Why economy will not rebound and reduce unemployment

Apparently, the challenges of industrial growth and social welfare enhancement have become a hill too steep to climb for the Nigerian government in the last 30 years. The relatively commendable average growth rate of over five per cent recorded consistently over the years, regrettably and inexplicably, bore little impact on a comatose industrial sector, leading to an unyielding level of unemployment officially declared currently as over 40 million. In spite of the international credentials of the managers of our economy, Nigerians have become skeptical of government promises, couched in such guises as NEEDS I and II, LEEDS and the current mantra of Vision 2020! Undoubtedly, issues of insecurity and inadequate infrastructural base may indeed contribute to industrial deceleration. However, one also recognises that neither of these two factors has hindered investment wherever entrepreneurs expect huge returns. Crude oil wells, for example, continue to be sited in the most inhospitable and insecure locations such as Iraq and the frozen, uninhabited plains of Alaska. The decisive factor in industrial regeneration and economic growth is the issue of the availability and cost of funds that would spur industrial consolidation and expansion. For example, low interest rate below five per cent will engender a bubbling entrepreneurial environment because of the greater possibility for success, while high cost of funds with high double-digit interest rates often in excess of 20 per cent, will dampen entrepreneurial drive, as investors, rightly, see the high debt repayment burden as catalysts for failure, particularly in a country like ours, where insecurity and serious infrastructural deficit also exist. Indeed, no economy can successfully develop where cheap long-term funds are rare or inaccessible as is currently the case in Nigeria. In spite of former President Olusegun Obasanjo’s campaign promises to bring down the cost of borrowing to single digit and successfully jumpstart the economy, neither his administration nor any other administration for that matter has achieved this feat to the chagrin of trade groups such as the Manufacturers’ Association of Nigeria, Nigerian Association of Chamber of Commerce, Industry, Mines and Agriculture and National Association of Small and Medium Enterprises, among others. I have oftentimes been asked by concerned citizens whether or not our monetary authorities are answerable to any external overlord, who controls or determines our domestic cost of borrowing. They wonder why our monetary authorities cannot just compel the banks to bring the cost of funds to a single digit, and thereby progressively change the direction and pace of investment and employment. Usually, in adopting a beneficent interest rate level, monetary authorities are guided by the size of the prevailing money supply in the economy; low, single digit interest rates in a cash-laden/surplus money market will facilitate access to cheap funds to every Okafor, Okeke and Okorie. Such spending binge will lead to the classic scenario of too much money chasing fewer available goods; ultimately, prices will rise and the resultant spiralling inflation will quickly deplete the purchasing power of all income earners; this, in turn, will reduce the aggregate level of demand, and will ultimately lead to lower industrial capacity utilisation and increasing production cost, with adverse consequences on the level of employment. In order to avoid such distress in the economy, our monetary authorities, especially the Central Bank of Nigeria will need to ‘altruistically’ step into the market, to reduce the huge spending power in the system by borrowing back at great cost, and ‘sterilising’ hundreds of billions of naira every month, and then attempting to further restrain market appetite for borrowing and spending by increasing the rate at which the money deposit banks borrow from the apex bank. Consequently, these banks would also set their lending rates above the increased CBN benchmark. Thus, in spite of contracting industrial activity, the CBN is currently unable to bring down its cost of funds to MDBs below the high, industrially unfriendly rate of 12 per cent; compare this with the three per cent or less offered to banks by Central Banks in more successful economies so that cheap long term funds become available to the public, particularly the real sector. Comparatively, the goods produced from those countries with appropriate infrastructural base and low interest rates will certainly be more price competitive than those produced in Nigeria, where cost of funds often exceeds 20 per cent, with a debilitating infrastructural base to boot. Thus, all efforts to grow our economy or exploit our export potential will inevitably fail if high cost of borrowing is not brought down. Nigeria’s monetary authorities readily identify the eternal presence of a systemic cash flush as the mitigating villain against low cost of funds to the real sector. Some Nigerians may wonder how so much cash could always exist side by side with the claim by the same monetary authorities that the banks do not have sufficient funds to lend to the real sector. Many are also inquisitive about the actual cause of the perennial plague of excess cash in the system. In response to these questions, our monetary authorities often put the blame at the doorstep of government spending, which they claim is always on the high side, even though the universal antidote for industrial resuscitation and employment has always been increased government spending. The excuse of government spending has so far become a successful camouflage to distract attention from the CBN as the prime promoter of the scourge of excess liquidity, which makes single digit cost of funds and socially inclusive economic growth impossible. In actual fact, the excess cash/liquidity in the market is the product of the apex bank’s substitution of naira for dollar-derived allocations, and the extended credit capacity that the huge naira deposits make possible for the banks. The adoption of dollar certificates for the payment of allocations of dollar-derived revenue will dispel the horrendous ghost of excess liquidity. A level playing field would evolve in its tow with single digit commercial lending rates to all sectors. Concessionary agricultural loans could become available at between zero and three per cent. Sustainable inflation rate below five per cent will become possible with a knock-on effect on purchasing power and consumer demand, and ultimately on industrial capacity utilisation and increasing job opportunities. •Boyo, an economist, wrote in from Abel Sell Ltd, Lagos.