By Jonah Nwokpoku & Prince Okafor
LAGOS — Former Governor of Central Bank of Nigeria, Chukwuma Soludo has said that the former President Goodluck Jonathan had the worst economic management team in history because he left Nigeria with an unprecedented rate of debt accumulation.
While speaking at the third anniversary lecture of the RealNews magazine titled ‘Can a New Buharinomics Save Nigeria?’ Soludo said “First, I supported President Muhammadu Buhari (PMB) over Jonathan not because I was convinced about the credibility of the APC manifesto (and I said so in my article in January this year) but for three reasons. I was convinced that the last economic team was bankrupting the economy and had no clue as to how to fix it,” he said.
“Second, PMB is the first president of Nigeria under a democracy to have seriously desired the job and struggled for it for over 12 years. To me therefore, he must have a few points to prove, and I was willing to bet on a man who purposefully wanted the job than otherwise. “Third, I was convinced that it would be in the enlightened self-interest of the APC, once in power, to do their utmost to keep power by delivering on the economy unlike the PDP which had taken power for granted. I am still confident that PMB can deliver change (although as I had indicated in my article in January, I didn’t believe that any of the two parties could deliver on their manifesto) but he and his team now need to run at the speed of a 1000 km per hour.
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“We must support them to succeed by contributing when we can, and criticising when we must — tough love! I am enjoying my status as ‘an independent’ (I don’t belong to APC or PDP) and I therefore have the liberty to say it as I see it from the balcony! “As at 1999 when PDP came to power, Nigeria was largely a pariah state still lucky to have survived as one indivisible sovereign, especially in the context of the struggle by NADECO and restiveness in many parts of the country. On corruption, Transparency International scored it 1.6 out of 10 and ranked 98 out of 99 countries in 1999.”
He added that “After 16 years, several challenges remain and some have even worsened (especially insecurity). Although President Jonathan’s regime had the worst economic management relative to the resources at its disposal, it must be stressed that tremendous progress was made in the aggregate 16 years of PDP government.
He said: “For the better part of this year, the external shocks to the economy have been complicated or accentuated by a gamut of the ‘tried and failed’ command and control policy regime: de facto fixed exchange rate, largely fixed CBN monetary policy rate, crude capital controls, veiled form of import bans through a long list of ‘ineligible for foreign exchange’, de facto scrapping of domiciliary account established by law, etc.
Interest groups lobbying to make policy shift permanent
“At first, I thought this was the usual knee-jerk response of policymakers to a ‘sudden’ shock. We tried a milder variant of this for a few months during the 2008/2009 unexpected/unprecedented global crisis (with global liquidity squeeze and massive capital flight) but even then, it was communicated as a ‘short-term crisis response’ and it was quickly dismantled. We now know what works and what doesn’t, even at a time of crisis.
“As one reads the confusing statements from government in the media: ‘We won’t devalue’, ‘we won’t devalue for now’, and the emotional debate about ‘nationalism’ around issues of import ‘bans’ and capital controls, one wonders whether it is still a ‘short-term crisis response’ or a permanent shift back to the old policy regime of pre-1986.
“Even if the government initially intended it as a short-term measure, interest groups have emerged and are lobbying to make the policy shift permanent. To add to the confusion, the policy is communicated as a ‘directive’ from PMB as widely publicised in the media.
“In the specific case of Nigeria currently buffeted by terms of trade shock with micro imbalances, especially fiscal and current account deficits as well as supply side constraints and with the economy skidding to a halt with rising inflation and unemployment, the question is: how should relative prices or asset prices including exchange rate and interest rate adjust to reflect as well as shape whatever economic fundamentals?
External shocks don’t kill economy
“External shocks do not kill an economy. How you respond will determine whether you worsen it or meliorate the terms of trade shocks. That is what we are facing, the classic one. And how you respond to terms of trade shocks depends on whether the shock is from the monetary, nominal shock or whether it is from the real side shocks.
“And I would say on this micro economic theory and evidence around the world are pretty much unambiguous. That faced with terms of trade shocks, countries with flexible exchange rate regime adjust faster and adjust better with less negative impact on growth and employment than those with fixed exchange rate.
“This is global evidence, pretty much unambiguous for countries facing terms of trade shock, that countries that allow relative pricing including exchange rates to become the key adjusters when faced with terms of trade shock have always almost done better than those that resorted to exchange rate fixing and distorting controls.
“In theory, if you don’t allow prices to adjust, quantities will adjust and the quantities that will adjust are output and employment. That is the experience we have had in Nigeria over the years. And that is what is happening today. Output and employment are adjusting with vengeance.
Policy regime inconsistent with objectives of creating jobs
“My thesis is that from Nigeria’s own evidence, that the current policy regime is inconsistent with the objectives of creating jobs, growing income and reducing poverty. Nigeria since 1973 can become a laboratory. Since 1973, we have become episodes of positive and negative price shocks.
“If you divide the episodes of positive oil price shocks, episodes of negative price shocks and also match them with responses of policy regimes, the evidence is that, in all cases, fixed exchange rates with controls, the economy has always done worse in that regime than in under flexible regime.
“From Nigeria’s evidence, current policy regime is inconsistent with objective of growth, job creation and poverty reduction. The current economic hardship is largely our choice and not just oil price shock: The current slump of the economy was predictable and largely avoidable. Just as it happened in 1981-85, the economy has been on a tailspin.
“There is now about four per cent growth shortfall relative to past trend, and this cannot be explained by fall in oil prices alone. For the first time since 1990s, per capita growth rate (on annualized basis) is now negative implying that poverty is also escalating; capital market has lost trillions, inflation and unemployment are on the rise.
“JP Morgan has delisted our local currency bonds and Barclays is threatening same, while the cost of borrowing for Nigeria rises. Foreign capital is on the run, while domestic savings is miniscule. It was ‘headline news’ when FG paid October salaries, while states are steeping in massive debt.”
“Policy choices entail costs and benefits, but the preference of one to another should be based on the ‘net positive effects’, depending on the stated objectives. To sustain the current arbitrarily pegged exchange rate will require a steep rise in interest rate and squeezing of bank credit to the private sector.
“Alternatively, intensifying the ever opaque and distorting controls and ‘bans’ will also severely harm the private sector. I will be surprised if the productive sector is not already feeling the heat. The irony is that it is the small businesses (which have no voice or power) that are suffering the most. Many are simply being choked to death by the ‘controls’.”