Economy: Token measures will not do – Part 1

The arrival of COVID-19 in the country has led to two fiat economic decisions, namely, varying reductions in interest rates on debt owed by specific economic operators and devaluation of the naira to N360/$1. Both measures can and should be honed by market forces into formidable tools for rapid economic growth and national prosperity. The announcement of the decisions was preceded by an ad-hoc “going for growth consultative round-table with CBN governor.”

Nevertheless, in addition to an Economic Advisory Council, the Federal Government inclusive of CBN, through the agency in charge of the Economic Recovery and Growth Plan (ERGP) where the secretariat of the National Economic Council (NEC) is based, is expected to have up-to-date plan implementation reports that should also indicate any missed goals with suggested remedies. So was the round-table not superfluous?

Exuding seeming benevolence, the CBN reduced the interest rate on its heterodox development intervention funds (amounting to N3 trillion) from nine per cent to five per cent and also extended payment moratorium from one to two years. Additionally, the apex bank granted dispensation to deposit money banks (DMBs) to extend charity, as it were, to indebted businesses through negotiated restructuring of outstanding facilities with a view to reaching COVID-friendly terms of longer tenures and lower interest rates than were initially in place. Similarly, the Federal Government was moved to sympathy and suspended interest payment on states’ debt whenever their FAAC receipts fall below a specific threshold while urging state governments to explore possible arrangements for their outstanding debts to commercial banks.

Amid the hyped COVID-19 benevolence, the size of expected interest rate cuts may be gauged from the monetary policy committee communiqué number 129 of 24/3/2020, which retained the monetary policy rate at 13.5 per cent. Given that inflation currently stands at over 12.2 per cent and it is still rising while the average prime lending rate (PLR) was 15.0 per cent and the average maximum lending rate (MLR) was 30 per cent in Q4 (2019), it is doubtful if the negotiated interest rates between DMBs and existing private sector or state government debtors would drop to single-digit level talk less equal the mid-single-digit range of international competitive lending rates.

Thus, as long as the underlying heterodox practices-induced inflation-fuelling excessive fiscal deficits and the mismanagement of total export earnings are unaddressed, the COVID-19 offers of interest rate cuts and devaluation of the naira are mere specious tokens. That is because major businesses and governments will still be saddled with uncompetitive double-digit interest rates and since CBN funds are routed through DMBs, the target small and medium enterprises would continue to be overburdened with extra under-the-table charges thereby negating the promised five per cent rate. And so the toll of the COVID-19 lockdown would probably be a deeper 2020 economic recession than was feared would arise from the injurious heterodox practices.

However, there is unexpected good news: the announcement of interest rate cuts alone represents open deprecation by CBN of the long existing regime of high interest rates. The Buhari administration, by implication, has voted for the conventional fiscal and monetary and exchange rate fixing procedures, which guarantee low interest rates and competitive production costs at all times. Therefore, following the easing of the COVID-19 lockdown, what the Nigerian economy needs to begin to bubble is correctional reform of the domestic currency, which has been ruinously managed since the 1970s. This newspaper has trenchantly made this fact known since 2001 as the way out of the statistically evident economic underperformance and failure in the midst of the country’s ample resources, but it has fallen on the deaf ears of stonewalling policy makers and their preferred economic advisers.

However, thanks to the coming of COVID-19, the chickens have come home to roost for everyone including even anyone with half an eye to see. The foreign loan-loving Buhari administration has been shunned by the fair-weather loan-dangling vultures of multilateral and bilateral and international capital market hues and was forced to apologise to Nigerians for begging a foreign individual for a gift of a few ventilators for treating COVID-19 patients. The vultures expect the economy to collapse before they wishfully swoop on the decomposing carcass.

But Nigeria does not need external borrowing and debt relief (the country was deservingly denied debt relief by the double-dealing IMF). This country is still capable of self-financing her economic success. To wit, the provisions of the Fiscal Responsibility and Appropriation Acts setting a ceiling of three per cent of GDP for budgetary deficit spending should be taken together with CBN Act 2007 Section “2 (a) ensure monetary and price stability.’’ Those provisions lay down for the CBN leadership to actualize (i) 0-3 per cent inflation range as price stability, and (ii) 3 percentage band (of individual exchange rate transactions) pivoted on the Appropriation Act exchange rate (AAR) as the mark of exchange rate stability. Accordingly, as regards price stability, given 0-3 per cent inflation regime there would arise near-inflation level central bank rate (or corridor-less monetary policy rate), which would sire competitive positive real lending rates of 4-7 per cent across the board. The consequential average PLR of four per cent and average MLR of 7 per cent will eliminate the tendency of the present day middleman-DMBs to profiteeringly pad the already excessively high lending rates. Low lending rates facilitate extensive access to direct bank credit (as opposed to hand-me-down CBN funds) by bank customers including small enterprises for competitive investments. CBN data show bank depositors’ funds are roughly at the same level as total financial sector credit to the domestic economy signifying underutilization of financial sector lending potential or capacity under the extant high lending rates regime. World Bank indicators of domestic credit provided by the financial sector as a proportion of GDP for 2018 are Nigeria (21.2 per cent) and, for example, Malaysia (this country’s quondam economic peer) (143.5 per cent). Also CBN data indicate that aggregate credit to the domestic economy (net) as at end-November 2019 was N35.5 trillion representing 24.4 per cent of 2019 GDP. A simple extrapolation showcases the benefits of a competitive low interest regime. According to NBS, Nigeria’s 2019 GDP is N146 trillion (at current market price). Suppose total financial sector loans are granted at the average PLR. Under the heterodox system, total credit of N35.5 trillion (Q4 2019 CBN Economic Report) at PLR of 15.0 per cent would give gross financial sector interest earnings of N5.3 trillion. However, total loans would rise to N210 trillion (143.5 per cent of 2019 GDP), which at PLR of 4 per cent, would give gross financial sector interest earnings of N8.4 trillion.

The benefits include (a) the financial sector would be better off under the low interest regime; (b) Government would generate increased tax from the financial sector and flourishing extensive bank borrower base; (c) The volume of cheap bank credit accessed by borrowers would exceedingly outstrip the constrictive CBN intervention funds, which are routinely undersubscribed; (d) Contrary to the misinformation fed to NASS through the Senate President by his preferred financial and economic experts, local borrowing by government does not exhaust banks’ lending capacity and so does not crowd out the private sector from cheap domestic bank credit; (e) The major establishments in the 46 GDP activity sectors would give birth to forward and backward linkage activities-driven diversification of the economy as a matter of course.

Recall the Federal Government even actively undermined and short-circuited domestic industrialisation and diversification of the economy when SON and NAFDAC gave Nigerian product standards to some Indian and Chinese firms to produce final products for Nigerians to import; and (f) There would be full employment and enhanced GDP growth rate.