Bola Tinubu, Nigeria’s president, is gloating. The economy “is looking much better,” he says, and he wants Nigerians to start rejoicing because their woes will soon be over. In his Easter message, Tinubu told Nigerians that “the seeds of patience, which they have sown, are beginning to sprout and will in no time bring forth an abundance of good fruits.” Abundance of good fruits?
What would that entail? Would it mean huge declines in Nigeria’s unemployment and poverty rates, which are among the highest in the world? Harold Macmillan, former British prime minister, famously said: “The central aim of domestic policy must be to tackle unemployment and poverty.” Indeed, one of the core mandates of the US Federal Reserve, America’s central bank, is “to promote maximum employment.”
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But Tinubu’s fiscal profligacy is, in part, forcing the Central Bank of Nigeria (CBN, to pursue aggressive monetary interventions that would stifle industrial competitiveness, deepening unemployment and poverty. Surely, any policy that makes job creation and poverty reduction more difficult is not something a president should gloat about and is not the kind of “abundance of good fruits” any country needs.
When Tinubu said Nigeria’s economy “is looking much better,” he was referring to the recent appreciation in the value of the naira, caused by a significant inflow of foreign portfolio investment. Speaking through Ajuri Ngelale, his special adviser on media and publicity, Tinubu said: “When the exchange rate was going haywire, it looked like we were asleep, but we worked on it diligently, and it is going down; it’s getting better.” But every informed Nigerian knows that the “we-worked-on-it-diligently” self-praise was a euphemism for the CBN’s aggressive interventions in (1) raising interest rates twice, first to 22.75 percent in February and then to 24.75 percent in March, and (2) exerting heavy-handed controls in the foreign exchange market.
Take the interest rate hikes. Of course, when a central bank raises interest rates, foreign portfolio investors, who want to take advantage of the high interest rates and get higher returns from their deposits, will bring foreign exchange into the country. Put simply, Nigeria has attracted foreign portfolio investment of about $3 billion because foreign portfolio investors found the interest rate too tempting to resist. And it is the large portfolio investment inflows that have led to the appreciation of the naira.
“When Tinubu said Nigeria’s economy “is looking much better,” he was referring to the recent appreciation in the value of the naira, caused by a significant inflow of foreign portfolio investment.”
But at what cost? No economy can sustain and survive an interest rate of about 25 percent. While high interest rates may attract foreign portfolio investment flows, which can come today and leave tomorrow; hence, they are called “hot money,” they are damaging to manufacturers who can’t leave because they have factories and machinery on the ground. High interest rates increase borrowing costs for industry, meaning lower profits for many companies and, thus, less willingness to borrow money to invest; that would mean few new jobs, if at all any, and probably even more job losses as profits fall.
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An economy is doing well when it is attracting significant foreign direct investment, or FDI, known as “sticky money.” However, over the years, foreign investment has not only declined in Nigeria, but it has also been dominated by foreign portfolio investment, which accounts for about 61 percent of the investment inflow as against only 20 percent for FDI. Yet, all over the world, it is FDI, not foreign portfolio investment, that is associated with job creation, innovation, technology transfer, research and development, skills enhancement, and other factors that drive economic growth. Unlike foreign portfolio investors, foreign direct investors are not attracted by high interest rates but by macroeconomic stability, including low interest rates.
But, let’s face it, the CBN raised interest rates because it must tackle skyrocketing inflation. Indeed, as the CBN governor, Yemi Cardoso, put it last month when announcing the new interest rate hike, the Monetary Policy Committee’s considerations were “focused on the current inflationary pressures and the need to ensure sustained exchange rate stability.” When a country faces high inflation and a weak currency, the central bank has no option but to raise interest rates to attract foreign portfolio investment, strengthen the value of the local currency, and mop up excess money supply and make borrowing more costly, thereby bringing down inflation, all else being equal.
Which brings us to the CBN’s other approach to strengthening the naira’s value. The apex bank is intervening in the foreign exchange market in a very aggressive way. First, it sold dollars to Bureau de Change (BDC) operators, about 1,588 of them, at a reduced exchange rate of about N1,100/$1, instead of about N1,251/$1, and gave them the rate they must sell it to the public, regardless of the forces of demand and supply. According to a story in the Tribune newspaper, in defending the naira, the CBN depleted Nigeria’s foreign reserves by $595 million in one day. But artificially strengthening the naira could trigger capital flight. An overvalued currency has its downsides too.
Perversely, the CBN is also chasing after so-called speculators and arm-twisting people to empty their dollar accounts and sell dollars. This approach is similar to the CBN’s currency redesign under Godwin Emefiele, intended to upend those believed to be hoarding naira. However, any approach that undermines people’s property rights and the willing sellers/willing buyers’ concept, despite the floating of the naira, is misguided, sending the wrong signals.
But let’s return to the interest hikes. The greatest economic evil, which every central bank must tackle head-on, is inflation. But the greatest source of inflation is government spending and the money supply. Which is why monetary and fiscal policies must work in tandem, not disjointedly. If a government indulges in fiscal profligacy instead of reining in excessive spending, it will leave the central bank with no alternative but to use the sharp instrument of high interest rates, cratering the economy.
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Which brings us back to Tinubu. Some people blame the current inflation rate of about 31.7 percent on the N30 trillion in ways and means borrowing and spending under President Buhari. But how much has Tinubu added to borrowing and spending in less than one year in office? According to the Debt Management Office (DMO, public debt rose by N9.43 trillion in the fourth quarter of 2023 under Tinubu, bringing total debt to N97 trillion. The total money supply is now N95 trillion; it has expanded by 79 percent. As Bismarck Rewane, CEO of Financial Derivatives, put it recently in a brilliant presentation on Channels TV, “if your GDP is at 3.4 percent and your money supply grows by 79 percent, ab initio, you are 73 percent under water.” And, of course, the CBN must act!
Sadly, Tinubu is playing Father Christmas with public funds. Recently, he gave $90 billion to subsidise Hajj fares, presumably to buy political favours. But Nigeria’s education and health systems are poorly funded, leading many to go abroad for better education and healthcare, increasing the demand for dollars. He also gave N95 billion to 95 large companies. Yet, last week, BusinessDay reported: “Rising costs push manufacturing exports down 62 percent in four years.” How does WTO-incompatible state aid to some companies address the high interest rates and other supply-side constraints eroding business competitiveness and non-oil exports?
Of course, here’s the crux: With an unprecedentedly large budget of N27.5 trillion, of which N9.18 trillion is a debt-funded deficit, Tinubu, a natural big spender, will spend profligately without inhibitions. Recently, he said, “Have faith; we will tame inflation.” What he meant was that the CBN would subdue inflation by aggressively using the monetary instrument of high interest rates. Elsewhere, fiscal policy plays its part through public expenditure restraint. Tinubu must tread the path of fiscal prudence.
