BONGO: Build Sustainable Infrastructure, Avoid Quick Fixes For Economic Rebound

Economist and Senior Faculty Consultant of Lagos Business School, Dr. Bongo Adi, says government should avoid quick fix approach and build sustainable infrastructure and institutions to achieve a firm hold on the economy. He spoke to DAVID OGAH.

Evaluate Nigeria’s economy under President Buhari
The economic situation since the inception of the present administration of President (Muhammadu) Buhari has been anything but auspicious. Inheriting an economy that tethered on the edges of collapse, with runaway interest rates, depleting reserves, low oil price and currency crisis, I guess the administration would have awakened to the enormous discrepancy between campaign rhetoric and empirical reality. The stock market – a veritable indicator of economic health – has plummeted, just as the currency is undergoing free-fall acceleration.

Investors in the Nigerian stock market lost over N1.6 trillion in the first 100 days of President Buhari’s government. At the end of 100 days, the market capitalisation closed at N10.1 trillion, down by over 14 percent from N11.7 trillion closing value on the last day of the former President Goodluck Ebele Jonathan administration. The All Share Index (ASI) dropped by over 13 percent to 29,511.1 points from 34.310.9.
These are palpable indicators to the uncertainties surrounding the policy environment, characterised by declining revenue and lack of clarity in economic direction.

Companies in the fast moving consumer goods (FMCG) segment of the market have seen profits eroded in response to massive drop in demand, as consumers are forced into belt-tightening. H1 profits of companies across the sectors have plunged: Unilever (down by 95 percent), Nigeria Breweries, Cadbury (98percent), Nestle (24percent), PZ Cussons (33percent), Honeywell Flour Mills (33percent) etc. The reality of the economy in the past five months has been very gloomy.

These facts are not exhaustive, but truly summarise the parlous state of affairs in our nation since the onset of the present administration. However, we admit it is quite naïve to attribute this to the actions or inactions of the current administration. I guess they have been caught in a twist of fortune brought largely by receding oil revenue starting from 2014.

Against the background of fall in oil price, what would you consider the right approach to shore up the economy?
Diversification has become a buzzword bandied about by both politicians and technocrats. We must diversify, but that raises several other questions: what are we diversifying into? How do we diversify? And even before we talk of diversification, do we have an overarching economic development ideology? My response is that over the years, we have allowed the basic building blocks of a developmental society to go under. Unfortunately, our politicians and policy makers are always interested in the same things that have always occupied their worldview – quick fix patches, instead of surgical and steady reconstruction of the enabling foundations for self-sustaining development.

The truth is that nothing short of the creative deconstruction of the dysfunctional and anti-developmental system we have now, is needed. But if we want quick-fixes “to shore-up” our economy, the first is, like Emir Sanusi said recently and I agree with him, remove subsidy; rebuild the refineries and attain self-sufficiency in domestic fuel supply; fully deregulate the petroleum sector; continue the ramping up of investment in the power sector to attain self-sufficiency in energy. These will massively reduce the cost of doing business and cushion the upside of shrinking purchasing power as a result of declining revenues. Like I said, these are quick fixes and will not deliver the economic El Dorado that we seek. To attain the competitiveness and poise needed to challenge the exploitative and unequal international system, which is largely responsible for our current woes; far-reaching reforms are not just required, but are imperative.

That would also require much more than leadership dictated merely by “strong body language” and rehearsed polemics. It would require deft intellectual sagacity as well as audacity to challenge the status quo in all its ramifications. Fighting corruption directly is good but is not necessary; creating strong institutions and individuals with strong moral dispositions would take care of corruption – what development economists refer to as “generalised morality”. That is clearly beyond quick fixes and I think government should quit the worn-out clichés of anti-corruption and get down to the business of creating resilient institutions that would dis-incentivise corruption.

Could naira devaluation serve as a viable alternative?
Putting your question into context, we know that devaluation of the currency is what takes place in a fixed exchange rate system and depreciation is what happens in a floating exchange rate system. The two refer to a drop in the value of the currency, meaning that the devalued currency is worth less than previously, relative to other currencies. If we are to devalue, it means we run a fixed exchange rate system. The implications of devaluation are that exports become cheaper; imports become more expensive; aggregate demand (AD) expands as a result of capital account surplus and hence real GDP growth with its attendant inflation.

However, these build on the assumption that demand is relatively elastic which of course is not always the case. The positive effects of devaluation in a fixed exchange rate regime will equally depend on the export profile of a country. For a mono-cultural economy like Nigeria, it is clear that sliding devaluation can never be beneficial because we have little to export. However, the other extreme is that with declining oil revenue–meaning that our foreign reserves are depleting – government faces enormous pressure to maintain the currency peg, using its reserves. How long will the CBN sustain the currency battle? Clearly, this cannot be sustained ad infinitum. Hence those who argue that government has no choice now than to devalue are correct in a way. Reason is, in the medium to long run, we will certainly run out of reserves to use as buffer and it is irrational to go borrowing just to firm up the naira.

Our foreign reserve is now under dual pressure coming from bridging the government current revenue shortfall and funding the exchange rate differential. This is a double whammy: either way, we are doomed! Devaluation is always a traumatic economic measure and is often undertaken as a last resort; after all other options have failed. But such procrastination simply adjourns the doomsday. Governments in power usually face inevitable public outrage and in transparent, democratic settings, rarely survive the aftermath of devaluation. Hence, no government joyously declares currency downgrading, except when it is inescapable. And, events that call for devaluation are usually of inescapable dimensions: it is undertaken primarily as an easier and less painful (from the government’s perspective) route out of stringent balance of payments deficit.

Having said that, and given our peculiar socio-political reality, I recommend that government adopt a stubborn stance by refusing any further devaluation of the currency. Japan, until 1985 Plaza Accord, refused to revaluate its exchange rate and China followed suit in recent years, to gain export advantage over the rest of the world. Such deliberate undervaluation by Japan and more recently China, worked favourably in the export-led growth strategy the two countries pursued. But for a developing country that faces the threat of output contraction, given that it depends on imported capital goods to produce the so-called non-tradeables, the impact of further devaluation would be devastating and could easily lead to social upheaval.

Expatiate on the economic implications of currency devaluation in an import-dependent nation?
Devaluation as I argued above, is always a traumatic experience for any country and the mere consideration of it is a pointer to severe disequilibrium in the macroeconomic system. As a corrective measure, you can only expect it to be painful. However that may be, the theoretical and empirical evidence on the implications of devaluation seems to be mixed. The prevailing “elasticity pessimism” implies that balance of trade may not improve as a result of devaluation given that exports may not match step with the attractiveness of the foreign exchange. Also, following the publication of a highly influential paper by Krugman and Taylor (1978), it is largely believed that devaluation could operate through several channels to induce a contractionary effect on economic activities. Rather than expanding, devaluation may likely give rise to a decline in real output. As an import dependent nation, the effect is definitely going to be adverse. And for the particular case of Nigeria where the macroeconomic fundamentals are already out of cuff, like high interest rates, the impact can be expected to be even more severe.

How can foreign reserves be spared from further depletion?
Of what benefit are large bank account to a person whose family is hungry and his roof leaking? Wouldn’t it be advisable to invest whatever we have as reserve to build the enabling structures for future capital accumulation? Or would you prefer that we have bloated reserve accounts and derive hedonistic pleasure in thinking about it? Reckless depletion of the foreign reserve cannot be encouraged, but we cannot support the padding up of reserves when education, health, and critical infrastructure are lacking.

Could removal of fuel subsidy offer real panacea to conserving foreign reserves?
Fuel subsidy should be removed at this moment. The new administration should address deregulation of the oil industry, boost refining capacity and implement PIB (Petroleum Industry Bill). Plugging the leakages in the system ensures that we are able to weather through any short-term effect of subsidy cancellation.

How best can government resolve the subsidy debate?
The truth of the matter is that sufficient public enlightenment hasn’t been conducted on the subsidy issue. Different people believe different things about fuel subsidy in Nigeria. Beside propaganda, government should embark on the sensitization of the masses on what the issues are, about subsidy. The reason why the common man is still opposed to it is because his questions about subsidy or no subsidy have not been answered convincingly. This must necessarily be done.