This Day (Lagos)

16 January 2013

Nigeria Must Align Monetary Policy With Macroeconomic Policies

There have been a lot of optimistic projections on the Nigerian economy for 2013; do you also hold that view?

2013 is a year in which Nigeria would witness an increased productivity from its current low productive base, but would also witness a threat to its dependence on natural wealth. In other words, Nigeria would produce more from the activity of its own labour, but would earn less from the mining of its resources.

Two, the Gross Domestic Product (GDP) is expected to grow between 6.8 and 7 per cent and that is real GDP growth. There would be some significant investment in capital formation in terms of gross fixed investment. There would be an increase in national savings ratio and there would be a decline in the rate of inflation, from the current rate of about 12 per cent to about 9.5 per cent at the end of the year.

But it is not to be a linear curve for inflation, it is going to gyrate. But at the end of the year, we would come out with single-digit inflation rate. Nigeria's dependence on oil would remain pronounced. However, productivity in the non-oil sector would increase as a result of the initiatives in agriculture and the fact that the power reform agenda would begin to translate, no matter how mildly, into some form of results. Those would be the major thrust.

So in terms of the investment function, we would see some additional investments, but nothing significant. In terms of productivity, because of power, we would see some technological gains and increase in productivity. In terms of savings, we would see some increase in national savings and in terms of inflation, we would see moderation in inflation because the wage pressure would not be much and the money supply pressure would be contained because money supply would be growing at modest rate.

Inflation gap, which is the difference between money supply and GDP growth, would still be narrow. So, definitely, there are nominal signs that the economy would maintain its growth trajectory. But because of population pressure and the ability to distribute the wealth in an even manner, would be more or less a challenge. So, basically, in Nigeria, the exchange rate would come under pressure because of the risks that the oil market, later in the year, would begin to show signs of decline. Clearly, oil prices are going to decline later in the year.

Don't you think that the high unemployment rate is going to affect some of your projections?

Oh, yes, the unemployment rate is a problem. Unemployment plus inflation is what we call the misery index. The misery index in 2013 is likely going to be lower than the misery index in 2012. The misery index in 2013, if you take a national unemployment rate, unemployment goes down by about one per cent in our projection; inflation goes down by about two per cent. Therefore, the misery index will reduce from about 46 per cent to about 43 per cent. It is still very high, but it is moving in the right direction. People would be less miserable in 2013 than they were in 2012.

In all of these, what are the opportunities for the emerging middle class?

The problem is that some studies say the middle class is increasing, so studies say that the middle class is actually wiped out. But the reality is that in 2013, the level of income inequality is likely to actually increase in the short-run. This means that the middle class would come under a lot of pressure. Why do I say that? As you privatise state-owned enterprises, as you go towards a discussion of subsidy removal or reduction, even though I do not think that the subsidy would remain in 2013 for some other reasons.

But as we move in that direction, subsidies are reversed taxes and in a capitalist environment, because of revenue pressure, you will move more towards a direction where the ability to pay approach is progressive. The taxes are going to be more indirect rather than direct taxes. When countries are undeveloped, they tend more to use indirect taxes which are regressive and which put the burden of taxation more on the poorer people. Therefore, the middle class are likely going to come under additional pressure in the short-run.

One issue that featured prominently last year and which has continued this year is the payment for fuel subsidy. What do you think should be done for the country to get out of this?

Subsidies for Nigeria, has to be shifted from consumption to production or from consumption to areas where they cannot be abused. Subsidising the consumption of fuel for car owners is an unproductive exercise. Subsidies have to be shifted to education, health or to production because it cannot continue. However, to do that, the credibility of government has to be established. At this point in time, it will be a very difficult exercise. But it is necessary, it is imperative and it is inevitable, but the timing has to be such that it will cause minimal disruption. It would be disruptive if the trust deficit has not been bridged.

The House of Representatives Committee on Banking and Currency said it is working on legislation that would lead to the creation of an independent body to take over banking supervisory role from the Central Bank of Nigeria (CBN). What is your take on that?

I don't know what criteria or what empirical data that was used to make that judgment. The United Kingdom had done it and has returned full cycle. The European central bank is now back to regulating the banks in Europe. However, in the United States, the Office of the Controller of the Currency is the one that regulates the banks; the Securities and Exchange Commission regulates the bank holding companies while the Federal Reserve sets monetary policy.

There is no one size fits all solution, but I am saying that in terms of financial services industry regulation, I do not see that as an urgent problem. I think we should focus more on making sure that monetary policy is aligned with the broad macroeconomic policies of the country other than trying to cannibalise the powers of the CBN in any form.

According to the committee chairman, the legislation is to allow the central bank concentrate on monetary policy and price stability in the country issues because they found out that previous banking crisis were as a result of lack of proper supervision of the banks... (cuts in)

But we have price stability already! So, I don't understand why they are talking about that. So, based on what data is he making that judgment? I would say that such plan is a bit precipitated. When we carry out a study on the cause of banking crisis in Nigeria, and it is proved empirically that it is as a result of poor supervision and that the poor supervision is because of the fact that it is domiciled within the Central Bank, then we can come out with a solution. I don't think we can come up with a therapy without diagnosis. With all due respect to the Honourable member, I think that his therapy is not based on any diagnosis.

What would be the effects of the proposed rebasing of Nigeria's GDP on the economy?

This year, one of the things you are going to hearing about GDP is that we are going to rebase our GDP and we are going to change the base year from 1990 to 2008. This probably would result to an increase in our GDP to about almost 40 per cent nominal. It doesn't change anything. We call it playing with mirrors because the number of yams you produce would not have increased. But if it makes you feel good, then fine. You know, if you have two mirrors in the room and you feel there are 10 of you in the room while there is only one person, if that makes you feel good, fine.

Some countries have rebased their GDP for accuracy and statistical relativity. Malaysia did it in 2005, South Africa went from 2000 to 2005, Ghana from 1993 to 2006. But what are the implications of rebasing the economy? The first implication is that there is a law of large numbers which says that growth is more difficult when you have a larger base. 100 per cent of one is one; while 100 per cent of 10 is 10. But 10 per cent of 10 is one. So, it becomes more difficult to grow once the base increases. When you rebase, the first thing that will happen is that you real GDP growth will reduce.

So, instead of reporting seven per cent growth rate, you probably will be reporting five per cent growth rate. The other implication is that there are rules of borrowing public debt and the comfort zone normally for West Africa and regional integration is that fiscal deficit should not be more than three per cent of your GDP. If you take your GDP to $400 billion, then three per cent of that becomes a higher figure. The National Assembly can then say you can spend more and then you can borrow more. But don't forget that borrowing and spending is not bad, as a matter of fact, it is the quality of spending and not the quantity.

In Nigeria people now have phobia for spending and borrowing. That is, because money spent is stolen and money borrowed is stolen, people don't borrow and don't spend. But that is a recipe for stagnation. So if you use the formula, maximum deficit for 2013 will go to N1.3 trillion from the current level. So, immediately the National Assembly says there is room to borrow, go ahead and borrow more, first of all, your growth rate would come down. Secondly, the ceiling for borrowing would increase. Right now it is one per cent of GDP which is N900 billion, but it would go to N1.3 trillion.

Now, you will still be able to meet the convergence criteria for ECOWAS, the level of inequality in the economy also would be magnified because theoretically the amount of money in the country has increased. The other implication is that there are three levels of countries: There are the low income countries, middle income countries and high income countries. The moment your income per capita crosses $1,500 or $1,700, to probably $4000 dollar, and you become a middle income country, all the international assistance that are supposed to come to you would be cut off.

So, that is a major issue and it is one of the issues that are going to be debated in 2013 because one of the reasons for rebasing the economy is to create political mileage. If you haven't been able to pass your exams, when you reduce the pass mark and you say more people have passed and the teachers in that school say you have done very well, that is what we call playing with the mirrors.

At a time when there were calls for the CBN to relax its tight monetary policy conditions, the National Assembly raised the 2013 appropriation bill, don't you think that would make the central bank to leave interest unchanged?

They increased the expenditure but the government doesn't have to spend it. The government can only spend that which it has and that which it can borrow. I am almost certain in my mind that there would be a supplementary budget sometimes during the year in which some of the things that are being planned, would either be removed or deferred. There would be an adjustment in our expectation if the price of oil goes down. It is almost inevitable that, that would happen. So I don't see that as a problem.

Bismarck Rewane

BioData

Mr. Bismarck Rewane is the Managing Director/CEO of Financial Derivatives Company Limited. Rewane joined the First National Bank of Chicago in 1976, as Deputy Manager (Credit). He began his banking career with Barclays Bank, UK, in 1973 and moved to Barclays Bank of Nigeria in 1975. Rewane also joined International Merchant Bank Nigeria Limited in 1981, where he served as General Manager until 1996.

He has been a Non Executive Director of First City Monument Bank Plc since 2002. He had served on the board of Lion Bank of Nigeria Plc and Intercity Bank of Nigeria Limited. He is currently the Chairman of Delta State Economic Advisory Management Team. He also serves on the boards of some other companies.

He obtained B.Sc. degree in Economics from the University of Ibadan in 1972 and became an Associate of the Institute of Bankers (England & Wales) in 1975. He completed the Barclays Bank International Graduate Training Programme at West London University.

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