The responses to the coronavirus are coming thick and fast. The most important responses are the ones that deal with the threat of the pandemic of course. I am not an epidemiologist or a public health expert so I will refrain from pretending to be one. All I can say is that we should all continue to listen to the experts and authorities, and of course follow their recommendations.
I can however comment on some of the economic policy responses. The first of which is the reduction in fuel prices. The government, via the NNPC, announced a reduction to 125 per litre. On the surface the reduction makes sense. Crude oil prices have dropped to record lows in recent weeks and that naturally should transmit to lower fuel prices. Officially the announcement suggested we are moving to a price-modulating arrangement where the price will change on a monthly basis. But then we know how these things work. The fuel price in Nigeria is a political topic. It is always easy when prices want to go down. Nobody complains. But will the political actors be as willing when prices need to go up? If you look at the PPPRA pricing template, the exchange rate used for this new price is 307 per dollar which must change. Oil prices will also probably go back up eventually. I would have preferred the government to use this opportunity to deregulate the sector and scrap the whole government fuel price fixing once and for all.
Then there is the rumoured securitisation of “ways and means”. To put that in English, the indirect debt that had been built up by the CBN giving credit to the government will be converted to more formal debt and sold. This is an interesting one. On the one hand there are rumours that the CBN’s balance sheet has been crippled by that debt. Rumours because the CBN no longer makes its accounts public. Getting some of that debt off the CBNs balance sheet will likely put the CBN in a better financial position to tackle some of the more serious challenges. As long as they don’t continue the bad behaviour of indirectly funding the federal government though. On the other hand, it will be interesting to see what moving this debt to the federal governments balance sheet does to its accounts. Will 2020 be the year when we see a debt servicing to revenue ratio near 100 percent? Overall, this seems like a move-the-bad-apple-around policy. The bad apples are still there regardless of who is currently holding them.
Next intervention. What better way to respond to cleaning some things off your balance sheet than adding more stuff on it? A N1.1trillion intervention fund from the CBN is reportedly on the way to support “critical sectors”. Where critical is defined as manufacturing and to support import substitution. This one is a bit interesting. Where interesting is defined as nonsensical. Lest we forget, the same CBN raised the CRR rate just a few weeks ago and effective CRR for some banks is now as high as 45 percent. Is the CBN essentially saying that it is a better allocator of credit than the banks?
On the federal government’s side there are plans to cut the budget. The benchmark oil price is being revised to $30 a barrel. The expected revenue from privatisation proceeds will be cut by 50 percent. On the spending side capital and recurrent expenditures is to be cut by 20 and 25 percent respectively. If you have been following my column you will know that even before the current oil crisis I expected most of the budget to be unimplementable, with most of the capital expenditure component not financed anyway. So, a 20 percent cut seems a bit funny. The actions on the recurrent side are interesting too. What is going to be cut? Salaries? Debt servicing costs? All overheads? Other spending like on the amnesty program or the social interventions? The devil is in the details I guess. The deficit is expected to rise to N3.3 trillion. Still the math does not add up.
There have been others like the reduction in interest rates from CBN interventions, to a change in the moratorium on debt and so on. Overall, and I hate to be the sceptic, but I am not convinced that most of the interventions will amount to much. Especially since some of the inconsistencies which are restricting the economy remains largely in place. And then there is the elephant-sized foreign exchange market problem in the room. But I guess let it not be like the authorities were not doing something.
NONSO OBIKILI
Dr. Obikili is chief economist at BusinessDay
