Ping-Pong Tournaments Between Fiscalists and Monetarists, By ‘Tope Fasua
Anyone that suggests that this economy will pull out of this morass first by reducing interest rates, so that people can borrow more, and hopefully employ more, and build big businesses, and then pay taxes, before we all have a taste of nirvana, does not love this country. What we need is more direct interventions that seek to directly boost productivity while putting money in the pockets of our citizens – especially the youths.
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria recently completed one of its bi-monthly meetings. A day before the crucial meeting, the Minister of Finance in an interview said she expected the MPC to reduce interest rates. Two months ago, the Monetary Policy Rate (MPR), which is the reference rate for the economy had been increased from 12 percent to 14 percent much to the chagrin of manufacturers and a number of stakeholders in the economy. The rationale behind that increase was to slow down inflationary pressures. According to one of the MPC members whom I met in a private forum, they had access to information that inflation – which then stood at 16.5 percent – was headed for 20 percent. Their concern was therefore to tame runaway inflation. It has since been confirmed that Nigeria is suffering from much more than mere recession, but a debilitating disease called Stagflation – a stagnant economy where people have no money to purchase goods and yet the cost of goods and services is galloping. Good job.
Since two months ago, inflation has been increasing – even though the Minister of Finance says we should be thankful that it isn’t increasing at the previously very high rates. From 16.5 percent it climbed to 17.2 percent and is now on 17.6 percent. Nobody knows what the future holds. For salary earners – especially those who have salary on paper but have been unable to cash those promissory notes for several months now – this is a double jeopardy. One wonders how the millions being owed months of salary by government and private sector alike, have been surviving the times. I echo Mr. Dele Sobowale – a columnist in the Vanguard newspaper – who reminded us last week that recessions always create jobs, only that the types of jobs it creates are the ones governments dislike (do they really?). These are jobs like armed robbery, kidnapping, illegal bunkering, fraud, yahoo-yahoo and the rest. We now hear of school lunch packs being snatched from the backs of children, and of landlords being kidnapped en masse as they try to shed some weight from their midriffs. We have also seen carjackers who do their businesses in their birthday suits (naked), and grown up men who have lost all sense of dignity and strip naked in front of their debtors’ houses and post the gory images on social media. The times are desperate.
Back to the issue of monetary vs fiscal policies. The age long competition rages in Nigeria. When these theories are being taught in school, one will think that they work in complementarity. Economic managers are meant to have these two sets of instruments at their beck and call. Monetary policies are dispensed through the instrumentality of interest rates, exchange rates, and sundry interventions in the money market by a nation’s apex bank. Fiscal policies on the other hand have to do with the instrumentality of taxation and government spending. Nigeria is a particularly interesting battleground for these ideologies chiefly because we love clichés in this country. This is evident in the fact that almost every Nigerian believes that the “number of books that someone has read” should determine what positions they get in government services. We haven’t even bothered to device other criteria for determining competence. Track record, past efforts, originality does not count. Does he have a PhD? What did he study? Which international agencies did he work for? Even those who criticise government decisions, these are the best arguments they put up.
And so we end up choosing wrongly. We fall into what Paul Krugman famously described as Adverse Selection – the tendency of developing countries to almost always choose the worst policy options which further put them in trouble. We believe the best people are the nerds. We get carried away by someone’s spoken English, their looks. If such a person has been to places where they have been brainwashed, we lay a red carpet and worship them. So long as they can quote copiously from some outdated textbook, they are our darlings. For we have not – and are not about to – bring up anything original for ourselves. I mean policies and actions that take into consideration our peculiarities. We may complain about our people buying everything foreign, but where it starts is at the point our leaders go shopping for policy actions and ideologies, and those to drive the policies. Nothing is original. Hardly any local content.
I believe if MPR is reduced from 14 percent to say 13 percent in the next meeting, it will show the direction the CBN/MPC is willing to go, but inflation will not necessarily increase as a result of that. Yes, there will be a little pressure on the value of the naira as portfolio investors divest marginally, but this can be balanced out by a marginal increase in productivity in the nation’s real sector.
Again I digress but I need to bring this article back on track. It is about the rivalry – a great irony because they should ordinarily work together – between monetary and fiscal policy. The rivalry is actually historical, and tracks the era in which the Chicago School trumped the Keynesians. The Keynesians were successful around the time of the Second World War, but the Friedmanians (Chicagoans) have held sway and enlarged their territories since the 1970s. The Friedmanians (who believe in the power of perfect market forces, privatisation, small government and the likes) achieved this success maybe because the rhetoric of private ownership of assets appeals to many people around the world. What is more? They have been able to replicate themselves in many places across the world – as Ministers and Advisers – especially in Africa. Anyone who tries to speak about government expenditure, or government responsibility, sounds quite old-fashioned these days and may be viewed with mild pity. In fact, the mere mention of ‘government’ makes many so-called economists cringe these days.
In a time of crisis, every gladiator brings out their finest daggers; if not with a view to murder their adversaries, but at least to pass the buck. No one likes to go down as the villain. In Nigeria, the Minister of Finance’s statement was viewed with some consternation by members of the MPC who took particular exception to the fact that she made such a statement on the eve of their meeting. They would not be preempted. It was classic. If they had reduced the rates, she would take the credit, and the people will say she instructed them to do the right thing. Meanwhile, an increase in rates was totally off the cards, as the people are almost on the verge of spilling to the streets.
The Minister argued that the MPC needed to reduce rates so as to spur growth in the economy. Again this brings up the problem of clichés. Should Nigeria be talking of economic ‘growth’ for growth’s sake at this point? If Dangote Group makes huge profits, Nigeria’s GDP will grow but such growth may not touch the majority of our populace. With 170 million mouths to feed, why are we shy of adopting other indices that measure well-being – or evolve something of our own?
I believe though that the MPC/CBN can begin to exert marginal downward pressure on interest rates for now without very serious adverse inflationary effects. Inflation is their fear; but we all know that the inflation that Nigeria is presently dealing with is not caused by so much money in the hands of so many people chasing few goods (demand pull), but higher production costs as a result of devaluation of currency (supply push/imported inflation). The inflation has also been feeding on itself (spiraling), as sellers adjust prices to ensure they stay alive. Goods and services which are essential to the populace are still being bought in any case. I believe if MPR is reduced from 14 percent to say 13 percent in the next meeting, it will show the direction the CBN/MPC is willing to go, but inflation will not necessarily increase as a result of that. Yes, there will be a little pressure on the value of the naira as portfolio investors divest marginally, but this can be balanced out by a marginal increase in productivity in the nation’s real sector. The other factor to consider is that most of our banks are not even in positions to lend, what with many of their books in bad shape presently.
The situation is so dire in Nigeria to the extent that it is running many people out of their minds. All the eloquent words in the world will not help that situation. As things stand, believe me, emotions are so tinder-dry and the next spark could lead to a major conflagration.
It is important to state that Nigerians need to come to terms with two realities. An economy on our trajectory will most likely have interest rates and inflation that is above normal. Ours is not yet a matured economy. Matured economies come with even bigger headaches than we have right now. We know some inflation is necessary for the growth of the economy, because producers of goods and services should liberally price in the time factor, and the growth in costs like staff salaries. Interest rates here can also not be in the region of five percent because of the costs that banks have to bear to do their business, as well as the need to price interest rates above inflation rates. Additionally, Nigeria is trying to borrow to finance its 2016 budget and it is unlikely the situation will change in 2017. I admit that it would send wrong signals to those who buy these bonds if the MPC begins a downward pressure on rates right now. Look people, we are not Europe. We are not USA. We are not even South-East Asia. We are Nigeria. We are peculiar. We should embrace that peculiarity, define our economic track and run on it.
Our chief concern in this country should be how to pull up our millions of youth into the productive realm and ensure we produce for ourselves what we need. The manufacturers and bank customers who are asking for low rates are not exactly coming with clean hands anyway. They are the same people with bad loans in AMCON and more sticky loans with the banks. The story of bank borrowers in Nigeria is a gory one. Almost 80 percent of loans have one big issue or another. In-house hanky-panky by the banks don’t also make things better. So before we clamour for reduction in interest rates, let us ask who benefits the most. The banks are also not about to change their attitude of lending only to ‘big boys’. What are the assurances that the poor man trying to grow his SME will be a beneficiary of rate cuts?
Let’s go for the denouement. By now most of my readers know that I favour a major push in the fiscal area. Nigeria must spend to incentivise some critical demographic and productive sectors. Tax policies should also not be too harsh on the real sector. That is my view. I believe it is preposterous for anyone in Nigeria to believe that monetary policies can solve our problems in a largely informal economy, with so many leakages and quirks, so many unpredictabilities, and so much formlessness. Compared to what I have seen of some of the largest economies around the world which have been able to sustain themselves, Nigeria is like the earth was before Creation Day, ‘dark and formless’. Anyone that suggests that this economy will pull out of this morass first by reducing interest rates, so that people can borrow more, and hopefully employ more, and build big businesses, and then pay taxes, before we all have a taste of nirvana, does not love this country. What we need is more direct interventions that seek to directly boost productivity while putting money in the pockets of our citizens – especially the youths.
My advice for the Minister of Finance, therefore, is that even as she ‘releases’ liquidity into the system, she has to follow the money. Chief Financial Officers (CFOs) of conglomerates are benchmarked on how many dollars they are able to repatriate and their head offices abroad are not happy for now, because even if the monies these companies were being owed is paid up, they have lost half of the money through our devaluation. Even Nigerian shareholders of major corporations who will get all these funds have externalised views. They are the ones with houses and investments abroad, and tastes for everything foreign. Their primary school children are studying in the UK and elsewhere. To that extent, only a very tiny fraction will remain in Nigeria if at all. Some of them will get those monies, and like our state governors, nothing will accrue to their poor staff who have been slaving away with no salaries for months if not years. So, there is every likelihood that hundreds of billions of naira will be released – or is being released – but the average economically-disenfranchised Nigerian will continue to complain bitterly. The situation is so dire in Nigeria to the extent that it is running many people out of their minds. All the eloquent words in the world will not help that situation. As things stand, believe me, emotions are so tinder-dry and the next spark could lead to a major conflagration.
‘Tope Fasua, an economist and consultant, is CEO of Global Analytics Consulting.