In this interview, Mr. Bismarck Rewane, Managing Director/Chief Executive, Financial Derivatives Company and one of the nation’s leading economic analysts, speaks on the state of Nigeria’s economy, highlighting the major challenges inhibiting growth, while recommending elimination of policy rigidities and injection of booster shots to achieve optimal economic growth.
By Babajide Komolafe & Elizabeth Adegbesan
IN the light of recent economic indicators, GDP, Inflation, MPC meeting, what is your assessment of the economy?
I think the economy continues to recover, howbeit, very mildly, below its full potential. In other words, the recovery could be accelerated if given a boost, say like a booster shot. What are these booster shots? The booster shots I have in mind are: an increase in the amount of credit extended to the private sector, a reduction in the Cash Reserve Ratio (CRR) deposits held by the Central Bank and symbolically a reduction in the Monetary Policy Rate (MPR).
In your views what are the major challenges confronting the economy since 2015 till date?
The challenges are, it goes back to the first question again, sub-optional output. When output is constrained, unemployment is high. High unemployment leads to dysfunctional behaviour because the unemployed people will be engaged in dysfunctional behaviour. Humans either engage in a functional or dysfunctional behaviour.
There is no vacuum. The dysfunctional behaviour gets in the way. A man who is robbing, murdering or kidnapping is getting in the way of those who are producing. The man who is producing has to first protect himself against the dysfunctional parties before he now starts to produce. Secondly, there is a distortion to the pricing mechanism. This is a mixed economy which is a free market economy managed by policymakers and regulators. So there are distortionary pricing mechanisms that are in place and one of that being the exchange rate mechanics, not the exchange rate itself. The exchange rate mechanism, it is still throwing up a distorted outcome and to large extent policy rigidities; we have policies in place that were made and have not been revisited while they are inhibiting the economy.
Let me talk about factor prices. Factor prices mean a price that is a product of a distorted supply-demand curve, disequilibrium. In other words, I called it disequilibrium price. The price mechanism is flexible by nature. Even when you get it right you cannot stay there because when the variables change, the right price today becomes the wrong price tomorrow. So that policy flexibility which allows prices to increase when there are shortages and allow prices to come down when there are surpluses does not exist. That is a conceptual part of the economic argument. The other part of it is physically putting incentives into the ease of doing business. Having said that, there are many things that are taking place at the same time; One being the incentives and the reforms that are been carried out from the office of the Vice-President.
Distorted pricing mechanism
Let me take the questions logically. Where is the economy? The economy is performing sub optimally because of constraints. Constraints are either philosophical or physical. Part of the philosophical constraints is the distorted pricing mechanism and part of the physical things is physical infrastructures like power, roads, railways, and others. What are the solutions? The solution is in prioritizing what we cannot do, not prioritizing what we should do. Because once you have eliminated what you must not do then automatically what is left is what you must do and then you prioritize it.
What are the things we must not do? I will give you an example. One of the things we must not do is to waste our resources on a national carrier. So there are some dumb things we cannot afford to do. For example, Apapa gridlock. We now have dead wait on all the bridges all the way to Fadeyi. Those bridges will cave in and will kill people very soon. How can a country with 12 ports have all their products being imported through two ports, Tincan and Apapa? Why in one corner of the country?
The reason is that the roads from Calabar, Port Harcourt, Koko to the inlands are all bad. Is it better to start to have those bottlenecks or to fix the road from Koko port all the way to Benin City so that people can use Koko port? Is it better to fix the port in Sapele, Port Harcourt, and Calabar and fix the road so that all of these goods, our imports today are less than our imports seven years ago when the price of oil was high. However, we didn’t have congestion. So logically it means that the congestion is as a result of a failure in something. So what are the things that we must not do? Rather than do all these nonsense about the national carrier.
Nigerians are flying. No Nigerian has said that the reason why he couldn’t do anything is that he couldn’t fly to London. He can either fly on Belview, Arik, Air Peace or British Airways or Lufthansa. They are paying. What is this madness about made in Nigerian cars? You increased the duty from 20 percent or 30 percent to 70 percent.
Nonsense about the national carrier
The prize of a Corolla went from N4 million to N22 million. Nobody, I don’t see you; you don’t see me driving a Nigerian car. I am not driving a Nigerian car. So all you have done is push up the price for everybody and create inflation. So scrap that policy. Let’s decide things we must not do first and the things that we do will just pop up. That is my philosophy.
Looking at the fiscal and the monetary policy response to the challenges we had in 2015 till now, how would you assess the effectiveness and appropriateness of those policies?
A policy is a cocktail but it depends on you. You say the cocktail or policies you are putting everything together to achieve a particular objective. The objective can either be what I want to achieve or the ailment I want to cure. Let us take Nigeria as a medical patient. Which ailment is more likely to destroy this country so that we can solve that? If you have a snake bite, the first thing to do is restrict the venom before you start talking about headaches and others. The most potent problem today in Nigeria is high unemployment and low output. Before you now start talking about inflation, low investments, and other things. By solving one you may solve the other. If you increase the level of investment you can by implication increase output and increase employment. But if you reduce the level of investment you can actually achieve the reverse.
So my point is that monetary policy, fiscal policy, the amount of money being invested in this economy is low compared to the GDP. If you take the C+I+G, Government and Investment are low. China has 43 percent of its GDP in investment we have less than 14 percent. I gave a presentation yesterday in Abuja and everybody was there at the Nigerian Investment Commission Council, it was very clear. So investment levels are low, savings levels are low and conversion of those investments into output is also low leading to high unemployment and dysfunctional behaviour. So what is it that we are trying to achieve? The monetary policy people are looking up to price stability which is extremely important. Please don’t make any mistake about that. But price stability in an environment of low output, high unemployment is a bridge to nowhere.
What about the fiscal policies?
When Obama came, he reduced taxes, put off the stimulus and others, it took eight years before the economy came back. How much are we spending? How much are we investing? On the investment, there is a multiplier. Investment stimulus multiplies itself on income. The total budget itself is less than 2 percent of GDP. It is not going to move the needle. So you’ve got to be bold, you’ve got to be aggressive.
But the monetary policy is to complement. At times we call it pro-cyclical movement. So if fiscal is stimulating the economy you will complement it by adding a bailout. Obama had a bailout, then they had Quantitative Easing (QE) and lower interest rates and that entire strategy put together gave them something.
What we are saying here is that we want to achieve an exchange rate level, which is important, but we are choking the economy with high-interest rates. These interest rates have started coming down. This is a smart thing; at least the effective interest rates have started coming down. But we need to send the right signals.
We still have less a year left to end this administration and probably another four years. What do you think we need to do to make this economy buoyant, booming and robust for every Nigerian in the next one year to five years?
Economic transition is not tied to the political timetable of any administration. That short-termism, looking at it and doing the prism of the electoral cycle is what has destroyed a lot of economies. The continuum of growth, the sustainable accelerated growth which has an impact on people is a continuous process. You can roll out all the parameters you want and indicators, without telling anyone of their impacts. I always talk about if GDP increases by 1.95 percent in Q1’2018, what is the impact of that GDP? Do you feel it? If GDP was growing at 6 to -7 percent you will feel it. There will be no space. There will be activities all over the place. You will be called every time for new jobs.
The impact of the trends: one is the variable that we monitor, two is the trend of the variable, three is the impact and four is how we manage the impact to ensure that we are getting optimality. There is sub-optimality, there is to large extent redundancies in the system and rigidities. So when we have policies is to hold on to the rigidity when in fact we should allow them to be flexible. So policy rigidities, sub-optimality leading into minimal and at times negative impact or the intended consequences.
I observed that you didn’t mention anything about the crude oil price.
Oil-induced recession, oil relieved, I don’t want to give anybody credit. It is an oil induced recession and oil induced recovery. That is all.