To promote stability in the Nigerian economy for ease of doing business, a mutual combination of fiscal and monetary policy instruments should be employed.
The ultimate aim of monetary and fiscal policy is to establish a steady and favourable economic climate with consistent growth and low inflation. When the national monetary policy is unstable, failure and breakdown in Nigeria's fiscal system is imminent. The incoming government should take a cue from the economic gaffe of the outgoing government - towards salvaging the drowning economy.
Over the last eight years of President Buhari's tenure, statistics show that the Federal Government operated an expansionary fiscal policy and a contractionary monetary policy. The conflicting fiscal and monetary policies at the inception of the Buhari government contributed to the death of over two million businesses in the nano, micro, small and medium enterprises (nMSMEs) subsector between 2017 and 2021, thereby pushing more than six million Nigerians into the unemployment market. In a supposed bid to promote local production, among others, the Central Bank of Nigeria (CBN) restricted the provision of forex for the importation of 41 foreign items. It was a devastating blow to indigenous firms that had become restricted from access to forex from the CBN for the importation of their raw materials. The unfavourable monetary policy has forced local manufacturers to source exorbitant forex at the parallel market in order to remain in business. Some local firms had to shut down their operations, making one wonder whether the forex restriction on the foreign items was deliberately designed to stifle local production.
The Background
Monetary policy (by the Central Bank) is a measure formulated to control and regulate the price, volume and direction of money and credit in order to achieve the macroeconomic objectives of full employment, economic growth, price stability, balance of payment equilibrium and income redistribution. While fiscal policy is a measure designed to control and regulate government revenue and expenditure, in order to achieve the same macroeconomic objectives. This latter is determined by the Ministry of Finance.
In circular Ref. TED/FEM/FPC/GEN/01/010 dated 23 June 2015, the CBN says: "In the continuing effort to sustain the stability of the foreign exchange market and ensure the efficient utilization of foreign exchange and the derivation of optimum benefit from goods and services imported into the country, it has become imperative to exclude importers of some goods and services from accessing foreign exchange at the Nigerian foreign exchange markets in order to encourage local production of these items."
Thereafter, in 2018, President Buhari signed an executive order to boost local content and empower qualified Nigerians. The Senior Special Assistant to the President on Media and Publicity, Garba Shehu said: "The President, pursuant to the authority vested in him by the Constitution, ordered that all "procuring authorities shall give preference to Nigerian companies and firms in the award of contracts, in line with the Public Procurement Act 2007." This is a laudable fiscal policy but with the bottleneck of an anti-local content monetary policy.
Recently, Dr Muda Yusuf, the CEO of the Centre for the Promotion of Private Enterprise (CPPE) bemoaned the conflicting and contradicting policies between the Federal Ministry of Finance and the the Central Bank of Nigeria; a situation where an item that is not prohibited under the fiscal policy is blacklisted under the import prohibition list and the Central Bank of Nigeria's (CBN) forex exclusion list. These trade policy conflicts by the fiscal and monetary authorities disrupt trade in Nigeria and portray the country as having two divergent trade policies.
The International Labour Organisation (ILO) affirmed that SMEs contribute 48% of national GDP, account for 96% of businesses and 84% of employment. They contribute significantly to alleviating poverty and increasing job creation. No doubt, policy somersault is a threat to the growth of SMEs. Nigeria's unemployment rate rose to over 33% in 2020 from 10.4% in the last quarter of 2015.
Also, as a 2022 Legislative Mentorship Initiative Fellow, I was privileged to participate in a one-on-one mentorship session with Dr Jumoke Oduwole (Special Adviser to the President on Ease of Doing Business and Secretary to the Presidential Enabling Business Environment Council). She affirmed the conflicting monetary and fiscal policies; how some policies of the Central Bank of Nigeria interfere and scuttle the successful implementation of some of her Ease of Doing Business plans and recommendations.
Clearly, the government is suffocating local industries through the Central Bank, while the same government is advocating local content growth on the other hand. This is a stark divergence and conflict between Nigeria's fiscal and monetary policies. Is that not an irony? How will the nation progress economically amidst such policy somersaults?
The Negative Impacts
The International Labour Organisation (ILO) affirmed that SMEs contribute 48% of national GDP, account for 96% of businesses and 84% of employment. They contribute significantly to alleviating poverty and increasing job creation. No doubt, policy somersault is a threat to the growth of SMEs. Nigeria's unemployment rate rose to over 33% in 2020 from 10.4% in the last quarter of 2015. The growing rate of idleness portends danger for the country and an avenue for a high crime rate to fester.
For instance, as at the time CBN implemented the forex exclusion policy, Arewa Metal Containers Limited (an indigenous provider of engineering services and fabricator of steel structures and storage products) just secured a fabrication contract with the Kaduna refinery. High grade steel is their predominant raw material. This is imported because Ajaokuta steel factory, which ought to provide high grade steel locally, is moribund. Unfortunately, high grade steel is excluded from the official forex window.
The company had to explore the parallel market for forex at exorbitant rates and because the policy was still new, the banks could not assist them to secure the procurement through an established letter of credit between the buyer and supplier. The company was forced to make a direct unsecured payment to the supplier.
"We ran into a false company in India and made a direct payment unsecured. We have not got more than 10-15% of what we paid them in dollars, more than five years now", said Mr Raymond Anyanwu, the general manager for Administration and Finance of Arewa Metal Containers Limited.
To promote stability in the Nigerian economy for ease of doing business, a mutual combination of fiscal and monetary policy instruments should be employed. Monetary policies and banking regulations ought to align with national financial policies and implementation. There must be close coordination and cooperation between the central bank and the government to achieve sound economic policies.
"When they say they are encouraging local content, this policy somersault has already knocked off local fabricators from bidding. A foreign company will bring fabricated items from its country devoid of extra costs and access official forex rate, while a local company gets forex for raw materials at the parallel market rate. Foreign companies already have a 40% advantage against local fabricators. This has kept local fabricators as local players."
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Recommendations
It is imperative to provide forex access to indigenous fabricating firms that use high grade steel (an imported raw materials) until Ajaokuta steel plant is revived. It is wrong to ban items not prohibited by fiscal policy from the Form M access through CBN. The Federal Government must harmonise the fiscal and monetary policies to end the policy conflict in international trade and reduce trade disruption.
Prosperous local businesses create jobs and income that boost the domestic economy and forex earnings. A pragmatic government ensures that laws regulating small and medium-sized enterprises enhance the welfare and economic growth of its people.
To promote stability in the Nigerian economy for ease of doing business, a mutual combination of fiscal and monetary policy instruments should be employed. Monetary policies and banking regulations ought to align with national financial policies and implementation. There must be close coordination and cooperation between the central bank and the government to achieve sound economic policies. The governor of the CBN and the finance minister should work together in partnership to achieve Nigeria's economic goals.
The ultimate aim of monetary and fiscal policy is to establish a steady and favourable economic climate with consistent growth and low inflation. When the national monetary policy is unstable, failure and breakdown in Nigeria's fiscal system is imminent. The incoming government should take a cue from the economic gaffe of the outgoing government - towards salvaging the drowning economy.
Odewale Abayomi, a lecturer at Kaduna Polytechnic and a Free Trade Fellow at Ominira Initiative, tweets @ODEWALEAbayomi
