Saturday, November 2, 2013 / Businessworld
We kicked off our special discourse on The Next CBN Governor: Whom Does the Cap Fit? with a prologue which gave an idea of the ideal person for the CBN top job, especially given the kind of persons that are running the central banks of other countries in the world. Of course, we were emphatic that the headship of the central bank anywhere in the world has ceased to be a job for the boys and is now strictly for ideas men or women who can bring about economic prosperity through the way they craft and execute monetary and financial policies.
Of course, the next CBN governor should be someone who can confront the socio-economic challenges that face us as a country and address them holistically and accordingly with a view to raising the standard of living of Nigerians. Kola Ogunleye in this Overview of the Nigerian Economy reveals some weaknesses which can actually be addressed with the right monetary policies combined with the right dose of fiscal policies. For instance, for almost a decade now, Nigeria’s economy has been growing impressively but only a few jobs are coming out of this growth.
Youth unemployment, particularly, is ticking like a time bomb, and it is thumb down for the managers of our economy, especially the monetary authorities who ought to have creatively directed bank facilities to those areas that will literally hatch the much needed jobs. The number of Nigerians living below poverty line is increasing by the day instead of declining. Therefore, the next CBN governor must be someone who will be able to deploy monetary policies and other development initiatives to create job opportunities in the economy while ensuring that the economy is growing rapidly.
Overview of the Nigerian Economy
Economic strategy is central to any development plan. No country has been able to reduce poverty or sustainably raise living standards without growing its economy. While growth does not automatically translate into poverty reduction, without it poverty reduction is neither possible nor sustainable.
The economy also provides the resources necessary to support the goals of nation-building, equity, citizenship and values, and determines citizens’ life chances for self development and fulfilled living.
Economic development is often “path dependent”, meaning that momentum is a strong driver of the pattern of development. Changing this pattern is difficult, requires careful management and leadership, and involves trade-offs and sequencing that may benefit some sectors before others. In other words, there must be a clear road-map with national economic development strategy serving as the compass for directing the resources of the country towards such listed economic goals.
Though different perspectives may be employed in analyzing the Nigerian economy, commentators do not find it difficult to agree on the following:
· ♦The economy does not serve the interest of majority of Nigerians.
· ♦The rapid growth in GDP headline figures have not translated to human development as vast majorities of the people are still living in poverty and in extreme case, some below poverty lines.
· ♦The economy is shaped by its history as a commodity producer operating in an environment of abundant resources and it is highly resource intensive.
♦Power relations in the economy are highly unequal and this give rise to outcomes that are skewed by international standards. In short, income and wealth distribution is skewed in favour of the rich and the powerful against the majority of the people.
· ♦While there are pockets of excellence in some areas, major parts of the economy are uncompetitive with high cost structures in both the private sector and state owned enterprises.
· ♦There is a huge infrastructural gap in critical areas of the economy: power, transportation etc.
· ♦A near absence of good governance and smart service delivery ethos.
· ♦A disproportionate percentage of public revenue is spent on running the government.
· ♦The democratic government has failed to alter the pattern of growth and development in the country.
· ♦The Nigerian economy is dominated by the informal sector as more Nigerians are engaged in economic activities that are outside the organized formal sector of the economy.
· ♦There are no robust institutional frameworks tailored to creating access for informal sector operators to benefit from government policies.
· ♦Monetary policies are not geared towards affecting output decisions not only because of the way they are designed but also because a large proportion of the populace is outside the banking system. Nigeria is under-banked by more than 40 per cent.
These problems encourage the persistence of several negative outcomes, the most serious of which are low levels of employment, high levels of poverty and inequality. Poverty and inequality can only be tackled through economic policy engineering that favours growth and transformation that raises employment and distributes the benefits of growth more widely.
Managing the post military economy was complex partly because the excesses and policy errors of the later years of the military left the country close to bankruptcy. Nigeria had little or no foreign exchange reserves, public debt had sky-rocketed, inflation rate was in the upper teens and investment levels had plummeted. The first task was to stop the decline.
Until 2003, the Nigerian economy was characterized by macroeconomic imbalances as it grappled with policy flip-flops in its attempt to correct years of military misrule. The overall fiscal balance was negative; the external current account balance deteriorated falling to a paltry 8% of GDP. Inflation spiraled high-sky jumping from 6.9% in 2000 to 18.9% in 2001. The period was also known for expansionary fiscal policies and corresponding monetary policies that encouraged profligacy and corruption both by the fiscal and the monetary authorities. Bank credit to the public sector effectively crowded out lending to the private sector.
Nigeria became highly vulnerable to oil market volatility as the external reserve position was weakened in the face of high oil prices and no provision for the proverbial rainy day. Nigeria could not manage effectively the unstable international oil market fundamentals while other oil exporting countries succeeded in managing theirs especially through mechanisms such as sovereign wealth fund. Nigeria did not establish a SWF until recently. Policies and institutions were generally weak and half-hearted measures were pursued to strengthen institutions through privatization and legal reforms.
2003 – 2007
This period marked a point of inflection in the trajectory of economic policy formulation and implementation in Nigeria. Against the background of a long legacy of poor overall macroeconomic management, achieving macroeconomic stability and sustainable growth in Nigeria became a major policy imperative for fiscal and monetary authorities. Real GDP growth accelerated in 2003 due to higher oil production. However, fiscal policy was pro-cyclical, and monetary policy was expansionary. As a result, inflation accelerated, international reserves declined and the currency appreciated in real terms.
The most significant policy initiative of that period was the articulation of a homegrown reform programme—the National Economic Empowerment and Development Strategy (NEEDS)—aimed at addressing Nigeria’s deep-rooted macroeconomic and structural challenges. Reforms to enhance oil sector efficiency, public sector transparency and accountability, fight corruption, and strengthen the financial sector were initiated.
Over the entire period, the major challenges of economic managers were to restore macroeconomic stability, generate savings from the oil windfall to hegde future oil price declines, and enhance the transparency and predictability of macroeconomic policies. Progress was made in strengthening the federal budget process, reducing non-priority outlays, and increasing investments in key priority areas in line with the NEEDS’ objectives, such as education, health, agriculture, water, and electricity. The critical challenge facing the authorities was to convince the states to participate in the fiscal rule to save windfall oil revenue. Timely passage of the Fiscal Responsibility Bill would provide the legal underpinning for prudent consolidated fiscal policy at all levels of government.
The CBN developed a credible communication strategy to enhance accountability for monetary policy. Interest rates were allowed to adjust, and excess liquidity was absorbed through market-determined instruments. Reforms were also put in place to strengthen the CBN's independence and enhance the soundness and stability of the banking system.
There was renewed focus on fighting corruption and promoting good governance in public institutions. Nigeria’s participation in the Extractive Industries Transparency Initiative (EITI) and establishment of the Economic and Financial Crimes Commission (EFCC) were two major steps taken in furtherance of good governance and transparency.
During the period under reference, we successfully negotiated our exit from Paris Club debt and the stage was set for sustainable economic growth.
However the economy continued to be dogged by the twin evils of lack of political will to implement reforms and the needed buy-in of sub national governments.
2008 to Date
Nigeria entered the global financial crisis from a position of strength because of reforms initiated earlier in the decade. The crisis had nonetheless had a significant impact on the economy. Lower oil prices had put pressure on the fiscal and external accounts. The banking system had been pressured by deteriorating asset quality.
Central to this success was the oil-price-based fiscal rule. This rule broke the link between public spending and oil prices and created an oil-savings cushion of $18 billion (15 percent of non-oil GDP) as well as foreign reserves that peaked in September 2008 at $62 billion (16 months of imports). Similarly, the bank consolidation in 2005–2006 provided the banking sector with a capital buffer against potential losses during an economic downturn.
Furthermore, in contrast to the boom-bust cycles of earlier years, Nigeria experienced no general macroeconomic crisis over this period, and the pace of annual GDP growth never fell below 6%.
Growth in 2012 slowed somewhat relative to the recent past, registering 6.6% by preliminary estimates, as opposed to 7.4% in 2011. Growth weakened, in particular, in oil, trade, and agriculture. Slower growth in trade and agriculture likely reflects a combination of fallout from the national strike in January, higher energy prices (tariffs), poor weather conditions (flooding), and growing security challenges in some parts of the North.
Growth in oil has been consistently slower than that of the non-oil economy. In fact, oil production (exports) in Nigeria was essentially stagnant in 2011-2012. Growth in oil is expected to remain low over the medium term, pending potential investments that could expand production significantly. Non-oil growth has been driven by domestic demand, and therefore concentrated in sectors servicing the domestic market. This fits the basic pattern observed in many other oil-dependent emerging market economies. Non-oil exports remain quite small in Nigeria (5% of all exports). As trade and agriculture comprise 75% of the non-oil economy, the strong registered growth rates in those sectors have been particularly important for explaining the non-oil economic expansion. Agriculture and trade have accounted for the better part of official GDP growth in recent years, while the rapidly growing sector of telecommunications has also been significant. Real estate and housing/construction have also witnessed double digit growth in recent years, although their shares in GDP remain modest.
While some fiscal and monetary policies were effective in stemming the slide of the national economy into deep recession, some did not make the expected impact on the economy and the lives of the people. With this, it is expected that the next CBN governor would re-appraise the entire economic and monetary policies, recalibrate them and help to move the Nigerian economy to new heights in the coming decade and beyond.
We look forward to receiving nominations from well informed for the best man for the CBN’s helmsman job and basis for the choice.
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