I spent the last couple of days mulling over the relationship between domestic savings and investment on one hand, and the outlook for growth for this country on the other. Our growth and development needs require access to huge long-term savings pool that we may parlay into investments (new and better schools/hospitals, roads, railways, waterways, new factories, broad band networks, etc.) that power higher growth levels.
A few facts are beyond dispute; and they helped mark the territory for my introspection. First is the understanding that our central government spends a disproportionate amount (close to 80%) of its revenue on services and wages. Leaving nothing for direct capital transfers for infrastructure projects. Enough has been said on why this is an unsustainable state of affairs. Second, a combination of uneven growth rate, high interest rates, and the generally prohibitive cost of doing business (it is enough to consider the humongous infrastructure gap) help depress corporate profits, ensuring that the business sector too is saving/investing far less than it ought to. And at the basic consumer level, richer people save far more than poorer people do (and for obvious reasons).
The numbers on the economy, however, tell a much more nuanced tale. Over the 3 years to end-2012, (the International Monetary Fund projects that) gross national savings fell from 40.2% of GDP (2009) to 27.2% (the IMF expects the trend to continue). The share of the public sector in this improved over the same period, from a negative 1.3% of GDP to 7.7%, while the private sector’s share fell from 41.5% of GDP to 19.5%. The brigade of plaudits for the current quality of domestic stewardship is clearly wrong on this score. The economy may just be worsening.
Over the same period, domestic investment fell from 31.9% of GDP to 22.4%, with the public sector’s share dropping from 7.7% of GDP in 2009 to a contribution of 6.4% in 2012. Private sector investment fared no better, dropping from 24.3% of GDP in 2009 to 16.1% in 2012. Thus pressured, the balance on the current account almost halved from 8.3% of GDP in 2009 to 4.7% in 2012. At this drop in the current account balance, on its own, tells most of the story that needs to be told about how we have fared over the last three years. It confirms that we are saving and investing increasingly less, and have been importing capital to compensate for the resulting saving deficit.
There is much to be said for the rapid drawdown of our fiscal buffers after 2009, in response to the second-round effect of what is now referred to as the Great Recession. Incidentally, some culpability is due to the monetary authorities pre-2009, who enamoured of a “big” financial services sector had with a wink and a nod permitted the inflation of asset prices. But so soon as the CBN’s extra-ordinary interventions in the market helped calm the system, the argument for throwing good money after bad weakened. At the same time, oil prices strengthened. So we really have no business borrowing from outside in any sense.
Now, no one is sure how much speculative capital has found its way into the economy (government gilts and equities). I have heard estimates ranging from US$10bn to US$12bn. One fact, though, is beyond dispute: the Central Bank of Nigeria (CBN) has defined its policy options around the adverse consequences on the economy of the hasty departure of such funds. Persuaded that the naira’s exchange rate will be the worse of were this to happen, it has kept domestic monetary conditions tight.
Tighter monetary conditions hurt businesses’ ability to make profit. They cannot invest, they cannot recruit. Domestic demand contracts. And like a mangy cur, the economy psychotically pursues its own tail in an ever tightening circle. On this score, much has been made of the CBN’s effect on the domestic economy over the last three years. In part, a high visibility governor has helped skew this part of the conversation.
But the truth is that the problem with this economy is entirely fiscal. Government has still to learn not to spend itself out of pocket, ensuring that we can rapidly grow our domestic capital stock with the savings, or else that we may properly put such surpluses away for the generation that will demand of us an accounting of all the largesse from crude oil exports. From my current vantage, I would, however, vote for spending much of our savings on building capacity, including eliminating those barriers to doing business that are a let on private sector investment.