The federal government recently released an Economic Recovery and Growth Plan, a medium term plan for 2017 – 2020, aimed at salvaging the country’s ailing economy. The plan puts emphasis on science, technology and innovation, as well as the Sustainable De
HowwouldyouevaluatetheEconomicRecovery andGrowthPlanrecentlyreleasedbythe federalgovernment?
You should make a comparison between the so-called economic blueprint and the various ones they had come up with in the past. One thing that is a glaring failure in all of them is the fact that they do not recognise the significance of the major drivers of the economy. Every national economy rests on a tripod, namely, inflation, interest rate, and exchange rate.
What is the best practice benchmark for inflation anywhere in the world? In order to judge which is better, you look at the rate of inflation in successful economies. Their rate of inflation is never above two or three per cent. We can assume that it is a prime parameter for success that inflation must be in the lower single digits. You would notice that no country that has succeeded economically does so when the cost of funds in the system is over 20 per cent. For the successful economies, the cost of funds is usually four, five or maximum seven per cent.
The reason why I haven’t paid much attention to the economic blueprint that they have just released is that like all other production and growth plans, it doesn’t seem to recognise the importance of the three indices of inflation, cost of funds, and exchange rate. So long as that is not attended to, you would continue to have problems. Consequently, I don’t have much faith in the new plan for a very simple reason: they have not targeted any instrument towards ameliorating the burden of excess liquidity.
Excess liquidity is the starting point. Excess liquidity is the primary cause of inflation, because it is too much money chasing too few goods. Excess liquidity leads to inflation, which is also a precursor of higher cost of funds. Exchange rate is also a factor of liquidity, because the more Naira in the system, with the rations of Dollar being auctioned will always depreciate the Naira, even if oil costs $200 per barrel. You find that the common denominator preventing us from growing economically is excess liquidity.
Until you have a document that identifies this problem of excess liquidity and how to manage it, you can make any plan and you won’t change anything. You can’t grow with inflation at 20 per cent, cost of funds at 26 per cent, and exchange rate that depreciates when you earn more Dollars.
YouhaveraisedobjectionstotheideaofDollarauctioning bytheCentralBankofNigeria. Whatarethereasonsforyour opposition?
America does not earn Yen and does not allocate Yen to bureaus de change in America to control the price of Yen. Anything that is auctioned is sold to the highest bidder. The Dollar is auctioned by the supremo-general, the CBN, which is supposed to be protecting the Naira. When you have the commander-general of the Naira, the custodian of the Naira, auctioning the Dollar, rations of Dollar, what do you expect? Just like the natural rational person, people will pay more Naira for the Dollar that is auctioned. Imagine what happens when the custodian of the Naira keeps auctioning rations of Dollar, another currency, in a market that is saturated with its own currency. It means that forever your currency is doomed, because even if you earn more Dollars, only rations would still come to the market, the market that is saturated with Naira.
What is your take on the CBN’s new policy of directly providing additional funding to banks to meet their foreign exchange needs?
Let us forget about this cherry-picking and ask ourselves, has the fundamental structure changed? As long as the system, where you, as the custodian of the Naira, continues to auction Dollar in a market saturated with Naira remains, there is nothing they can do on that, that should interest anyone. It’s just a distraction. So long as the system continues where you have to auction Dollar, whatever gains they see is only temporary, it’s not sustainable.
At the cost of doing the Dollar supply, they are also losing to the banks N600 billion interest charges that the banks earn for making you mop up the excess liquidity in their hands every year. N600 billion for doing nothing, for not lending to industry. If they lend to industry, the excess liquidity that cause inflation won’t be there.
Inflation is the worst enemy any country can have. Every government has the prime mandate of making sure inflation remains very low. Our inflation rate keeps rising. Now it’s about 20 per cent. Where in the world have you seen any successful economy with inflation rate of 18 per cent? How do you think we can be like them when their inflation rate hardly goes beyond two per cent? Inflation is a ravager.
Canyouthrowlightonsomeoftheravagesofinflation? Eighteen or 20 per cent inflation rate means that every five years, if your income is static and your employer is so bad that he doesn’t increase your salary every year, the whole income they were paying you in year one may not buy you a newspaper. Inflation attacks across the board.
Inflation also determines the cost of borrowing. It means a family that used to buy one loaf of bread everyday can no longer afford it. It is replicated in households across the country. What then happens to the baker? He would close shop. You see how inflation can reduce consumer demand and also affect the viability of your industry.
But the industries have what we call the double whammy. Rationally speaking, lenders would be unwilling to extend credit to manufacturers when inflation is about 18 per cent, because if you do so, by the time you get your money back, inflation would have taken away a huge chunk of the value. Now you are expected to compete with countries where cost of borrowing is two or three per cent.
HaveyouapproachedPresidentMuhammaduBuharito makeanyeconomicpropositionssincehecameonboard? How would you advise me to do that? There is an economic team to which you can make such presentations. Am I living in the Arctic? If their economic team does read my contributions in the papers for 14 years, or two years – considering the new economic team – on a weekly basis, in three national newspapers, I can’t go telling them, please, listen to me. On what basis would I do that? Then it becomes as if I’m looking for something. I have travelled the length and breadth of this country with labour. Each time I go, they would say, oh, this is your transport for coming from Lagos. I would say, no, I can afford it; I’m not here for money. What I’m saying is not for sale. I just want to make sure that these wrong things are corrected.
There is no way we can grow or diversify the economy if we continue this way, because the more Dollars we earn the weaker the Naira. Take for instance when our reserves were in excess of $60 billion and the price of crude oil was about $120 per barrel, did the Naira appreciate? Some would say it appreciated. But by what rate? May be from N153 to N150, to the Dollar. I laugh when I hear about these marginal increases, when your income has quadrupled. It means it has inundated the market with the Naira equivalent of $60 billion.
IfyouweretomeetBuharitoday,whatwouldyouadvisehim?
I will tell him, sir, your people are not telling you the truth. The intervention they are asking you to make will have no positive impact on the economy. These interventions are not new, all other administrations before you have made similar interventions. Oh, I want to do diversification. Yes, sir, all other governments before you also wanted to diversify the economy. But they all failed because they did not recognise that diversifying the economy with increased and consistent output will become impossible with the scourge of excess liquidity ever present in the system. Why should we say we want to fly like the eagles of the First World and we are applying the tactics of the duck?
Sir, if you want to reinvent this economy profitably, tackle excess liquidity and you will find that the cause of excess liquidity are mainly two-fold, namely, CBN’s capture of Dollar earnings every time in exchange for Naira at its unilaterally determined exchange rate, and, secondly, CBN’s adoption of benign cash reserve requirements that still compel CBN to borrow as high as 16 per cent from the banks to remove redundant money from the system. Excess liquidity drives inflation, cost of funds, and exchange rate. Those three factors, if you can manage them at best practice level, with inflation not above two or three per cent and cost of funds at five to seven per cent maximum, then the growth that we crave would come. You can only get that arrangement when you stop the CBN from the stranglehold monopoly on the foreign exchange market.
A monopoly is a situation where one person or group of people control about 80 per cent of the market. CBN controls about 80 per cent of the Dollar market, that is a monopoly. With such monopoly you can expect the distortions that go with that arrangement. And at the end of the day, the CBN would pay as much as 18 per cent to mop up the entire Naira that has been substituted for Dollar by it and poured into the system. That means the banks have no interest in paying attention to the real sector because they are making free money for lending back money to CBN. They won’t be encouraged to lend to the real sector, where they know there are all sorts of challenges. In any case, how can any sensible businessman borrow money at 26 per cent in a system where he still has to provide his own road, water electricity, etc.?
HowdoyouremovethestrangleholdofCBNontheforeign exchangemarket?
Very simple. Do something that is constitutionally appropriate. Give Dollar earnings to their beneficiaries, albeit not in cash. Let CBN give Dollar certificates to the three tiers of governments for money received in Dollar – not money received in Naira. At the end of the day, Ambode, for instance, who wants to buy rail tracks, does not have to, first, be given Naira as allocation, and then go to a third party to change the Naira to Dollar to be able to pay for the track. If he has the Dollar certificate, he would simply approach the CBN with the invoice of the tracks or cabins he wants to order, which he lodges with his bank. The CBN would then release the money, from Lagos State government’s money with it, to the supplier upon receipt of the bill of lading attested to by the state government and its bank.
Meanwhile, if some states want their money in Naira, they can approach their banks to pay them cash value of the Dollar certificate. Consequently, the banks would have a flush of such requests and a lot of money in Naira. And because there is a limit to how much cash the banks can keep due to the cash reserve requirement, they would be compelled to lend to the real sector. Because the banks would not want to violate the cash reserve requirement, and there is no CBN coming to mop up funds, they would have no option than to lend at lower rates – single digit rates.