Economy: Do not sidetrack the solution – Part 1

Three now distinguishable pathways to managing the economy deserve to be assessed based on their individual actual and/or potential benefits and sustainability. In chronological order, one pathway involves observing the true meaning of fiscal and monetary provisions of the laws since independence, which are today embodied in the CBN Act 2007, the Fiscal Responsibility Act 2007 (FRA) and the Annual Appropriation Act. Adherence to this pathway has been espoused in the Nigerian media since 2001. An outline of the fiscal and monetary practices and their potentials was highlighted in this newspaper’s editorial of May 11—13, 2020. The second and extant official pathway, which began in the 1970s upon the demise of Bretton Woods system of fixed exchange rates, stonewalls the intendment of the aforementioned fiscal and monetary laws and boastingly employs home-grown heterodox fiscal and monetary procedures to run the economy. The third pathway debuted in 2017 with Bola Ahmed Tinubu advocating unrestrained fiscal deficit spending by the Federal Government.

Amid the economic lockdown occasioned by COVID-19, Tinubu issued two statements, namely, “Economic policy: Coronavirus economic stimulus,” that was released in April, 2020, and “The case against high interest rates in time of contagion,” which came out in May.

In the statements, Tinubu urged FG to spend massively and also furnish funds at little or no interest cost to the private sector and thereby avert economic recession. Tinubu’s concern about the fastest road to bringing about national economic prosperity is not new. Recall (as contained in this newspaper’s editorial of 21/2/2017) that at the National Defence College, whilst the economy was in recession, Tinubu said among other things, “It is necessary to speak truth to power” and called on FG to bring the economy out of recession by “avoiding the nostrums of mainstream orthodoxy that say that government deficits are always bad”. However, it was in the April 2020 statement that Tinubu provided specific numbers necessary for a little appraisal of his proposal as follows: “Deficits run by a national government in its own currency are part of modern governance…The best step would be to suspend the 5 per cent (FRA) budgetary limit for this fiscal year. Alternatively, the limit should be raised to 25-30 per cent to allow the Federal Government more room to make the minimum expenditure necessary to save the economy and the people.”

Tinubu recommended that the FG should use the deficit funds to, 1) render emergency sustenance relief to most needy and modest Nigerian households especially the recent unemployed as well as owners of small and medium enterprises; 2) maintain demand for locally made products and help sustain private sector markets; 3) provide payroll support to companies and businesses whether or not their workers are fully employed; 4) hire additional government workers to augment existing bureaucracies to implement the programme; 5) re-establish commodity boards and enable them to pay guaranteed minimum to maximum price range for strategically important crops; 6) construct new crop storage facilities and improve transportation of farm produce to the market; 7) maintain the school feeding programme and expand it to as many states as possible thereby creating extra jobs and bolstering food production to enhance farm incomes; and 8) facilitate implementation by CBN of virtual zero interest rate policy and give conditional interest-free loans to large businesses with a view to assisting them to maintain operations and their pay rolls and even to hire extra hands. Additionally, FG should coordinate efforts with African countries for debt forgiveness by multinational agencies, failing which the debtor countries should seek a wholesale rollover of debt at reduced interest rate.

Tinubu is the acclaimed national leader of the ruling party at the federal level and his proposal requires a critical examination. Indeed, Federal Government is already implementing some of his recommendations through Trader Moni and school feeding programme in selected states. Also, the CBN plans to include non-interest window in its intervention programme. Now, suppose the Federal Government jettisons the revised 2020 budget in favour of Tinubu’s proposal. In plain figures, given the 2019 GDP of N146 trillion, for Federal Government to incur 30 per cent fiscal deficit, it is necessary to print and expend N43.8 trillion in 2020, which represents over four times the initial budget presented to the NASS. Tinubu made his case when the inflation rate was already above 12 per cent. So it was inconsistent to call on CBN to implement a policy of low or virtual zero interest rate in the second statement noted earlier.

Doubtless, Tinubu’s economic advisers wittingly dispensed with lessons from economic history of other countries. The sheer magnitude of the recommended fiscal deficit and its extensive disbursement easily surpass the scale of what occurred in either Germany in the 1920s or Zimbabwe in 2000s. Briefly, according to official sources, following French-Belgian military occupation in January 1923 of German industrial district in Ruhr valley in order to force Germany to pay its World War 1 reparations, workers embarked on passive resistance. But the German authorities continued to pay the workers with rapidly inflating German Papiermark currency.  In December 1922, the exchange rate was 7,400 German paper marks per US$1, but the exchange rate soared to 4.2 trillion marks per US$1 by November 15, 1923, when the economy finally collapsed. The Papiermark was subsequently replaced in order to put an end to the hyperinflation.

With respect to Zimbabwe, the revenue-strapped Mugabe regime resorted to extra budgetary printing of zimdollar currency to pay its soldiers (who were engaged in war in DR Congo), civil servants and to expand social services especially education. Economicshelp.org says, “In 2008, Zimbabwe had the second highest incidence of hyperinflation on record. The estimated inflation rate for November 2008 was 79,600,000,000 per cent. That is effectively a daily inflation rate of 98.0 per cent… (The highest hyperinflation rate was Hungary 1946 with daily inflation of 195 per cent.) To stop hyperinflation the Zimbabwe government stopped printing the local currency in 2009, and acquiesced to use of foreign currencies as legal tender. “In June 2016, nine foreign currencies were legal tender in Zimbabwe, but it was estimated 90 per cent of transactions were in US dollar and 5 per cent in (South African) Rand” according to official sources. But limited inflows of foreign currencies subsequently made it necessary to return to use of local currency.

Clearly, the end product of Federal Government’s massive spending of printed money beyond the FRA limit is known, namely, hyperinflation characterized by rapidly rising prices and interest rates, pervasive shortages of basic goods, extreme hardship, mass poverty, very high unemployment, loss of confidence in the domestic currency leading to barter, near-cessation of normal economic activity and economic collapse. When the domestic currency is restabilised, the economic setback suffered may require about five years to return to GDP per capita level attained before the onset of hyperinflation.

Some lessons should be noted. One, as Zimbabwe currency slipped into worthlessness, “far from stimulating the economy as the donors and multilateral institutions promised, market reforms deepened the economic crisis” cautions the Financial Times of London. Two, redenomination did not dent inflationary pressures as the people had come to expect hyperinflation and demanded higher wages and pushed up prices as hedge against the future. Three, there is no alternative to sound management of the domestic currency.

Next, Tinubu observed the FRA was modelled after the Maastricht Treaty. Curiously, the ex-Senator, ex-Governor that is ostensibly guided by regulations and a manifesto, Tinubu exhorted erroneously that fiscal laws are not adhered to in Western countries and encouraged Federal Government to disobey FRA, the law of the land.