Onyedika Agbedo
Renowned economist and Managing Director of Cocosheen Nigeria Limited, Lagos, Mr Henry Olujimi Boyo, in this interview, declares that positive indices that can drive the Nigerian economy are lacking and pointedly accuses those who has the responsibility of managing it of deliberately running it in reverse gear.
Boyo, however, praises President Muhammadu Buhari’s decision not to sign the African Free Trade Agreement, noting that it’s not in the interest of the country. He also speaks on other pressing issues in the economy with mind probing verdicts. Excerpts:
Nigeria’s foreign reserves have been rising and now stand at $46.7 billion. How would this rub off on the economy in 2018?
I believe that your question is predicated on the usual belief that increasing dollar revenue will induce improved social welfare and economic prosperity. But if you care to look back in our history, you find that this has never been so. You will find that the periods of relative increase in reserves never really translated into improved social welfare or economic prosperity. It certainly has never induced what is popularly known as inclusive growth, in other words, growth which carries everybody along and also recognises particularly the needs of the millions of people that are usually deprived.
Therefore, I am suggesting that your expectation that things would improve socially and economically with the increase in dollar reserves from about $28 or $29 billion two or three years ago to $46.7 billion now is totally misinformed and unfounded. This is because periods of increased export revenue particularly the ones derived from crude oil sales never impacted positively on the economy. If anything, increasing dollar earnings through oil exports seem to have made us poorer. So, I’m not tempted to align with your suggestion that with increased reserves things would get better. No, our history does not say so.
What then are your forecasts for the economy with increasing reserves?
That is not difficult; all you have to do is to look back at what happened in the past. That’s usually a good way to go forward. Every time that you have increased export revenue from crude oil, you will find that inevitably, you will be confronted with the problem of too much naira in the system. Every time that you earn more dollars, instead of bringing economic respite, it creates all kinds of respite within the economy such that ultimately the citizens become poorer. That seems to be an anomaly of some sort but if you go back to the last 15 to 20 years, you will see that I’m correct. This happens because the process by which the increasing dollar revenue is infused into the economy is basically destabilising, distortional, disruptive and retrogressive. That process ensures that you will never be able to improve social welfare because it takes away from the Central Bank of Nigeria (CBN) the power to effectively control and manage what is called price stability.
Price stability is the first battlefront of any responsible government. Price stability ensures that static income earners, particularly those people who are pensioners, do not get poorer and poorer. Ask anybody in this country how is life and the likely response you will get is that life is hard. When you ask what they mean by that, they will explain that things are just very, very hard. When you push further you will hear something like this — they pay me N20,000 per month in my office and I used to live on that amount. But now the N20,000 can only buy half of what I used to buy before. That is the verbal expression of the frustration people face. The domestic expression of the frustration leads to stresses in households, quarrels, family breakages and even murder. And if the domestic unit is unstable in millions of households, what do you get? Instability and insecurity! That is why I’m emphasising the critical significance of maintaining price stability. Anybody that understands that will understand everything I have been saying.
Inflation should be maintained at a reasonable level that usually should not exceed two or three per cent. Ours is now 13.34 per cent. At 13.34 per cent, within four or five years, you will lose almost 50 per cent of your purchasing power with whatever income you have. That is enough to make you go mad if you don’t know how to have a replacement of income. It is for this reason that you find that the CBN and its Monetary Policy Committee (MPC) seem to have failed. You can never say that 13.34 inflation rate is price stability; not in any language. And you are also aware that it is the rate of inflation that also dictates the cost of borrowing. This is because nobody in his right senses will lend out money at a rate that is lower than the rate of inflation because that means the person will be losing money at the end of the year rather than making profit. At the same time, if inflation is high and cost of funds has to be over the rate of inflation, manufacturers everywhere in Nigeria, especially the small and medium scale sub-sector, cannot thrive because they don’t have access to funds. Without access to funds, are you expecting them to do magic.
Talking about cost of funds, what is your take on the recent decision of the MPC retaining the Monetary Policy Rate (MPR) at 14 per cent and Cash Reserve Ratio (CRR) at 22.5 per cent?
That is what I have been saying; that if you want inclusive growth you must have price stability and price stability means the rate of inflation not exceeding one, two or three per cent. And cost of funds should not be more than five per cent. I have been explaining that there is a causative link between inflation and cost of funds and that inflation pushes cost of funds.
The 14 per cent MPR that the MPC recently declared means that banks that want to borrow from the CBN will pay the apex bank 14 per cent interest. If the banks pay 14 per cent to borrow from the CBN, at what rate would they lend to their customers? So, for banks to be able to lend to manufacturers at four or five per cent, which manufacturers perceive as the appropriate lending rate, first of all the MPR must come down. The MPR must come down to three or four per cent so that the banks can lend at four or five per cent. That way, the country will witness increased productivity, as going into manufacturing will not be such a risky business. The question to ask therefore is why can’t the CBN and its MPC bring down the MPR to four or five per cent. They cannot bring the MPR to four or five per cent because if they do so in an environment which they claim there is already surplus naira supply, then of course banks will lend out indiscriminately and that will fire inflation. As I always say, the way we are running the economy is as if we are deliberately running it in reverse gear. We run it in reverse gear if positive indices that could drive it forward means low rate of inflation at one or two per cent; low rate of cost of funds at four or five per cent; and a stable and responsive exchange rate that responds to the flow of dollar income into the economy. What is happening in our economy today is totally the opposite of these three things I have said.
The latest statistics from the National Bureau of Statistics indicate that inflation dropped for the 14th consecutive time in March to 13.34 per cent. What has been responsible for this taking into consideration the fact that the existing MPR and CRR has remained unchanged for quite sometime, but you argue that it’s on the high side?
I don’t think you understand me very well. Look, if the MPR is at 14 per cent it means that banks would have to keep lending at about 20 per cent or more, which not only drives inflation but also makes it almost impossible for Nigerian industrialists to be competitive. I am an industrialist and I won’t borrow at any crazy rate.
But the fact is that even with the current MPR and CRR, the inflation rate has been dropping and you say the CBN isn’t getting it right?
Let me ask you a question. If in every year the inflation rate comes down by half per cent or one per cent, how many more years will it take before inflation will come down to one per cent or thereabout? How many more Nigerians would have died? We are in a crisis situation with the MPR at 14 per cent. Take a study of any country that successfully outpaced its competitors and you will never find the MPR at 14 per cent. The MPR at 14 per cent is disruptive. In Europe, instead of the government or the central bank paying the banks to mop up their excess liquidity, the banks even pay the central bank. Why can’t they copy that?
The debt stock of the country has been increasing of late, with the latest figures showing that it rose by N8 trillion between September 2015 and September 2017 and now stands at N20.37 trillion. What does this portend for the economy?
Well, there is nothing wrong in accumulating debts if the loans obtained are deployed into areas that will drive the economy and improve the social welfare of every Nigerian. On the other hand, if you take a cursory look at the impact of increasing debt over the years, you will find that usually there is nothing to point at as a significant development as a result of the debt accumulation. Apart from the issue of corruption that dismisses any possibility of real growth, because the corruption rate in the country is not one, two or three per cent, the point however, with regards to debt accumulation, is that if you are not putting the money you are borrowing into things that would support generations yet unborn, then you are passing on to those generations the burden of paying your debt. And shouldn’t it worry Nigerians that the debt seems to always increase when we are earning more revenue?
If you look back in history, in the last 10 years or more, in real terms, there has not been truly any deficit in our fiscal plans. Annually, they announce that they plan to spend N7 trillion but they would only be able to gather N5 trillion from taxes and other revenue sources, so N2 trillion would be borrowed. But I am saying categorically that there has never been any need to borrow any amount of money. The N2 trillion they say they would borrow is usually unnecessary. Do you know why? It has become evident over the years that when the budget is being planned, they deliberately under state the possible income. Consequently, you have a situation where on paper there is always a deficit. The price of crude oil may have been predicated on $40 per barrel, but in the course of the year, it sells above the estimated price, may be by $10. Ordinarily, that extra $10 over 12 months should cover that deficit, but not only would they borrow the N2 trillion that they had predicated in the budget, they would also spend that extra revenue earned. And usually, they never go back to the National Assembly that has powers over appropriation to say that they are going to spend more. They just get together in the Governors’ Forum and say, ‘the money in the Excess Crude Account (ECA) belongs to us; let us share it’. And they will share. In the process, they compound the problem of excess liquidity.
I have written about this a number of times in the past. How can you be talking of a deficit when you earn more? Like now, in the 2017 budget, they projected that oil was going to sell at $44.5 per barrel. Now that oil is selling at between $58 and $60 per barrel, are they still not borrowing?
Recently, President Buhari declined to sign the African Free Trade Agreement and the decision did not go down well with a cross section of the populace and even abroad. As an industrialist, what is your take on the issue?
I ask you a question in return. Where do you owe your first responsibility? Is it to the survival of the country or the ability to trade much more widely?
To Nigeria of course…
(Cuts in) If you have a country of 198 million people as the recent figures from the National Population Commission (NPC) indicate, in economic terms what do they call that? What economic opportunity does it provide? The answer is that it provides a huge market. A huge market is what companies all over the world are looking for. The manufacturers in your country, how are they going to take advantage of this free trade if they have to borrow at the rate of over 20 per cent in order to produce? How will they compete given the state of our infrastructure, which warrants that they have to produce their own electricity and virtually all the other amenities? If they can truly survive why haven’t they survived all these years? Equally important is why do you want to supply other African countries with groundnuts when the whole of Nigeria cannot taste groundnut? In other words, have you fully met the demand of the Nigerian market?
So, the President made the right decision?
Yes, otherwise what you are going to find is that hawks from different countries will go and set up in Togo, Gabon and other surrounding countries and bring their goods into those countries and call it locally produced goods and bring them into your country. If it is rice, will your people ever be able to produce rice? No! Won’t your rice mills close down? Who will be the beneficiary? Those outside countries of course. Why should the European Union (EU) cry more than the bereaved? The EU is sponsoring this whole thing.