Last week, an assessment of some economic policies was reported here. Not all principles can be evaluated, and even new ones have emerged. This is the nature of economic policies because economic activities are dynamic in nature and the managers of an economy must be on their toes in anticipating, interacting and reacting to the changing climate and environment. Of course, some basic and standard functions are predictable and require policy rather than discretion. This article is concerned with continuity in policy evaluation, but looks more closely at the roles of the environment in which policies operate.
The budget for the next year is presented to the Assembly and prepared for consideration. The total estimate of the budget in terms of expenditure is N26tn, almost N5tn more than the 2022 estimate of N21.83tn. The estimate for debt servicing will be N8.25tn or approximately 32%, and staff cost is estimated at N7.78tn. Of course, the rest, less than 40 percent, will take care of other transfers, even to the lower tiers of government and capital and recurrent expenditure.
Recent visits by the President and possibly the Vice President have also raised expectations of investment into the country. A capital inflow of $10bn is also expected, which the government intends to use to intervene in the foreign exchange market. As we move forward there will be more expectations but an expectation will be an expectation. In reality, it is often far from the expectation, especially if the environment is not optimal.
If inflation is high and volatile and foreign reserves do not grow, expected investment inflows will remain expectations. Foreign investors, unlike Nigerian multinationals, prefer to repatriate their profits in accordance with the laws of their countries. Therefore, they will ensure that repatriation of profits is not affected by foreign exchange shortage in investing in any economy. Foreign investors in the current situation we are in will be interested in build-operate-transfer on a long-term basis. So it is important to get reliable experts in business negotiations when signing contracts with foreign investors.
Public-private partnerships are the best way to help us attract foreign investors in this critical situation. It should be a way to complete some ongoing projects like steel industry and railways and major highways. There is a need to study the variations of PPP before accepting the favorable ones. There are about 15 categories that I’ve highlighted in this column over the past few posts.
Last week I tried to explain that the Nigerian economy is not dead, it is in a coma. It is in emergency mode, requiring immediate adjustments in the short term to secure it for medium term operations. The rate of inflation seems to be rising faster than expected, but not surprising given the massive depreciation of the naira against major world currencies and our manufacturing dependence on foreign inputs. As soon as there is an announcement that the naira will depreciate in the foreign exchange market, sellers in our local markets raise their prices by the same amount or more. Those price increases are determined by anticipating changes in the prices of inputs and the total price of output. This implies that the government needs to quickly deal with foreign exchange depreciation as part of the short-term stabilization of the economy.
Theoretically, economic managers seem to be motivated to operate the economy on the free ride of the market. This is the background of neo-classical economic theory or laissez faire economic theory. But the Nigerian economy cannot be run on that theory because there are fundamental structural rigidities that make the Nigerian economy more Keynesian than classical. John Maynard Keynes recognized such rigidity and market failure when he advocated government interventions in the functioning of markets. Delay in intervention can make recovery more difficult.
The Nigerian economy is not out of recession because interventions often come too late and before a problem is fully resolved or sometimes inadequate to the problems at hand. The 2007–2008 global recession led to a decline in US economic activity and contagion effects in other market economies around the world until President Barack Obama intervened heavily in the US economy. The need for intervention in the Nigerian forex market is even more compelling now.
But what caused the massive depreciation of the naira? Of course, this is not due to importing raw materials. Why should the Central Bank of Nigeria find out? I can guess the benefits of CBN. First, it is the issue of speculative attacks on the market. The oil subsidy mafia has entered the forex market with their massive wealth to speculate on the forex market. They devalue the naira in the parallel market and make foreign currencies scarce. One of the objectives other than financial gains is to enable a return to fuel subsidy.
Second, the recent profligate spending on government travel. The President’s avoidable large-scale attendance at international conferences and the cost to the economy in foreign exchange contribute little to the reduction in foreign reserves that should be used to intervene in the foreign exchange market. The government is still behaving as if the economy is not in financial crisis. That is the context in which we operate the economy and economic managers need to understand policymaking. The CBN should approach the research department to determine the sources of volatility in the foreign exchange market.
It is hoped that the expected $10bn (re-debt?) will not be poured into the forex market as an intervention fund. If it does, the naira will appreciate immediately, but the money will soon disappear and the subsequent depreciation will be uncontrollable. Intervention in the forex market cannot be limited to financing the market. Promoting domestic production and productivity is part of the interventions. Part of the interventions is to shift the economy from consuming foreign goods to consuming what we produce and producing what we consume. The CBN must liaise with the South African Reserve Bank on a range of central banking issues, including interventions and regulation. As a market economy, it has managed to maintain some stability of the rand over the years. Today, the ratio of the rand to the dollar is less than 20 units and in 2004 it was 12 units.
The proposed 2024 budget is based on even more substantial debt. A noticeable trend in the budget is that there is a greater shift towards domestic borrowings and external borrowings. This is because it is clear that sources of external credit are drying up. It’s time we started cutting clothes according to the size of our clothes, not the size of our country. Let the budget reflect the state of the country in the present predicament. There are genuine complaints about the high cost of administration, but the proliferation of ministries, departments and agencies in the current political appointments of current Bola Tinubu indicates the government’s apathy towards reducing the cost of governance. Paying several nominees from his personal reserves.
The Nigerian economic environment continues to be plagued by corruption and elite vandals. There is no country in the world that is free of corruption, but in other situations, anyone caught is publicly punished according to the law of the land. There are a number of publicly identified corrupt individuals who operate freely and participate in elections. In the recent P&ID United Kingdom case some 'important’ people have been named as masterminds of the case against private gains and the nation. We have not heard of anyone being arrested and investigated by anti-corruption agencies or clarifying the roles of employees. A country with 'incredible corruption’ cannot attract genuine foreign investment. The need to begin cleaning up the environment of corruption through transparent and swift government intervention is critical to send messages to local investors and foreign investors that Nigeria is ready for business.