By Victor Ogiemwonyi
Keen observers of the Nigerian economy will notice the rapidly declining key indices for measuring the macroeconomic activities of a country. The triple rates that are inflation, interest and FOREX, are currently in their worst translation in years. Added to the unemployment situation, experts are beginning to worry about the future. The combination of these rates, gives you not so much the picture of what we see now, but what will see later, if we do not quickly change course. Our capital market crisis for instance, continues, three years after all the worst hit countries have recovered. The capital market is the biggest wealth creating institution in Nigeria. It raises capital for important financial transactions and the stock market places daily value on the companies listed on it.
The important role this industry plays is why every government should pay attention to it. Recent policies by the monetary authorities is stifling growth at a time when growth of the economy is what should matter. We cannot close our eyes to what has worked everywhere else – low interest rates stimulate growth. Growth and prosperity is needed to end unemployment and lift the stock market. A rising stock market will wipe out the current debt overhang in the economy. There is a serious need to actually re-inflate the economy. The value lost in the last banking / stock market crisis will not be recovered so quickly without seriously re-inflating the economy in a sensible manner.
The fight against inflation to the detriment of growth is not the wise course to take. There is no doubt that inflation is a threat to investment, but the policy tools directed at it, like high interest rates and the use of our external reserves to support the Naira is a bad strategy. The rapid development of Asian economies even when they had inflation should teach us that growth is more important when faced with rising inflation, particularly in an environment where everything is lacking.
In my view, inflation is meaningless in an environment of scarcity. We will have to out grow inflation like the Asian Tigers have done. There is too great a need for development for us to be hung up on inflationary fears. The growing unemployment that is crippling the economy is the imperative to pursue a growth strategy. We are already seeing the associated crime and security implications of the huge unemployment and poverty levels in the economy. Analysts now think the security situation is serious enough, and is beginning to cut into our economic growth.
The current Monetary Policy Committee (MPC) pre occupation with inflation has resulted in a 12% MPC rate, which has translated throughout the economy. Capital market investments take a back seat, when you can get a 15% Treasury bill rate. This needs to be moderated. High interest rates kill everything. It does not support growth, and generates it’s own cost pull inflation.
The question should be what are the major components of our inflation? It starts with the terrible infrastructure we have not had a will to confront. The lack of basic infrastructure like roads and electricity makes the cost of producing anything high, thus making us, unable to compete. The little production capacity in Nigeria is dying because the cost structure that includes the cost of maintaining and fueling generators does not support a conducive economic environment.
If we want to lower our inflation, we must first provide basic infrastructure. The fight to keep inflation down and pursue real rates of return on investments is an illusion. The way to strengthen the Naira is to produce more than we consume. Without productivity, the economy slows and poverty increases.
The foreign exchange situation is the other headache. Lower oil prices and rising demand for Foreign Exchange are all signs of a rapidly weakening economy. This again has some bearing on why the CBN is maintaining high interest rates, the theory is that lower interest rates encourage users to borrow low and demand more foreign exchange and therefore may lead to excessive speculation. The instinct of Central Bankers is always to play the tight monetary policy card. This is a losing battle, high interest rate inhibits growth and causes more inflation as production collapses and the resulting scarcity necessitates importation to meet up local demand and also encourage dumping from cheaper production environment in other countries, resulting in stronger demand for foreign exchange locally, in a never ending circle. The resulting desperation leads to the unwise decision to use our reserves to defend the Naira.
Wasting the little reserves we have to defend the Naira is suicidal since no one really knows the right value for the Naira to the Dollar. Some analysts have argued that our real estate prices already translate currency at the real rate to the Dollar. In an economy that reflects value, the real estate prices quoted in Nigeria would be seen as unreal. Using the dwindling reserves we have to defend the Dollar is like selling the fixed assets of the company to pay for it’s operating debts, sooner or later, there will be no company to pay its operating expenses. Our reserves form a major part of why foreign borrowers lend to us.
The $34billion we currently have in our reserves is hardly enough to meet our six months imports at the rate demand is growing for foreign exchange. We should do the right thing by letting the Naira find it’s value in a free market. Let us do the courageous thing let those who need forex find it where they can and at prices they can pay for it. We will need to rationalise the obvious consumption pattern that could soon ruin everything. Nigeria now spend over $1billion of it’s reserves to import food.
We also have become one of the largest importers of wines, a taste acquired in the last two decades. Add that to the several million dollars spent for school fees overseas and the mortgages we now allow to be paid from official sources, you can understand why we are getting everything wrong. We should suspend the use of official window for frivolous imports. and focus our attention on developing our local capacity, using our foreign exchange reserves on only necessary imports, instead of exporting it to pay for luxuries that benefit a few.
Let those who want foreign exchange pay for it. Devaluing the currency to where the price to the Dollar will reflect import and value. Notice that people no longer import sand in containers into the country, because the incentive to do it is gone. There was a time Nigeria experienced that, when we were artificially propping up the Naira. If we were to find the Naira at N200 to $1 today, we will survive. No one imagined in 1990 that the Naira will ever exchange at the N160 it exchanges for today. A devalued Naira will encourage exports and bring in foreign exchange. Our focus should be on growth and creating jobs and putting people back to work, believe me, if you pay them with cheap Naira they will not mind.
Victor Ogiemwonyi is MD/CEO Partnership Investment Plc, Ikoyi Lagos.
