial stability is less important than protecting social status. Of course this is not how madam minister actually runs her home but it is how Nigeria runs its treasury.

Rather than cut back recurrent spending by downsizing government ministries, departments and agencies (MDA’s), the fiscal authorities have decided to expand the tax dragnet to catch more tax evaders and tax avoiders. This is good but could be better if government decided to trim its flab. Too many social transfer payments and excessively staffed government agencies have made the budget a beached whale from which every roving scallywag can decide to cut a piece of flesh. True enough, puritanical Keynesian economics recommends that at times of recession government should expand fiscal spending and widen the public deficit, but this would make sense only if it creates fresh jobs. Obviously that is not happening because the Central Bank of Nigeria (CBN) has insisted on adopting a tight monetary policy that has not accommodated fiscal expansion by way of lowering interest rates. The CBN’s argument is equally sensible; inflation rate at 18.22 per cent in 2016 was too high to allow for monetary expansion, especially at a time low international oil prices was doing a mean number on the foreign exchange rate which was threatening to climb over the N500/$ watermark. But since the middle of 2017 with inflation sliding to a recent 15.91 per cent in October, exchange rate stabilizing at about N360/$ and  GDP nestling at a sober but hopeful 1.4 per cent, it is about time the CBN boldly brings down rates. No economy anywhere in the world has achieved meaningful growth with commercial lending rates as high as 20 per cent per annum.

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To make matters worse, the fiscal gap of over two and half trillion naira and the debt service rate of over two thirds of projected revenue in 2018, paints a morbid picture of state finances. If the fiscal authorities are not meet the growth targets of the economic recovery and growth plan (ERGP) between 2018 and 2020, government’s macroeconomic policies need to shift ground. Basic economics teaches that when the fiscal faucets are allowed to flow freely and money supply is choked off in a clammy bear hug, interest rates go up as gross domestic output takes a nasty dip. For 2018 to nurture good tidings before the 2019 election cycle the fiscal authorities need to be a whole lot sharper in policy design and execution. The fiscal authorities need to increase revenue by raising value added tax rates, bringing more people, especially the informal sector, into the tax net by suasion; cut down on government bureaucracy (this becomes more difficult especially as the President has promised his party faithful more jobs as 2019 elections looms) and insistence on greater transparency in budgetary spending.

All this, however, may not mean much if the CBN continues to keep rates up. High interest rates remain one of the economy’s must significant albatross. Not even (at least a sane) mother cuts off her child’s head to cure it of headache. The country’s monetary policy regulator needs to support the fiscal push towards economic expansion; its inflation fears are exaggerated and seem to be an emotional crutch to simulate policy performance. Monetary policy restraint is more effective the closer the economy is to full employment but with excess (underutilized) capacity the chief impact of lower credit rates is, in the short run, to increase output and not prices.  The CBN’s determination to reel in inflation to single digits is admirable but if this must come at the cost of people losing their jobs and manufacturers going out of business, the obvious preference is for inflation to slide on the strength of productivity gains and increase in domestic production.

Finance Minister, Kemi Adeosun, and CBN Governor, Godwin Emefiele, need to speak to each other more robustly, even though they appear to be on the same page publicly the implications of their respective policy stands is a different matter all together.  Of course all parents tend to want to protect their offspring from worldly harm but when parental love becomes a gilded cage, breaking free from the iron bars is the only way the child learns to grow. This is precisely the case with the Nigerian economy; the two wet nurses are stifling its progress.

 

 

Source: Business Hallmark, National Bureau of Statistics, Q=Quarter, F= Forecast

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