OPINION: STATE OF THE ECONOMY: Stimulation Is Another Key.....Haruna Y. Sa'eed
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| HARUNU YUNUSA SA'EED |
Inflation,
Nigerians and The CBN:
A Wrong
Prescription
By
HARUNA Y. SA’EED
Hysaeed2002@yahoo.com, 08035776025(SMS 0nly)
Prices have continued to rise and
our ability to pay for basic and essential items has continued to fall, so are
our well being and our prosperity. Investment for the future by firms and
individual households are on the decline.
Every
person on the street accepts that we are faced with inflation. So, the Central
Bank of Nigeria, CBN, cannot be wrong in saying same. It is also not wrong in
deciding what to do when the economy is faced with uncertainty as to affect the
value of our naira as a store of the overall value of wealth.
This is a key role as enshrined in
the Act establishing it. We know that every player in a soccer game is expected
to work toward scoring goals for his team for its pleasure and that of the
team’s fans/country. A disaster sets in where we have an “own goal”, where
displeasure sets in.
Similarly, if a doctor gives a
wrong prescription or fails to diagnose correctly, cure will fail to be
achieved or even fatality, death, may arise.
We doubt not of the fact that; the
proper functioning of money is extremely valuable in terms of promoting
economic efficiency. Thus, the CBN tries to always regulate the supply of money
so that it is sufficiently scarce that it can serve as a store of value.
Sometimes however, it does so
forgetting that money must, yet be, sufficiently abundant that there is enough
for it to service all the desired transactions. Therefore, the banking sector,
the CBN
system tries to regulate, must be sufficiently robust and stable. It must
provide, (and be seen to be doing so) proper incentives for lending to go to
viable and plausible projects, rather than wildly risky ones.
The level of price rise over the last one
year had been enormous. Those that carry out the responsibility for its measure,
place it at 16.8%, quite high by any measure. Individuals even see it
differently placed it more than double what it was at last year when prices of
rice, maize, sugar and more were at N8,500, N4,000 and N6,500 respectively and
now at N17,000, N15,000 and N15,000. People even take it to electoral front by
saying that it is not the change they voted for. Households ration their
consumptions and change their way of life. Effects have reached children
education and even stable food on the table. Family, social and even family
relationships are threatened.
The CBN might have, or obviously, looked at
the situation as resultant of cash supply, whether from the banking system or
which ever source a control of the banking sector can also stem.
As a cure, therefore, the CBN raised its rate
from 12% to 14%. However, this prescription, we believe, is wrong. If such a
prescription has any effect on our financial system, even though Gen. Ibrahim
Babangida, the then President, once said that our economy has defied all
economic principles, will only worsen our travails.
The source of the inflation killing us today
is not money supply. It is not also prosperity. It is recession, as we see with
the IMF’s forecast reversal from a positive to a negative (-1.8%) growth. It is
not from increased salary pay-out.
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| KEMI ADEOSUN, MINISTER FOR FINANCE |
Indeed, it is lack of these that
face us today. We are in recession, at least that is what our Ministers of
Finance and that of Budget and Planning tell us. Minister of Finance, Mrs. Kemi
Adeosun admitted the country “is technically in economic recession”; though
believe we can come out of it shortly by dwelling on where we are going – as
reported by Daily Trust on July 22nd, 2016.
The Minister of Budget and
Planning, Mr. Udoma accepts same but disagrees with the IMF – thus “we expect
to be marginally positive by the end of this year.” Salaries are owed by many
states; and companies have, mostly, performed poorly last year which also
translates into their dividend pay-out.
Government are only advertising
for jobs, and thus, not paying for them, yet. So far, only about N300bn has
been released and only nominally, too, from a capital budget of over N6.06
trillion, just about 5%. The Federation Account had been sharing about 50% of
last year’s allocation in the last 11 months, except this month (July 2016)
when about N550 billion was shared up from the usual sum of about N250billion
to N300billion monthly.
Again, lending by banks had been
tight. Banks hardly lend out. Further, the level of “hand out” being given by
mostly corrupt persons has almost dried out due to the government corruption
war, now being waged. People now stay within the basic need, in fact at their
bare. Capital and fixed assets markets have crashed; especially housing and
tokunmbo cars. So where is the money?
There seems to be consensus on the real
causes of the current inflation; at least outside the CBN. The foreign exchange
has seen changes within this period more than ever, in both official under the
CBN and in the private markets; Banks and Bureau de change. The dollar had
moved from N196 and N230 to about N282 and N374 respectively.
With our near total dependence on imported goods,
the translation in the rise in their prices is obvious. The pump price of
petrol had moved from N86 to a cap of N145.
Transportation of persons and goods has to
absorb this through their prices. Prices for services of, even, business
centres and barber shops saw rises. What we pay for electricity also moved by
about 85%, affecting everything on its way. Added to this, capacity utilization
in our remaining factories shrunk affecting quality supplied to the market.
Again, the positive control of our boarders
against smuggling meant fewer good across the border translating into higher
prices to cover drop in quantity and increased risk. So, a cocktail of these
factors have come together to raise our inflation level and not money supply.
The government, right from the campaign, has
made it very clear that a priority would be placed in getting cost of borrowing
down, to a single digit. This, it is believed, will bring the cost of doing
business and owning assets down. On the side of the banks, this will also stem
the incidence of default and bad debts, thus strengthening their balance sheets
and confidence in the financial institution.
The economy is in recession and cash strapped.
The Minister of budget and planning pledged that, with what the government has
planned to do, the economy will come out of the recession by the year end. This
is saying that what is contained in the budget, will, if adequately implemented;
give adequate injection into the economy as to stimulate it to come to life.
Therefore, stimulation is another key objective of government now.
To date, what we see are only advertisements
for the expansion spending. When the jobs are eventually rolled out, spending
toward execution will see money changing hands, enhancing both demand and
supply – leading to increased production and growth. We can then expect a
resultant inflation as a result of this, as growth comes with some level of
affluence.
Even then, the least the CBN should do is
to take action that limits availability
of loanable fund. Further contraction
of the financial system will further worsen the already bad liquidity
contraction situation. The focus of government, and indeed, the CBN is, in the
overall, and should be, to loosen the belt for people to take in air freely, or
at least more comfortably.
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| GODWIN EMEFIELE CBN GOVERNOR |
When Monetary Policy Committee (MPC) at its
251st sitting and the CBN announced the increase of the benchmark
interest from 12 to 14 percent, the governor said it was part of the measure to
attract foreign capital and check headline inflation.
However, it is doubtful if any of the two
objectives can be met. Foreign capital is attracted to, all things being equal,
profitable environment, while inflation controls are only effective if they
attack the root cause of the inflation. Interest rate measures are aimed at
controlling money supply – which we have seen earlier as not the cause of this
inflation. Rather, we see possibility of it negatively pushing the economy in a
number of ways.
One such is shifting the
objective of the Government in bringing the lending rate further away from the
desired single digit to a likely region of 27% - 28%. This will surely bring
more hardship to people and organizations already liable to banks – the
practice of banks being to adjust rate without recourse to borrowers. Business
will hardly cope with additional cost thus, worsening their profitability. Poor
income and balance sheet affect stock price.
Thus, this action will have a
weakening effect on foreigners’ interest in Nigerian businesses. New loans will
be less attractive (in line with the objective of the policy), thereby killing,
weakening expansion and growth. Inversely, the drop in production with rising
demand may push the inflation further up.
Second, as a consequence to the
falling activity above, the already bad unemployment situation may further
worsen as firms disengage staff while at the same time enjoying high prices for
small quantity produced.
Third, jobs or contracts
already executed with borrowed funds and not paid for may turn out to be
unprofitable leading to possible defaults and bad debts. The spread allowable
for jobs is usually around 30% and often not paid for over a period of one
year. With interest compounding monthly, the final cost is better only
imagined.
Fourth, the Government
advertised jobs may not be executed because of funding problems. This will mean
the multiplier effect expected from the expansionary spending may not be
achieved. This can leave the state of our infrastructure in a perpetual
deplorable state, thus slowing or even reversing the country’s match towards
greatness.
Fifth, the combined effect of
one to four consequences listed above, is to send the economy further into
recession. This will cause a lot of damage to the political goodwill of the Government
which can create unpalatable consequence.
Daily Trust of July 27th
has summarized, in a pictorial form, the effect of raising interest rates to
include: increase in the cost of borrowing; increase in mortgage interest
payments; increased incentive to save rather than spend; increase the value of
Naira; falls in consumption and investment; increase in government debt
interest payment and discourages investment.
Expectedly, as a way out of the
current situation, both monetary and fiscal overseers should come together and
complement each other as a way of finding solutions to the economic woes we
face. Suggestions would include for the CBN to key into the Government’s desire
in achieving a single digit interest rate, thereby designing a frame work and a
time table for achieving same.
Without doubt, the benefits of
low interest rates far outweigh those of high rates. The sooner we achieve that
the better, else our economy would hardly attain prosperity. It can be observed
that, in countries with low interest rates, venture capitalist still have to do
a lot to augment bank lending as a way of saying even the low rates can be a burden
on start ups.
Second, such collaboration
should see division of responsibility, in such a way that government efforts in
providing incentives through grants and other forms of support should not
conflict with those offered by the CBN – either directly or through the banks.
Third, interventions and
support from international donors, creditors and governments can be better
understood and put in proper perspective in line with the second above. This
will reduce duplication and ensure proper planning and even monetary controls.
Fourth, an overall goal should
be determined and agreed upon. For this moment, it is obvious that or this
moment that we are in recession, the objective is none other than growth. A
reasonable and a more economic reality is therefore, to stimulate the economy
with expansionary fiscal disbursement which the CBN should favour.
Fifth, in line with the Chinese
Loans for reviving and modernizing the railways, critical areas should be
identified – infrastructure, housing, education and health, with potential for
boosting local economy with high local contents, then international and local
financiers can be given good incentives to come in.
Clearly, the provision made in
the budget for capital is inadequate for the level of stimulation required to
energize the economy, nor is one year adequate. Very huge and ambitious
projects, that can last years with potential for not only cash injections but
for propelling the economy, are needed.
I suggested, elsewhere,
that in transport, construction of super high motor ways and railways, criss-crossing
the entire length and breadth of this Nation should be pursued. Further, time
is not on our side. The world cannot wait for us to drag on. Fortunately, we
now have a leadership the world respects. The environment clime has greatly
improved – insecurity and corruption have been sufficiently tackled.
In conclusion, yes, we
are truly faced with an inflationary economy, one occasioned not by money
supply but by a variety of other factors. Thus, seeking to cure it by control
of money supply will amount to wrong prescription. This will not only fail to
solve the problem but create a worst situation.
The real causes had been
increase in prices of foreign currency; petrol and electricity. Others are
enhancement of boarder controls and fall in output. Boarder controls act as
incentive to the Agricultural sector. The high price the farmers now enjoy,
though will flatten out after harvest, is an encouragement in the sector.
Prices of other items including petroleum will tilt towards equilibrium with
greater competition. In any case, working collectively by both monetary and
fiscal regulators can help in getting not only the inflation under control but
in getting out of the current recession.
Although, some may argue
that these recommendations may tamper
with the autonomy and independence of the CBN. I totally disagree.
Collaboration strengthens independence, and above all, understanding and
collective goal attainment. These are all critical for national match to greatness.
HARUNA Y. SA’EED,
Former Accountant General of Kaduna State and the Pioneer ES,
NEITI,
wrote from Kaduna.
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