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The results of the government’s attempts over the past 15 months to control the commanding heights of the economy are now visible across the country. From the government’s obsession with fixing the exchange rate and prices of essential goods and services to directives to banks and companies not to lay off workers regardless of the consequences on their businesses and deciding how and to whom companies must sell their goods and regardless of price, the government’s efforts have come full circle.
With the GDP contracting by -0.36 percent in the first quarter, and with the Central Bank of Nigeria recently reporting that that economic activities declined faster in June, the economy has officially gone into recession. Inflation is at an all-time high of 17 percent, likewise benchmark interest rate (14 percent). The Naira is depreciating daily both at the interbank (N318/$) and at the parallel market (414/$). As attested to by an analyst recently, companies can no longer comply with the government’s bizarre directives “are offloading excess workers to keep afloat, fuelling unemployment and underemployment, which has reached 45% among the youth, worsening poverty and social malaise. Nigeria’s misery index has climbed to 47.7%, becoming the country with the 5th highest misery index in the world for the first half of 2016.”
The results were so glaring and the country was gradually going the way of Venezuela that the government had to eat its pride and grudgingly raise the price of petrol and claim to float the Naira. However, comments and reactions from the presidency has shown that the government was only forced to take such actions and is not comfortable with or in support of market reforms or liberalisation, preferring the antique and expired practice of socialist control and command economics. No wonder it is still interfering in the fx market and trying to determine rates. Consequently, investors have seen through the government’s hypocrisy and have continued to stay away from the country, thus deepening the scarcity of forex in the country.
A new poll result recently confirmed what we all know – the fast deterioration of the country’s manufacturing sector as a result of challenges like foreign exchange constraints, petrol and diesel supply hiccups, poor power supply policy inconsistency and limited access to credit. Also, the manufacturers association of Nigeria (MAN) reported last week that about 50 manufacturing companies have been forced to close shop in the country while about 222 small-scale businesses have also been forced out of businesses within the last one year leading to over 180, 000 job losses. What is more, the association said painfully that most of the manufacturing companies that closed shop in Nigeria relocated to neighbouring countries with more friendly business policies from where they manufacture and import to Nigeria.
What is the government doing in response to this alarming deindustrialisation of the country and worsening economic condition? For now the president only offers platitudes of working to ensure that the country moves up 20 places and “be one of the top countries on the World Bank’s Ease of Doing Business index in the next three years” while actively planning and working to be granted awesome powers to further control and legislate the economy to death. In an ill-advised move and in keeping with the government’s “command and control” economics, the government is seeking emergency economic powers to legislate and regulate interest rates that banks can charge on loans. The government obviously got this idea and inspiration from Kenya which recently regulated its interest rates – a move that was described as “ridiculous and impracticable” by many analysts.
The interest rate must, in the first instance, cover the cost of funds to the banks (what it cost the banks to attract the deposits which they proceed to lend to customers) and cannot be lower than the Monetary Policy Rate, which is the rate that the banks borrow from the Central Bank as it discharges its lender of last resort role. This is not to talk about the cost of services by banks and shareholder returns.
There is also a clear linkage between the prevalent rate of inflation and the interest rate. With inflation at 17 percent, a depositor of money to the bank (at 14%) will pay an inflation of 3 percent. There is therefore no way bank lending rate can be lower than inflation rate. It stands to reason therefore that to effectively tackle the interest rate, the government needs to work to bring down the inflation rate and increase the ease and cost of doing business rather than seeking to usurp the powers of the Central Bank to arbitrarily determine the interest rate.
One does not need a prophet to know that this move will fail woefully. Instead of continually making the country a laughing stock in the comity of nations by such rash and antiquated policies, the government should accept the simple reality that it is not in its place to control the economy. Its major function with regards to the economy is to regulate players in the economy. Sadly, in its ill-advised attempt to be the most important player in the economy, it has no capacity and has neglected the need to develop its capacity for effective regulation of economic players, thus further exposing the economy and consumers to all the negative effects of a free and unregulated market.
