Nigeria’s economic harakiri: An embarrassing spectacle
AS JPMorgan expelled Nigeria’s sovereign debt from its Index just over a week ago, it seems that the time for Nigerians to remain silent while two branches of our government seem determined to lead us into catastrophe.
On the one hand, we have the Central Bank of Nigeria’s (CBN) monetary policy of vainly “defending” the Naira by choking off foreign exchange transactions via capital controls, and on the other, we have the Federal Government’s fiscal policy of importing vast quantities of refined fuel subsidised from “virtually empty” coffers. These are the two edges of the blade with which Nigeria guts its own economy whether we move to or fro.
We are committing economic suicide while the financial world looks on, aghast, as Nigeria makes a spectacle of herself.
Between the two evils we do both short-term and long-term damage to Nigeria’s economy: Damaging growth in the short term with schizophrenic monetary policy, and undermining long-term growth by fiscal indiscipline that makes investment planning nearly impossible for business.
We must demand protection against our own Central Bank. The bank has fled from pillar to post in a helter-skelter series of desperate gambits; freezing inter-bank liquidity by putting a 0% limit on foreign-exchange held by commercial banks, rapidly instituting a bottle-neck via their Dutch Auction window for currency, before just as suddenly abolishing this window before the election: and finally imposing baffling import restrictions and counter-productive capital controls.
None of these measures, or all of them put together, has worked or can work. The result has been that our Central Bank’s irresponsibility has left JP Morgan no choice but to expel Nigeria from its Emerging Market Government Bond Index. To pretend at false and disingenuous surprise and outrage as the CBN has done is to deal a grave insult to the common sense of the Nigerian people.
Every investor or observer with sense has known this was coming, in view of the fact that JP Morgan issued a “negative” watch back in January; when Standard and Poor’s downgraded our rating and when Moody’s and Fitch followed suit. Despite these warnings, the CBN’s behaviour has gotten worse and less logical in every move they have made in this period.
Each policy gyration from the bank plunges the blade deeper, slashing more of the vital organs of economic development while incentivising corruption. We have undermined local manufacturers, consumer sentiment, and investor confidence, damaged the stock market, whilst impairing the country’s sovereign rating – these have been the dividends of the last nine months of the apex bank’s policies.
Many Nigerians might be used to CBN’s inconsistent policy and perhaps expected nothing else, having lived most of their lives under some sort of unpredictable parallel rate and gormless policy.
Confidence has been fatally damaged, however, among the influx of foreign investors who have been so assiduously courted, cajoled, and cozened by successive governments since the return to democracy.
As the CBN’s only way of controlling the currency has been to severely restrict avenues of supply through administrative measures, these investors have found that they have drafted contracts based upon a CBN rate that turned out to be a mirage on the day that many transactions came to fulfilment.
Furthermore, these measures negatively impacted businesses based in Nigeria on an ongoing basis that have had difficulty figuring out how to fund their operations. As the increased cost of these difficulties is simply passed on to the consumer, we end up with a severe inflationary effect in the wider economy – the very evil we are ostensibly trying to avoid.
Uncertainty leads people to market expectations when they are unsure of the true value of the currency. Frankly, the market expectation for the Naira’s near and midterm future is not sanguine; this will lead to inflation as well as slow growth as business becomes wary of investing in capacity: thus we are staring at a real possibility of stagflation.
This will be the fatal cut from which it will be impossible to recover. The relatively little domestic price volatility we have seen is due to the strong profitability of Nigerian business, but as profits decline then panic in the face of pricing uncertainty will be our undoing.
Earlier this year if you looked at the results of bellwether companies such as Flour Mills, Dangote Flour and Honeywell, their earnings in Nigeria have already taken a hit and were depressed. This combines with the “3.8 per cent year-on-year contraction for a consecutive second quarter (Q2) in Nigeria’s manufacturing sector” cited by Bismarck Rewane are certain signs that Nigeria could mismanage herself into a recession.
The CBN is attempting devaluation in disguise: That is devaluation without the political implications of an actual devaluation. They’re playing politics plain and simple as they pander to the emotional attachment that Nigerians have to the strength of their currency; despite the fact that a strong currency is bad for the prospect of the growth in manufacturing which the country urgently needs.
The cost of maintaining the façade of a currency that hasn’t devalued is too high. The cost is too high and it cuts too deep, we imperil the long-term health of the country’s economy. Speculative Demand aside, the normal demand in Nigeria for foreign exchange is enough to cause a crisis under the present circumstances. Trade is 24 per cent of our GDP and by keeping the naira artificially high we are squandering the chance to incentivize the development of manufacturing in the country.
The present effort is akin to applying a tourniquet around a gut wound – utterly pointless. Worse than pointless because, like all wrong treatments, it distracts from the proper remedies. The reality is that demand will be relentless and reserves will deplete until such a time as foreign portfolio investors feel oil prices have bottomed or domestic interest rates go high enough to be irresistible and cause an inflow capital into the economy.
The unfortunate effects of the CBN policy raise the question, “has Nigeria come to this pass by risky but calculated design, or unfortunate accident?” Yes, the CBN isn’t stupid, but being “not stupid” isn’t the same as being smart.
The market looks at CBN and simply says, either they don’t know what to do or they aren’t able to tell us what they’re doing. Neither view inspires confidence nor this makes observers think they should shut the currency and, by proxy, the economy.
The dollar reserves are being depleted less quickly than when, earlier in the year, they tried to subsidise their way to a high value for the Naira – but make no mistake they are still being depleted. As such it is futile to defend the Naira by administrative fiats.
As Morgan Stanley recently noted, Nigeria’s failure to let its currency officially adjust has taken a severe toll on economic growth in Nigeria as, “Economic growth has decelerated sharply and financial conditions have tightened,” an understatement to say the least.
The current fragile stability is a phantom, which must pass. As one seasoned financier observed wryly, “there are still some volatile times ahead.”
We must wage war on our Fiscal Indiscipline
The only currently operating part of the country’s fiscal policy makes no sense. Simply put, in the new era of $50 oil, the series of bad but manageable long-term fiscal policies of the Nigerian government have become catastrophic. Amidst what The Economist characterises as the “detritus of daft energy policies” that afflict Nigeria the simplest and:
“The most straightforward piece of reform is simply to remove all the subsidies for producing or consuming fossil fuels. Last year, governments around the world threw $550 billion down that rat hole.”
Nigeria’s annual contribution to this general waste was $7 billion.
Plainly, subsidising consumption is neither sensible nor effective. Last year, while oil prices were high, it was a bad idea, but we could arguably afford to indulge ourselves – in the present fiscal circumstance it remains a bad idea in principle and a potentially catastrophic one in practice.
Quite apart from endemic corruption, it’s simply not a very good way of helping the poor. The money can be spent better and the Nigerian government must have the courage to follow the examples of India, the UAE, Kuwait, and Indonesia which have just recently jettisoned their subsidies. This money would be better invested in infrastructure, hospitals and schools – or even conditional cash transfers to the very poor.
The fall in oil prices means that Nigeria has a practical chance to reform its policy, and missing it won’t be simply squandering a good opportunity; it will have serious and negative consequences.
• Soleye is the president of CRYO Gas and Power in Lagos.