Professor Yemi Osibanjo, SAN, GCON |
The above excerpt deserves
critical appraisal. Economic report should ordinarily be based on verifiable
results than be intended as propaganda. In this regard, the claims of economic
success stand debunked by the Nigerian GDP report which shows that the economy
contracted in the five consecutive quarters ending March 31, 2017 and an
already one year-long economic recession. Contrary to official claims, the fall
in crude oil prices was not enough to bring about the economic contraction. The
factors responsible for the decline include, firstly, the administration’s
decision initially to crush the Niger delta militants, which severely reduced
crude oil production and export volumes.
Secondly, the drastic
reduction of energy imports as well as local production for domestic and
industrial use whereas there was enough forex within the economy to procure
needed imports; thirdly; retention of funds in the excess crude account against
the principle of the paradox of thrift; and fourthly, improper management of
the national currency compounded by naira devaluation. The way forward should
have been de-sterilisation of a small part of the unutilised and sterilised over
N100 trillion fake national domestic debt to meet any shortfall of public
workers’ salaries and pension arrears at no additional interest cost to the
national treasury.
As a matter of fact, the
2016 GDP distribution recorded 5.6 per cent for the entire Petroleum industry
and 2.7 per cent for Public Administration. But for the sheer willful handling
of public sector forex receipts in a manner that compromises the working of the
economic system, the remaining economic sectors (which contributed 91.7 per cent
of GDP and which did not face any forex threats) could have exerted more than
adequate impact to buoy up the economy thereby preventing any economic
contraction and recession.
Professor Osinbajo claimed
that the economic problems arose over a protracted period of time and pleaded
for the administration to be given time to grope at an unhurried pace for
solutions. While, admittedly, the economic challenges have subsisted for some
four decades, they were/are the lagged repercussions of wrong decisions taken
literally impulsively overnight long ago. Osinbajo also expressed the oft
repeated intensions by administration after administration but which have
remained permanently on the shelf, namely, “giving the private sector the
necessary incentives and creating environment to invest and do business (and
delivering) a country that grows what it eats and produces what it consumes” to
which should be simultaneously added evolving and consuming cheap domestic bank
credit in preference over foreign loans.
It may be recalled that the
economy clearly headed in that direction in the 1960s/70s. For a maze-free way
forward, the Cabinet and Economic Management Team (which Osinbajo credited with
the administration’s 2016 recession-blighted under-achievements) should peruse
date contained in the “50 years Special Anniversary Edition of CBN’s
Statistical Bulletin” particularly Table A.2.4.1, Table 2.4.2 and Table c,4.1.
from 1960-78, prime lending rate (PLR) stood at 6.0 per cent for three years
and 7.0 per cent for 15 years. For most of the period, the deference between
the minimum rediscount rate (MRR) and the PLR was about 2.5 per cent while the
difference between the MRR and maximum lending rate (MLR) was 0.0 per cent in
1977, 1.0 per cent for 10 years, 3.0 per cent for five years and 4.0 per cent
for two years.
The lagged effect of the
substitution of CBN deficit funds for withheld Federation Account dollar
accruals (which began in 1971) started to manifest with the PLR moving from 7.5
per cent in 1979 to 29.8 per cent in 1992 while the MLR escalated to 36.1 per
cent in 1993. For most years since 1979 the PLR has stayed above 16 per cent.
Yet, the very infrastructural constraints adduced by banks to defend the
present-day excessively high lending rates existed in the 1960-78 era. Also relevantly,
manufacturing capacity utilisation that began to be compiled in 1975 peaked at
78.7 per cent in 1977 but plummeted to 29.3 per cent in 1995.
From the preceding, a
significant correlation between cheap bank credit and diversified industrial
activities is deducible. Given competitive lending rates, the volume of
non-performing loans becomes negligible thereby making banks better off. By way
of illustration, available World Bank indicators put domestic bank credit to
the economy as a proportion of GDP for Malaysia in 2014 and 140 per cent and 22
per cent for Nigeria.
Nigeria and Malaysia were
economic peers in the 1960s. Today private sector bank deposit base can support
loans amounting to 140 per cent of GDP. Nigeria’s 2016 GDP stood at N103
trillion. The indicated bank credit level of 22 per cent of GDP amounts to N23
trillion. That total sum, assuming it goes at the high PLR of 16 per cent,
would yield under N4 trillion interest income in a year. But supposing bank
credit volume rises to 140 per cent of GDP, the resulting bank loan potential
become N144 trillion. If the sum is offered at the 1960s /70s PLR of 7.0 per
cent, bank interest income will rise to N10 trillion.
The increased bank credit
volume would translate into sprouting of diverse big and small firms (economic
diversification at last), faster economic expansion than would emanate from
government revenue alone, huge tax revenue from thriving enterprises, improved
employment and lowering of poverty, etc. factors that lead to cheap bank credit
engender stable prices (0.3 per cent inflation) and a realistic exchange rate.
That tripod essentially defines the conducive environment that government is
expected to put in place. Virtually all other needs including provision of
infrastructure constitute lines of business which investors voluntarily
undertake if profitable. Such is the road to the long hoped-for private
sector-driven economy.
The critical role of cheap
bank credit was highlighted, the other day, by the Manufacturers’ Association
of Nigeria (MAN), which demanded exclusive bank loans at 5.0 per cent lending
rate. However, special lending rates for different sectors are unhelpful and
prone to corruption. The various sectors of the economy are interdependent and
should therefore have access to competitive lending rates. However,
sector-specific loan gestation or payment periods may be granted.
Therefore, Osinbajo should
stop prolonging unnecessarily the country’s poor economic conditions. He should
use just two strokes of the pen to put in place presidential executive orders
that would (a) finally bring to an end the improper withholding of Federation
Account dollar allocations by the CBN which began in 1971 and (b) scrap the
Foreign Exchange (Monitoring and Miscellaneous Provisions) Decree 1995, which
unconstitutionally authorises the improper multiple currency practices. These
two pen strokes will restore the economy to sound health within six to nine
months or practically overnight. (Guardian)
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