Where Nigeria got it Wrong


Monday, December 01, 2014 5.50 PM / Olufemi AWOYEMI

Nigerians should now prepare for serious financial decisions on account of imminent hard choices that is now upon us….and we cannot deny/pretend any longer.

We now have a situation better known as a ‘perfect storm’ – an event where a rare combination of circumstances will aggravate a situation drastically and in Nigeria’s case the economic management issue was the tipping point to a sovereign that was already dealing with insecurity, economic hardship, political uncertainty, leadership inertia, failing institutions, weakening infrastructures and a glaring disconnect between its growing productive population and economic opportunities…

Today, US dollars hit N190 on the streets….. not surprisingly…. #Fact - Interbank was very volatile today as it touched $/N184.60 before closing at $/N183.60 as a result of CBN’s timely intervention.

For any discerning follower of economic events, it was obvious from the MPC’s decision that they
misread the priorities and consequently the mix of options available and necessary to take.

Why? To make a decision premised around the banks as against the larger economy, would appear an underestimation of the significant paradigm shift that we faced. Culling from page 14 of the CBN Nov 2014 MPC report..."The Committee is fully aware of the short run implications of a tight monetary policy stance on lending and growth. However, available data indicates that banking system liquidity has been LAVISHLY deployed in pursuit of speculative foreign exchange trading at the short-end of the market. While the Committee remains fully committed to the goal of promoting inclusive growth through lower interest rates in the medium- to long-term, banks as agents of financial intermediation have a critical role to play in the nation’s development process. A banking system with an overly high profit motive negates the core tenets of banking and purpose of a banking license. Under the circumstance, monetary policy must be bold and emphatic on the goals macroeconomic management seeks to achieve and encourage the flow of credit along those lines.” 

It was the evidence needed to conclude that we got it wrong with our Central Bank. The stakes are just too high this time around. 

Recall that at Governor Emefiele’s confirmation hearings, he alluded to two key promises:

1.    Not to devalue the naira; and

    To do all he could to bring down the lending rate i.e. drop the MPR. 

This was not a bold move at the time when imagination was required rather than political acquiescence. How could we do one without the other?

In a series of articles and scholarly work by a team assembled by Proshare/BusinessWorld; the evidence had been established i.e. – the headwinds, the developments in China, Russia, USA and UK; oil price volatility and economic response, state of development and role of the CBN. Further, seasoned economists have looked into the developments and opined that while we faced fiscal side challenges, we can at least dig into the bag of tools available on the monetary side to signal the change needed.

We got it wrong!
While it is obvious that the new CBN Governor has done the opposite of what he promised; it is in the mix and vision again that continues to bother. Not having any documented record of his economic beliefs/credentials; one is left with conjectures of what the policy direction is going forward.

For anyone familiar with the structure of the Nigerian economy, it would be a  BOLD monetary policy that should have six months (or a year ago) delivered the following:
1.    Encouraged the Nigerian Govt, to borrow money when the oil prices were higher than our ‘benchmarks’, and borrowing ratio to GDP was beneath tolerable levels;

    We had known about the headwinds associated with oil revenues for years and its consequential  impact on sovereign finances AND should have realised the need to execute FORWADS – i.e. forward sale of crude oil would have made more sense that even if oil prices went northwards above commitments, we would have avoided the dislocation being faced now;

3.    The Naira could not be supported on the back of dwindling dollar revenues and a ramp up of non-oil exports could not cover for the insatiable gap in consumption pattern and as such a significant shift would have been required to arrest the overvaluation as indexed by huge demand for dollars for imports –
a recalibration was needed including a unified fx market;

    The domestic lending market was virtually a ‘blue chip’ market without any head room for small businesses which accounted for about 70% of the population; and

    The need to make a switch from consumption of foreign goods was not simply a nationalistic imperative but an economic necessity.

An idea of a BOLD move would look like this:

1.    Price the Naira to $/N200;

    Lower MPR to 8-9%;

    Reduce CRR;

    Make a case for fiscal policies that enable us deliver a spurred-on domestic market despite the short term displacements.

This sounds drastic, perhaps revolutionary to some but in a few weeks time, the inevitability would become apparent. 

On the altar of political expediency, we now have a plethora of policies that will deliver a more expensive foreign goods market for which local goods cannot fill the gap. This is outside the immediate consequence of the spikes in interbank lending rates (12.5% today) which would impact bond yields. With the MPC decision, effective borrowing costs of most firms will go up just as their input costs leading to shrinking margins and return to shareholders; and the beginning of a waiting game on price cuts/increases amongst competitors.

This is outside the following:
1.    The USD$ exposure of Nigerian banks which has to be serviced;

  Majority of our state governments are now technically insolvent and may not be able to meet salary payments in the next six (6) months or thereabout;

 The informed decision by the MoF/SEC not to approve the borrowing requests of states based on their obvious financial states and its implication on the political economy and decision making; and 

 The compelling need for us to engage in a belt-tightening regime which is YET to be reflected in the 2015 Budget or the revised MTFP. 

Nigeria had it easy with its last two Central Bank Governors. The consequences of which made us lazy, laid back and unable to apply ourselves to the rigour required in managing a sovereign economy with clear headwinds and existential revenue challenges (discounting any misgivings or shortcomings noted by experts, economists and analysts; on account of the shifting dynamics that created period paradigm shifts which are often not considered in the main).

We got it wrong this time and it is unfortunate for we knew all the factors at play today, ahead of time.

This is not an expository economic contribution but a statement of conviction from a team that is invested in finding a solution.

The choice before Nigeria, given the fast shifting dynamics, is one of an existential crisis that require imagination, thought and political will to deliver. 

The next question must be what do we do now? How do we redial the numbers? 

 Proshare Nigeria Pvt. Ltd.

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