Posted By: KOFOWOROLA BELO-OSAGIE and OLUWATOYIN ADELEYE
It is interesting that almost all stakeholders who have tried to discuss our current economic predicament believe that the Nigerian economy is in “recession”. But is this a correct characterization? If these stakeholders are in error, then, we can conclude that the nature of the problem is not generally understood, and if policy makers are in error in this regard, then policies designed to revive the economy will be ineffective, and may aggravate current problems.
What economic condition is Nigeria now experiencing? Let us quickly dismiss what it is not. First, it is not depression, where national output, incomes, employment levels and rate of inflation are all negative. Second, it is not deflation, where price levels and interest rates decline as well as aggregate expenditure in the domestic economy, as is now happening in Japan. Third, it is NOT recession which is characterized by negative growth in national income for two consecutive quarters (six months) without incidence of inflation. Fourth, the closest term to describe the current Nigerian situation is stagflation, which is decline in national income combined with inflation. We can argue that while stagflation is the closest description of the present state of the economy, that state is actually worse than stagflation, in the sense that inflation is accompanied by absolute reduction in national income and employment level, as well as a chronic external deficit. If we accept the fact that Nigeria is experiencing something worse than stagflation, then the appropriate package of policies that can revive the economy is significantly different from that being proposed by government, external donor agencies and by the organized private sector to tackle recession.
Recognizing the causes of the current Nigerian economic predicament is a major step to resolution. Some of these causes are policy mistakes of previous and present governments, wrong attitudes of Nigerians to production and consumption, and a curious tendency of accepting policy advice from stakeholders who place their individual interest over that of the country. We shall be specific.
- Failure to refine crude petroleum at home due to constant breakdown of the four refineries;
- Excessive importation of food and other agricultural inputs which Nigeria is well suited to produce, due to irrational dependence on shared oil revenue;
- Continued depreciation of the naira exchange rate which propels cost-push inflation arising from imports; especially petroleum products, industrial inputs and food;
- Sustained tight monetary policy implicit in high and rising interest rates which discourage investment by small and medium-scale enterprises;
- Recent trend of introduction of new taxes at Federal and State levels which is a leakage from the national income stream as it discourages production and consumption;
- Failure of the National Assembly to pass the Petroleum Industry Bill (PIB) which is expected to liberalize the downstream segment of the Petroleum and Gas sector with huge potential to increase output, incomes and employment;
- Failure of the political party in power, past and present, to restore a proper federal structure with considerable devolution of powers to federating states which was destroyed when the military overthrew the First Republic in 1966. All federal governments have resisted the restoration of the federal system that provided a solid foundation for stability, peace and mutual respect during the First Republic. Current political discontent and agitation in oil-producing states resulting in destruction of production and pipeline facilities reduces output of crude oil and gas, in the process destroying the environment, reducing earnings of foreign exchange as well as electricity supply. The solution to the constitutional problem is negotiation among the geopolitical regions, and definitely not the militaristic approach adopted by the Federal Government in 2016.
- Shortcomings in the implementation of The Treasury Single Account (TSA) which suddenly drained large sums from the commercial banks with adverse effects on liquidity, lending capacity, employment in banks and solvency, and increased exposure to bank distress.
Current economic problems arise from WRONG exchange rate policies adopted since 1986 under the Structural Adjustment Programme (SAP). Before then, the country operated a fixed exchange rate regime which provided a stable environment for the country to attain middle-income status during the Gowon Regime. Proponents of SAP and flexible exchange rate system argued that the naira was “over-valued”. From the initial exchange rate of N1= $1 in 1986, the exchange rate has deteriorated to N310.00= $1.00 on the inter-bank market and N475= $1 in the parallel market as at October 5. The orthodox theoretical argument is that depreciation of the national currency raises domestic prices, improves the balance of payments position and increases gross national income. But empirical results of depreciation of the naira indicate that the policy reduces national income as well as worsens the balance-of-payments position. This confirms the position taken by experts that the Nigerian foreign exchange market is unstable. The implication of this is that to obtain the desired results of improved balance of payments position, increased national income and reduction in the rate of inflation, the country should find a way to appreciate (raise the value of) the naira. This would involve devising policies to tackle destabilizing speculation against the naira, increase exports and devise a strategy of taming the parallel foreign exchange market by integrating it with the Bureau De Change and subjecting it to Central Bank control. Appreciation of the naira then results in lower rate of inflation increased national income and improved balance of payments position.
Nigerian monetary policy has been restrictive since the introduction of SAP. The Central Bank, in its inflation-targeting strategy of monetary policy, regularly mops up so-called excess liquidity by selling securities to banks, resulting in rising short-term interest rates. This discourages lending and makes the structure of lending interest rates prohibitive to investors. This works against increased national output and employment. The assumption of the Central Bank is that lending is for consumption, which would have been tenable if the inflation was demand-pull. In cost-push inflation, rising short-term interest rates, in addition to reducing output, may also compound inflation. In the current Nigerian situation, easy monetary policy is preferred.
Fiscal policy should be significantly restructured. Government’s commitment to increasing non-oil revenue should continue. The percentage of expenditure on recurrent items should be reduced while capital expenditure is significantly increased to accommodate additional infrastructural facilities. In the short run, budget deficits should be employed to expand national income and employment opportunities. Sale of national assets should not be considered.
In this era of globalization, application of new technologies, particularly ICT and the development of entrepreneurial capabilities make a country more competitive in world markets as well as increase the productive capacity to satisfy domestic demand. This policy, working closely with fiscal policy, increases national income, improves the balance-of-payments position and reduces inflation.
- Paper delivered by Professor Osagie on behalf of recipients of honorary degree awarded at the 42thgraduation ceremony of the University of Benin, November 26.
Posted By: KOFOWOROLA BELO-OSAGIE and OLUWATOYIN ADELEYE