The new economic reform agenda of the current Government is giving hope that our troubled economy can rise up to its challenges. The response to COVID-19 though slow in starting, was the right thing to do and will produce positive result at the end, and the curve will be flattened. The economic reforms since COVID-19 is a great source of hope that the Government is finally coming to the reality of our economic situation. They are coming to realised that they must be addressed through bold reforms and hard decisions.
Fortunately, the Government is in a strong position to take these hard decisions. The economic troubles do not give then room to escape the consequences of not doing the right thing. The hardship also gives the people no alternative, they are already at the worse place they can be. The Government has no election calculations to defer their inaction on. They will have to bite the bullet. There is the added advantage of a Government that can take decisions and stay with it, whether right or wrong. The three critical decisions in the recent weeks shows they are on the right course. Deregulate fuel prices and get rid of the scandalous subsidies, unify the FX rates and stop subsidising efficiencies creating arbitrage window for corruption and the focus on progressive taxation, that pushes the burden of tax to those who use the services. It is also a more efficient way to collect taxes.
The decision to deregulate the pump prices of petroleum products is a great one. We can no longer afford the Silly subsidies that benefited those who did not need it. The costly nature of it and the Huge corruption associated with it, was sufficient to shut it down long ago. The COVID-19 struggles showed us that the world has changed and we needed to change with it. The Huge cost savings from these subsidies, will go a long way to address other social needs that have been left unaddressed, for a long time. The significant Reforms just announced, where the CBN is moving to unify the foreign exchange rates at the investors and exporters window is the most realistic thing to do. That is where the market is. This is where those who constitute a bulk of the users of FX come to buy or sell and the Banks intermediate here. The CBN should match the market in its selling prices, supply only at the top of the market. The market will moderate itself.
The next most important step to follow this, will be for the CBN to follow up with a circular that clearly state that they will encourage Nigerians and others who wish to save FX in their Domiciliary Accounts locally in Nigerian banks to do so. They will have nothing to fear from the central Bank. FX savings account for individuals will help manage FX rates as widespread Domiciliary Account holdings will take the pressure off CBN intervention and from the Bureau de changes Retail end of the market.
I have always posited that inflation rate of any economy, is the aspirational growth rate of that economy. In other words, our current inflation rate at 11.5 percent and our growth of about 2 percent shows we have potential growth and economic demand that outpace current growth by 9.5 percent
The assurance to citizens that there is no illegality in holding and saving in a Domiciliary Account within the country for personal use, will be encouraged rapid increases in the flow of FX from everywhere. It will go a long way in decentralising sources of FX inflows and will greatly create a huge FX savings support that help the economy and reduce the burden on the CBN. Prior to the 2015 elections, some analysts estimated that Domiciliary Accounts holdings in our Banks in the country held as much as 26 percent of the reserves of available FX at the time. Whatever the true figure was, it was huge enough to cushioned the available FX reserves at the CBN.
The ill-advised attempts to change policy on Domiciliary Accounts was a disaster. The capital flight that followed that attempt, is yet to recovered. This idea might seem revolutionary now, it is not, bold market reforms like these, are the only hope for Nigeria. Many years ago, around 1998, I wrote an article about the quagmire that was the FX situation in Nigeria and suggested that the CBN fund Bureau De Change (BDCs) segment of the market at the time, because this irrelevant segment of the market, was responsible for rate setting. The small retail end of the market we referred to as “Black Market” because this was the market accessible to the larger population and the supply was not available, speculators had a field day.
My reasoning was that, organising that part of the market and funding it, will put out the fires that fuel the daily rises in FX rates. That was 7 years before the CBN warmed up to the idea. If you Free up the Domiciliary Account end of the market today, there will be the same exact effect , that the opening and organising for the retail end for BDCs did , to closing in on a fairer FX rate .Since the funding BDCs became official policy, It has helped in price discovery, and getting a large individual Domiciliary savings organised and making it legitimate , will take off pressure from FX exchange rates , and even further deepen price discovery.
It takes out a large number of speculators in the market. This is one sure way to get the full benefit of the new policy to unify FX rates. The CBN current moves come on the back of some revolutionary policies in this current CBN. It shows the CBN is working with Data and prepared to take pressure. It is paying off. For years many, including this writer, has clamoured for low interest rates. I have argued years ago, that the economy cannot grow on high rates that were mostly in the 20 percent – 30 percent range.
Check out all the economies that are growing in the world. Their financing rates were all in the single digit range. The last 3 quarters in Nigeria has shown that the CBN is ready to force interest rates down and there is nothing wrong with that. Depositors and Investors are getting used to the low rates on their deposits and the Banks are getting weaned off the rigged game of collecting deposits at 3 percent and lending to Government at 10 percent. I have always argued that of the 3 rates the CBN monitor in the economy, Interest rates, is the only place it has control and it has shown these past months that it is possible to take control of interest rates.
Inflation, should worry us less, we can grow with a 12 percent inflation. A strong growth will see us outpace inflation with time. The Asian economies have shown that it is possible. I have always posited that inflation rate of any economy, is the aspirational growth rate of that economy. In other words, our current inflation rate at 11.5 percent and our growth of about 2 percent shows we have potential growth and economic demand that outpace current growth by 9.5 percent. That is not unusual for an economy that has so much infrastructural deficits and inefficiencies. The reason inflation is so low in the west, is that it’s efficiencies especially enhanced with technology, have levelled inflation.
The CBN ‘s new direction to unify the FX rates, will eliminate one of the biggest leakages in Nigeria. It will also eliminate unseen corruption that stinks to the heavens. The federating States will also benefit from the more realistic exchanges rates used for the monthly allocation to States as well. The reform in taxation has also been revolutionary. It needs to go further; the SME space need more air to grow it. Any SME that is not having revenues of N50 million should not pay any company taxes. That is double the current N25m allowed in the new tax regime. Doing this, is even a better form subsidy for SMEs, the current culture of throwing money inefficiently at them and the growing bureaucracy, just to disburse these monies people, yet SNES are not seeing this, is a problem. Taxes are a better way to subsidies and incentivise SMEs. It is also very transparent. The progressive taxes like VAT and Stamp duties will make up for the taxes lost from SMEs. The Taxing authorities will have better focus on the taxes that are easy to collect and reduce their cost in collecting it. The next biggest reforms, are dismantling the NNPC, sell of 70 percent to the public of the various enterprises to be created and sell 30 percent to core investors , who must commit to listing on the Nigeria Stock Exchange within 3/5 years…..NPDC , PPMC NNPC ventures , ….should be the first of the privatisation entities. The waste and drain pipe the NNPC has become, cannot continue.
This Government is in a good position to make these happen. There will be opposition from the usual quarters, this Government must show its back bone to those who think they can hold the country to ransom. They should let them know; they have no more elections to win. Government must insist on those reforms that will benefit the majority of Nigerians. The fuel deregulation must include dismantling PPRA and focus it on its Regulatory role, under the Department of Petroleum Resources (DPR) and nothing more.
The Government new found courage to reform must be encouraged by all and kudos given to all those at the helm doing these reforms. For a Government that has been so vilified for most of its policies, we should also applaud her, for doing the right things and pushing reforms that will make meaningful improvements to the lives of people in the long run.
VICTOR OGIEMWONYI
Ogiemwonyi is a retired Investment Banker and writes from Lagos
