Beyond recession, towards a resilient economy
The management of Daily Trust requested a presentation from me on “BEYOND RECESSION: TOWARDS A RESILIENT ECONOMY”. My focus will be on “Towards a resilient economy” because virtually all the actions and policies that are required to help build a resilient economy are the exact same ones that will naturally take Nigeria well beyond today’s economic recession and unto a path of rapid and sustainable economic growth. If you aim for the skies you might end up at the ceiling. Likewise, if you do what is necessary to achieve rapid economic growth, then the chances are that you will at least attain modest growth, even where some plans fail.
My honest summation is that, even if we start today to embrace holistic, creative, sincere and reformminded economic policies, the “animal spirits” that these measures unleash will harness the creative and entrepreneurial energies of our people once again and quickly place us firmly on the path of sustained rapid and inclusive growth.
The Federal Government of Nigeria (FGN) is doing some things right, such as the effort to curb overhead expenditures and to be more frugal than past administrations, but then they are also doing many things wrong. There is a reluctance to completely break from the past and embrace significant economic reforms, even when our present predicament clearly warrants same. If we do not act now or if we do not act quickly, we may find our economy needlessly mired in a hopeless situation where the citizenry might not witness an increase in income per capita (living standards) for 6 to 8 years.
The search for an economic policy direction must end now because we are facing an economic crisis. A crisis is an inflection point. It is that point when multiple outcomes become possible. When you superimpose our demanding political calendar, which requires Presidential elections in a little over two years, it becomes clear that 2017 represents the last full calendar year that this administration has within which it must embrace major economic reforms, if we expect to still attain many of the more palatable economic outcomes. It is no use arguing over who or what caused the economic recession (-2% growth) and high inflation rate (over 18.5% p.a.) that we are currently facing; far better to focus on what we need to do to get us out of this sorry state.
There are several units within the FGN that are carrying out meaningful but disparate actions that solve many fringe economic problems. Various actors appear to be working in “silos” solving fringe problems. What appears to be still missing is a bold, holistic and audacious effort to harmonize fiscal, monetary, exchange rate, trade and macro-prudential policies in a bold and concerted manner. Very few people want to take on the “big gorilla” in the room.
They prefer to scratch around the fringes or work in silos, whilst almost accepting a 0.1% growth target as the achievement to celebrate because it might signify the end of a “so-called technical recession”. That is why the impact of the FGN’s Economic Management Team is not being felt. A corollary of this proposition is that many people are simply minding their own business. Because they fear for their jobs, they are not interested in tackling their colleagues whose actions are negating and/or eliminating the most positive outcomes that the Government owes the electorate. Meanwhile, the populace is yearning for transformative economic changes.
I know that there are those who will criticize me for saying that the FGN’s economic policy direction remains unclear. My response to them is that the most significant economic reforms embraced so far by FGN came about rather reluctantly i.e. by FGN hanging on to an untenable position until it eventually disentangled itself or got overpowered by its own internal contradictions. We saw this with petrol prices and also the devaluation of the naira. When these “reforms” came, they arrived in the form of halfmeasures.
Thus, we stopped short of both petrol price deregulation and opted instead for a limited price fix that was clearly unsustainable. We equally stopped short of adopting truly market-determined exchange rates and instead embraced a “fudge” that spewed widely divergent multiple exchange rates. Half measures typically bring some pain, but often fail (as in this case) to yield any lasting gain.
Determined to help force through the required soul-searching by FGN’s Economic Management Team, the rest of this paper will discuss ELEVEN major policy actions/inactions which the FGN and the ruling political party should consider. My approach is holistic. I am aware that some of these measures might require a bipartisan consensus. We must shake off the indolent mindset that leads us to believe that all Constitutional changes are taboo. Or the mindset that shirks any economic action that is out of the ordinary. Accordingly, I seek to draw attention to the following eleven items:
The Central Bank of Nigeria should accept that its foreign exchange and demand management policies have failed. The more restrictions they have placed on forex repatriation the less
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likely it has become that badly needed forex inflows from portfolio investors, foreign direct investors and Nigerians will pick up. CBN has inadvertently created a siege mentality, thereby making privileged access to its forex allocations, which are reserved largely for the politically well-connected, the best investment game in town. Furthermore, the directive to banks to allocate 60% of forex to manufacturers who account for only 10% of GDP has exacerbated an already bad supply situation. 40% is much too small to accommodate the rest of the economy and so all other sectors have been crippled, including the Service sector which accounts for over 50% of GDP. This has unleashed panic thereby sending the parallel market to the high heavens. Forex inflows disappeared partly because of the uncertainty surrounding the ability to repatriate interest/dividends through an overly restrictive 40% window. There is nothing magical about 60% or 40%. It has no “scientific” basis. Meanwhile it has huge adverse distortionary implications on the supply side.
The end result has been our mindboggling and widely divergent multiple exchange rates which have spooked investors who have taken fright and also taken flight. Sadly, we have effectively “shot ourselves in the foot” by taking unsustainable actions that crippled both forex inflows and the Service sector, whilst favouring even those manufacturers who own “zombie” industries that are horribly import-dependent;
2) Linked to 1) above is the failure to reach some accommodation with Niger Delta militants. Three previous administrations (the preceding three) ended up brokering peace deals. A failure by FGN to broker a peace deal has cost the nation over $6 billion per annum. Dithering over amnesty payments promised by a previous administration was ill-advised because Government is a continuum.
The FGN should urgently pursue high-powered negotiations which should be brokered by persons with a healthy track record in this activity and the ancillary pipeline protection business. In the longer term, I favour a constitutional amendment that reserves a one per cent royalty payment to immediate host communities on ALL mining and mineral producing activity (including limestone, oil, precious stones etc.). Communities will then be well incentivized to keep production activity going. This will give them some significant “skin in the game”, which is preferable to a longterm reliance on amnesty payments which constitute a moral hazard.
A 13% derivation payment to a possibly “unaccountable and distant” State Governor is not anywhere as effective as a 1% royalty payment to a host community;
We should simultaneously embark upon some asset sales which improve long-term efficiency and will yield foreign currency. I argued in my 01 October, 2016 published Letter to my Countrymen that the Federal
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