Ben Atonko
14 December 2008
The global financial meltdown and the fall in oil prices, coupled with the lack of economic strategy exert pressure on the national currency, resulting in depreciation against foreign currencies, Dr Obadiah Mailafia. The Chairman/Chief Executive Officer of the Centre for Policy and Economic Research in Abuja. He spoke with Sunday Trust in Abuja
What is the cause of the current fall in the value of the naira against major currencies-the dollar, for instance?
I'm of the impression that several facts would have accounted for this. First, obviously is the general global financial meltdown. That would have created its own crisis of confidence in our national currency.
Linked to that is the reduction in the expectations for external earnings from petroleum. The collapse in the global petroleum prices has affected expectations in terms of earnings. Even as you know, the recent budget proposals by the president-how to down grade fiscal rule-at about $45 per barrel and some reduction in terms of expected production-I think to 2.2 million barrels per day.
All this means there's pressure on foreign reserves-as you know, over the last month alone, we lost a reduction by up to $5billion from our foreign reserves. We wouldn't be expecting so many income flows from the reserves as we expected before. All this is putting pressure on the national currency.
A few weeks ago, you could see that even the monetary authorities weren't exuberant in intervening in the foreign exchange market as it used to do hitherto. On average it used to be an intervention of about $300-400million per week. Now, we see that over the period, it was able to intervene only to the tune of about $100million in the foreign exchange market. That is a pressure in terms of the disposable resources that could be utilised in foreign exchange intervention by the monetary authorities. And I think that operators are reading the handwriting on the wall and they're a kind of discounting the value of the national currency as a consequence of this lowering of expectations.
We have to look at the global meltdown in general, lower expectations from petroleum earnings and by extension, pressure on foreign reserves earnings and the capacity of the monetary authorities to intervene robustly in the foreign exchange market.
Considering these negative factors, how do you think the Nigerian economy would fare?
This year is gone, it's a matter of weeks. So we're talking more of next year. But this year didn't fare badly. Even though we now experience a slow down in growth, this is a universal phenomenon deriving from factors that aren't exactly within our control as a nation. But truly, the economy didn't fare well the way it should. As well meaning as government was, we saw slowness in developing an effective economic strategy. In fact, as I speak to you, I don't think there's an economic strategy. That is crucially important because rational actors need to be able to anchor there expectations on a firm and robust economic strategy. We're yet to see one.
The National Economic Planning Commission hasn't yet come up with a viable strategy and that remains an issue and because of that investors are rather careful. All of that has caused a slowdown. There're quite serious problems that need to be tackled and we don't hear the right sort of noise as far as this is concerned.
Millions of youths are unemployed in this country; many of them educated graduates with no hope and no jobs. We're yet to see sufficient passion in tackling these issues. And tackling this kind of issues means revisiting the fundamental project of industrial development of this country. This country isn't the Gambia, it isn't Seychelles-we can't just live by services. We're a country of over 140million people. The people need jobs, they need industries, we need to strengthen the manufacturing base of this country. Manufacturing is in near comatose state. Look around you, in a city like Abuja with over 3million people, there's hardly any factory to talk about. All these people you see in suits are just hustling with absolutely nothing to do! Going from one government office to the other, hustling for what they can get-that's all it is and we have become a nation of fraudsters and impostors as a result of this.
We need to create jobs, we need to build strong and robust industrial base for this country. In doing that, we have to ignore some of these things some international agencies tell us. We need to focus on building real productive sector.
Second, it's important to create the right environment. Ours remains a very lawless society. You can't drive from here to let's say Jos without fearing for your life in one way or the other. Some of these criminals come from all over the place-even from Niger, Chad etc. They can commit any crime and go scot free. Nobody would want to invest in a lawless society. The investors would choose sectors that are capital intensive, that would enable them to recoup their money quickly and leave. So we need to create an enabling environment. The rule of law has to be implemented to the full to create a stable and harmonious society in which everybody would be free to engage in lawful economic activities.
Infrastructure: roads, water, harbours, highways, electricity, all this is important. There must be a rigorous commitment to project implementation, not only to project appraisal but to project implementation and the highest authorities must receive almost daily progress reports and people responsible for those projects including contractors, if they're not performing should be removed with alacrity.
And we have to deepen the reforms. We hear nothing again about reforms and the new language is that of transformation. There're major areas of this country that require reforms. One example is the absence of a fair competition and anti-monopoly legislation. There're several cartels in this country-there're oil cartels, there're commodity cartels-so many cartels. Try to set up a bus industry in this country or try to sell motor spare parts, then you'll understand exactly what I mean by cartels. Those cartels must be broken. You can't have fair market economy where there're cartels or where there're groups with all kinds interests blocking certain sectors, keeping it unto themselves, holding consumers to ransom and setting prices too colossal. A lot of that is going on and is linked to the substandard products we receive in this country.
How long will the naira continue to depreciate and how low can it go?
I believe it's a temporary situation. I understand it's now N130 to the dollar. In the black market, I understand it has gone to N135 and 136 depending on who you're talking to. Don't forget that over a year ago, it went to over N145 to the dollar. Then it improved up to N116. That's the lowest I can remember.
There've been a lot of discussions about what is appropriate for the naira and the general consensus among experts including the international agencies such as the International Monetary Fund is that the naira is rather undervalued. And if you look at the fundamentals of the economy, you could actually put it at somewhere as low as N100 to the dollar.
That was the situation when the trend in economic fundamentals was highly profitable. With the current situation, obviously, lowering of foreign reserves, lowering of petroleum prices worldwide and lowering of budgetary expectations in terms of earnings from oil, all of that means that there's a downward pressure on the naira and it may continue for a couple of months. But I expect that the naira will rebound.
You will recall that Merril Lynch recently came up a report-not the Merril Lynch we used to know. It's the Merril Lynch that is now a small outfit of the Bank of America. They came out with a report recently that said Nigeria is the safest economy in the world. And I call it the paradox of imagination. Our relative safety is based simply on the paradox that we're not deeply integrated into the world economy. If you're not deeply integrated, whether good or bad, the effects on you are likely to be attenuated.
So because of our relative safety, relative lack of deep integration into the world economy, the impact of the global recession of ours wouldn't be as hectic as it would affect other countries say Malaysia, Singapore, India that are quite deeply hooked with the world digital economy. So our own safety is based on our structural weaknesses.
That being the case, I expect that the naira would be resilient at least in the next couple of months as the rest of the world continues to feel the impact of the global meltdown.
But let me put a caveat here. Even for countries like the dollar's, it went through many ups and downs over the last one or two years alone. It even reduced by close to 20 per cent at some stage and then rebounded again. Up and down swings shouldn't be totally strange to us.
In economic theory, a reduced naira may not necessarily be a very bad thing because the shift provides a stimulus for economic diversification and export of non oil commodities which according to economic theory, should be cheaper than when you have a naira that is expensive.
Isn't it an irony that Nigerian banks are declaring fantastic profits when banks elsewhere are in dilemma and the naira falls?
The banks, as a result of consolidation are flushed with a lot of cash. Unfortunately, this cash isn't being deployed to finance the real sector. They're using more of it in trading which is the sad reality of it. And they complain that the risk in giving credit is very big and we don't have strong credit regulating agencies. Even the laws for recouping bad loans can go on and on for ever and because of inefficiencies in the commercial courts, chancery division of our laws, banks generally concentrate on trading.
But we need to deepen the regulatory framework. There is still a huge credibility gap. Monetary authorities ought to be more vigilant. It's one of the ironies of our situation. There's a disjunction between commercial banking and the real sector and in a situation where there's more uncertainty, people will be involved in chasing as much dollars as they can get. That will make the dollar more expensive in relation to the naira.
Nigeria imports a lot. What will the situation be like?
We should expect our imports to be more expensive in naira terms. But in the long run, it would be good opportunity for you to begin to look at ways of producing those goods at home rather than importing them. An import-dependent economy is not an economy to be proud of.
To make banks channel resources to the real sector, what specific steps would you want the central bank to take?
As with any monetary authority, the role of the central bank, foremost is to ensure price stability, to control inflation and keep prices stable over a long time. Second, it should look at the legal tender currency of the country. The third one is to regulate the banking and financial system and to ensure that there's a systemic equilibrium in that system. Finally, there's to be an adviser to the government especially on finance and the economy.
Now, the question is, to what extent have we achieved this? You go to a place like Kubwa or Nyanya, Onitsha, you see a lot of fake currency in circulation. This is going on-nobody is doing anything about it! The extent of bad currency circulating in this economy is heavy, yet no one is defending the naira. It's a disaster for the people of this country.
If this naira fall enters far into 2009, what would be implications on the budget and what should government do?
Obviously, it has very important budgetary implications. It means that we have to apply more fiscal discipline as far as spending is concerned. Because we don't have unlimited resources to do whatever we like. And I think there should be a curb on wasteful recurrent expenditures that don't truly generate returns. And we really need to recalibrate the balance between recurrent and capital expenditures. In a situation where you have an overwhelming recurrent expenditure vis-à-vis the capital expenditure isn't a healthy development because it's when you invest in physical assets and in human capital that you expect to generate huge returns that would translate into robust growth in the long term. We need to cut our coat according to our size.
During the budget announcement, the president indicated that there would have to be more budget discipline and I wouldn't agree more. We have to cut expenditures like unnecessary travels abroad which are just tourism rather than real work. There are a lot of trainings that are done outside by all kinds of fake companies. This is colossal waste to the people of this country. There're all kinds of useless courses taking place abroad that can actually be run here. Why not bring those people to train the people in the country instead of taking our wealth by people travelling aimlessly abroad.
The way government does business is very expensive. It's true at the federal, state and local levels.
Do people need several cars and motorcade? My answer definitely is no! Tony Blair had only two cars and an outrider that went out with him when he was Prime Minister. That is true of Prime Minister Gordon Brown. But here, some people will have 20-25 motorcades all going for one small function. We need to curb such waste and channel the money to building investment in education, health, infrastructure etc.
The public service is still in a very terrible state. Standards have fallen massively. We need to rationalise the public service to ensure that it's modernised and it becomes a robust bureaucratic machinery for implementing the policies of government. We can learn from countries like Malaysia, Singapore, India. They have a highly competitive system where only the best, through a rigorous examination process are recruited into the civil service. And once there, they're properly trained, they're well paid and because they're well paid, anybody who is corrupt is rigorously dealt with.
We foresee a situation where government will come back and seek supplementary budget if this fall continues.
I believe government might have considered that while preparing the budget.
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