Juliana Taiwo-Obalonye, Washington DC Nigeria and other debtor countries have been warned by the International Monetary Fund (IMF) of risk associated with debt repayment following growing global debt levels. This is even as the IMF has warned that voters’ disillusionment raises the threat of political developments that could destabilize a range of economic policies in…
By Onyedika Agbedo
Recently, the Federal Government unveiled its much expected economic blueprint tagged Economic Recovery and Growth Plan 2017-2020 (ERGP) with the broad objective of restoring growth, investing in social infrastructure and building a globally competitive economy. In this interview, renowned Economist and Managing Director, Cocosheen Nigeria Limited, Lagos, Mr. Henry Boyo, says the plan is standing on a faulty foundation and would certainly fail.
Do you see the recently launched Economic Recovery and Growth Plan 2017-2020 (ERGP) as an achievable project?
As they say, history is a very good guide for the future. Consequently, I think it will be appropriate to ask: Have we had a plan of this nature before? What was the expectation? What was the reality? When you take it from that perspective, you will recognise that the ERGP is nothing new. It is almost a rehash of all earlier plans of that nature from the Vision 2010, Vision 2020, NEEDS and to God knows what. They all have the same objectives of growth of the economy, competitiveness of the economy, increased rate of employment, improved social welfare, etc. So basically, in terms of intention and purpose, this particular plan is not different from earlier ones.
Then the second question is: How successful were the earlier ones? The answer obviously is that the economy was run without recourse to the benchmarks indicated in any of those plans. So, ultimately, you can say that those plans all failed to achieve the objective of regenerating the economy, increasing employment, increasing productivity and competitiveness, diversification of the economy and provision of infrastructure, among others. What should come out of that observation should trigger the next question, which is, why did they all fail? They all failed because they remained in denial of the significance of the appropriate management of money supply to an economy.
The fiscal plan and a projected visionary plan cannot be implemented in a vacuum. They all have to be laid upon the standard platforms that drive economies successfully everywhere in the world. And the tripod I refer to as the foundation for inclusive growth, real growth, export competitiveness, increased productivity, increased employment and all that, are not necessarily realised as a result of fiscal interventions, particularly the unfortunate hope we place on annual budgets as a driver of growth.
For example, we are now celebrating a N7 trillion budget as the highest budget ever in our history. But we fail to also recognise that N7 trillion today is equivalent to possibly N3.5 or N4 trillion three/four years ago. In other words, you really have not expanded anything; if anything, you have just increased the quantum of money but in terms of the value, it’s absolutely static or even possibly retrogressive. So, the expectation that you would get improved performance of the economy as a result of the expansion in the money spent is obviously unfounded. Besides, in an economy like ours where the requirement for power infrastructure alone is speculated to be over $100 billion and the total value of our N7 trillion budget is only about $21 or $22 billion, even if you consume the whole budget on power alone, our power needs would still remain largely unsatisfied. And so long as the inflationary tendency of 20 per cent or thereabout continues to slide the value of the naira, you might be expanding the quantum sum but in terms of real value, you are probably standing on one spot or even going backwards. So, the reality I’m trying to paint is that fiscal directives or concessions to make it possible for people to facilitate entry into certain areas of business might help but in terms of say quantum monetary interventions rather than real value, it is a misplaced hope that we would ever grow with that kind of arrangement.
Where then would growth come from?
In reality, growth is best predicated on private sector enterprise. This is because there is limitless amount of funds available in the private sector for investment and growth. So, if you have the real sector having access to funds that are cheap and the cash reserve ratio is as low as five per cent for example, the banks would have plenty of leverage to create more money in order to lend to people who would put it to work. If on the other hand you don’t have a benign cash reserve ratio that allows the banks to be able to lend out money to investors and things like that, you would of course have industrial contraction, employment contraction and all that. So, the point I’m trying to define is that it is a misplaced expectation to keep extolling the virtue of a quantum budget figure as capable of taking us out of recession or improving the performance of the economy; it is only a small quantum of intervention compared to what is actually required. But what drives an economy is the activity in the private sector and what drives the activity in the private sector is also the amount of money that is available at reasonable cost for banks to lend to industries and all that.
If the cost of fund is 20 per cent or more, as much as anybody would want to invest, it would be crazy to take loans at that rate because you would probably have serious challenges along the way. But if the cost of fund is very modest at four or five per cent, you find that investors would be able to access loans at cheap cost and also be able to invest those funds in productive ventures. But if simultaneously with excess of supply of money existing in the system as it has been existing for donkey years the cost of fund is high, what you see is that the government itself and the Central Bank will be shortchanging the system by borrowing more of the funds in the market than the real sector. The Central Bank particularly will be busy mopping up excess liquidity and in order to be able to mop up excess liquidity, it needs to offer to the banks higher rates of interest. Meanwhile, higher rates of interest to the banks means that the banks will be more inclined to lending to government and forsake the real sector, especially when lending to government is risk free. Really, there should be no much inclination for the banks to lend to the real sector knowing that at the rate of interest above 20 per cent, they can hardly survive because their money would be in jeopardy. So, you find a situation where the economy can never grow no matter the kind of ERGP you have so long as banks have the facility to lend to government at 15, 16 or 17 per cent interest rate in order to sterilise the money. Have you ever heard of any commodity that becomes more expensive the more surplus it gets? Any commodity that is seen to be in surplus must be cheaper; it’s a natural logical conclusion. Why is it that in the case of the naira, when it becomes surplus and in excess, it becomes more expensive to borrow. That is an odd reality. Why should any thing that is surplus become more expensive to borrow? That is a contradiction that is a pointer to the fundamental imbalance in the economy. Consequently, you have the reality that even if you have the best ERGP, and you ignore the power of this tripod that I have described above — the rate of inflation, cost of funds and exchange rate — it will be a miracle if it succeeds.
Given your submission, what should be the priority of government now in order to make this plan a success?
The priority of the government should be directed to ensuring that the private sector is given ample latitude to perform its role as the driver of growth. And the private sector cannot perform that role so long as the indices defined in the tripod I have talked about remain at variance with best practice elsewhere. You would agree that inflation at 17 or 18 per cent is at variance with two or three per cent in successful economies elsewhere. You would agree that cost of fund to the real sector at 20 per cent or more is at variance with four or five per cent in successful economies elsewhere. You would agree that an exchange rate that continues to depreciate even when we earn more dollars is at variance with successful economies elsewhere. So, that tripod I have described is so critical but people often take their eyes off the ball on those issues.
Available information indicates that government drew the plan in consultation with the private sector. Don’t you think some of the fears you have expressed were taken into consideration?
Don’t speculate about what you don’t know and about what I don’t know. Let’s talk about realities. The reality is that whether they consulted the private sector or not, so long as the end result of those consultations or non-consultation still mean excess liquidity and inflation, then the plan would fail. This is because it is not the portion that they say we are budgeting in a year that can drive an economy; I have made that very clear. Salvation would never come from the annual budget; salvation would come from an area that has limited supply of credit and that is the private sector. That is why the banks and the CBN have to work together. The CBN gives the banks the authority to create money and lend out and if they don’t have enough money they can come back to the CBN to borrow and lend out. But if the rate at which the CBN lends to the banks is already as high as 14 per cent, why would the banks borrow at 14 per cent and lend below that. They will probably lend at over 20 per cent and at that rate there is no way the real sector can perform. So, if the CBN really wants to galvanise the real sector, then its monetary policy rate must come to as low as two per cent. But the monetary policy rate can never come to two per cent so long as you have excess liquidity as a perennial burden. Excess liquidity as a perennial burden means that you are constantly being threatened by spiraling inflation and spiraling inflation makes nonsense of any economic plan. So, if they consulted with the private sector, they (private sector) will tell them that their problems are cost of funds, inflation and exchange rate. So, you find that the ERGP is also in denial of those same factors that led to the failure of Vision 2010, Vision 2020 and the NEEDS. There is no concise realistic plan for reducing the level of excess liquidity that drives inflation, cost of funds, high rate of unemployment and also productivity and competitiveness.
One special feature of the ERGP, which other blueprints lacked, is the creation of a special delivery unit in the Presidency to monitor its implementation. A lot of people believe that might ensure the success of the plan…
(Cuts in) Look, can you put your hope on the implementation programme of a project that has failed ab initio? You can say you have an implementation team to monitor the project but what are they going to monitor? A plan that cannot be implemented because the factors that should drive its implementation have been ignored? If the implementation team would be useful, they should go and monitor the progression in that tripod — the rate of inflation, cost of funds and exchange rate. They can say, ‘CBN, you know that for us to achieve this plan, inflation must not be more than two per cent because if inflation is more than two per cent, cost of fund will be five per cent or more. So, it is the Central Bank they should be monitoring. That is why I have always advocated that the CBN Act is good in that it gave it independence, but then that independence should have been circumscribed by this kind of implementation team you are talking about. If the implementation team makes sure that the CBN ensures that inflation does not go above two per cent, what will be the result? Consumer demand will improve; not only will consumer demand improve, cost of fund will not be more than two per cent of inflation, which will be about four or five per cent. With that kind of cost of fund, everybody would be willing to borrow, especially when they are not being crowded out by the Federal Government, which is also competing to borrow those funds. So, this arrangement consolidates the pattern of economic recklessness because it is still in denial of those factors that should drive economic recovery and growth.
What you are saying in effect is that the plan cannot pull the economy out of recession?
But that is the truth! But we have always been in recession, not just in the past six months. The factors that should define non-recession should have been increased employment, lower prices and increased consumer demand and better social welfare. When last can you say those things were features of the Nigerian economy? When last did you hear that we had inclusive growth in the last 10-12 years? When last did you hear that more people were taken out of the poverty trap in the last 15 years? So, if the indices that are being engendered by high price of crude oil could camouflage most of these things, it still did not succeed because it did not change employment situation, export competitiveness, capacity utilisation in the industrial sector and the level of social welfare of our people. That is the reality.
So how soon would the country come out of the present economic mess if the ERGP would make no impact as you have said?
The country can never get out of the mess until it accepts the reality of the importance of the tripod in driving its economy. You can never have any person who will be willing to build industries and produce anything if there will be no demand for that product. This is because reduced consumer demand means higher the inflation rate. The person who is making bread and has 10 bakery lines, if there is no demand for his product, he will reduce it to two lines and throw people out of job. That’s how it goes. So, consumer demand is dependent on the level of inflation. So, if inflation continues to grow, it means that you are also constricting consumer demand; if you constrict consumer demand, you impact negatively on industrial expansion; if you impact negatively on industrial expansion, you will increase your unemployment rate; if you increase the unemployment rate, you deepen poverty and worsen social welfare. These things are straightforward.