New Telegraph

Mayungbe: No problem with borrowing to expand economy

Since he assumed office on May 29, President Bola Tinubu has introduced several reforms to address the country’s fiscal crisis. However, measures such as the removal of fuel subsidy and liberalisation of the exchange rate seem to have worsened inflation, and there are calls in some quarters for the measures to be reversed. Do you support such calls?

According to the World Bank, Nigerian government has spent over $30 billion on fuel subsidies over the past 18 years. This translates to an average of $1.6 billion per year, with a huge impact on funds available for critical infrastructure and other essential sectors like: Health, education defence etc. Government’s reasons for abolishing the fuel subsidy include, freeing up financial resources for other sectors of the economy; incentivizing domestic refineries to produce more petroleum products; reducing Nigeria’s dependence on imported fuel; increasing employment; developing critical public infrastructure; reducing the budget deficit and generating a budget surplus in the near future; reducing government borrowing; curbing corruption associated with fuel subsidy payments; increasing competition and reducing pressure on the exchange rate. The Debt Management Office (DMO) has stated that the country’s public debt stock was increasing because the government borrows to finance fuel subsidy, and if this continues, it will get to a point accountants call ‘insolvency’. Most vehicles used for carrying large numbers of people and goods are diesel powered which is already deregulated. Domestic kerosene used mostly by the poor is no longer subsidized, meaning that the poor are already paying market prices for their fuel. The huge cost of subsidizing fuel (PMS) means that the government is subsidizing those who can afford fuel (pms) at market rates and not the poorest of the poor who actually need the subsidy. Also, when the subsidy regime is examined critically from the forensic point of view, there exists a ring of corrupt and fraudulent players in the whole scheme. What about those who smuggle subsidized fuel to the entire ECOWAS region? In short, the word ‘subsidy’ must be removed from the fuel market in Nigeria and the President has done just that. There is no doubt that some sectors of the economy will react directly or indirectly to this policy, while some mischief makers would also want to defame the government about it. Tough measures are not new in Nigeria, except that some of our youths are too young to understand that every day is not Christmas, and for the sake of tomorrow, we must take hard decisions today. In 1983, the foreign reserves could not guarantee a month of import. Inflation was between 30 and 50 percent. Workers across the federation were owed salary arrears of between eight and 12 months and prices of essential commodities like milk, sugar, yam, rice and beans escalated beyond the means of workers and the masses in general even amid severe scarcity.

In fact people had to queue for essential commodities which were being rationed then. It was a very critical situation and I was among the victims. Due to the scarce foreign exchange, government had to introduce the import license regime and placed some items on import restriction. The present day government need not allow the situation to degenerate to the point explained above. The bleeding must be stopped before healing commences. Others who are criticizing the government should come out to tell us how to heal a bleeding wound differently from the above method. However, the two most important problems that government needs to fix are security and electricity. Do this and see the ingenuity of Nigerians. On the liberalisation of the exchange rate, this policy too is the most appropriate step in the present circumstance. We have heard of the can of worms at the CBN under the previous headship of the apex bank. People are complaining about one side of the policy and are not exploring the huge benefits of the other side of the policy. Foreign exchange is used in international trade (import and export). Liberalization of the rate means the market will function on willing buyer and willing seller basis. It will lead to imported inflation, however, what of the export benefits and deliberate efforts at boosting local substitutes. One can export, and earn foreign exchange into his domiciliary account and exchange it at the lucrative foreign exchange market. What government should do now is to cut the long process of commodity export in Nigeria. Agencies in charge of export business are too many and most of the time, frustrate genuine export initiatives. That is why some Nigerians route their exports through Ghana which is very fast while the revenue that could have been earned by Nigeria goes to Ghana. My view is that when the channel to export and earn foreign exchange is widened, the foreign exchange market will obey the demand and supply law, but for now, the demand for foreign exchange is high while the supply side is narrow hence the high exchange rate.

The CBN has been tightening monetary policy since May 2022, but this has not curbed inflation. What do you think is responsible for this and what measures should be introduced to effectively curb rising inflation?

A rise in prices across an economy is called inflation and it is driven by too much demand relative to supply (i.e too much cash chasing few goods and services, whereby the highest bidder gets the goods or services.) Let me classify inflation in the Nigerian environment into two categorieslocally-induced inflation and import-induced inflation. On locally induced inflation, from my simple explanation of inflation, the question to ask is how to expand the supply side of the equation as a starting point. Production of basic foodstuffs is hampered by insecurity whereby farmers cannot go to farm in major food producing communities in Nigeria. This triggers inflation. Should you resort to importing the food items, you will bring in imported inflation due to costly exchange rate. The simplest solution is to arrest insecurity so that producers can have unfettered access to their farms. This is applicable to both consumable food items and exportable commodities. To tighten monetary policy against items that are not available is an over-kill. Tightening of monetary policy should not be a blanket policy. It should be targeted at specific sectors while it should be relaxed for some specific sectors. For example farming and agriculture value chain should enjoy a relaxed lending rate. Incentives should be given to local producers of consumable items. The objective is to raise production level and bring down inflation. From all available evidence so far, we have seen that lending to government through the way and means has been the cause of the hyperinflation because such funds are not backing any form of production but are instead turning our youths to idle money mongers.

The dignity of labour is almost lost. What we have seen is that the CBN is tightening monetary policy in the private sector of the economy but opening the tap for government. In some situations we have seen inflation triggered by negative supply shock, a situation where traders see a government pronouncement and react to adjust prices thereby causing inflation. An example was the President’s declaration that subsidy was gone, and what did fuel stations do immediately? It affected tomatoes and pepper seller, garri and yam sellers who have been paying real market cost of diesel fuel for the transportation of their commodities. On import-induced inflation, having merged the various exchange rates, we have seen the real strength of the naira. Importation should now be rationalized against items that cannot be locally produced. Goods and services that could be produced locally should not qualify for foreign exchange allocation. In fact the policy of 1983 where many items were banned and local producers given incentives to produce should be re-examined. We have also seen that inflation was triggered by expectation and anticipation arising from government’s decision to merge the exchange rates and immediately everyone adjusted the prices of their goods and services including goods that are 100% produced locally. There is no doubt that some foreign producers of goods and services where our importers expect to source their merchandise have not fully recovered from the impact of the global pandemic. Therefore their level of production has not recovered till date and prices have gone up from their end. Raising interest rate in the banking space also serves as an overdose of the pill. My recommendation includes: That an outright ban of some goods and services that can be found locally is necessary now; giving incentives to local producers and placing high tariff on imported luxurious goods are the right things to do now.

In your view, how can the CBN succeed in ensuring a stable exchange rate?

By the nature of exchange rates, it cannot be stable because it must fluctuate according to the volume of import and export and the balance available in the foreign reserve. To improve our exchange rate, we have to narrow the outflow and widen the inflow of foreign exchange. To do this involves a whole review of our economic architecture. First of all, we have to improve on our security without which no one can do much. Second duty is to fix electricity as urgently as possible. Thirdly is to motivate local producers for either local consumption or for export. Next is to shorten the long process of exportation created by the export agencies.

Despite Nigeria’s public debt hitting N87.91 trillion in Q3’23, the government has said it will borrow to fund the 2024 Budget. Are you worried about the rising debt? How can the problem be addressed?

For an economy to expand, borrowing is necessary. The question is the purpose of the borrowing and the sustainability of the borrowing. Everyone likes Dubai, America etc. but do not ask how those infrastructural projects that attract us were financed. I have no problems with borrowing if the objective is to finance infrastructure or expand our economy. I don’t want to join the cynical people who will accuse government in advance that the borrowed fund would be looted.

The IMF and World Bank have urged the FG to carry out tax reforms, including increasing the Value Added Tax (VAT) rate, as part of efforts to boost revenue generation. Will your support an increase in the VAT rate?

Increase in VAT should only be targeted at luxurious item but no tax should be increased at this time. We only need to expand the tax net to cover more economic operators. Some areas need to be taxed.

There is growing concern about the large number of Nigerians leaving the country (Japa), but there are some analysts who argue that the development will ultimately be good for the economy. Do you share this view?

It is a welcome development. It is also a signal to government to do things right. No one can stop economic migration in the present global structure where other countries are putting incentives to attract foreign technical expertise for their local economy. Look at Nigeria too; people are migrating to the cities in search of greener pastures. Those governments at state and local government level who can put their acts together attract migrants from other states to grow their economies. Lagos is an example.

The CBN has said that there will be another round of banking recapitilisation. Given the experience of the 2004/2005 recapitilisation programme where some banks were alleged to have manipulated investors who eventually lost money in the stock market, how can the apex bank ensure that such challenges do not reoccur?

While the apex bank is involved, the bulk of the responsibility is on the Securities and Exchange Commission (SEC) which should regulate the capital market and protect investors. Do the regulators review the financial statement submitted by listed companies (if they actually submitted one)? The job of reviewing the financial statements is not for the traditional accountants who helped in preparing the accounts in the first place, but the job should be given to forensic accountants who are trained to detect fraud, window dressing and creative accounting. SEC has to overhaul its oversight function in the capital market.

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