LBS OCTOBER BREAKFAST SESSION REJOINDER.
NEW DEBT IS THE WAY OUT OF BAD DEBT: YOU HAVE NOTHING TO LOSE BUT YOUR CHAINS. Presented by Bismarck Rewane, October 4th, 2023. (Accessed 27th October, 2023).
The above presentation is a detailed piece coming from a well-known and respected source; however, it has some submissions which I objectively wish to respond to. However, my response will be brief and limited only to the aspects on the Nigerian economy. Caveat: Opinions expressed hereunder are strictly personal.
(Assumptions: Writer is not of any distinct school of economic thought, but rather, believes in aggregation of the best of each popular school and building best economic practices therefrom.) Tubi, O. Theophilus.
On the title: Unless the respected Bismarck’s (BJR) title is based on the assumptions of Modern Monetary Theory (MMT), I posit that this title gives an unqualified assumption about debt and more (new) debt, which I doubt is the intention of the writer, as it may send the wrong signal to a reader. I have nothing against debts in principle and as a general rule, but its acquisition and accumulation must be constrained (economic constraints), judiciously prudent, capital-development-project-tied, and above all sustainable, that is, not at the risk of long-term debt-dependency or better still, debt-crippling of the Economy, the ubiquitous debt-overhang and debt-trap. Unrestrained borrowing leads to financial and economic ruin, which not only loses you your chain (as suggested by the title) but also your shirt and much more. This is why ever-increasing debt-servicing thresholds eventually leads to debt-relief calls by affected economies.
Therefore, in place of “New”, the word “Good” may be substituted.
On page 21 of 86: NIGERIA VS THE GLOBAL ECONOMY.
BJR stated that, “Nigeria is still a bank-based economy but transitioning to a market-based economy”, and that “puts severe limitation on the effectiveness of monetary policy to fight inflation”.
However, I posit that this later assertion is limiting, as there are more egregious and structural fundamentals that needs to be taken into consideration, as part of the primary reason for the ineffectual nature of our monetary policies and programs, as regards inflation targeting to date, namely:
(i) a 22.1% Bank Deposit ratio; (Bismarck, 2023).
(ii) As at September, 2023, 67.2trn was the total currency in circulation (Money supply) of which 2.7trn, that is, 85% of the said currency in circulation, (CIC) was outside the Banking system, (CBN, 2022);
(iii) Only N500 billion, representing 15% of CIC, was within the Banking system. CBN, 2022
(iv) Nigeria Financial Inclusion Index is put at only 64%, meaning only 64% of Nigerians are banked, that is, about 40 million, or 36% of Nigerians remain unbanked. (CBN, 2023).
(v) Interest rates offered on savings (up from 1.4% to 4.2%) vis-a-viz that offered on loans (24% to 30%) is abysmal and discourages Savings, which is supposed to drive Investment. That is why the savings rate in 2023 is said to be at 5.18%, and considered an all-time high.
Now, although it was reported that of the 2.7trn outside the banking system, the sum of 1.9trn had been retrieved as at January, 2023. (CBN, 2023), given that the currency swap policy has been temporarily halted, it is safe to assume the CIC situation is now back to status quo ante. By implication, (i) to (iii) above translates to the obvious fact the effectiveness of CBN’s monetary policy is severely limited, as it has direct control over a mere 15% of CIC, which means that even if a 100% monetary-policy-implementation-success-rate is achieved, (which is neigh impossible), at any particular time, it only translates to 100% of 15% effectiveness. At most, we can extend the coverage of effectiveness to 20% due to the Bank Deposit Ratio (Savings). The implications of (iv – v), are also obvious to see. Please note points (i – v) enumerated thus far, as they shall feature as we progress, let us label it “parameter-2”.
Therefore, given parameter-2, it is safe to assume, that if we desire more effective monetary policy control, ongoing efforts must be more than doubled, and new ones initiated to, amongst other desired outcomes, bring more CIC into the Banking system, increase financial inclusion index, and encourage Savings.
On page 24 of 86: NEW CBN LEADERSHIP – HARD TO CATCH A FALLEN KNIFE
BJR’s “No more dumb decisions”; seems to endorse the “Suspended all intervention programs” initiated by the former CBN governor; which to him is an indication to a “full shift to orthodox monetary policy”, as this is expected to “support a reduction in the total money supply”. So let us x-ray each item.
There is no gainsaying the obvious fact that the former CBN Governor, Godwin Emiefele, had his limitations, brought about principally by his deficient background in Monetary Economics and his too-close rapport with Deposit Money Bank (DMB) CEOs, as a former one himself. His appointment and such similar appointments of Bankers, highlights the debate about appointment of career Bankers to head apex Banks, as against the ‘better option’ of seasoned monetary economists. Monetary policy coordination and execution go well beyond traditional banking roles. The two roles are almost diametrically opposed in practical terms and outlook. Too many conflict-of-interest issues between CBN and banks have torpedoed well-intentioned monetary policies in recent times.
A seasoned monetary economist is someone who not only possess a minimum academic qualification of B.Sc. Economics, M.Sc. Economics and PhD Economics (majoring in monetary economics at each degree level), but who has demonstrated extensive academic and other professional track records, earning him/her national and international distinctions. Attending a plethora of local and international specialised monetary policy related courses is not, and can never be an equivalent grounding. One cannot emphasise this point enough. (The only exception would be Dr. Ngozi Okonjo-Iweala, given her extensive and deeply rich background and experience, if she is interested, or someone with a similar profile) We can check the antecedents of former CBN/Federal Reserve Governors, in Nigeria and overseas to better understand this simple point.
Now, it seems the fact that it is called a Central Bank, has confused the uninitiated, as to its core functions, which are much more than to (a) “Act as Banker and provide economic and financial advice to the Federal Government of Nigeria”, as against others like, (b) “Ensuring monetary and price stability”, (c) “Issue legal tender currency”, (d) Maintain external reserves to safeguard the international monetary value of the legal tender currency”, (e) Promote sound financial system in Nigeria”, and (f) Controlling inflation. It should be pretty obvious that all these functions, taken as a whole, demand more than a Banker, no matter how seasoned, can deliver. I however do not discountenance the redeeming possibility of a Banker CBN Governor, aware of his/her limitations, but who is desirous of change, assembling a Team of monetary economic experts to serve as personal/official advisers. This is not without drawbacks though, as you cannot give what you don’t have. This is why they have not received the required rigorous attention in recent times.
More tellingly, the nature of the commitment, dedication, rigor, and impartial decision-making, required to bring sanity into the Banking system, is hard for a Banker CBN Governor to muster, due to long-standing relationships with most DMB CEOs and other extraneous considerations. How many career-banker tuned CBN Governor can initiate and complete the Banking sector reforms, more popularly called Bank Consolidation done during Prof. Charles Soludo era?! Again, the only exception would be a career banker-turned CBN Banker with an Axe to grind with fellow Bankers.
Suspend all CBN intervention programs (initiated by the former CBN governor): Doing this permanently will be akin to throwing away the baby with the bathwater. It is prudent to “temporarily suspend” these programs, in other to reassess them holistically and objectively, through individual impact assessment studies. The outcomes should determine how they can be better handled going forward, but outright cancellation or transferring them to DMBs or other depository corporations (ODCs) will merely end up as other similar programs, with very limited impact/success rate. A sort of reinventing the wheel. As an example, the Anchor Borrowers Program (ABP) enjoyed 50% repayment/success rate. That is quite significant in recent times and it will be hard to see similar intervention programs manged by DMBs or other financial institutions with such rate. (I hope to be proven wrong).
Full shift to Orthodox monetary policy?! Orthodox monetary policy or mainstream monetary policy, also known as Neoclassical monetary policy, has a set of assumptions, and develops models based on those assumptions, which simply implies the consistent usage of any given set of monetary policy tools by the central bank, which in essence, denotes not shifting or deviating from traditional or usual methods. In effect, it is anchored by two premises, one being that there exists a natural rate of interest at which the economy operates at high employment and low inflation equilibrium. (sic) Two being an assumption or belief, to the effect that central bank’s interest rate, that is, minimum rediscount rate 18.75% (MRR), which anchors all other interest rates in the money market and the economy, and can be manipulated to hit this natural rate mentioned in one, albeit by close approximation. This is attempted using three main monetary policy levers to control the money supply, namely, the cash reserve ratio, statutory liquidity ratio, the discount rate, and open market operations.
In essence, what a full shift to orthodox monetary policy does is a rehash of the overly simplistic quantity theory of money, (at least as regards the Nigeria economy, given “parameter-2”). The orthodox monetary policy theory which places economic growth as a function of economic activity (Q), and Inflation (P). If (V) rate of money spent per time, is constant/predictable, then an increase/decrease in (M) money supply, will lead to a corresponding increase/decrease in either P or Q., has since been modified and integrated into the general Keynesian macroeconomic framework. So, going back to adopt such is regressive, rather an adoption of even a heterodox monetary policy and by extension, heterodox central banking is the least expected model to be adopted in Nigeria. See why parameter-2.
“Support a reduction in the total money supply”: As shown in the orthodox monetary policy theory, which has since been modified, economic activities decline (contraction of the economy) when that is done, all in an effort to induce, deflation. Now, while that may be a desired goal of monetary policy, given the country’s level of economic development, as evidenced by several macroeconomic indicators: with a GDP of $447.39 billion USD, at the end of 2022, and a per capita of $2,184, representing a growth rate of 3.1% down from 3.4% recorded in 2021; more recently, in real terms, 2023 Q1 grew by 2.31% and Q2 grew by 2.51%, year-on-year, respectively, (CBN, 2023); latest figures indicate a 53.40% youth unemployment rate, and a conservative 33.3% general unemployment rate (NBS, 2022), which places us as the second highest on the global unemployment list, according to Bloomberg; an inflation rate of 22.79%, as of July 2023 and, food inflation was 26.98% also in July, (NBS, 2023), representing a 17-year high; just to recall a few, and our generally economic growth projection, and desired movement towards a Steady state economy, is it in our overall interest to reduce money supply?!
Inflation is defined as a persistent tendency for nominal prices to increase, leading to reduced purchasing power. However, a distinction needs to be made between cost-inflation, induced by fuel price hike, and currency depreciation, on the one hand, and demand-inflation, which is as a result of too much aggregate demand, that is, when too much money is chasing too few goods. Economics Nobel laureate Milton Friedman, postulation that, “inflation is always, and everywhere a monetary phenomenon”, has time and time again been proved wrong, particularly in the last two decades, where central banks in the US, Eurozone, Japan and China have been pumping their economies with money (reduced single-digit interest rates) without inciting inflation, see The Economic Times article. It was trite knowledge that the trade-off that had always been assumed between unemployment and inflation, given their inverse relationship, has never applied to the Nigeria economy. See graph of Phillips curve as it pertains to Nigeria in fig. 1 below.
Figure 1 – Nigeria, Real GDP Growth, Unemployment and Inflation Rates.
Source: Tubi, O. T., from CBN, NBS, 2018.
Therefore, these restrictions do not hold true for Nigeria and as such, we have wiggle-room to be innovative, bold and daring in our approach to fashioning ingenuous solutions to our economic difficulties. Better yet, we are now possessed of powerful Econometric Modelling Tools, to build and simulate the ideal variable mix for optimal economic outcomes, using dynamic stochastic general equilibrium (DSGE), modelling or computable general equilibrium (CGE) modelling and other techniques. CGE models are able to trace the paths of adjustment to the new steady-state, whereas static ones will show long-run changes only. Modelling the adjustment path provides a much richer understanding of the evolution of the economy in response to a given shock or policy. The outcomes from these econometric modelling, once the parameters are properly set, will give near perfect, real-life outcomes.
Source: Author from Computable General Equilibrium (CGE) Modelling and SG’s CGE model.
Further, food inflation can and should be controlled by borrowing a leaf from Europe and America. Farming subsidies must be institutionalised and the resultant produce guaranteed for wholesale purchase. State and regional collection/redistribution, and sales hubs/centres, should be created in addition to large-scale Super-marts and distributive chains. These farm produce can be taken to these food exchanges where subscribers/buyers can pick them up or have it trucked to them.
The Ministry of Agriculture and National Agriculture Development Fund (NADF), can be tasked with extending and upgrading the already existing National Farmer Database used during Dr. Akinwunmi A. Adesina’s tenure as Agric Minister, to contact farmers directly when government subsidized farm inputs like fertilizers were ready for pickup. Using the database as input, an extensive application platform with additional specific parameters and tools for sustainable farm practice optimization, including GIS and 3D enabled, is to be developed and integrated into it, to effectively map all farms and arable lands, incorporating all needed features of the farmlands, and enabling remote sensing capabilities for planning and monitoring farm activities. This was part of the missing puzzle in the 50% performance rate recorded with Anchor Borrowers Program (ABP). If remote monitoring of farmlands were possible, enabled and incorporated into the verification process, a higher success rate would have been achieved. The beauty of this platform is that it is a veritable institutional tool that is permanent and can be multi-tasked, as the occasion demands.
Once we are able to hold down and eliminate food inflation, half the inflation problem is resolved.
On page 32 of 86: WHY IS THE NAIRA DEPRECIATING?
1. On High Naira speculation. The following quote says it all, “The amount by which the parallel-market exchange rate exceeds the official rate, known as the parallel-market premium, will depend upon a host of factors, in particular, the penalty structure and the volume of resources devoted to apprehension and prosecution of violators.” (Pierre-Richard Agenor, Princeton University Essays in International Finance, 1992.)
Suggested counter-measures on this. Nigeria as a sovereign republic cannot and should never allow itself to be at the mercy of speculators. Such situation is anathema to nationhood and erodes the very concept, as it subjects the country to the vagaries of economic subjugation.
i. The Nigeria Naira is the only legal tender within Nigeria, and it is time our laws are dutifully enforced. Therefore, a timeline should be set for all Forex within the Nigerian economy to be lodged at DMBs for onward transfer and domiciliation/lodgement with CBN.
ii. Owners are at full liberty to access and transact legitimate transactions with their domiciliary accounts, other than cash withdrawal of USD$$$.
iii. All Forex not within the banking system after the set timeline shall become forfeit to the federal government. This shall be added to the current whistle-blower system and the same reward condition shall be extended to it. Set up a Special Forex Recovery Task Squad for enforcement.
iv. All foreign currency remittances should be cashed/credited to Nigeria and be domiciled with CBN.
v. Forex speculators causing unreasonably high (phantom) demand causing Naira depreciation will be effectively neutralized by CBN insisting on proper documentation of all Forex requests, disbursement, and usage. Collusion to circumvent this provision in any way should be treated as economic sabotage.
vi. Any and all regulatory restrictions placed on import of Forex is therefore counter-productive and should be removed.
vii. CBN to retain within its vaults (all bullion) and to keep Forex balances on its books against keeping the majority of it abroad.
viii. Forex allocation should follow approved and well-defined national priorities.
ix. The Banking Sector needs another round of integrity test. Most are essentially not financially sound.
x. CBN must be financially re-engineered to deliver on its mandate to fund development programs. The current bullion purchase must be strengthened as well as the proper management of its Forex reserve.
2. On Low Forex liquidity as Gross external reserves down 13% to $33.24bn in September (y-o-y) despite higher oil prices. Oil production < OPEC quota (1.6mbpd), and Average Forex turnover down 8.85% to $84.60mn: According to a study, Nigeria’s main forex revenue is haemorrhaging on two fronts:
(i) Lack of accurate data on the actual number of producing Oil Wells and Active Rigs operating within its territorial economic zone, caused by administrative inadequacies
(ii) Darth of verified actual crude oil and condensate production figures even from amongst so-called authoritative sources, both local and international.
Analysis under the Drilled and Completed Oil Wells Category found that between 1999 and 2017, a cumulative total discrepancy of N12.478 trillion or better still, when adjusted for inflation, N14.786 trillion in year 2022 value. That is an average annual revenue loss of >N1.643 trillion.
Analysis under the Active Rigs Category revealed that the Nigeria Economy lost, in just 9 years, between 2010 to 2018, a cumulative total of N28.358 trillion or better still, when adjusted for inflation, N34.170 trillion in year 2022 value, an average annual revenue loss of >N3.797 trillion.
Analysis under the Crude Oil and Condensate Production Category showed that for the period between 2010 and 2019, a cumulative total of $21.265 billion or better still, when adjusted for inflation, $22.967 billion in year 2022 value, this translates to a consistent average revenue loss of >$2.2billion annually. Tubi & Adenikinju (2023)
Nigeria is owed by (IOCs) operating withing its shores.
According to Chevron Nigeria Limited (CNL), 2019 Annual Report, it was observed that “the latest years for which income tax examinations had been finalized for Nigeria was year 2000”. Meaning Chevron Nigeria Limited is in arrears of 21years income tax remittance!
Add to these, the sum of $62 billion judgment debt being owed to Nigeria by International Oil Companies (IOCs) in line with the Production Sharing Contract (PSC) law.
On page 33 of 86: WHAT IS THE FAIR VALUE OF THE NAIRA?
With due respect, BRJ’s assertion and the ‘way’ he used PPP to determine the fair value of the Naira is subjective and violates one of the cardinal rules and principles, guiding under what conditions absolute purchasing power parity holds, to wit; “absolute purchasing power parity holds when, the purchasing power of a unit of currency is exactly equal in the domestic economy and in a foreign economy, once it is converted into foreign currency at the market exchange rate.” Gabriel Zucman, (2005).
Put in another way, PPP is a simple theory that holds that the nominal exchange rate between two currencies should be equal to the ratio of aggregate price levels between the two countries, so that a unit of currency of one country will have the same purchasing power in a foreign country.” Taylor & Taylor, (2004). Emphasis mine.
In essence, PPP suggests that the value of one Naira in Nigeria should ordinarily be at par, (short form of at parity) that is, equal one Dollar in the US, or one GB Pounds in the UK. It is the reason why local currencies like the Naira, can easily be classified as weak or strong against other major currencies. Whatever value the Naira assumes, against other world currencies is ultimately a decision of the Monetary authorities, using standard templates. Therefore, if a Big Mac costs one unit of the dollar ($1) in the US, (dollar being their unit of currency), it should ordinarily cost one unit of the Naira (N1) in Nigeria, NOT what one Naira has weakened to against the dollar. That is the point.
Again, and more importantly, PPP measurement index is not an end in itself but a means to an end, and as such, is an indicator (one of many) used as a metric for comparing/measuring the standard of living conditions between two countries. The corresponding argument is therefore, what wage rate (minimum wage) would afford a citizen at least one square meal a day, in either economy? This is universally acknowledged as the barest minimum to keep citizens at least on, if not above the Poverty line. So, if you do not earn up to the $1.20 a day, (not per hour, for a whole day’s work), you are considered living below poverty line. US minimum wage is $7.50 per hour, while minimum wage in Nigeria is N30,000, that is, N1,000 for a whole day’s work, not an hour (less than $1 at parallel market rate), which equates low standard of living.
The PPP model assumes the value of each county’s unit of currency must give equal level of utility satisfaction. So, to isolate the current weakened value of the Naira, and ascribe it as its true or close to its true value, that I respectfully disagree with.
Finally, it was an enjoyable experience reading through the renowned expert’s presentation, and learning from his wealth of invaluable experience.
Tubi, O. Theophilus is a Consultant Economists and Energy Expert.
(+2348034370667, tubiotesq@yahoo.co.uk,)