By Udeme Clement

Being the concluding part of the interview on austerity measures with Akpan Ekpo, a professor of economics and Director General, West African Institute for Financial and Economic Management (WAIFEM).

Events have happened in quick succession on the economic front over the past few weeks. Oil price fell, austerity measures were announced, the CBN devalued the Naira from N155 official exchange rate to N168 per dollar. What are the implications for Nigeria?

The CBN is using monetary policy to address the seeming economic crisis in the country as a result of dwindling oil prices. The problem is that the measures appear too many and are to be implemented at the same time. The fiscal side of the story though not under the purview of the CBN is not clear. However, the Ministry of Finance is a member of the Monetary Policy Committee (MPC), hence the fiscal variable should be in the CBN’s reaction function. In this scenario, we need proper co-ordination of both monetary and fiscal policy. The measures portray a panic situation in an environment of increased risks and uncertainties. In an economy that relies heavily on neo-liberal economic policy, the CBN cannot do otherwise.

The measures are not only short-term but would bring untold hardship to almost all sectors of the economy. We are told that there are long-term gains. How long is the long-run!  In the long-run, we are all dead though not all at the same time. Reserves are dwindling due to declining oil revenues, elections are around the corner and the economy is heavily import-dependent. Hence, the CBN increases the Marginal Policy Rate (MPR) in anticipation of inflationary pressures. The Excess Crude Account (ECA) is no longer there because if it was available, the economy would rely on it in the short-term. These measures to bail a dependent primitive capitalist economy may have short-term positive effects but would not change the structure of the economy.

Increase in lending rates would further kill the real sector. You cannot stop speculation in a market economy.  It is a casino economy with the major stakeholders as gamblers. Yes, the Foreign Direct Investment (DFI), whose major component is portfolio investment would decline because the investors speculate, watch the market and as soon as things are bearish, they pick-up their portfolio and move on. How many of the foreign investors have physically built new factories in the country to employ a sizeable work-force? Consequently, the CBN with all its competent experts cannot go beyond the economic framework implemented by the State. It may shape the framework but it cannot go outside it.
How do you explain the effect on the Naira to a common man?

The local currency has been devalued in an attempt to manage the exchange rate. The official rate is now N168 to the Dollar from N155, with a band of +/- 5 per cent. The black market rate would increase if oil revenues continue to decline because there would not be enough Dollars to back the Naira, prices would increase, which may worsen the inflationary situation if it persists. Normally, you devalue to earn more revenue for government because your goods would be cheaper. But in this case, our major export is crude oil, we have no control of both the price and output. Oil is an exogenous source of revenue.

The structure of our economy must change in favour of production, manufacturing must contribute about 25 per cent to Gross Domestic Product (GDP) and the economy must be industrialised. We must produce and export finished or semi-finished goods in sphere of production. The devaluation would favour foreign investors who would bring in foreign currency and change to millions of Naira and invest in the service sectors of the economy.

The CBN also increased lending rate from 12 to 13 percent. What would be the effect on borrowers and can the situation get better or worse?

The lending rates would increase above the current 25 per cent, hence small-scale investors would find it extremely difficult to borrow and invest. The unemployment situation may worsen. Banks would struggle for funds to shore up their balance sheets. There is no doubt that declining oil revenue would have adverse effect on the economy. For the government to contemplate austerity measures signifies the seriousness of the matter.

The government can no longer rely on ECA because the account itself needs to be replenished with revenue from oil. It may become difficult to back the Naira. If greater weight is placed on the market to determine the exchange rate, that is, floating the currencies then prices would rise. Imports would be affected, foreign exchange is needed to pay for imports of goods and services and the Nigeria’s economy is heavily import depended.

This is the time to think outside the box. It calls for economic self-reliance but the process must start now. The neo-liberal economic framework must be abandoned in favour of economic nationalism. The liberal framework deepens dependency. History is repeating itself, from austerity measures to stabilisation, to structural adjustment. This negative shock is another warning signal on how not to rely on exogenous source of revenue to finance development and drive the economy.

Is Nigeria’s economy in recession?
The economy is not in recession for now. Government data show that the economy is growing at about 6 per cent and inflation is single-digit. The relevant macroeconomic fundamentals are moving in the right direction for now. For how long remains a challenge. The unemployment rate of almost 30 per cent makes mockery of macro-economic stability. Though the economy is not in a recession, the “misery index” has been rising. General economic performance is poor.

Have we ever experienced recession in Nigeria?
Yes of course. Every market economy goes through the business cycle.  A dependent capitalist economy like Nigeria cannot escape recession or depression. It is a recurring decimal in such economies. If nothing else, Nigeria’s economy would experience recession as a client based on the dependent and periphery nature of its system. A depression is a pro-longed recession. No two of them are alike. The economy experienced recession in the 1970s, 1980s and 1990s. The global economic crisis of 2007/2008 also affected Nigeria. If any known market economy would have escaped from recession, it would be the USA economy. Despite the better management of the economy, it experiences periodic recessions and the last global economic recession was triggered by the collapse of the sub-mortgage sector in the USA.
Could government have handled the situation better and what effect would it have on fuel subsidy?

Within the context of the neo-liberal economic framework, the government would remove subsidy. However, subsidy is not bad. It depends whether you are subsidising consumption or production. In addition, can you properly target the population you want to subsidise?  There is nothing wrong in assisting investors who wish to build refineries in the country because the advantages are too numerous to mention.

Election year is when the economy experiences excessive spending. What measures would you advise government to put in place in order to prevent rising inflation?

The ministry of finance is responsible for fiscal matters, but because fiscal and monetary policies need to be coordinated, the CBN has a role to play. When there is excessive spending in the economy the CBN can use monetary policy to ensure that inflation is checked. So, the monetary authority can use monetary policy to reduce money supply in the economy in order to curtail inflation.  We need the inter-play of fiscal and monetary policies to ensure that the economy does not deviate so much from its potential like relative full employment output, if that exists in an economy like Nigeria. We hope that the minister of finance would be able to handle the fiscal side to ensure stability now and even after election year.

Looking at the economy generally, what is the state of inflation now?
At present, inflation rate in Nigeria’s economy is single digit, which is about 8.7 percent. But it is not a big deal in the sense that an economy can have 12 per cent inflation rate and still be doing well, once it is not run-away inflation. For example, there are countries with high inflation rate that are doing well. What is more important is to know your threshold, which is at what rate inflation becomes a problem in the economy. For Nigeria, if there is employment and we go up to 14 per cent there is nothing wrong.  The rich can always draw from their savings to deal with high prices but the poor would be the most affected. So, maintaining price stability is very important in an economy. The single digit inflation shows that the variable is moving in the right direction, because it is one of the major maco-economic fundamentals.

Aside from inflation, what is giving serious problems to our economy is high rate of unemployment, which is almost 30 per cent now and still rising, especially among the youths. Every year, thousands are thrown into the labour market. The rising unemployment is worrisome due to output loss and social problems it creates in the society. That is why one wonders why the economy is growing but not creating jobs.

What is the economic implication of rising unemployment in a growing economy like Nigeria?
It means the real sector has not been revamped. The real sector that is very crucial to development is still very weak. The questions here are, what are the real problems? Why are the entrepreneurs not accessing various intervention funds from government? In reality, the small entrepreneurs are not benefiting from intervention funds approved by government to resuscitate the real sector, and we are being told that billions are there for them to access. Many of them lament of unnecessary bureaucracy and stringent conditions of collateral that they cannot meet.