ECONOMY: EXPECTATIONS AGAINST REALITY 02102006

A week ago, we assessed the results of government reforms in the areas of banking, foreign exchange market and the deregulation of the downstream sector of the petroleum industry.  In view of the failures, we invited Mr. President to reconsider some of the instruments arraigned by government in favour of declared objectives in the three sectors classified above.

As things stand, deregulation of the downstream appears to be only on paper not in deed as products scarcity persists outside Lagos and prices have risen by up to 30% since the announcement of this programme.  Worse still, the poor now pay about 100% more for kerosene than the ‘rich’ pay for the pleasure of driving their cars, while diesel, a less refined quality of fuel used by SMEs and other income and employment generating industries is more expensive than car fuel (PMS).

The banking reform has given rise to a cartel of 24 banks which inspite of their much bigger capital base still show no affinity for supporting SMEs as expected.  The CBN itself and EFCC lately continue to berate increasing incidence of round tripping, money laundering and insider trading, which all undermine the stability of the Nigerian economy.  Banking consolidation has also shown that large does not necessarily mean more efficient, but it has increased the number of unemployed in the country.

The Wholesale Dutch Auction adopted by the CBN to improve efficiency and probity in the foreign exchange market has been incapable of improving the official value of the naira to a rate commensurate with reserves, which have more than quadrupled as a result of the fortuitous increase in the price of crude oil in the last four years.  Instead, the CBN’s largesse at funding the black market with $200,000 weekly to each, of possibly over 1000 Bureaus de Change (BDCs) in the country appears to be a great cost to bear so that people, i.e. smugglers and looters of the people’s treasury, who cannot adequately defend their need for foreign exchange or provide supporting documentation to back their applications can have easy access to our nation’s hard earned crude oil dollars;  Never mind that the goods and materials brought in by smugglers do not attract duty and imply a loss to the national treasury; local industries are further destabilized by the presence of cheaper imported substitutes which drive them out of business with the attendant adverse effect on employment in the country, meaning more suffering for our people. 

Mr. President drew on his experience as a businessman and farmer when he demanded that commercial lending rates should come below 10% so that the industrial and commercial sectors would be galvanized to produce more, create income and reduce unemployment.  Indeed, no country has been known to significantly improve its economy and achieve enviable growth rates with double digit interest and inflation rates!  Regrettably, the government’s NEEDS programme did not establish a viable structure for bringing down lending rates and inflation as it was more a statement of intentions and expectations than an articulate mechanism that would ensure growth.  Current lending rates to industry and commerce exceed 20%; a level which does not support entrepreneurship in the real sector!  The reality is that Mr. President would never see his dream of single digit interest rate before he leaves office in 2007!

However, rather than be intimidated by the credentials of his advisers and the supporting noises by their principals in the IMF & World Bank, Mr. President should consider asking basic common sense questions, answers to which might remove the blinkered truths and half truths copiously fed him over the last seven years!  For example, why would any one in his right senses be glad to lend at 14% as the CBN does when the commercial banks come borrowing while at the same time, the same CBN is prepared to pay a rate of 17% for moneys which it borrows from the capital market; such arrangement can only be a road to disaster if adopted by a private investor!

Furthermore, Mr. President should ask for better clarification why his advisers decry fiscal expansion by the three tiers of government, yet the same governments do not have enough money to repair roads, hospitals, schools, or improve power supply!  Infact, inspite of the proclaimed cash surfeit in the bank accounts of the three tiers of government, government continues to borrow at about 12% for treasury bills and 17% for bonds to remove additional cash values from the banks. Meanwhile, the cash so borrowed is just sterilized or kept idle in the CBN vaults and the money is not put into any productive use to ameliorate unemployment or our infrastructural deficiencies.  Mr. President should ask to be told why inspite of the open declaration of excessive cash, the government continues to borrow to pay the arrears in allowances for a host of government pensioners inspite of idle cash mopped up in its vaults!

Baba should seek clarification from his advisers so that he can satisfactorily explain to Nigerians the reason for building up reserves to cover all our import needs for over 36 month’s henceforth at a time when the economy needs huge injections of capital to jumpstart the economy, and create jobs and improve our dilapidated infrastructure.  Nigerians want to be convinced that it makes sense to canvass for foreign direct investments which attract higher costs to the economy than to dip into our own foreign reserves which carry no cost burden whatsoever.

Our people need to be convinced that the government is acting in their interest when it cautions against rascality in government borrowings while the same government is borrowing money it does not need as billions of naira are taken up every month with an interest burden of anything from 12-17% on our people!  Mr. President must gather courage to ask his Economic Team why it is endlessly mopping up excess cash (even though not available for development) at such high cost every month!  Nigerians need to know that excess liquidity and its attendant adverse economic reactions result every month because the CBN seizes the nation’s dollar earnings and converts it to naira at its own unilaterally declared rate of exchange before sharing to the three tiers of government!  The huge naira sum expands commercial banks lending ability many times over and creates the ghost of seemingly excess credit expansion capacity in the banks while the CBN simultaneously moves in to mop up this cash by borrowing it back at a high cost.  Baba should ask why the issue of too much cash in commercial banks cannot be addressed by increasing banks’ cash reserve ratio from its current level of about 11% to a higher level commensurate with a credit capacity that would be salutary to the economy.  This arrangement would cost the Nigerian people little or nothing in place of the high cost we helplessly incur.   But it is clear that if this approach is adopted bank profits would collapse and this would not find much favour with the banking gurus who control our lives!