Finally, with the nomination by the president and confirmation by the Senate of some ministers, there is some shape to the Buhari administration. And not too soon. Looking across our leaders’ shoulders at the economy’s dashboard, it is immediately clear that it is not just the cabinet that’s in need of shape. To push the automobile metaphor further, the economy is decelerating faster than the foot on the gas pedal can pump.
Have we run out of fuel? Or is this a fault with the engine and drive-train mechanisms? At this stage, the answers to these questions matter only in so far as they help the design of a response. Economic orthodoxy suggests that in an economy that’s slowing down as fast as ours is, the central challenge before government is to spend its way out of the downturn. If government’s spending boosts consumer spending, and encourages businesses to invest, then there is a real chance that we may drive domestic growth rates up.
Incidentally, this has been the Central Bank of Nigeria’s tack over the last seven years. It has combined a narrow-minded focus on tightening bank liquidity with infusions of cash into preferred sectors of the economy in the hope of driving real sector growth. Even now, it is driving massive infusion of liquidity in the banking sector in the belief that high interest rates have been the main let on business investment in the economy.
However, the one benefit of the CBN’s efforts at reflating the economy, thus far, is that it appears to prove that the problem with the economy is not a famine of loose cash. There may be structural reasons why the economy has refused to respond to successive and now innumerable attempts to jump-start it by pumping a lot of money into it. This realisation may then have prompted the apex bank’s more recent foray into fiscal policy making with its restriction on access by 41 industrial sectors to local foreign currency markets.
But even this has not particularly worked well. Demand management is always a difficult task even when market tools are to hand. To attempt this through administrative measures is to invite queues, and black markets.
With the benefit of these insights, we are therefore clear on what the thrust ought to be of the Buhari government’s policy platform over the next four years. Over the next 12 months the challenge is to staunch the decelerating economy, to grow business and consumer confidence in a way that boost spending by both. Rumours even suggest that it has been agreed that the appropriation act for 2016 will be reflationary.
Now this is the nub of the matter. After the profligacy of the last administration, government does not have the means to drive aggressive spending growth. It cannot also borrow off either the local market nor internationally. Beyond this obvious limits, though, there are more serious ones. The structure of our new deficits (budget and current account) conceal fundamental flaws. The budget deficit rests on a growing spend on consumables. The current account deficit has no connection with the importation of capital goods.
By pursuing aggressive new spending on the back of these structures, we are, in other words, poised to build new vulnerabilities (high inflation count, for instance) on the back of hand to mouth spending. It is too short term a response. Myopic even. If the economy’s engine is not to stall over the next plan horizon, we must go several steps better. We must boost investment in new capacities across sectors. Long ago we agreed that government had neither the means nor the temperament to do this all by itself.
So we latched on two concepts: private sector-led growth (in the real sectors of the economy); and public private partnership (to drive investment in infrastructure that would support this growth). Thankfully, the legislative ecosystem to proceed with these initiatives is in place.
Still we worry. On the economy, this government’s body language is not simply wrong, it is leaking both engine oil and radiator lubricant. Whereas the task is to free the economy so that new investment may come in (both foreign and domestic) the central bank has of late pursued an autarchic monetary policy, while much of the federal government’s pronouncement thus far (on the refineries and oil subsidy, for instance) speak to the possibility that over this electoral cycle industrial policy is it.
And the economy’s wiggle room tightens.