Economy: Adopt best practice solutions
Acting President Yemi Osinbajo has since May 29, 2015 been chairman of the National Economic Council. The Vice President is constitutionally assigned the responsibility, which make him not only the main superintendent of but also adviser to the President on the national economy. It was his lot to present this year’s Democracy Day Speech, which contains largely the economic report and expectations as follows: “In the next two years, we will build on the successes of the last two… we did not find ourselves in (economic) crises overnight, and we simply do not expect overnight solutions to our challenges.”
The above excerpt deserves critical appraisal. Economic report should ordinarily be based on verifiable results than be intended as propaganda. In this regard, the claims of economic success stand debunked by the Nigerian GDP report which shows that the economy contracted in the five consecutive quarters ending March 31, 2017 and an already one year-long economic recession. Contrary to official claims, the fall in crude oil prices was not enough to bring about the economic contraction. The factors responsible for the decline include, firstly, the administration’s decision initially to crush the Niger delta militants, which severely reduced crude oil production and export volumes. Secondly, the drastic reduction of energy imports as well as local production for domestic and industrial use whereas there was enough forex within the economy to procure needed imports; thirdly; retention of funds in the excess crude account against the principle of the paradox of thrift; and fourthly, improper management of the national currency compounded by naira devaluation. The way forward should have been de-sterilisation of a small part of the unutilised and sterilised over N100 trillion fake national domestic debt to meet any shortfall of public workers’ salaries and pension arrears at no additional interest cost to the national treasury.
As a matter of fact, the 2016 GDP distribution recorded 5.6 per cent for the entire Petroleum industry and 2.7 per cent for Public Administration. But for the sheer willful handling of public sector forex receipts in a manner that compromises the working of the economic system, the remaining economic sectors (which contributed 91.7 per cent of GDP and which did not face any forex threats) could have exerted more than adequate impact to buoy up the economy thereby preventing any economic contraction and recession.
Osinbajo claimed that the economic problems arose over a protracted period of time and pleaded for the administration to be given time to grope at an unhurried pace for solutions. While, admittedly, the economic challenges have subsisted for some four decades, they were/are the lagged repercussions of wrong decisions taken literally impulsively overnight long ago. Osinbajo also expressed the oft repeated intensions by administration after administration but which have remained permanently on the shelf, namely, “giving the private sector the necessary incentives and creating environment to invest and do business (and delivering) a country that grows what it eats and produces what it consumes” to which should be simultaneously added evolving and consuming cheap domestic bank credit in preference over foreign loans.
It may be recalled that the economy clearly headed in that direction in the 1960s/70s. for a maze-free way forward, the Cabinet and Economic Management Team (which Osinbajo credited with the administration’s 2016 recession-blighted under-achievements) should peruse date contained in the “50 years Special Anniversary Edition of CBN’s Statistical Bulletin” particularly Table A.2.4.1, Table 2.4.2 and Table c,4.1. from 1960-78, prime lending rate (PLR) stood at 6.0 per cent for three years and 7.0 per cent for 15 years. For most of the period, the deference between the minimum rediscount rate (MRR) and the PLR was about 2.5 per cent while the difference between the MRR and maximum lending rate (MLR) was 0.0 per cent in 1977, 1.0 per cent for 10 years, 3.0 per cent for five years and 4.0 per cent for two years. The lagged effect of the substitution of CBN deficit funds for withheld Federation Account dollar accruals (which began in 1971) started to manifest with the PLR moving from 7.5 per cent in 1979 to 29.8 per cent in 1992 while the MLR escalated to 36.1 per cent in 1993. For most years since 1979 the PLR has stayed above 16 per cent. Yet, the very infrastructural constraints adduced by banks to defend the present-day excessively high lending rates existed in the 1960-78 era. Also relevantly, manufacturing capacity utilisation that began to be compiled in 1975 peaked at 78.7 per cent in 1977 but plummeted to 29.3 per cent in 1995.
From the preceding, a significant correlation between cheap bank credit and diversified industrial activities is deducible. Given competitive lending rates, the volume of non-performing loans becomes negligible thereby making banks better off. By way of illustration, available World Bank indicators put domestic bank credit to the economy as a proportion of GDP for Malaysia in 2014 and 140 per cent and 22 per cent for Nigeria. Nigeria and Malaysia were economic peers in the 1960s. Today private sector bank deposit base can support loans amounting to 140 per cent of GDP. Nigeria’s 2016 GDP stood at N103 trillion. The indicated bank credit level of 22 per cent of GDP amounts to N23 trillion. That total sum, assuming it goes at the high PLR of 16 per cent, would yield under N4 trillion interest income in a year. But supposing bank credit volume rises to 140 per cent of GDP, the resulting bank loan potential become N144 trillion. If the sum is offered at the 1960s /70s PLR of 7.0 per cent, bank interest income will rise to N10 trillion.
The increased bank credit volume would translate into sprouting of diverse big and small firms (economic diversification at last), faster economic expansion than would emanate from government revenue alone, huge tax revenue from thriving enterprises, improved employment and lowering of poverty, etc. factors that lead to cheap bank credit engender stable prices (0.3 per cent inflation) and a realistic exchange rate. That tripod essentially defines the conducive environment that government is expected to put in place. Virtually all other needs including provision of infrastructure constitute lines of business which investors voluntarily undertake if profitable. Such is the road to the long hoped-for private sector-driven economy.
The critical role of cheap bank credit was highlighted the other day by the Manufacturers’ Association of Nigeria (MAN), which demanded exclusive bank loans at 5.0 per cent lending rate. However, special lending rates for different sectors are unhelpful and prone to corruption. The various sectors of the economy are interdependent and should therefore have access to competitive lending rates. However, sector-specific loan gestation or payment periods may be granted.
Therefore, Osinbajo should stop prolonging unnecessarily the country’s poor economic conditions. He should use just two strokes of the pen to put in place presidential executive orders that would (a) finally bring to an end the improper withholding of Federation Account dollar allocations by the CBN which began in 1971 and (b) scrap the Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree 1995, which unconstitutionally authorises the improper multiple currency practices. These two pen strokes will restore the economy to sound health within six to nine months or practically overnight.