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Serial bailouts as growth strategy!

By Les Leba
Nigerians may be forgiven if they do not know that the cumulative effects of the policies of Central Bank and Ministry of Finance (MOF) are generally responsible for the level of economic growth and price stability in the country.

Thus, as in the Nigerian experience, a nation may be inordinately blessed with abundant mineral, agricultural, water and human resources, but may still end up with poor economic growth indices, which belie its abundant natural endowments!  Indeed, some analysts may insist that the causes of such economic failures maybe politically instigated and such critics may absolve the CBN and MOF from direct responsibility for the state of the economy at any time.  This position can only be partially true, because CBN and MOF traditionally and technically control the critical instruments for modulating the economy.

Thus, corrupt and irresponsible political policies will acquire vigour and wreak havoc on the economy only if CBN’s monetary and MOF’s fiscal policies align with such retrogressive governance.  Conversely, progressive, astute and disciplined CBN and MOF policies will inevitably minimize the economic malaise of anti-people policies, which may be pursued by a thieving political class.

Manufacturing sector is generally the driver and mover of an economy, and for Nigeria to become a leading industrial nation, our comatose industrial landscape must be revived, sustained and invigorated.  Indeed, in a story titled “Making Nigerian Economy Competitive Through Manufacturing” (Punch 28/5/2010, pg 22), Mr. Jide Mike, Director General of the Manufacturers Association of Nigeria (MAN), noted that  “without a healthy manufacturing system in Nigeria, there will continue to be absence of any meaningful economic growth, and wealth creation; employment generation and poverty reduction cannot be achieved without a strong manufacturing sector in place.”

In the same report, the immediate past President of Lagos Chamber of Commerce and Industry (LCCI), Otunba Solomon Onafowokan, agreed that there is a strong correlation between industrialization and development and Otunba also recognised that  it is through industrialization that we can add value, promote linkages, boost employment and reduce poverty among our people.

The current LCCI President, Chief Femi Deru also insists that the way forward for our economy is to do everything possible to encourage entrepreneurs and professionalism. “This is the way to go, if we must diversify our economy, create jobs, reduce unemployment, minimize criminality and above all advance the welfare of our people” (Nigerian Economy, Punch 18/6/2010, pg 47).
Chief Deru believes that for this to happen, government must create the right environment for business to thrive by tackling the problem of infrastructure, quality of public institutions, ensure an investment friendly financial system and foster the right policy environment.  It is unlikely that other experts would disagree with LCCI’s diagnosis of the problem and the prescribed solutions.

However, it is possible that above_listed prerequisites for rapid industrialization can be compressed into the single pursuit of what is generally described as “economic price stability”, which is often reflected in single digit lending rates to commerce and industry, and relatively stable exchange and modest inflation rates, preferably bottom lower single digit to ensure stability and preserve the purchasing power of all income earners.

In this manner, investors’ confidence would be enhanced and long_term planning will become realistic and in turn stimulate further investment and employment.  For example, a situation like ours where official statistics suggest that annual inflation is running at over 11% may have debilitating consequence for savings and investment; it would be a wasteful and self_inflicted tragedy for anyone to contribute to pension funds or indeed save when inflation remains in double digits.  It would also be folly to invest in long_term savings as a ten_year maturity bond, for example, would ultimately attract possibly zero value with consistent annual inflation rate of 10% and above over the period!  A case in point is the plight of Nigerian pensioners who now find that their expectations for a dignified lifestyle during retirement have become a pipe dream!

However, in spite of the above, some analysts will still insist that adequate power supply is the critical requirement for our industrial takeoff.  This may be so, but the truth remains that adequate power alone will not by itself reduce interest rates to single digit, nor will it bring inflation rate to lower single digit nor will it cap spiraling fuel prices and ensure a stable exchange rate for the naira, nor will it reduce the rising level of our national debt burden without commensurate improvement in our social welfare. In any event, it is patently clear that power funding requirement estimated at over $30bn annually cannot be accommodated with annual budgets of about $27bn (out of which recurrent expenses is about 70% and capital expenses about 30%)!

Furthermore, even if government approves full liberalization of the energy sector and the constitution is amended to allow each state to invite bids from the private sector for power generation, transmission and distribution, the cost of the service will remain oppressive, particularly to Nigeria’s critical mass, if interest rates remain in higher double digits and inflation remains a ravaging monster on the purchasing power of most income earners!

So, above analysis should hopefully demonstrate the critical importance of the components of ‘price stability’ to industrial growth and enhanced economic and social welfare!  The reality is that for the past three decades or more, Nigerian environment has never remained enabling, as interest rates hovered between 15 – 30%, inflation continued unabated year in, year out, and our exchange rate lost over 96% of its value within the same period!  No wonder our industrial landscape has continued to contract, and millions of Nigerians join the job market every year, and take home pay of most workers remain just enough to take them to and from their respective workplaces!

Both CBN and MOF who have responsibility for modulating price stability are fully aware of their woeful failure, especially when rapidly increasing export dollar revenue in 2008 earned us a place amongst the world’s poorest nations, much against rational explanations!  In other words, these agents of government attempt to divert attention from their failures and seek other culprits instead!

Indeed, in recognition of their inability to favourably modulate the economy with traditional instruments at their disposal, they choose to take easier options whenever possible, even if such option will further pauperise our people!  One of such options currently being vigorously pursued by government’s financial team is that of bailout packages for selected troubled sectors of industry to access beneficent promises of correct management of price stability which is regretfully absent in the market.

Indeed, CBN Governors and Ministers of Finance have over the last three decades blamed everything under the sun, including reckless abandon in the banking sector, and the excessive spending of government at a time when such spending would have instigated consumer demand and/or infrastructural enhancement!  In fact, when these government top brasses blame banks for their failure to achieve price stability, they conveniently ignore the fact that banks and other financial institutions are by law subject to supervision and regulation by CBN and its affiliated Ministry of Finance!

It is generally recognised that apart from the buoyant activity in telecoms and oil sectors, almost all other sectors are famished; until last year, banks were also members of this priviledged sector, until Lamido Sanusi stuck a pinhole in their balloons!  However, in recognition of the critical need for single digit lending costs for industrial growth, our financial and economic teams have carefully selected a handful of other industrial subsectors, which could be injected with cash inflow with about 7% interest rate!  The first beneficiaries of this largesse were banks, who walked away with N640bn even though they had oppressed real sector with over 20% interest rates for so many years!  Thus, in spite of their financial recklessness and major responsibility for industries’ heavy borrowing costs, they were the first to be reprieved by the CBN!!  Talk about justice for the oppressed!

Lately, the list of beneficiaries of CBN’s cheap money includes the aviation industry, which is expected to share N500bn with manufacturers, even though the aviation stakeholders themselves with less than N4.8bn loan burden have indicated that at least N300bn would be required just for upgrading the existing and obsolete equipment at our airports.  What, pray, would be left for other manufacturing sectors?

CBN has also graciously agreed to print N200bn more naira notes (same as credit extension to those banks participating in the scheme) to return the nation’s agricultural sector to the path of growth.  An additional N200bn will also be printed and provided to banks to similarly finance Small & Medium Enterprises subsector.  Another N70bn will also be provided to textile sector at a cost not above single digit interest rates.
There is also a bailout package (more naira printing!) to support private sector players in the power sector in addition to CBN guarantees to ensure that oil marketers continue to be able to access funds for the importation of fuel.  These foregoing are supplementary to other such CBN guarantees designed to promote interbank lending.   All above cash injections should dramatically increase the cash level in the system and hopefully provide succor to the beneficiary sectors.  But wait a minute; this is the same CBN whose mantra over the last three decades, is its claim that its greatest challenge is the management of too much cash in the system!!

Well, if liquidity is no longer the problem to enable the same CBN pump more money into the system, why then does the CBN continue to borrow (via issue of treasury bills) to mop up presumed excess cash in the system?  Besides, why is the same government team that goes borrowing  a monthly average of about N100bn through its monthly bond issue (government long term borrowing) with coupon rate of about 10% also willing to lend out its own  money as bailout packages at a ‘mere cost’ of 7%?  Sounds like ‘a fool and his money scenario’!

Certainly, serial bailouts with its serious potential for rapid inflation is not the way out!  All industrial sectors could do with cheaper funds, and indeed, the pure water subsector, for example, is a great employer of labour, and may rightly demand a bailout also!

However, the apparent contradictions, folly and failures in the pursuit of elusive industrial growth will be resolved once CBN’s monopoly in forex market is dismantled, as interest rates will fall to below 10%, while inflation will retreat to 1 – 2% with salutary impact on exchange rate, consumer spending power, increasing employment and enhanced social welfare.  Those who have ears let them hear!

This article, first published in June 2010, is hereby reproduced in view of CBN’s insistence on liberal bailouts as a growth strategy.
Save the Naira, Save Nigerians!


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