Many, including myself, recognize the pivotal role that politics will play in the success of government policies.
But I wonder if there could also be a concept of ‘economic will’ behind the effectiveness of economic policies?
I hope so.
If we accept that rational decision-making derives from deep held convictions, then Nigeria’s foreign exchange (FX) management dilemma must stem from our policymakers’ belief that the primary function of the Naira is its ability to procure Dollars.
Consequently, they seem to perceive the Naira as lacking any significant inherent value in the local economy.
This has been the mindset guiding the trajectory of our fiscal strategies, and unless there is a fundamental alteration, we shall continue on our one-way flight to a monetary Zimbabwe.
Let me present three brief instances to buttress my point:
Firstly, the Central Bank of Nigeria (CBN) has long employed the Monetary Policy Rate (MPR) as the primary tool to regulate the money supply and purportedly control inflation.
About a year or so ago, under Emefiele, the CBN raised the MPR to 12%. and the Tinubu regime (without a Governor at the time) raised it to 18.75% last July.
The idea behind this was to curb cheap money in the system to make Naira scarcer and in effect reduce both inflation and the exchange rate to the dollar.
In the CBN’s wisdom this would happen because cheaper Naira means more demand for scarce Dollars since we do not earn enough, therefore the pushing exchange rates up.
Thus in effect commercial lending rates are pushed exceedingly high.
Consider this:
In a nation where energy costs constitute up to 20% of capital input for production, coupled with expenditures on security and logistics, local manufacturing of anything will unsurprisingly struggle to remain economically viable.
And it becomes financially untenable when you add a very high cost of borrowing money.
It is therefore a no-brainer for the businessman to simply import finished goods from China or elsewhere than to try to brace the challenges of local production.
The local producer will be unable to compete with the importer.
In effect any Naira he gets at any cost will be used to buy Dollars to pay for the imports.
With reduced local production and increased consumption of imports, and increasing FX exchange rates, inflation must overtake the cost of money.
So back to square one. The high MPR has been a consistent failure.
Secondly, over the past four years under the Buhari administration and the present Tinubu dispensation, the government has allocated somewhere around 2 trillion Naira towards various subsidies, excluding petroleum subsidies.
While subsidies can mitigate financial hardship and stimulate economic growth when deployed judiciously, the current approach lacks strategic foresight. Distributing subsidies indiscriminately, without leveraging them to bolster the local economy amounts to a self-defeating strategy.
For instance, rather than dispersing cash upfront through programs like Trader-Moni, the Government can achieve greater economic impact if it was structured to incentivize local production. For instance consider making Trader-Moni payments a bonus tied to supply invoices.
Thirdly, in a curious attempt to stabilize the Naira, the government came up with this bright idea to borrow $3 billion from international creditors against Nigeria’s future crude oil earnings.
The money was to be used by CBN to ‘defend’ the Naira by flooding the market with dollars.
This logic-defying economic strategy was bound to lead to inevitable and catastrophic losses.
It is like a man going to play Poker with a million dollars in his bag, whilst everyone else at the Poker table has not more than $10K in their wallets.
That man will lose his money, any which and every way.
The really painful and inexplicable part is the loss of our future earnings.
Economics, is often praised as a science, but it is more akin to sorcery both in theory and in practice.
The reality of the crisis on our hands today is that the Naira is in free-fall, like a trailer hurtling downhill without restraint.
So my recommendation is simple, we need to put a wedge behind the trailer.
What is this wedge?
One specific thing: Infrastructure.
Strengthening the Naira requires a multifaceted approach, with infrastructural development at its core.
We need to spend to create local value, not to consume.
Government should spearhead an ambitious housing project to build 2 million homes in 6 brand new cities one in each Geo Political Zone with mandatory use of 80% local building materials over the next 3 years.
Imported Cement is not a local building material.
This type of project will give speculators in Abuja and all the state capitals a new venue to go to hustle.
Nobody is going to import houses to erect in those cities, so as long as the payments are handled creatively we can have cheaper Naira sufficiently employed locally for a while.
Such an initiative has the potential to generate numerous multiplier effects across various sectors, ranging from financial services to technology to agriculture
At the end of the day the economic trajectory of this country will be determined by the convictions of our policy makers and their commitment to fostering economic resilience.
Like I was saying, economic will.
SBI
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