President Buhari launched his government’s Economic Recovery and Growth plan, last week. The ERGP is in many ways similar to the Obasanjo Government’s National Economic Empowerment and Development Strategy (NEEDS 2004), which was also designed to re-invent the economy to sustain inclusive growth, and upgrade our infrastructure, and also reduce the level of unemployment. Sadly, well over a decade later, the promises of the NEEDS programme remain a mirage. Unfortunately, the factors that induced the failure of NEEDS are inadvertently also embedded in the Buhari ERGP. 
The above title was first published in the Vanguard Newspapers on February 14th 2005. A summary of that piece follows hereafter. Please read on…

“The Governor of Central Bank of Nigeria, Professor Chukwuna Soludo, formally presented “The monetary, Credit, Foreign Trade and Exchange Rates” Policy Guidelines for Fiscal Year 2004/ 2005 to the media recently.

The implications of the guidelines which were published in the CBN’s Monetary Policy Circular No.37” of February 14th 2005 will be evaluated in relation to the potential impact on the following economic variables, i.e. inflation, interest rates, excess liquidity, exchange rates and external reserves. Invariably, the expected impact of the implementation of the guidelines is presumed to align with the objectives and goals of Government’s Economic Empowerment and Development Strategy, NEEDS. 

Although, NEEDS document projected inflation rate below 10%, the CBN’s report, insists that inflation rate has actually fallen to 9.5 percent from the self-destructive 23.8 percent that prevailed in 2003-Q4, however, MPC's Circular 37, admits that the “12-month moving average inflation rate was actually 15 percent”. It is unusual that the year on year inflation index of 9.5 percent would be as much as 5.5 percentage points below the reported moving average inflation index of 15 percent, especially, when significant increases in domestic fuel prices and a naira rate that is artificially depreciated against the dollar, continuously instigates inflationary pressure. Thus, the seemingly ‘positive’ statistical indices reported by CBN may seem progressive, but to the common man, the increasing pangs of hunger and desperation continue to be real-life experiences. 
The monetary authorities are also clearly aware that money borrowed  with over 20 percent interest rates, and compounded with unexpected, arbitrary and oppressive charges by lending banks, can only spell doom for ‘Industrial and economic growth’! Not surprisingly, Government’s NEEDS programme therefore, sensibly adopted single digit lending interest rates as a prime objective. 

The MPC Circular No. 37 carries a comparative statistical table of key macroeconomic indicators as projected in ‘NEEDS 2004’ against the ‘actuals’ for the same year.  The indices seems to portray the ‘excellent performances’ of macro-economic indicators against the targets!  The curious thing about the excellent results sheet, however, is that the pivotal subject of interest rate hovering around 25 percent for most part of 2004 was not assessed against the single digit benchmark of the NEEDS programme President Obansanjo, who is also a renowned farmer is aware that you cannot grow Nigeria’s industrial base and stimulate employment with interest rates above 10 percent.

The Monetary authorities may not have been too eager to broadcast its failure in the critical area of interest rates, nonetheless, the Monetary Authorities they clearly recognised the need for urgent remedial action; Consequently, (the CBN base rate, to commercial banks) i.e. the Minimum Rediscount Rate (MRR), was reduced to 13.5 percent from the former more oppressive rate of 15 percent, so that, banks could then add the permissible 4 percentage points and lend to customers at 17.5 percent. Furthermore, the plethora of bank administrative costs would most likely push this already oppressive rate well above single digit to over 20 percent, and discourage productive enterprise and job creation. 

Furthermore, MPC circular No. 37 seeks to explain that the lower MRR of 13.5 percent has been made possible by the new adoption of the year on year inflation index of 9.5 percent instead of the former moving average inflation index of 15 percent for determining the MRR, It is undeniable, nonetheless, that with MRR still as high as 13.5 percent, domestic cost of lending cannot be competitive against those successful economies, which sustain policy rates below 3 percent, in order to sustain low inflation rates and reduce both industrial and agricultural production costs to stimulate investments.

The MPC Guidelines also identified the main villains that will threaten macroeconomic stability in 2005 as, the decision to share part of the ‘excess’ crude accrued from 2004, with the expectedly higher, State Government budgets and increasing export revenue from a ‘premium’ market price of $30 per barrel (relative to $25 for 2004). Thus, inflation and exchange rate stability will therefore inevitably become daunting challenges in 2005.  But, we need ask, why should increasing export revenue, create such a big headache for the monetary authorities?  Every business corporation would normally celebrate seasons of increasing sales revenue and higher profits, to finance retooling, expansion and beefing up of working capital, It consequently, we find the CBN’s fears of ‘the imminent expansionary fiscal policy stance in 2005’ rather intriguing, particularly, in view of severe the deprivations in the area of education, health, energy and transportation, which demand urgent interventions!  It becomes more confusing despite when government still goes cap-in-hand to borrow or seek foreign investments for infrastructural and remediation despite the expressed concern of the CBN for the bounty of increasing fiscal surplus.  The explanation for CBN’s ambivalence and fears is deep rooted in the process/mechanism, for infusing foreign exchange earned from crude oil into the monetary system.  

The current mechanism is for CBN to consolidate the monthly distributable pool of foreign exchange and unilaterally determine a rate of exchange for converting the dollar denominated revenue to naira.  CBN’s adopted exchange rate was generally lower than the DAS rate offered in the open market by up to 25 percent in the recent past!  The currency substitution means that the humongous naira cover for the billions of distributable dollars has to be generated or found every month.  The three main sources of finding the naira cover, are through direct printing of fresh naira notes, borrowing back government funds from the capital market by sale of Treasury Bills at interest rates of up to 15 percent and also through the direct auctions of dollar rations against surplus Naira liquidity under the Dutch Auction System.  Invariably, three modes of finding naira cover for distributable dollars will induce an inflationary spiral which is clearly socially destabilizing to make the attainment of single digit inflation rates particularly difficult!!

Indeed, every time, the dollar component of monthly distributable revenue is unilaterally substituted with Naira allocations, the resultant huge Naira liquidity that results in the banking sector would invariably encourage liberal advances,  balances which are not predicated on any direct productive activity, and further fuel systemic and destructive inflationary spiral. In its attempt to arrest the drift and restrain such arbitrary bank lending and expenditure the CBN immediately embarks on a regular mopping up operation to reduce the huge cash holdings or the liquidity base of the commercial banks, even if this means borrowing back government money with double digit interest rates!  This endless cycle is repeated every month whenever the federation pool is shared and the outcome clearly depicts the CBN’s dilemma and the horrendous challenge to macroeconomic stability, whenever we are blessed with increasing crude oil revenue!  Thus, the larger the dollar revenue to be shared, the greater also is the problem of excess liquidity and the need for the adoption of anti industry and anti people postures in the management of monetary policy!  Consequently, the prayer of our monetary authorities would be for providence to reduce our export revenue in order to sanitize the liquidity problem, notwithstanding the oppressive cost of government borrowing to fund its budgets.