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Going for Growth
The focus of the Central Bank of Nigeria and the soon to be constituted economic management team should be on growth-oriented policies so as to lift the ailing economy and bridge the widening inequality gap in the country, writes Obinna Chima
The Nigerian economy is currently in dire straits with major economic indicators looking grim amidst increasing vulnerabilities.
In fact, analysts have warned that the economy would be in a vulnerable position if oil prices fall again and further borrowing becomes too expensive or no longer feasible.
More worrisome is the fact that a country whose Gross Domestic Product (GDP) used to grow at an average of seven per cent about five years ago has continued to totter with growth hovering around two per cent.
The latest data released by the National Bureau of Statistics showed that GDP growth rate slowed to 2.1 percent in the first quarter of 2019, compared to the 2.38 per cent recorded in the fourth quarter of 2018.
This is just as the level of poverty and unemployment have risen sharply in the past few years, with population growth also outstripping GDP growth.
In addition, the country’s revenue generation level has remained low, even as the federal government has been accumulating liabilities faster, compared to assets.
Clearly, the performance of these macro-economic indicators has a relationship with monetary policy decision.
That was why as the Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, commences his second term, private sector operators during a recent consultative roundtable have stressed the need for the CBN to pursue growth-friendly policies.
The event titled: “Going for Growth,” was for private sector operators to express their views and also provide inputs into the roadmap to be unveiled by the CBN Governor for the next five years, in the coming days.
Emefiele, in his remark, warned that rising volatility in the crude oil market occasioned by the rapid increase in the supply of shale oil by the United States, which has seen its production rise from nine million barrels per day in 2017 to over 12 million barrels per day today, also portends great risk to Nigeria’s growth trajectory.
He stressed the need to take actions that would wean the economy from excessive reliance on crude earnings for survival.
“This means that we must strengthen our efforts over the coming years to stimulate growth and create jobs in critical sectors of our economy that will help insulate our economy from shocks in the global economy.
“In doing this, the CBN has recently been caught in a syndrome which we term “The Dilemma of Monetary Policy in Nigeria.”
“Typically, for a nation to be seen prosperous, any citizen of that country will expect the following macro-economic indices to prevail: That is, a low interest rate regime, a stable exchange rate regime and robust reserve position, a low inflationary environment, and lastly, an environment of full employment.
“In fact, I love these and would have less stress in monetary policy if all these are possible. But the question we should ask ourselves at this session is, in the Nigeria of today, are these all possible at the same time?
“Indeed, we are fully cognisant of the diversity of opinions of even some of you in this audience regarding our actions on monetary policy.”
Defending the Naira
To Emefiele, the Bank would continue to defend the naira, saying that the CBN Act demands that the Bank “defend” the Naira using the foreign exchange reserves.
“In effect, the CBN would be disobeying the law establishing it, if it sits idly by and allow the Naira to be determined wholly by the so-called market forces.
“Second, those who call for floating of the currency betray their willful ignorance of the effects of significant depreciation, however short-lived, on inflation.
“Several empirical analyses have shown that the pass-through of changes in the exchange rate on consumer prices is almost one-to-one.
“This implies that for every percentage point depreciation in the Naira, there is almost the same rise in inflation.
“I have also heard a lot of people suggest that all they want is for the CBN to reduce interest rates. In fact, for us at the CBN, achieving a low interest rate regime will give us a great sense of accomplishment.”
Constraints to Reduced Interest Rates
Furthermore, Emefiele noted that given the determination of the central bank to stimulate economic growth, he would continue to pursue a policy of moderating interest rates.
“Yet, in an environment where inflation recently was a high as 18.72 percent, it would be counter-productive to reduce interest rates because any attempt to ease interest rates under a high inflationary environment will no doubt retard growth.
“While we are delighted that we have been able to fight inflation down to very low double digits, we believe it is still too high for the Nigerian economy. Our goal is to moderate it down to single digits.
“More also, we need to keep in mind that Nigeria’s high interest regime reflects not only the cost of capital, but also the cost of doing business in the country.
“A typical branch of Nigerian bank provides its own security with sometimes permanent police presence, its own electricity supply with several generators, diesel tanks and inverters and its own broad band internet services.
“For banks whose main source of income is from interest earnings, these deficiencies become costs which it must necessarily pass on to borrowers. So regardless of what we do at the CBN, it is important that we realise other aspects of our business environment that promote and sustain high interest rates.”
Speaking further, the CBN Governor who just last week assumed office for the second term of five years, said the policies of the apex bank in the past five years have been focused on protecting the purchasing power of the poor and vulnerable persons in the country.
According to Emefiele, the apex bank is very comfortable staying on the side of the weak, vulnerable, and poor masses and protecting their purchasing power.
He argued the central bank’s development finance initiatives and foreign exchange intervention are targeted at supporting vulnerable persons in the society.
“Sadly, while most people in this room may be spared the brutal consequences of inflation, the majority of Nigerian masses and fixed income earners are not.
“The poor masses are the ones that bear the brunt of losing purchasing power of the meagre salaries they receive, ever so infrequently.
“Indeed, given the current resistance to pay increased minimum wage of N30,000, one wonders how the fixed income earner would survive the consequences of inflationary pressure arising from the pass-through from exchange rate depreciation being proposed by the naysayers,” he told his audience.
Emefiele said the task of building a stronger economy was far from complete; with the pace of Gross Domestic Product (GDP) growth still very fragile and badly lagging behind population growth rate of 2.7 per cent. He reiterated the fact that the level of credit to the private sector by financial institutions was still very low.
According to the CBN Governor, domestic industries particularly high employment generating sectors like textile and garment sectors have continued to deal with rampant smuggling and dumping of materials through our borders.
“These challenges no doubt call for action by the monetary and fiscal policies through the implementation of policies; the spirit and letter of which must be respected by all,” he added.
“And then, you structure the school fees in a payment system that can last 30 years or more. So, it is that intervention in education that can begin to build the next world class innovators and students for Nigeria.”
Economic Growth Drivers
A former Commissioner of Finance, Lagos State, Mr. Wale Edun, in a presentation noted that forex supply is one of the factors that causes distortions to the economy.
According to him, the “task is for us to get foreign exchange from anywhere, be it diaspora and everybody bringing back their foreign exchange, because the challenge is always on the supply side. Basically we have to deal with the issue of liquidity in terms of foreign exchange.”
He urged the central bank to work with the fiscal authorities in attracting foreign investments, saying liquidity in forex leads “to so many good things.” He listed these to include stability in the naira and long-term funds for investments.
To Deji Alli, Managing Director of ARM Investment Managers, highlighted the impact of the country’s huge infrastructure deficit on economic growth.
He also advised the CBN to collaborate with other regulatory agencies to develop policies that can attract long-term equity financing.
“If we can’t attract long-term equity financing, then it is going to be difficult for us to attract foreign investments in any manner,” he said.
According to him, the right regulatory framework should be developed for pension fund administrators to commit some portion of the over N9 trillion pension funds to infrastructure development.
“Policies have to be in place to create attractive opportunities for the country to move ahead,” Alli added.
On his part, the Vice Chairman, Alpha African Advisory and former Chief Executive Officer of the Asset Management Corporation of Nigeria (AMCON), Mr. Mustafa Chike-Obi, stressed the need for the federal government to implement policies that would enable the country achieve double-digit growth rate.
He called for an end to the removal of certain subsidies in the country as well as pay greater attention to security and infrastructure. According to him, three subsidies in the economy – fuel, foreign exchange and electricity subsidies – were hindering growth.
On fuel subsidy, he said, “the economy is losing N1.2 trillion per year. Who gets the fuel subsidy? The rich people with six cars are those benefitting from fuel subsidy.
“The average rich person in Ikoyi is getting approximately 100 times a year fuel subsidy than person in Shomolu in Lagos.”
He added that, “everybody deserves to have electricity but you charge electricity based on those who needed it the most in the market price. Most people that uses generator pay N160/Kwh and pays comfortable.
“If you tell these power company that they can sale power at N160/kwh, they will make sure much money that more power will be generated.”
He also expressed concern about Nigeria’s rising debt service ratio, which according to him could be about 70 per cent.
“It is almost a guarantee that Nigeria is going to be talking about debt rescheduling soon and we need to start putting our house in order ahead of that,” he said.
He said: “The government acts like everything is fine and as if they have done well. The truth is things are not fine.
“The problem we have in Nigeria is that we keep problems until they become so big that we have to fix it. I have advocated that we should use inflation to change the minimum wage every year. We can be doing this if we have vision in small step because most of the great things that are done are done with a plan and gradually.
“We have serious problems in this economy. The problems are that of growth, unemployment and productivity.
To the Governor of Lagos State, Mr. Babajide Sanwo-Olu, power is a very important driver of economic growth.
For him, with improved supply of electricity, firms would be able to produce goods and services at cheaper rates.
The Governor pledged to continue to “fight power providers in the state,” until there is increased power supply to households and firms.
The governor emphasised that making Lagos a 21st century economy requires improved power supply to drive businesses and households.
He pledged to modernise essential services in the state and strive for maximum efficiency in the public sector institutions.
“We are going to do this so that we can become increasingly competitive and innovative. It is important to unleash the potential of the state so as to attract foreign direct investments (FDIs) to the state,” Sanwo-Olu.
He urged the Central Bank of Nigeria to remain vigilant so as to safeguard the economy from external shocks.
According to Sanwo-Olu, there was need for policymakers in the country to positively take advantage of ongoing US-China trade war as well as the Brexit to reposition the economy.
The President of the Dangote Group, Alhaji Aliko Dangote, on his part, described consumer credit as a vital tool for fighting corruption in the country.
To this end, Dangote urged the CBN and commercial banks in the country to work towards developing consumer credit products so as to encourage low income earners.
“We need to work very hard on consumer lending. It is even going to help the government in fighting corruption especially for the low income earners. If somebody has a paid job and there is consume credit, you can take such credit to buy household equipment and pay for four years.
“We must also do mortgage. It will also help in terms of fighting corruption,” he explained.
He, however, said the biggest challenge in the country was implementation.
“How do you have economic growth without power? Without power there can’t be growth. Egypt electricity increased by 10 gigawatts, which is equivalent to 10,000 megawatts, in 18 months.
“But in Nigeria we have been struggling for 18 years without adding 1,000 megawatts and we have spent about three times the amount Egypt spent. Why? So, I think we all need to be concerned about that. I keep saying that when you look at the contributions to the GDP, the government is only about 17 per cent and 80 per cent is private sector,” he added.
Owing to this, he advised private sector operators to remain committed to contributing to the growth of the economy.
“It is only the private sector that can partner with government to create this. It is not difficult but we must drive the process. No foreigner can invest unless we the locals invest in our country.”
He pointed out that smuggling was causing a lot of harm to businesses in the country, citing Nigeria’s porous border as a challenge.
Dangote said there was need to focus on import-substitution.
The Chairman of Zenith Bank Plc, Mr. Jim Ovia, in his contribution, stated that to engender growth, there is need to get all the fundamentals in the economy right.
“No matter the economic theory we propound, if the fundamentals are not right, it definitely cannot work. If we have the fundamentals right, the common man does not want to know whether interest rate is high or low,” Ovia declared.
The founder of the commercial bank also supported Dangote’s call for consumer lending, saying the reason why the initiative has not blossomed in the country was because of inadequate Know-Your-Customer.
The founder of ANAP, Mr. Atedo Peterside, in his remarks, noted that monetary policy has its limits.
He advised the CBN to ensure that the issue of multiple exchange rate is addressed.
He also said there was need to implement policies that would ensure that inflation gradually drops to about five per cent.
Peterside called for friendly policies that would encourage fledgling entrepreneurs, saying, “when Aliko Dangote and I were in our 30s, we were allowed to grow, but today we are killing the youths.”
He also urged governments in the country to address the issue of multiple taxation.
The Chief Executive Officer, Access Bank Plc, Herbert Wigwe, also said there was need for a conducive environment for businesses to thrive. He called for stability of government policies to enable investors plan long term. He faulted a situation where policies are suddenly changed in the middle of business decisions.
In his contribution, Nduka Obaigbena, the Chairman of THISDAY and ARISE News Network, advised the central bank to extend its development finance intervention to the education sector so as to enhance the quality of graduates that are churned out annually.
This, he said would have a multiplier effect on productivity in the country.
Obaigbena added: “We spend lots of money on school fees and our educational institutions are getting worse.
“What the central bank can do is to consider a framework for student loans, where proper salaries are paid to cutting edge professors so that we can get the quality we need in education.
Furthermore, Chike-Obi stressed the need for coherent and forward-looking policies to address the myriad of problems confronting Nigeria.
“We are badly in need of good leadership; we need a leader that would map out the strategy and roadmap for economic growth in this country,” he said.
“There is need for coherent monetary and fiscal policies. For me, the position of a CBN Governor should be a cabinet position and the CBN Governor should always be meeting with the Minister of Finance and the Minister of Budget and Planning every two weeks.” he added.
Therefore, as Emefiele develops his roadmap for the next five years, the central bank under him should play a stabilising role in influencing economic growth by ensuring effective transmission of monetary policy. The CBN should always develop a cordial relationship with the fiscal authorities so as not to be seen to be working at cross purposes. And as expected, the central bank must remain focused on primary of achieving stability. This means purposeful manipulation of policy instruments such that fluctuations in employment, production and prices are minimised and potential growth in real output is realised.