Africa Press-Nigeria :
Prof. Akpan Ekpo is the Director General of the West African Institute for Financial and Economic Management (WAIFEM). In this interview with Charles Okonji, he speaks on the looming currency crisis fueled by global oil price crash. Excerpts:
THE coronavirus pandemic and global crash in oil price as well as this oil war between Russia, Iran, Saudi and the rest of the world oil giants, has compelled Nigeria to lower its price in order to make more money. What is your take?
With all these things, more pressure has mounted on Naira and we have found out that inflation has set in.What are the possible ways to save the Naira from further crash?
One way of saving the Naira is to have an economy that is productive and not a consuming economy. To do that, it means you have to diversify the economy and start to industrialise, and don’t depend on crude oil revenue as the major driver of the economy. The oil sector contributes only 10 percent to the national GDP, while the non-oil sector contributes 90 percent to GDP. That is where we should be targeting because, the Nigerian economy has been the oil story, and oil will finish one day. Nigeria does not have control over the price of oil and the output. This is known in economics as an exogenous source of revenue, which is not used to finance development, but seen as a windfall.
When I was with the Ministry of Finance some years ago, with monetary policy, we tried to budget without oil, but now we have gotten used to budgeting with oil price benchmark. So production is the only way. That means you have to change the structure of the economy towards production because in the Central Bank of Nigeria (CBN) has been injecting Dollar to protect the Naira, but this is not sustainable. As you can you, with this kind of shock, the Federal Government has done some adjustments in the exchange rate, so that is one of the ways to make the Naira strong.
Again, for the Naira to remain stable or gain value, the government has to make sure it invests heavily on infrastructure. Time has come for us to have power, at least 18 hours power supply, if not 24 hours. No economy develops based on generators. But this time around, we are moving towards a very dangerous recession called double whammy (getting into big trouble). We are going experience inflation on goods in demand and supply side. So, we need to fight against having ‘currency crisis’ where the oil price will continuously go down. If we don’t have enough reserve to meet arrears of credit, it will result to crisis, and by that time economy will collapse.
What do we do to avoid currency crises?
We should avoid move Nigeria out from being a consuming economy to a producing economy as well as becoming an export oriented economy. I am not saying export of primary products. We should avoid a situation where nobody will trust the country with letter of credit, because if this happens, then the economy is finished. However, the government is trying to put protection mechanisms in the right direction, but as long as the economy is still a consuming economy, it won’t take us anywhere.
Just recently, the CBN through the MPC announced that part of the measures to absorb the pressure mounted on the value of naira was to retain the MPR which is also laudable. They did the right thing by leaving MPR. But we have to note that the Monetary Policy Rate has no impact on lending rate. The MPC only has impact on inter-bank rates. You can recall that I was in CBN for 5 years, the monetary policy rate has no impact lending rate in Nigeria, that’s why the MPR is 13.5% you normally add plus four to get the lending rate which is at 25 percent the banks are charging, except you one of the big companies before you can be considered.
So the MPR will have no impact if it is lowered. What they should have done is to raise the CRR a little, to be able to fight inflation because; inflation will soon be a problem. So for this problem, CBN just left it the way they are and watch to see what will happen, so the focus now is on the fiscal side, it is the government that should do certain things fast. For example the 2020 federal budget has been cut by 30 percent which not what they should have done. They should have cut down on the overhead and the cost of governance, because is this capital expenditure that lubricates the economy.
Now that we have the pandemic and the oil price crises as the oil price is continuously going down, the government should plan budget assuming that the oil price will be $10 in the worst case scenario, so that the market does not collapse. I insist that the government should cut the cost of governance, it’s too much. Leave capital expenditure as it is.
Moreover, to save the naira, the government should make cutting down of the country’s debt servicing allocation which they failed to reduce. They should cut it and go for renegotiation with the creditors on how to pay the debt. They will give us some concession and we may negotiate for more years to pay. They can tell us, let me give you one year to pay your debt because in our budget, the debt servicing is too high, not even the principal yet, it is too high.
Again Russia and the rest are on price war to get the market share. Another area they should have is cutting of their very high salaries and not capital expenditure in my own view, I know that what they have done will also affect salaries of people and they will use the money to buy things to improve on aggregate demands, But if you look at the cost of governance, look at the debt servicing, cut these areas drastically, because the way this thing are going, if it continues this way, I think there will be problem in the global system, because the global system and Nigeria are still struggling to get out of economic hardship. Even though we end this recession, we are still in trouble because if the inflation was over technically, but inflation is rising, and unemployment is also rising, which has resulted in stagflation. So the fiscal framework has to be improved on if we want to save the situation.
