By Uche Chris
Last week was a turning point for Nigeria in two economic fronts, a momentous time when the nation faced a long-denied truth.
First, the Monetary Policy committee, MPC, of the Central Bank of Nigeria, CBN, again, raised basic Monetary Policy Rate, MPR, or interest rate, by 100 basis points from 13 % in June to 14% in July reflecting the failure of the 1.5% hike in May to stem the rampaging inflation rate, which grew from 16.8% to 18.6%, a jump of over two percent during the period.
The second element was the disclosure by Finance Minister, Mrs. Zainab Ahmed, that Nigeria is practically broke. These two issues directly affect the economic future and living standard of the people. Both problems may appear disparate and unconnected on the surface, but for informed observers, they are two sides of a coin, and indeed, a product of the same policy mindset and orientation.
Put differently, inflation is high, which is the target of the rate hike, because Nigeria is broke. Nigeria is broke because it has been spending beyond its revenue capacity by embarking on a senseless and irrational borrowing, which every reasonable observer, including the World Bank and IMF, and local experts warned, would come back to bite our hind.
But Zainab Ahmed, and Mrs. Patience Oniha of DMO, argued dismissively, that we did not have debt problem but only revenue underperformance. However, shun of all the semantics and economic jargons, any reasonable person knows that debt must be repaid and it can only be repaid within available revenue capacity. So their infantile revisionism was a red herring, which has unraveled.
Repayment is not a function of the debt but of revenue. So borrowing is not based on the problem for which the debt is needed, but on the capacity to repay. A person on minimum wage may have a need for a car but no bank would advance him the money to buy it because he lacks the capacity to repay.
This simple analogy explains how foolishly idiotic our economic managers have been by borrowing according to need rather than the capacity to repay, which had been the mantra of Mrs. Ahmed and Oniha. About five years, former finance minister, Mrs. Kemi Adeosun, raised the alarm on the inevitability of today and nobody paid attention.
Ironically, it is the same persons, namely Ahmed and Oniha, who brought the foreboding tale, shamefully admitting, without resigning, their irrationality. In saner climes, we should be seeing their backs, not their disgraceful faces. It shows how incompetently the nation has been managed.
An interesting and intellectually engaging debate that went on during the Covid 19 period and governments’ response around the world, but particularly in the U.S; between two of the world’s greatest economists, Dr. Larry Summers, former Chief Economic Adviser, and Treasury Secretary to Presidents Clinton and Obama; and Prof. Paul Krugman, Nobel laureate, and apostle of “Depression economics”, came to a head yesterday, and bears relevance to our situation.
The debate had no winner until yesterday, when Krugman wrote an Op-Ed in Wall Street Journal, titled, “I was wrong”. The subject of the debate was the impact of spending the way out of Covid recession. Summers had warned then that excess money supply through cash transfers to people in the midst of scarcity of goods and services because of lockdown and social restrictions, will inevitably lead to inflation.
However, Krugman, who made his career on the success of overcoming the 1929 Great depression, dismissed the warning as offshoot if classical economics, in contradistinction to Keynesian economics. Well, we have the result before us and inflation is ravaging global economies, with the U.S. at nine percent, the highest in 50 years, and still counting.
The lesson here is pretty obvious: Nigerian government and the CBN were spending money as if there is no tomorrow, sadly so, when the money was being borrowed both from Ways and Means, and externally through bonds, Treasury bills, and loans. This went on when the economy was actually contracting, thus creating a huge money supply chasing fewer goods. So, the CBN should have known this day was coming.
The inflation rate surged to 18.63 per cent in June, up from 17.71 percent in the previous month, according to the National Bureau of Statistics (NBS). The new rate is the highest the nation has recorded since January 2017.
Official explanation for the necessity of rate hike is twofold: The effect of Covid, which we have referenced already, and Russia-Ukraine war and its global dimension, especially in relation to current energy crisis.
These are only half truths as the case of Covid suggests. Covid did not cause the inflationary pressure buffeting world economies. Rather, it was the knee-jack and reductionist responses adopted by the world, led the U.S., that is responsible. Although, Nigerian government gloated for exiting Covid recession in record time, it was a pyrrhic victory.
It was a short term gain at the expense of sustainable long term growth. We were borrowing to avert recession forgetting that debt must be repaid, and money that is not tied to production is hot money with inflationary propensity.
Again, Nigeria is broke not because of the Russia-Ukraine war, as government people have argued. We’re broke because of the unsustainable debt burden and subsidy, which has been aggravated by the Russia-Ukraine war. It is not the war that caused it; we were long broke before the war, which only made a bad matter worse.
In their presentations of the Medium Term Expenditure Framework and Fiscal Paper, last week, Ahmed and Oniha blamed revenue shortfall and subsidy for the situation. According to them, while oil production bench mark in 2022 budget was 1.86mpd, later revised down to 1.6mpd, output has hovered around 1.4mbpd, a shortfall of over 400,000 bpd, which they attributed to oil theft and vandalism.
Oil producers are enjoying price windfall on account of the Ukraine war, yet Nigeria is bearing the brunt. Deficit is over N3 trillion. Debt servicing overshot revenue by N310bn between at N1.9 trillion and N1.6trn respectively. Subsidy for 2023 will hit N6.7 trillion. How so?
Because of what we did, or failed to do, before the war. It is subsidy and lack of local refining capacity that are driving Nigeria to bankruptcy. Nigeria is having a pangs of non oil producers, as an oil producer.
The sustenance of subsidy is having grievous effects on the economy. Next year Nigeria will borrow money to pay subsidy, and there will be no money for recurrent and capital projects. Keeping subsidy beyond June 2022, as previously envisaged, was a mistake that caused our suffering today. And the labour unions and activists share in the blame.
Subsidy is undermining the little growth achieved before. Government is making political decision to the detriment of economic growth and development. Continuing with subsidy will eventually cripple the country and produce the Sri Lankan effect. Government should develop a holistic policy.
But it would be difficult to remove subsidy without assuring Nigerians of palliatives to cushion the effects, such as fixing the refineries, and providing cheap transport system.