Wednesday, November 30, 2011

Of Monetary Activism and Fiscal Impotence

By Olu Akanmu

Recent economic events call for deep national introspection on our economic management. These include the recent release on national economic performance by the National Bureau of Statistics (NBS), in between two MPC meetings; the push by government to withdraw so called “oil subsidy” and the attendant resistance by the population to this government move. It also includes the admission by the Finance Minister that she could only deliver a paltry 5% reduction in national recurrent expenditure from 74% to 69% over four years. According to the NBS, headline inflation rose to 10.5% in October. This is despite the policy activism of the monetary authorities to keep inflation at bay. Over the last one year in particular, the monetary authority has launched a series of liquidity contractionary moves that has seen MPR jump from 6.25% in January to 12% in October, and the Cash Reserve Ratio for banks doubling from 4% to 8%. Credit growth especially to the real sector and to consumers which had shrunk as a result of the loan default crisis of 2008/2009 has not also been significant as to impact seriously on investment and consumer expenditure. Banks are still not seriously lending despite the off-loading of their bad loans to AMCON and the stabilization of the financial system through the injection of capital into distressed banks. Bankers are not confident to lend. Business is not confident to invest. Consumers are not confident to spend.

While our GDP continues to grow at above 7%, we see the first signs that national economic growth rate might be tapering off, as growth rate year on year actually declined from 7.8% to 7.4%. Our economic managers have traditionally undeservedly thumped their chest that they are responsible for our economic growth. The fact is that as a nation, Nigeria has been very lucky. Global geo-politics, the war in Iraq and the possibilities of another in Iran, coupled with rise of China has meant that global demand for oil was increasing at a rate faster than it could be supplied. This has led to the rise in global oil prices, a windfall for oil producing nations with such natural factor endowments like Nigeria. The impact on growth rates on economies like Nigeria where oil accounts for 14% of our GDP has been huge. Nigeria has also been lucky by another natural factor, sheer good weather in the last decade which has helped our agricultural output. This along with the increase in cultivation of our huge mass of previously uncultivated arable land has seen agriculture output and contribution to GDP growing to more than 40%, outstripping even the oil sector. The increase in cultivation of previously uncultivated land however has little to do with government policy. It is an un-intended consequence of our poor economic management that has seen unemployment standing at more than 23%, with many school leavers driven to subsistence agriculture just to make ends meet. According the National Bureau of Statistics, another 1.8 million joined the unemployment queue in the last six months bringing the total number of unemployed in Nigeria to 15 million by June this year.

Nothing illustrates our poor economic management than the mass of unemployed youth, massive misery and poverty in a country who people otherwise should be living with basic comfort. Our GDP growth numbers averaging 7% annually over the last ten years have not translated to jobs and economic prosperity for our young people. The social consequences are becoming manifest even beyond crime. There is now a clear correlation between terrorism and unemployment. Yobe and Borno states, the capital base of Boko Haram have the highest unemployment rates in Nigeria at about 60%. Social conflicts and skirmishes are clearly highly correlated to social pressure to survive and the frustrations of young energetic people to get a decent living.

Despite aggressive monetary tightening, inflationary pressure has not abated, with core inflation remaining firmly above 11% last quarter. The naira is under pressure. A potential global economic contraction driven by crisis in the Eurozone could depress oil demand and oil prices, putting further pressure on the naira with attendant imported inflationary pressure. The fact is that we are seeing the limits of monetary activism especially when it is not complemented by sound fiscal economic management. Our monetary authorities might have attempted to be too heroic perhaps out of patriotic passion. Unfortunately, they may be judged by the promises which their grand heroic postures have engendered as those who have the tool box and the tools to fix our economic ailments. Until recently, we virtually forgot that we had a Finance Ministry (and even a Presidential Economic team) as our Reserve bank became a combined fisco-monetary authority.

Is there however any hope that the fiscal side of our economic management will wake up and become more potent? The admission by the Finance Minister that the current economic management team can only reduce recurrent expenditure by 5% from 74% to 69% over 4 years leaves much to be desired. Essentially, the Federal and state governments will continue to consume virtually all the money they make leaving very little for investments in infrastructure, power, roads and education that will drive long term economic growth. Government spending priority continues to be misplaced. The revelation that government intends to build a new house for the Vice President at a cost of N7b is unfortunate. The N7b at non-inflated cost, could probably fix tens of kilometers on the dreaded Ore-Benin Expressway with huge impact on our economic life. Such symbolic gestures are important. It will show that the government recognizes the need for sacrifice, for prudence in economic management and it is willing to start with itself. President Jonathan lost a huge symbolic opportunity to communicate commitment to economic prudence by continuing with our traditional bloated ministerial cabinet and huge retinue of Special Assistants. The fact is that the structure of government and its civil service are too large for prudent economic management, especially at this time. The National Assembly has further compounded the problem with its own huge cost as one of the most expensive but unproductive parliaments in the world. These are the root of the “Collect and Consume” mantra of the governments at all levels that have seen our recurrent expenditure growing to nearly 75% of national budget. A wise Joseph advised the biblical Pharaoh that the nation should save in its season of fat cows for the coming season of lean cows. Even the ancients understand the principles of economic cycles, of building strong national reserves to absorb economic shocks and uncertainties. In Nigeria however, we are not only consuming everything in our season of fat cows, of high oil prices, we are even borrowing after depleting our national reserves.

The Federal government has not been able to win the debate on the removal of so called “oil subsidy” because the people believe that it has no moral basis to ask them to make sacrifice. The people believe that oil subsidy is a corrupt artificial creation of our governments driven by a perverse incentive not to make our refineries work. The people do not trust that the state will spend wisely and honestly the subsidy when withdrawn for infrastructure development. If people must make economic sacrifice in form of taxes (which is what the oil subsidy withdrawal is), the government must have the moral credibility to ask them to do so. This seems to be the greatest challenge of government and its attempt at fiscal reforms. Reprioritizing national economic spend will be painful in the short term. Rationalizing the bureaucracy at federal and state levels , cutting excess fat in government including the national assembly, fighting corruption and entrenched interests such that improves the quality of government spend call for a courageous leadership that is credible, that will lead a national painful structural economic and political adjustment. The government unfortunately, seems to have spent a lot of its political capital and goodwill in the brief period after the election. As we write this essay, the government has just completed its first six months in office with very little to show in fiscal policy development and achievement. It can use the remaining forty-two months to make a difference. It can however only do so if it stays committed to the values of good governance, zero tolerance for corruption and executive prudence such that gives it the moral credibility to ask the people to make the desired economic sacrifice.

Olu Akanmu is an executive in the financial service industry. He publishes a blog on Strategy and Public Policy on