A former Central Bank of Nigeria Governor, Prof. Chukwuma Soludo recently stressed the need for policy makers in Nigeria to start developing an economy beyond oil by designing an export-oriented industrialisation strategy. This, Soludo, who spoke with journalists at a recent forum in Lagos, said would make exports the country’s major source of foreign exchange revenue.Â Obinna ChimaÂ andÂ Nosa AlekhuogieÂ present the excerpts:
You recently talked about Nigeria having a dominant and broken fiscal side of the economy; can you shed more light on what that statement meant?
In a regime where you have the total recurrent expenditure in excess of your total revenue; people talk about recurrent being 70 percent of the budget, they are including the debt.Â But as a percentage of your total revenue, your recurrent expenditure is a hundred and something percent which means as it is today, part of our borrowing is actually to finance recurrent expenditure. My dear friends, I do not know any country at least in the last 40 years that has been able to achieve the kind of transformation that we desire in terms of the investment requirement that you need to jumpstart everywhere where your recurrent expenditure actually is far in excess of your fiscal revenue. And you are borrowing to consume, so to speak. Thatâ€™s the first sign that you see. And you also see the borrowing thing. Part of the borrowing requirement, the escalating borrowing by the government is also linked to the forex regime. This is because government revenue is also partly dollar-denominated oil earnings. What you have is that you get the earnings and convert it into naira forÂ the Federation Account Allocation Committee at maybe between the range of N305 -315/$. Thatâ€™s the rate of the borrowing, whereas the general price level has adjusted at the rate of the parallel market rate. Now that gap will continue. And so you keep borrowing, becauseÂ if the exchange rate were to be much more market-determined,Â it would not be N305 and the fiscal buffer that you would immediately get can actually close that gap. So the huge borrowings that you keep having at all levels of government can be eliminated. Like I said, the price level has already adjusted because thatâ€™s the primary price indicator in the market. The prices that people hear, the exchange rate that people talk about is the parallel market rate. Anybody who saysÂ it is irrelevant is not discussing Nigeria’s economy. The official one is like the time when you had the price control regime. Even those who had accessed forex at the official rate, when they are fixing their prices, they are fixing their prices in comparison with the imported ones which are taking signals from the parallel market rate. So the general price level has adjusted there. So, in other words, when you do that, it also has implications for the fiscal side.
What do you think can be done to achieve a single exchange rate regime?
The first step in that direction and the mechanism for that is very clear and simple. The very first step in that direction is to eliminate the so called 41 items that you said are ineligible for forex. You cannot unify the forex market with those kind of things; once you begin to discriminate and do all those kind of things for eligible transactions. You have two ways if you donâ€™t want those things to come in. It is either youÂ use the exchange rate and then you use the commercial and trade policy – raise the tariffs on them but have a competitive exchange rate regime. If it is expensive for people to import them, they would not import them. But we have had this regime before.Â This whole concept of multiple exchange rate causes distortion in the system. Eliminate that and have one single market for all of this, and then you have the interbank market. It would work, period! It has been done before, it is not rocket science.Â Like I said, make no mistake about it, what has happened in the last two months, itâ€™s like what I said before, you have taken hundred steps backward and you are now taking ten or fifteen forward. Thatâ€™s a good thing to applaud. It is good progress. But it doesnâ€™t remove the fact that you are still ninety to eighty five steps short of where you ought to be. So, the first step is to eliminate the distortions and unify the market and so on.
Your advice to the monetary authorities is to eliminate the multiple exchange rate regime. But if you are to advise the fiscal authorities, what will you tell them?Â Â
The point is that at the fiscal level, the major constraint is politics. Here you have aggregate government revenue at three to five per cent of GDP at the federal level. It is one of the lowest in the world. Now, the Economic Recovery and Growth Plan (ERGP) targets to raise it to 15 per cent; but how do you get there? because if the fiscal revenue gets anywhere, even 10 per cent of GDP, much of the fiscal crisis would go. Now you are having debt service to current revenue at about 66 percent. Thatâ€™s clearly not heading anywhere. You have to do two things to fix the brokenÂ public finance – the revenue thing has to go up and forex is part of that equation. And of course, the tax reforms that must follow in terms of depth, breadth and collection efficiency and thenÂ the composition of government spending must alter fundamentally for us to get anywhere. As it is, it is largely broken. And we cannot also be talking about going to a post oil economy where the entire thing is really about oil. The non-oil revenue as a proportion of the non-oil GDP is almost zero. So, there is a hugeÂ work to be done there but in the short term, exchange rate must inevitably be part of that equation.
Don’t you think removingÂ the restrictionÂ on those 41 items from accessing forex would negate the federal government’s import substitution strategy. Also, a lot of manufacturers have invested heavily in domestic production, especially in place of those 41 items. What do you think will happen to their businessÂ if the forex ban is lifted?
You see, Nigeria has gone through a lot. That it is sad going through this adhoc import substitution mechanism. Yes, you need import substitution, but also not a crude one. We have gone through this before. We banned goods, sometimes we ban wheat, we ban this and un-ban it, every regime comes to ban and the next regimeÂ un-ban. That is not the way to deal with incentives. If you have a market-determined exchange rate regime and you do not want some things to come in, let’s say tomato,Â impose tariffs. And if the exchange rate finds its market value, the exchange rate plus the tariff will make the imported tomato uneconomical. That is where you deal with it on a sustainable basis, because as day follows night, if it is not done by this regime, subsequent regime would eliminate those kinds of things; you cannot afford to do a thing like this, it does not make any economical sense. It would not endure.
So part of what is going on actually, it is the parallel market rate more than anything else that has helped to signal much of the changes you are seeing even in production in terms of its protective effect. That is because it is not about allowing or not allowing imports. But when we think about imports, somebody should do the numbers, what is Nigeriaâ€™s total import as a percentage of GDP? When I hear those funny things about Nigeria being import-dependent, I donâ€™t know what they are talking about. Import as a percentage of Nigeriaâ€™s GDP is one of the lowest in the world. Do the numbers and compare it across African countries. So, when they say we are import-dependent, I do not know what they are talking about. The thing is to get our policies right and you are not going to stop the imports even as you are diversifying and going into import substitution because you would even still need more imports to sustain them because you would import machinery , parts, raw materials and so on. So as you industrialise and expand, your imports would continue to grow. What is the size, look at your current account, situation. So my view is that there are all kinds of policies that can be put in place to promote domestic industries. We had the backward integration policy on cement. There was no discretionary exchange rate for cement before they started building the factories. They were incentives that were built that were commercial in nature. Thatâ€™s where the Ministry of Trade and Industry would come in, thatâ€™s where Ministry of Finance would come in and central bank is to maintain a competitive and stable forex regime and allow the commercial policies to do their jobs. The point is that the monetary authorities cannot be everything, but they have to be something and then be effective at the things they were given the mandate. The central bank Act clearly spells out the four sole functions for the central bank. If only the central bank can deliver on those effectively and leave the rest and co-ordinate. Let the fiscal and commercial policy authorities do their own part, you would have a much more stable and competitive system. The point is to have a strategy if you want to diversify the economy. You also need exports. We cannot depend on oil and continue with this gyration. To have exports, you also need a competitive forex regime to encourage people to get into exports. So, if you are thinking that itâ€™s until you ban this or that, you actually forget the thousands of jobs and the many factories that have closed because they actually need some of this things as inputs for themselves. That is what I call having a mismatch between micro and macro by trying to pick the micro.
We need just not import substitution; we also need export-oriented industrial strategy. Import substitution is good but we are doing it in a crude form.Â But more importantly, for us to think of a life beyond oil, we must have a clear strategy that targets export-oriented industrialisation. We have to earn foreign exchange from export of manufactured goods. As we head there, we should be targeting manufacturing base in excess of 30-40 percent of GDP. For that to happen, some people said we have large internal market. A large internal market that is just a small fraction of the economy of Belgium; Belgium, a country of about 11-12 million people, its economy is more than twice the size of ours.Â But itâ€™s a tiny place. But can you imagine, Belgium thinking of itself as a huge economy.
Nigeria is a small open economy and the best strategy for creating sustainable prosperity is not import substitution but export oriented industrialisation. You cannot do that with this kind of crude inward looking thing. This economy is small in economic terms. When we look at the economy of 190 million, what is our per capita income? That is what matters because that is your purchasing power. How much can they buy? To create prosperity of the type that will lift up millions of people out of the job market, we need to be exporting.Â With high level of urbanisation, huge youth population and unemployment market, we need industrialisation like yesterday and it is not an inward look one. You need to be exporting. Donâ€™t forget, China has over a billion people but they were implementing export-oriented industrialisation and not import substitution and that is why they create trillions of dollars in reserves and now they are invading the world and opening markets all over the world and giving you loans trying to take up minerals all over the place. And they did that with a weak currency in real effective terms, very weak currency and now the world, even America is threatening to label them with currency manipulator because they are making their currency weak which would make imports into China expensive. Itâ€™s a deliberate strategy. It makes import into their country expensive and makes exporting very rewarding. But if we must also fix our infrastructure, it requires a lot more work than just talk to get these things to happen. But to go the easy way of going back to the 1970s, or 60s, crude import substitution is a dead strategy for a country like Nigeria. It can only work temporarily and in so far as we continue to have oil receipts to pay for your forex. But oil is on its way out!
Talking about fiscal reforms, what is your take on the Treasury Single Account (TSA) that has been built to over N4 trillion?
In 2015, I said TSA is a good Idea, the idea has been there and I commend the government for implementing it. But for an economy that is in recession, in dire need of refuelling, you canâ€™t go and claw back all the liquidity in the system and just sterilise it at the central bank and keep it there. Yes, you have achieved one thing. If you want to be uncharitable, you would say the emotional objective of ‘yes, letâ€™s deal with them, the bankers and these people that are keeping the money.’ But you forget that the ability to extend credit to the larger economy is also dependent on the cash and liquidity that they have. If you put that fund into the system, of course their liquidity position would change and the ability to extend credit would also change. The government itself is competing with the private people in the loans market with the diminished balance sheet in terms of the deposit base of these banks and the high cash reserve requirements that you put, then you turn around again and wonder why you have high lending rates and why they are not lending to the real sector at a lowerÂ interest rate. You cannot eat your cake and have it. You must be clear that each of this stuff that you take has major impact on the economy.
What is your outlook for inflation in Nigeria?
Donâ€™t forget, inflation is a twelve month thing. When you say March this year, you are actually comparing prices as at March this year to the level of March last year. If the price level has gone up, everything goes up. The subsequent changes, thatâ€™s why if you look at the monthly changes, they are very infinitesimal, but if you compare to the previous one, thatâ€™s how you get the rate. So as the base is elevated, the subsequent changes from that base, it doesnâ€™t mean that prices have come down, it only means that the rate of increase has slowed down. And I think people must get that point. Inflation is simply the rate of increase. So if the rate of increase relative to last yearâ€™s prices hasÂ slowed down, it doesnâ€™t mean that prices have come down as it were. Once you restore stability, then expectations, the way people form expectations even about mark- up pricing, will also come down significantly. That is because if people are producing and they expect that the next time they go to the market, the exchange rate is over the roof, of course they would sell the existing stock, taking advantage of what they are expecting it to be. Once you anchor expectations at that level it would also affect the inflation expectations and even the rate of change in price level.