The fundamental question to be asked is why Nigeria should not follow expansionary fiscal or/and monetary policies when the economic activity is at low ebb with the likely real GDP growth at about 4 percent in 2015, the unemployment rate is high and the crude oil prices are ruling low affecting both the fiscal and external positions. This question gains added importance in light of the sluggish activity in the world economy and low primary commodity prices.
Further questions arise from this fundamental question. Should fiscal policy be expansionary to provide stimulus to economic activity or should monetary policy of the Central Bank of Nigeria (CBN) be accommodative to enable banks to provide credit to activities that produce goods domestically to improve supplies?
If fiscal stimulus is needed, one needs to also look into questions of the quality of government spending, not so much the size of the budget. The aspect of quality spending is often misunderstood in terms of money allocated for spending for different economic sectors. The pattern of ‘spending’ need not represent pattern of ‘investment’, if one were to put it in simple terms. Increasing the investment rate would lead to higher real income with some time lags whereas spending could have a large element of wastage. It is here the governance issue comes to the fore. In this context, the president’s initiatives to deal with corruption and unaccounted money need to be strengthened by further fiscal and monetary policy actions, not mere announcements.
Some economists including the former CBN governors felt that petroleum subsidies should be eliminated altogether within a timeframe. While this recommendation should be heeded, due attention needs to be given to the as-yet unknown and uncertain aspect as to whether the poorer sections would be affected by such a policy decision. If it does, one would need to clearly identify the poor and to provide the identified with necessary subsidy options. This is not an easy task but a beginning should be made in this direction if the country should move towards equitable growth.
Given the current expectations of continued soft crude oil market, Nigeria would suffer most in 2016 since it has not diversified adequately to help develop non-oil exports. There is however a silver lining in this situation, if one cares to observe. The prices of petroleum and allied chemical products are also low at present and are likely to be so in 2016 as well. Nigeria would have to consider whether it is possible to create stocks of petroleum products as buffer against any possible reversal of the current price trend. In this connection, policymakers must address questions about funding of such a stock-pile, its size, and the rules of its release. Simultaneously, efforts should be made to promote economic use of petroleum products.
The economic use requires the country to develop public transportation, especially of railways and roads. Good public transportation like the one, say, in London offers many positive external economies: less use of petrol for use of private cars, less gas emissions, relaxed minds for the office-goers who are accustomed hitherto to use of private car and less road congestions so that emergency use of ambulances and police patrol can be effective. The security aspect in road and rail transport is often used as an excuse for not developing public transportation but this can be addressed if police administration is revamped and reformed.
Economic use of diesel oil can be promoted if all offices of the government, banks and other public bodies close not later than, say, 7:00 p.m. Sitting late in the offices to avoid problems related to power cuts at homes and to have air-conditioned comfort is unjustifiable. It does not lead to improvement in labour productivity; it on the other hand has adverse repercussions on family lives of office staff.
The recent announcement about government’s resolve to be austere should be fully explained in detail. It would be of no use if it does not help reduce the (a) formation of too many committees, (b) time taken on committee deliberations, (c) number of official tours, (d) number of seminars/conferences beyond a reasonable degree and (e) new staff recruitments. Financial frugality should be understood to mean economical use of rare resources and improved quality of public spending.
A good number of economists of Nigeria believe that fiscal deficit should be kept under sharp leash partly under the influence of the neo-classical economic thinking and partly because of the regrettable past experience with the governments indulging in wasteful expenditures. Fiscal stimulus issue is now in sharp focus in policy discussions in the US and elsewhere. Keynes is invoked; modern monetary theory and to an extent a strand of behavioural economics are cited by those who advocate fiscal stimulus to augment economic activity in the US and in other industrialized nations of the West that have not yet come out of the deep global financial and real crisis. In the case of Nigeria too, one needs to examine whether there are limits up to which fiscal deficits could be incurred and whether incurrence of such deficits could be premised on a definite pattern of investment. Besides, the mode of financing the deficit should also be determined with reference to the defined investment pattern and the expected economic outcomes.
However, a number of economists will object to fiscal stimulus because they contend that inflation would result whatever be the mode of financing the deficit and the pattern of investment. They, to borrow Mervyn King’s term, are the ‘inflation nutters’. They would readily cite the fact that consumer price inflation is over 9.0 percent at present and is above what Musgrave termed the ‘margin of tolerance’. They, however, ignore the fact that with the current low incomes, aggregate demand is low and both the consumption and investment demands are and would be drifting downward. In such a situation, one could well ask: should fiscal discipline be the cause of deficient demand?
Nigeria has given to itself inflation targeting as the framework of monetary policy by the Act of 2007, though in reality there is no clear-cut evidence that such a framework is in vogue. In any case, inflation targeting has lost much of its sheen since 2009, even if it were to be ‘flexible’ with focus on output-employment position. In the case of Nigeria, however, flexible targeting is not easily possible. For, output gap estimates are weak, partly due to weaknesses in statistics. Besides, the concept of ‘expectations’ has to be infused with sufficient meaning in working out the inflation target itself.
Assuming that the fiscal policy would not be unduly loose but would let foreign investments flow in without any bureaucratic overreach, how should monetary authorities help promote output without aggravating inflation? As we all know, the CBN, like all other central banks in the world, announces its policy in terms mainly of the official rate, the monetary policy rate (MPR). Quantity variables such as the money supply, bank reserves and foreign exchange reserves are also cited in the monetary policy statement essentially in defence of the decision on MPR. OMO is undertaken to manage liquidity in the economy. Management of the foreign exchange rate movement within a determined limit is undertaken with reference to auctioning procedures and rules and special schemes of purchases and sales of foreign exchange.
The problem is that there is little empirical support to the view that MPR official rate and other policy announcements favourably impact the flow of bank credit in activities that quickly generate output. The transmission mechanism of monetary policy is not well established. This is not surprising for it is so in most developed and other emerging market economies as well.
A number of questions on the recent conduct of monetary policy may be asked essentially to see whether it is truly forward-looking and growth-inducing. Should the MPR be higher than the inflation rate by, say, 3 or 4 percentage points? Is it to create a mirage of having a positive real interest rate? Or, is it to provide a clue to the bond market that long-term rates should be higher than MPR that is by definition a short rate? The current approach of having the policy rate at a very high level could well be the reason for lending rates of banks to be high, much higher than the rate of profits that one would reasonably expect to earn on legitimate economic activities. In this connection, one may ask, what is the rate of profits that provides incentive for plough-back into the concerned activity as investment? Will it be more than, say, 12 percent?
Bank lending rates are generally high at over 16 percent in recent years. This is justified on the ground that banks incur high costs due to power shortages or outages forcing them to use power generation sets. Besides, banks have to provide security as well as space for customers to park their cars. Adaptation of new technologies, high wage costs and the cost of funds mobilized as deposits are further add-ons. However, of all these factors, the intractable one relates to the use of power generation sets for long periods of time. Unless power supply is uninterrupted and available at competitive rate, financial transaction costs would be high and thrust on consumers of banking facilities.
The questions raised above need to be addressed with a perspective to the future. Past experience can only be a limited guide to meaningful policymaking and policy action. The reason for making this point may be understood better in light of the facts cited below. First, the MPR which was unusually low at 6.00 percent at the beginning of 2010 went up gradually to 12.00 percent by October 2011. At this rate, MPR was steady for 37 months till October 2014. Since then, the MPR is at 13 percent. The MPR is higher than the official rates prevailing in most major emerging market economies.
As regards the average inter-bank call rate, it was unusually low at 4.00 percent. It moved up to 10.53 percent in 2011 and 13.78 percent in 2012. It then moved down to 12.03 percent in 2013 only to go up to 11.77 percent in 2014. Now the rate is closer to the double-digit level.
The average of monthly consumer price inflation turned out to be 13.26 percent in 2010, 12.01 percent in 2011, 11.48 percent in 2012, 10.25 percent in 2013, and 8.08 percent in 2014. The average for the five-year period came to 10.03 percent. Now the average consumer price inflation is 9.4 percent.
The MPR at 13.0 percent and the current average inflation rate of 9.4 percent implies that the real interest rate is positive at 360 basis points. Purists would object to such a derivation on the ground that the MPR is not a representative rate. But if the banks’ lending rate were to be taken as the representative rate, the real interest rate would be phenomenally high at over 600 basis points.
Did the high positive real rate lead to an improvement in the saving rate? Saving data is an area which needs to be improved considerably. As a proxy for the saving rate, if one were to consider the growth in quasi-money, then one notices unsteady trends. From a growth of 3.3 percent in 2010, quasi-money moved up to 9.7 percent in 2011 and to 23.4 percent in 2012. It then decelerated to 7.4 percent in 2013 and sharply rose to 38.7 percent in 2014. Is this because of the trends in M2 growth? Probably so. M2 increased by 17.3 percent in 2010, and then decelerated to 10.3 percent the following year. It then moved up to 14.2 percent in 2012 and again decelerated to 9.1 percent in 2013. In 2014, it increased by 16.6 percent. M2 growth is hardly consistent with the real growth and inflation rates.
This article has raised a number of questions that are rarely asked but require to be addressed quickly. It also conveys the idea that for better policymaking, information infirmities should be fixed, if necessary with the assistance of multilateral organizations. More importantly, a strong economic revival programme with a well-orchestrated fiscal stimulus and supported by a requisite degree of monetary accommodation would set at rest inflation fears and provide a base for future sustainable development. Fortunately, the private sector has caught on with the idea of economic diversification. Agriculture should be given added emphasis and it is here the governments should consider land reforms and providing necessary incentives and infrastructure facilities such as good roads, marketing and warehousing. The governments should also support the recent private-sector initiatives to bolster investments in both steel and petroleum refinery projects. This implies that the government should give more weight to mobilizing non-oil revenues and to monitoring non-oil deficit in the fiscal policy calculus. On their part, the monetary authorities should pursue a policy that helps to augment non-oil growth along with price stability. A coordinated policy approach is thus the need of the hour.
