Economic expert, Henry Boyo, in this interview with Online Editor, VALENTINE AMANZE, and Assistant Politics Editor, DANIEL KANU, speaks on recession, wrong monetary framework, and the way out of the economic woes.
President Barack Obama put money in some sectors to lift America out of recession. What led Nigeria into recession and what is the way out?
Well, let’s start with the word recession. Technically defined recession, is negative growth rate in two consecutive quarters.
By that definition, yes we are in recession but we need to look at the features of recession generally, and these features include low level of unemployment, low consumer demand, riding inflation, and weaker exchange rate, among others.
I think those are descriptions which we are very familiar with. In other words, the implication of those descriptions is that we have not been performing as well as we should be.
We cannot be performing as well as we should be if we consistently have rising rate of unemployment, inflation. The inflation of 17 per cent that we have now did not just jump from 2 per cent.
It has been a journey and that is why I say the features of recession have been in the economy for some time, for many years in fact. But it has only become recession because technically the growth rate has declined for two consecutive quarters.
The features that are still being displayed are features that we have been used to over the last 20 years. Inflation has never come down to 2 per cent as best practice in successful economies.
Tell me one successful economy that has inflation at 4 or 5 per cent. Tell me one successful economy that has the monetary policy rate, which determines the cost of funds, ultimately at 14 per cent. None!
Tell me one economy that is successful that has been generating higher and higher rate of unemployment. Is there any time in the last 20 years or so that we would say unemployment dipped?
What I’m trying to say is that don’t get hooked unto just the technical definition of recession because the features of recession have been with us for quite some time.
You can liken it to somebody who has been driving his car on reverse gear for a long time but now it has come to the point where the driving in reverse gear is actually stepping on the gas. That is what the recession implies.
All those indices that normally drive an economy are out of gear, you cannot have a situation where you celebrate 17 per cent inflation because that destroys almost everything.
You cannot have a situation where you have interest rate to the real sector at 25 per cent and you’re expecting to produce and compete with goods from countries where entrepreneurs are getting 2 per cent or even zero per cent interest.
Yes, the economy has fallen into recession but in terms of the features of recession the truth is that we have always exhibited them only that they had not precipitated into a rush rather than the steady decline we were getting before.
I get your point when you said the United States decided they would select certain sectors and decided they would put money into them and all that. That may be so but in our case we have a different platform.
Why do I say that? When Obama was saying give money to that and that bodies or sectors the American economy was not suffocated with liquidity.
I want this to sink in: the American economy was not already suffocated with liquidity. Everybody wanted money because there was a collapse here and there.
The Federal Reserve Bank was not already afraid of inflation and mopping up money and paying interest to banks for giving back to the Federal Reserve for excess liquidity.
In our case we have had consistent excess liquidity, meaning surplus cash.
You can’t deny that if there is one prime hunchback on the back of the Central Bank of Nigeria (CBN) for over 20 years it is excess liquidity. There is hardly any month the CBN does not mop up excess liquidity.
I want you to understand this very well because it is very fundamental to everything that I will talk about in this interview.
When you hear them say we are selling treasury bill to mop up excess liquidity they mean they are giving you an instrument so that you can part with your money, although they will pay you an interest for letting them part with your money.
That does not mean that the money we are gathering will be used for anything, indeed it cannot be used for anything because if I am already complaining that the system is suffocated with money and I’m taking it out, it would not be appropriate for me to say I’m putting it back into the system.
Way out
The way out of this recession from the explanation I’ve made is not pouring money into the system in form of intervention or anything because the economy is saturated with money already.
You must find a genuine way to mop up the liquidity without putting it back through the back door, using the banks.
A lot of journalists promote this thing ignorantly because they hear so-called experts say that we will spend our way out of recession, and I laugh because these people are calling for the breakdown of the economy totally if it hasn’t broken down already.
In November 2015, the CBN had already foreseen that there would be too much liquidity of N6 trillion in the economy in 2016. They put it as advanced notice that in 2016 they would mop up N6 trillion from the economy, that is N1.5 trillion every quarter.
They saw that we have a problem with our economy being suffocated with naira and inflation would be uncontrollable, that is why they are taking the cash.
They’re taking out this cash in order to sterilise it. They’re not taking it out to fund budget deficit or something.
If it is for funding budget deficit, for example the N2 trillion or so budget deficit, the Debt Management Office (DMO) will borrow for that purpose.
But the CBN borrowed from your so-called open market, which is just to confuse all of you who don’t understand economics; they borrowed it to control excess liquidity.
They need to protect excess liquidity because the prime mandate of the Central Bank is price stability. Price stability means inflation at best practice level, say 2 per cent maximum or 3 per cent, that happens in other economies anywhere.
Compare what is the rate of inflation in the U.S., Europe, Malaysia, and Nigeria, and you will see that inflation is the pivotal circle around which economic policies and systems work.
Because when people say they can spend their way out of recession, they are making a fool of the situation.
And unfortunately because they count on the ignorance of your disposition, then you also pick up the opinion that one professor said this or that.
What drives inflation
What drives inflation is excess liquidity. So long as you continue to have excess liquidity, you have a saturation of managing the economy.
If excess liquidity drives inflation and inflation drives monetary policy rate, because it’s in trying to control inflation the CBN would extend its monetary policy rate such that the Finance Minister [Kemi Adeosun] can be saying with her level of understanding that MPR should be reduced.
You reduce MPR when the CBN is being seen mopping up excess liquidity, can’t you see it’s a contradiction?
So it is absolutely inappropriate that a whole finance minister who should know better should be saying reduce MPR. That’s not to say that MPR is at best level; best level MPR should be tied to best level MPR in successful economies elsewhere.
They say if you want to be an eagle, you start comparing your performance with that of an eagle rather than that of a duck. So if they tell you that in Ghana MPR is 26 per cent, big deal! But we don’t want to be like Ghana.
We want to be like a first world economy. We must use the best approach. So you now find that because excess liquidity drives inflation and inflation drives higher cost of funds and a combination of excess liquidity and inflation and high cost of funds bastardise your economy.
The combination of all three will weaken your naira.
At the end of the day it is the market dynamics of naira and dollar that is significant. I even say unequivocally, without an iota of doubt in my mind, that the problem with Nigeria for the past 20 years is too much money, liquidity.
At the time I started work in 1975 when I came out of university, I bought a new 504 Peugeot car for N6,500.
So you can see that inflation is critical but they are downplaying its role. It’s the key.
Money injection into infrastructure
Whether you put it in infrastructure, though it is better to put it in infrastructure, or you put it into consumer spending, you’re be injecting money into the system. In the system, it does not separate itself, it is all money.
And if the custodian of the naira is telling you that I already have too much naira liquidity in the system, whether you spend it for infrastructure or recurrent, it would still have the same impact, it would still drive inflation.
There is need for a fundamental restructuring of the country’s monetary framework.
This is to make the economy readily transformed to induce vast expansion in industrial activity with single digit lending rates, increasing employment opportunities, lower single digit rate of inflation and a market-determined exchange rate mechanism.
For a long time our economy appears trapped in a paradox of deepening poverty with increasing export revenue, while reduced export revenue similarly leads to extreme poverty.
It is inexplicable, for example, that Nigeria became listed among the poorest nations in the world at the same time that we had our best-ever dollar reserves of about $60 billion in 2008.
If you can understand this indicator and trends, especially the causative factors – excess liquidity drives inflation, inflation drives MPR, MPR drives higher cost of funds, higher cost of funds drives higher cost of production, inflation and higher cost of funds make you uncompetitive, and inflation at 20 per cent makes certain that we’ll all be poor.
Incomes don’t grow at 20 per cent annually, whether it is salary or whatever, so you’re bound to be shortchanging yourself and reducing your consumption, that is the path of poverty.
Role of Treasury Single Account (TSA)
At the particular time that TSA was established under former President Goodluck Jonathan, in one of my articles, I drew attention to it.
There was the fear that TSA would rob the banks of liquidity and therefore they would not be able to lend as if they were lending to anybody in the first place. And what happened?
Journalists at one time asked the man who was the chairman of the Bankers’ Committee on how they’re coping with TSA, believed to remove so much liquidity from their hands. I quoted the man’s response in my article.
He said TSA has not affected them in any manner, that if anything they even have more liquidity prior to TSA.
They asked him how, and he said it’s true that TSA may have taken about N700 billion out of the system but the CBN was kind enough to reduce bank’s cash reserve requirement (CRR) that inadvertently pumped in N1 trillion in their hands.
So they’re better off after TSA than before TSA. And I highlighted this in the article.
Look, if I write anything that is nonsense they would have finished me and I won’t have the courage to continue doing what I’m doing today. I don’t need to do any further research on this issue because we are on the wrong track in monetary framework.
They quote themselves in the newspapers so I pick all their argument, piece them together, and you can see the contradiction in what they are projecting.
I wrote in 2006 telling then CBN Governor, Charles Soludo, that he made a fool of us selling dollars to bureau de change (BDC).
I didn’t want to be personal so I said: “CBN stop this nonsense’’, you cannot tell us that this is a good policy. Nobody answered me, even Soludo abused me.
But 10 years later [new CBN Governor] Godwin Emefiele himself said Soludo and [Lamido] Sanusi before him sold $66 billion to bureau de change; that if we had that money today we won’t be in this position.
Is Emefiele now doing the right thing?
If you understand a little bit of banking, you would ask if liquidity was a problem and why is it that the CBN has to borrow to control liquidity?
Meanwhile, with N6 trillion being projected to be mopped up in 2016, the CBN would be paying the banks N600 billion as interest charges. N600 billion! If that is all the profit the banks make, then they’re not worried.
Banks suddenly become main lender to the CBN. Since December last year – because banks were already aware or informed by the CBN that N6 trillion would be mopped up – they themselves have calculated their profit and everything based on that lending of money that will not be used for anything.
So the banks would make their N600 billion. They would lend primarily to the government either to Debt Management Office or the Central Bank.
Another 30 per cent of lending would go for importing fuel, the balance is used for infrastructure and all of that.
This will put the money back to the system and the problem will persist.
Borrowing to finance budget
Assume that the head of your clan says you have to sit on the $26 billion you have, and use it whenever the need arises to defend our currency.
Meanwhile, your family needs N1 billion to expand your farmland and your clan says go and borrow that $1 billion from XYZ, what do you call that kind of practice?
Worse still, the people keeping your $26 billion are the same people you are going to beg for $1 billion. Where you are keeping your $26 billion worth of reserves, you are also earning possibly one per cent interest.
These people called portfolio investors can go to the same bank you’re keeping your $26 reserves and borrow it for 3 or 4 per cent and come to Nigeria because Nigerians are giving 20 per cent interest.
Then they change it to naira and at the end of the year you’re given 20 per cent interest. This is the reality.
I mentioned this issue of TSA at the time.
What is required to be done is not for the CBN to simultaneously lower the cash reserve requirement because it means returning money TSA took away back.
Instead of mopping excess liquidity, you can reduce liquidity surplus in the system by saying all banks must hold for instance 90 per cent of their cash reserve requirement.
If it increases the cash reserve ratio from all private and public deposits to 90 per cent, it can only use 10 per cent of the funds in their care. When that happens, you no longer auction the dollars to the highest bidder as the CBN, the custodian of the naira, does every week.
The CBN is responsible for the depreciation of the naira.
When people tell you that the naira rate of exchange is so strong, they want to kill you because the only people who get an advantage from that are portfolio investors.
Government selling off national assets
Let’s assume that we get $6 billion from the national assets and the people who are giving you the $6 billion borrowed it from the bank that is holding your $26 billion. Are they not using your money to buy your assets?
So if you want to change the game plan, reduce liquidity by cash reserve ratio by raising it as high as possible. That way you can control liquidity.
The CBN enjoys monopoly of dollar supply whereas the dollars in fact don’t belong to the CBN.