One of the four disastrous policies that gave rise to Nigeria’s recession was discontinued by the Nigerian CBN about two months ago. Those four policies were (a) the policy of currency controls started in December 2014 (b) high interest rate policy in a recession (c) High CRR policy by the CBN in the midst of a recession and (d) the full implementation of the TSA and the movement of trillions of naira from the economy and kept in CBN vaults after Buhari’s swearing in and before his ministers were appointed.
The policy of exchange controls through artificially controlling the demand for forex led to JPM removing Nigeria from its JPM index and with it went billions of dollars of foreign exchange from Nigeria. It also had the added effect of dissuading other investors from investing in Nigeria. Now that that policy has been discontinued and the foreign investors are waiting to ensure that the new pro capitalist bent of the current CBN holds true, one can be rest assured that foreign currency will soon start to run into Nigeria at a time at which it is so much cheaper due to the massive fall in the value of the Naira to buy up Nigerian businesses or set up Nigerian based businesses with foreign capital.
The next layer of policy that needs to be attacked is the disastrous interest rate policy currently being implemented by the CBN. This issue took center stage with the debate between the finance minister and the CBN on the acceptable rate of interest for the economy in its present circumstance. The Finance minister wants growth but primarily wants lower interest rates in pursuance with her policy of giving effect to Nigeria’s fiscal policy of stimulating growth through the use of existing revenue sources as well as domestic and international borrowing at the cheapest rate possible for the FG. The CBN rationale was anchored on a number points: (a) past interest rate drops were not channeled into credit lending for businesses but directed to traders seeking to purchase limited dollars (b) lowering interest rates to allow cheaper borrowing for the FG in order to stimulate growth is counter-productive unless the FG first takes steps to boost industrial capacity, manufacturing capacity and output (c) they want to encourage the inflow of foreign capital because between July and now they have seen an inflow of over $1 billion dollars and (d) it asked the FG to reduce taxes to the lower income earners and raise taxes on the higher income earners as a fiscal tool of reducing the tax burden and increasing disposable income.
The context within which we are playing is a situation where Nigeria is in the middle of a massive recession. We know that most of the rams brought for sale at sallah were left unsold, rental properties in Lagos are going unrented at current prices, houses are going unsold, traders at Alaba and Ladipo markets are experiencing markedly low patronage, many state government workers are owed months of salary, children are being withdrawn from private school and the tales of woes about the state of the Nigerian economy is showing no let up. In effect, there is a distinct lack of liquidity within the system and the recession is a clear manifestation of the distinct absence of demand. What is clear however is that the CBN is intent on attracting foreign capital investments into Nigerian treasuries (debt instruments). This will encourage lazy investment managers seeking high returns to place their money with Nigeria once they are confident that they can retrieve their money from Nigeria at the market rate of exchange when they choose to exit the market. The CBN’s flirtation with exchange controls discouraged foreign investors from coming into Nigeria and raised questions about Nigeria’s commitment to the free flow of capital. That CBN policy has now changed some two months ago. It will take some time for foreign investors to get over the effects of CBN’s former and now discredited policy.
Eventually, foreign money will come into Nigeria to take advantage of the large Nigerian consumer market and the low cost of access to it by virtue of the massive fall in the value of the Naira. It is the investors that will set up business operations, hire people or that will buy up existing businesses and expand their operations that should be the sought after investors required. Their investments are more sticky and their commitment more long term. Lagos appears to have been a magnet for these types of investments in recent times.
The CBN is instead trying to attract the fickle and short term money. Investment into fixed income assets are short term and the entities taking advantage of this inflow are the FG, state governments and a few corporations. The money creates few jobs and it takes more than 14% interest to attract those investments as they would be more concerned about the ease of extricating its profits from the Nigerian market. The CBN did not state where the $1 billion dollars of inflow went to nor can it be sure that the money came into Nigeria because of the high interest rate as opposed to the discontinuance with the policy of currency controls.
What is clear is that whether money is injected into the economy through fiscal injections into infrastructural projects or through tax cuts to the very poor, the net effect is more money will be spent within the economy. I fail to see the rationale behind the criticism of fiscal stimulus on infrastructural spending due to an absence of what the CBN terms manufacturing capacity whilst in the same breadth encouraging the reduction in taxes which itself is stimulative. Infrastructural spending has greater long term benefits and can work to connect disparate markets that has plagued Nigeria’s different geo-political zones (especially where old rail links makes transporting perishable goods from the North East to the ports of the South uneconomic). The inter connectivity of the various geo-political zones can only ensure a greater level of economic activity throughout Nigeria.
The reality is that many businesses are using banks to finance their day to day investments/ operations and as a bridge when cash flow is temporarily under pressure. Additionally, a lot of consumers work in environments where resort to bank overdrafts and loans have become imperative. High rates of interests affects both classes of people/Businesses. Consumers have less money to spend and businesses bottom line are even more imperiled due to the weak demand for its products and services and the high costs of operations (of which high interest is one). Businesses faced with the reality that most cannot pass on that added cost to consumers will have to cut costs in other ways.
The most likely option will be to reduce staff to stay competitive. Unemployment can never be a good side product and we are seeing millions in Nigeria being added to the list of the unemployed. Whilst lowering interest rates in order to allow the FG to borrow on the cheap is hardly a good reason to lower interest rates, however lowering interest rates in order to stimulate domestic demand is a very good reason to lower interest rates. The CBN clearly thinks a recession is an acceptable malaise in its efforts to lower inflation through the inflow of foreign exchange and the consequent appreciation of the Naira.
What however is clear is that the fiscal and monetary policy of the country have divergent objectives and they are working at cross purposes. The FG wants a booming economy where growth is the hallmarks and government spending is to be used to give effect to that growth. The Monetary policy as effected by the CBN wants to attract short term investor money into the debt capital markets in order to instigate an appreciation of the Naira even if that causes most of Nigeria’s businesses to go into bankruptcy. The irony is that the supporters of the CBN policy position are calling for the sack of the ministers of budget and finance for the recession caused by the very actions and objectives intentionally being pursued by the CBN.
It is also becoming clear that an unelected CBN is using its legislatively guaranteed independence to frustrate the economic policy objectives of the elected government of Nigeria. The independence of the CBN was meant to ensure that credible policy positions were embarked upon irrespective of short term political imperatives. The wider issue now is whether a CBN at cross purposes with an elected government vis a vis policy objectives should be allowed to continue on its present course especially in circumstances where its economic expertise is in serious doubt. At least the public is gradually becoming aware that the recession was delivered by the CBN in its bid to encourage the transient foreign inflow of cash from investment funds in the hope that this will lead to an increase in the value of the Naira and a decrease in inflation. My view is that massive inflows of foreign cash will come once the CBN’s policy of currency controls was discontinued. The more useful and longer term form of foreign investment is what is needed as opposed to the short term investor base that seeks short term profit opportunities with the least risk.