When the Economic Ship of Nigeria actually entered the storm during the transition period of 2015, there was no captain and a petty officer (ill-equipped CBN Governor) was at the rudder, alone. His first accomplishment was to break the rudder. The ship wandered aimlessly in the storm, while the whole nation waited for a captain to be appointed in the person of a Finance Minister, who would put together a crew, a solid economic team to navigate the ship out of the storm. For some inexplicable reasons, the ship did not run aground or collapse in the long period it took to appoint a minister, something that should be seen as immediately urgent and critical.
Now on the effectiveness of fisco-monetary policy in Nigeria. Foreign exchange has more impact on welfare of Nigerians and the economy of Nigeria than interest rates. While in advanced societies they may be able to talk about interest rate as instrument to target inflation and by extension growth, we may not be able to do that in Nigeria. The reason is simple, we import almost everything we consume including toothpick and only less that 8% of the population has access to formal credit markets and banking. In this scenario, the flow through from forex rate to inflation is near automatic and blunts any direct effect of interest rate on inflation, and interest rates may not also flow through to exchange rate. Moreover, changes in the forex rate directly determine changes in welfare (poverty) without any wedge. And because of the large trade imbalance (unsustainable deficit without crude oil receipt), domestic interest rates on Naira has less impact on the economy of Nigeria than the interest rate on the US$ dollar or the Euro – our trading currencies over which we have no control.
Our manufacturing sector is so inefficient and the integration with the overall local economy so shallow that much of the credit given by banks simply goes to buy forex for import.
We have a silo-type economy in which each of the major sectors stands alone and faces external trading partners with a minimal form of inter-sectoral integration within the local economy. This is because we just import stuff and consume. Hence, we have a notorious asymmetric sectoral responses to economy-wide policies and shocks. Note that even in the oil sector, while companies in the upstream have lost revenue (in US$) because of lower prices, they have gained substantially as a result of more than 60% decrease in their Naira liabilities (including salaries, contracts in Naira, pensions and other Naira liabilities) in dollar terms. The midstream and downstream of the same sector, facing US$ inputs are affected adversely because of their Naira revenue last mile. The Banks and importers with US$ liability or first-mile input and Naira (last mile) revenue have collapsed or in the process of collapsing. Hence, a sectoral-bias monetary policy should not drive or inform overall policy. If we need to stimulate growth in certain sectors, like Agriculture, then we should make specific friendly policy to target the Agric sector, but we should make national economic policies that are nationally efficient and do not presuppose that Agricultural sector is the economy of the country.
On welfare/poverty, a change in forex rate instantaneously affects welfare of Nigerians, but it is not clear how short-term interest rates affect welfare of the majority of Nigerians, as they have minimal, if any, exposure to, and relationship with the interest rate transmission mechanism in the short run, especially in a crisis like this. Even if they will like to take advantage of the short term opportunities created by interest rate policies, the demand for money (the Naira) for consumption -as a result of the depreciation- dominates the demand or supply of money for interest rate arbitrage or other short run opportunities. And most Nigerians don't have the access or capacity anyway.
The effect of the balance of trade deficit on our foreign exchange dominates at every point the effect of the interest rate on our foreign exchange rate. Which again makes interest rate instrument hard to justify or extremely difficult to make successful. For a normal trading economy, a depreciation will immediately make exports cheaper, and lead to higher foreign demand for the country's exports and higher domestic demand for domestic products, which means expansion for factories and production, which means higher employment, and by extension higher demand for the country's currency (both by buyers of our product and also to finance the expansion), may be higher interest rate (if needed to cool the economy that might be heating up). This effect will, sort of, rebalance the forex with the appropriate level of appreciation, with the overall economy at a higher level of employment and capacity. In Nigeria's case with no exports, except oil, inefficient capacity to produce and all kinds of obstacles in the way of innovation and businesses, a depreciation of the Naira does not lead to these automatic adjustments, but only intensifies the demand for US$ and a further depreciation as speculators fuel expectations of further depreciation leading to all kinds of arbitrage activities and bets. Meanwhile, the poverty level and depth immediately increase, as relatively cheaper local substitutes of comparable quality are not available for the imports. Interest rate policy is useless, because the credibility and legitimacy of the local currency are in question, what drive our domestic behaviour at this time are the monetary policies governing the US$ and Euro, not our monetary policy. The initiative has been lost and the opportunity missed.
We are really at the mercy of oil revenue, which must improve to earn us higher dollars. Remember, it is in the interest of the oil industry, especially the upstream, to keep the Naira depreciated because the industry's receipt is in US$ while its local liabilities are mostly in Naira.
Besides higher oil prices or higher oil production, it is not clear what will take us out of this mess in the short run. However, tax reforms and fundamental expansions (not round tripping forex and importing components to assemble) of domestic production capacity are key in the medium to long run. I'm sure the shock was worse in the crisis of 1984-1988 when the Naira fell from N0.75/$1 to N7/$1 an over 833% fall in just 4 years. Now that was a disastrous exchange rate crisis, and we still feel today the impact of the poverty and fundamental changes it unleashed. Nigeria's economy and Nigerians were very basic and not as connected to the rest of world financially then and there were less barriers to international mobility of Nigerians. So a number of Nigerians simply voted with their feet to counter the collapsing local economy. The government also became very innovative with programmes and projects: Fertilizer companies, New refineries, petrochemical complexes, export terminals and promotions, free trade zones, MAMSER, DFFRI etc. were all innovations of the time. Though the ideological foundations of some of these programmes and projects were questionable, certain integration, local process and expansion of the economy was achieved, and the momentum was not sustained, even as corruption ate away the gains.
On tax reforms, it is the laziness of the government and the fear of the politicians of the democratic implication of a solid tax systems that is keeping us hungry amidst plenty. There is simply no reason or excuse why the National budget revenue system of an economy with a GDP of over US$568billion economy (before the recession and exchange rate crises) would not be able to generate at least US$100billion in tax revenue. Only, there are certain depth of tax reform required to liberate some of this revenue that will by and large awaken a democratic response that will demand accountability in government expenditure. I suspect the politicians are avoiding this outcome, and middle class is comfortable with this silent and dangerous pact, which in the long run will kill our democracy and choke our economy to death. A healthy level of taxation is necessary to support a vibrant economy like the Nigeria's economy. A national budget of less than $30billion is no where sufficient to even provide the infrastructure that can support a US$500billion dollar economy, and we have not even talked about the education, research and health investments needed to keep it growing and vibrant. Tax reform is a critical necessity.
If this balance of payment crisis continues, because the oil prices remain depressed, we might be looking at a deepening of the currency crises, and then banking crisis (which is already underway because of the US$ liabilities of the banks), which will deepen the current economic crisis and then lead to an economic meltdown. And it might be worse than Venezuela and Greece, and may lead to another round of austerity measures that will bite so hard, a political crisis may occur. Why not?
When the Captain of the wandering economic ship was eventually appointed, it was the worst Finance Minister Nigeria ever had since independence, when competencies and capacity were matched with the circumstances facing the economic ship. It was very obvious that politics trumped exigency and national security, in the appointment. What we had was a rudderless ship in the middle of a storm with a bad Captain who could not even read an economic compass. Hence, we lost the early opportunities to stare the economy in a way that minimizes some of the adverse impacts. We should note that when it comes to the Finance Ministry and Central Bank, even nationality does not matter for countries who understand how important these positions are ordinarily, and a crises? That is why the U.K will hire a Canadian to become the Governor at the Bank of England and Ukraine facing a crisis will hire foreigners and immediately grant them citizenship in order to ensure the right competencies engage the challenges. There are several countries that have done that. No one can claim that in the whole of the UK a qualified Central Banker could not be found. It is not about qualification, it is about specific competencies for specific challenges at specific times. That this debate which should transcend nationality even degenerated to the level of politics and ethnicity, either suggest we have no clue what we are up against or only God will save us from our tribalism and idols of the cave.
The salient point is that the situation the economy has been facing is simply out of the league of the Finance Minister (who's an accountant with a BSc and Post-Graduate Diploma). Even more disastrous is the fact that we have a BSc/MBA commercial banker as Central Bank (CBN) Governor. It all meant the President had no idea what we were dealing with and up against. Knowing how weak the CBN is but with tenure security was sufficient reason to strengthen the economic team with a supper solid finance minister, to compensate for this weakness. The President of the Federal Republic of Nigeria chose to play politics with the critical last chance he had to form a solid economic team suited for the storm facing the country's economy.
Everyday I read the public debate in the media and I shake my head at the nature of the arguments and policies (if one could describe some of them as such) being proposed. In this, some have managed to make arguments that tend to transform this national crisis into an ethnic and political debate, a crisis that is a national security threat. It seems to me most of us have no idea what the country's economy is in. It seems either we have no clue or we are toying with what we are facing. We are facing a Financial and balance of payment crisis, let us pray hard that it does not get to a currency crises, then a banking crisis, an economic meltdown and then a political crisis. We are not better than Venezuela or Greece in terms of the quality of their economic teams and management; I just don't understand how Venezuela got there before us. With our relative population size, let us pray. Pray very hard.
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