My last column was on the difficulty in reversing bad policy and how decision makers, thanks to politics and other issues, find it difficult to backtrack even when they know a policy has failed.
This week I want to take it further and talk about policy lags. As you may expect, policy takes time to work its way through the economy. If you implement a policy today it takes some time before you start to see the results, whether positive or negative.
For example. If policy makers decide that they want to raise interest rates to reduce inflation, it takes time from when they announce and implement the interest rate increase until the effects on inflation start to show up. Sometimes it takes months or even years. This delayed outcome is a feature of most policies, even those whose outcomes turn out to be negative.
If policy makers decide to close the border for instance, it will take time before the negative effects on inflation and productivity start to show up. Or if policy makers decide to split the securities market into two, it takes time for the dislocation in the market and the outflow of liquidity to flow into other less desirable alternatives. Or if policy makers decide to force banks to lend using regulatory muscles. It takes time for the new risky lending practices to show up as non-performing loans.
You probably get my drift. Any policy, even if it has good or bad outcomes, takes time to mature and show results. And as the famous saying goes “time waits for no man” or woman. The implication is that policy makers have to think about policy properly before deciding on a path. Especially policy makers who have a fixed four-year mandate to deliver. There really is no time for experimenting. But this is a real conundrum for the electorate: if all policy takes time to show results then how do you know if you are being led in the right direction or down a destructive rabbit hole?
Another debt flashback to the 80s
The current administration has tabled a request to the National Assembly to allow it borrow some 30 billion US dollars externally. The borrowing is to allow them to execute some key infrastructure projects across the country. Projects which are “critical”. For context, Nigeria’s total external debt as at June of this year was just over $27 billion. So, this proposal is essentially seeking to double the current external debt. For even further context, the federal government spent 54 percent of its actual revenue in 2018 and the first half of 2019 servicing already existing debt. I will leave you to solve the math here.
There are of course significant infrastructure challenges which need to be tackled. Power plants, railways, bridges, and so on need to be built. No one can debate that. But there are two ways to tackle this.
The “easy” unwise way which is essentially government borrowing money against its balance sheet hoping that it will generate enough tax revenue to service and repay those loans. Then the hard more prudent way, which is to structure these infrastructure projects so that they generate revenue on their own and allow the private sector to invest in them. So far, the government seems to want to go the “give us money to build it” way.
We all know how that ends. As my friend likes to say, “it will end in tears”. It is not only that the government will borrow that amount and the infrastructure will fail to materialise, but that kind of borrowing will cripple the government’s balance sheet. And because the debt is in US dollars, every devaluation of the Naira which historically is at 14 percent a year, will put the mostly Naira earning government further into debt. And as much as we want infrastructure, we know that a country with a bankrupt government is worse than one lacking infrastructure.
If all this sounds familiar it is because we have been here before. It is a replica of the borrow dollars to build infrastructure policies of the 80s which left us with no infrastructure but with the debt around our necks. Debt that crippled government and the economy for almost three decades until we successfully begged for forgiveness. Unfortunately, it seems like the current National Assembly shares many characteristics with a rubber stamp so there may be no resistance to this new debt binge. Which way Nigeria?
Dr. Obikili is the chief economist at Business Day