World Bank meeting: Matters arising

The Business Editor of a Nigerian Newspaper who is attending the World Bank meeting has asked me to respond to the views expressed by David Malpass, the President of the World Bank when he was asked to set an agenda for the incoming government.

He raised the following issues as challenges within the economy which should be addressed. In giving this reaction we shall avail ourselves of the opportunity to address additional issues deserving of prompt and urgent attention. The issues he raised in no particular order are:

1) Trade protection.

2) Dual exchange rate

3) High inflation

4) An economy in need of diversification.

Trade protection

Trade protection assumed front burner concern following the decision of the Central Bank, in an attempt to battle the falling rate of exchange to exclude some items such as tooth pick which consumed considerable amount of foreign exchange as they were imported from official foreign exchange allocation.

The argument is that we should ordinarily be in a position to produce locally such products. A decision was taken to exclude such products after careful study from allocation of scarce and dwindling stock of official foreign exchange.

It is worth emphasising that those items have not been banned as the observation is often make but only to aid the management of demand will no longer receive official foreign exchange allocations. What we must admit here is the fact that such controls are difficult to enforce as there is always the possibility of diversion of foreign exchange obtained for other purposes.

But market forces in any case will not do the job in the circumstances. It was also expected that such restrictions could impact on local productivity leading to enhanced employment opportunities situation. Anything that could increase employment hits the bull’s eye as such a development favourably impacts the related anti-social consequences of unemployment.

What also we must take on board as we discuss is that the war on balance of trade advantage is not restricted to developing countries of the world. If anything it is also pronounced amongst the developed countries of the world as one often hears the United States accuse China of unfair trade practices to gain market share advantage in the international market.

The West must also accept the responsibility from the point of view of shared prosperity to facilitate market entry for products and services from developing countries of the world into their markets. The Nigerian AGOA experience is instructive in this regard.

Therefore trade liberalisation is a good idea as it has the potential to enhance overall world productivity as specialisation is optimised. But developing countries of the world don’t have any options but to adopt trade liberalisation advisedly if they will not undermine their development potentials.

Dual exchange rates

Dual exchange rates are inevitable to the extent that countries are not able to meet officially; demands of foreign exchange within an economy. Unsatisfied demands seek supply elsewhere and once that is the situation, a different rate which commands a premium must result. It is as simple and direct as that.

Therefore it is right to conclude that maintaining single rates of exchange for most countries of the world, except those countries with tradeable currency is a veritable tall order. If truth be told, Nigeria is not going to be able to maintain single rate of exchange speaking realistically in the foreseeable future.

In the interim as we adopt our demand managed rate of exchange, there is the need to consciously manage the spread so that the premium is not too tempting to resist by would be rent seekers. It is dangerous for any government at this point in time to attempt floating the exchange rate. The depreciation will be so precipitous as to threaten the stability of the economy.

When Buhari’s government came on board, it came under pressure to liberalise and allow the market determine the rates. And that pressure and other extraneous factors, such as the Covid pandemic contributed to the parlous state of the exchange rate today. There is the imperatives to correct certain critical related issues before floating could be attempted such as bringing to an end fuel importation and its associated subsidies.

High inflation

High rate of inflation is a phenomenon across countries of the world. And if we may add is now associated with elevated base interest rates as an attempt is made by monetary authorities to come to terms with spiralling rates of inflation.

The genesis of this situation was the onset of Covid 19 which shut down most Economies of the world. And as the pandemic slowed down, there were concerted attempts made to kick start economies through quantitative easing. Therefore massive liquidity was injected into the economy providing a perfect setting for inflationary spiral. It is also worth of note that interest rates are factor costs which have inflationary implications! Our take is that countries should concentrate on supply side economics to find a solution.

As productivity is boosted and the supply situation is positively impacted, we might begin to witness a lowering of inflationary pressures. I personally do not believe in targeting inflation rates except to the extent that it provides yardstick which could focus the mind and psychologically could be motivating. Inflation will come down as we increase productivity and reduce the rate of unemployment thereby increasing demand.

Diversification of the Nigerian economy

We must note upfront that it is not true that the Nigerian economy is not diversified. Contrary to the received wisdom, the mainstay of the economy is Agriculture which contributes in excess of 26% in terms of contribution to GDP.

Oil contributes about 14% of GDP but because it accounts for over 80% of foreign exchange inflow, it is often thought that it is a dominant sector. There are other sectors such as Communication and Technology, Services, Nollywood, which contribute substantially and their contribution is rising relatively more rapidly.

The point remains that as soon as we can wrestle down insurrection, banditry, kidnappings for ransom, other sectors such as Mining will blossom. But there is the need for deliberate focus to be made on sectors which could reduce the dominance of oil as a source for foreign exchange income. But we must create an enabling environment.

Subsidy removal

It is a Bobby trap for the outgoing Administration to expect the incoming Administration to kick off by removing Subsidy. Such a move would precipitate chaos in the Land and dissipate goodwill immediately. It is ill advised!

To ameliorate the impacts of subsidy removal, there will be the need for some measures to be pursued with passion. There is the need to concentrate to remove any obstacles in the way of Dangote Refinery taking off immediately. Fuel importation consumes about 33% of available foreign exchange.

And if we can stop importation, we will be able to boost supply of foreign exchange and end the payments of subsidies. There is the need for urgent action on the four local Refineries. It might be advisable to privatise them to be run by private sector interests.

As we do so, there will be the need to clean up the Agean stable by tightening controls at the borders to checkmate smuggling. It is uphill but doable. One is alarmed about the announcement that the World Bank has extended loan to the outgoing Administration to cushion the impacts of subsidy removal! How rational is that?

Such a loan should have been reserved for the new Administration that would be saddled with the responsibility of ending the subsidy regime. Are you still wondering how come as a country we perpetually swim in waters infested with sharks labouring under debt overhang?

Insurrection

One of the low hanging fruits the incoming Administration must take advantage of, is to terminate insurrection and banditry in the land. This must be done ruthlessly and not hand in gloves as has been the case so far.

No options for achieving this objective will be off the table including asking for the assistance of foreign countries. The expectation is that within the first six months that this burden must have been considerably impacted.

Other low-hanging fruits

There must rapid staff movements at revenue collection points if we must end the old ways of doing things. This should include the ports and borders and targets must be given for revenue inflow. There will be the urgent need to leverage more on technology for revenue collection to limit human interference. There should be a review of costs centres to determine major expenditure heads for the adoption of impactful strategies for results.

The police should remove road blocks on our High ways which today are simply points for extortion of hapless wayfarers. We should aggressively return patrols in a manner which will not make them easy to second guess. There are issues relating to the preparation of annual budgets and its approvals by the National Assembly including what should be expected at the sub national levels which will engage our attention subsequently. Shalom.