A fondness for bolting the stable doors days after the horses have fled has long been a local shortcoming. The Buhari administration has, however, elevated this national penchant to statecraft.
Or how else does one explain the 18 months it took the Central Bank of Nigeria (CBN) to abandon its managed exchange rate, even when it was obvious that the policy was burning a huge hole in the apex bank’s pocket? Or the decision, once finally it abandoned the failed policy response, to try putting a lid on price movement in what was originally advertised as a free market?
The echo chambers linked to the financial services markets would reverberate for a while yet, discussing the immediate or remote influences on the CBN’s decision, last week, to remove “perceived or implied” restrictions on activities in the interbank foreign exchange market, thus allowing anyone with foreign exchange to sell directly to the banks on a “willing seller, willing buyer” basis.
But whether it really took the “white man’s” counsel (the CBN’s governor was reportedly recently on a roadshow, where foreign investors let it be known that the chances of them directing funds into the domestic market was slim on the back of the administered prices in the new interbank market), or the almost nil balance on the gross external reserves, to persuade the apex bank to free the market (twice in as many months), the truth is that we are in a worse situation today, than we were at the beginning of the year.
Our current circumstance places a huge burden on the design and implementation of appropriate policy responses over the three years that remains of the Buhari administration.
With the apex bank’s rate-setting committee scheduled to meet next week, the conversation around monetary policy responses was at the fore and centre of a meeting of policy wonks that I was privileged to be at last week. The lead presenter defined the current state of the economy as one of “stagflation” — stagnant output growth, and rising domestic prices. He thus did not see a lit candle’s chance in Hell of the CBN’s Monetary Policy Committee (MPC) agreeing to raise rates to dampen inflationary pressure. Because any such rate rise would worsen general economic conditions.
Of course, the consensus was that output growth this year is going to be negative. We are never going to do enough in the second half of the year to reverse the contraction in the first half, especially in an economy that goes to bed in November.
Worse was to come though. For we were reminded that, in truth, the economy today faces a worse fate than stagflation. Indeed, domestic prices are up. But output growth is down. For this perspective, then, the current challenge before monetary policy is not so much that the MPC ought to do no harm by not tightening monetary conditions. But that any attempt to reflate the economy in our present conditions would simply push local currency liquidity up, and put downward pressure on the naira’s exchange rate. So the MPC can likewise do no good.
Ordinarily hurdles of this magnitude before monetary policy makers should kick the can for fashioning an appropriate policy response down to the fiscal policy side. However, anyone who has followed the debate around our public finances (how much crude oil are we really producing, for instance?) would understand how constrained that space is. Nonetheless, a low tax take does mean that some space is open for boosting non-oil revenue.
How to proceed with this? Raising tax rates today will simply increase the burden on a small and shrinking tax base. It would, inevitably lead to further business closures. Broadening the base, a more attractive option in the circumstances has proved beyond the ken of successive administrations. But it also holds out the prospects of further attenuating domestic economic activity. If not of heating up the polity, as civil society organises to resist the new impositions.
Thus, any which way, our pain points are set to multiply in the days ahead. These new burdens would make sense if the gains arising therefrom are sustainable. But successfully driving through the changes that we must undergo to right the economy would require both conceptual clarity, and a singularity of purpose. Two attributes that have, thus far, remained scarce in our policy planning spaces.