Lead Economist and Enterprise Partner, SPM Professionals, Paul Alaje, proffers solutions on how to fund the Federal Government infrastructure development programme in the face of declining revenue.
QUES: The Monetary Policy Committee (MPC) meeting is scheduled for Monday and Tuesday this week. The monetary policy parameters have not been changed for some time now. What is your expectation from the meeting this time around?
PAUL: My expectation is that the monetary policy rate (MPR) will not be changed. If one looks at the recently released inflation figures by the National Bureau of Statistics (NBS), which moved from 11.2 per cent to 11.6 per cent, this obviously will be a wrong time to be expecting a reduction in the MPR to say 13 per cent or 12.5 per cent.
My expectation will be that it will be left unchanged. To think that a major decision will be taken that will affect the economy is becoming too late. It will be good enough for the MPC to effect any change in the existing monetary policy parameters. What I think will happen will be for MPC members to sit on the fence as they meet this week over the MPR.
Again, this is the last meeting of the MPC for the year. This is coming close to the Christmas period, a major festive period.
So, if MPR is reduced, what we will have will be the real market having effect of its own on Christmas and other celebrations. We will be having a high level of demand, which will drive price high.
So, we may be having crazy inflation, knowing full well that Nigeria currently has 14 per cent of food inflation, which is major driver of high inflation.
I believe the MPC would have done their study and will not make that mistake of trying to reduce the MPR at this time.
On the other hand, there might be a consideration for increase in the MPR. When we look the financial market generally, it is currently horrible.
Performance in the financial sector has been nosediving. Over the years, for about two to three quarters now, one wonders how the financial sector, which includes banking and insurance, are making their profit.
In recent times, two banks have been directly affected because of the environment, particularly the situation with the Nigerian economy.
QUES: So, what do suggest the best decision for the MPC should be at this time?
PAUL: The best decision for the MPC right now is to sit on the fence and wait till next year and see if the economic environment will change, and also observe if Mr President’s promise of reducing poverty by taking out about one million people out of poverty within six months since he made the promise will materialize.
Since that has not been done, I think they will still continue their policy of sitting down to watch the MPR with the hope that market forces will adjust prices, or any major policy of government that will drive change in terms of economic indication that will bring prosperity to the people.
If that is not done, I am afraid, we will continue to see the MPR at 13.5 per cent for a long time. We will still be operating at 2 per cent GDP level.
QUES: At what point do you think it will be auspicious for the MPC to change its sit-down-and-watch policy and move the rate one way or another?
PAUL: I think the MPC should change the policy when it has seen that the economy is having significant reduction in foreign direct investment (FID) in Nigeria.
At that point, what the MPC should do will be to increase the MPR so that more investors will come to Nigeria to do business.
One of the reasons the MPR has been relatively high is because Nigeria has not been attracting foreign direct investment into the country.
When we compare the country’s situation with other countries with similar population, force and influence, you see that those countries attract more investments.
Countries like South Africa, until recently Egypt, attract more in terms of foreign direct investment to their economies relative to their populations compared to Nigeria.
When we have more and more foreign direct investments, then the MPR certainly will have to change. It is not only at the rate banks lend, it is also what the investors want to see as the performance of the country’s economy in terms of the rate they will be willing to part with.
We may also need to watch what the international market is saying. An increase in the United States monetary policy rate, even for 0.1 per cent increase, will mean that the US will become a better investment destination for foreign investors rather than coming to Nigeria, assuming there are just two countries in the world.
Considering that in Nigeria we are still facing foreign exchange difficulties, it makes our situation worse.
On the other hand, when we start feeling that we are carving private sector consistency, poverty, hunger, unemployment and all such vices are ravaging the people, what we need to do at that time is to significantly reduce the MPR so that bankers will be forced to lend to the private sector to be able to deliver Mr President’s promise of removing a lot of Nigerians living below poverty who cannot meet their basic needs out of poverty.
When CBN and other stakeholders in the money policy space look at what is happening in the international market and the foreign direct investment, local market, poverty, inflation and the Nigerian economy at large growing at 6-7 per cent inflation rate as expected, then we can make informed decisions.
If that is not done, we will continue to sit on the fence and try to tread with caution, which eventually may lead to economic disaster.
QUES: How concerned are you with the criticism about Nigeria’s rising borrowing and cumulative debt situation?
PAUL: Any informed economist and professional will be genuinely concerned over the situation. When one is talking about debt-to-GDP ratio is not up 25 per cent; that there are countries that do up to 100 per cent, we are missing the point.
The economists believe in what is called necessary and sufficiency. This is about the necessary argument to continue borrowing.
Here, the first thing one will look at as a necessary condition is what is happening to debt and gross domestic product (GDP).
Nigeria has a good mark in that. But, a decision to borrow or not is not supposed to be taken until one has seen the debt servicing to revenue level.
If that is bad, then the decision should not be taken. So, other alternatives to financing debt should be looked at.
If we look at the debt level and juxtapose that with the revenue available to service it, the level is too high, which is well over 50 kobo for every N1.
From the medium term Expenditure Framework (MTEF) and even the 2020 Federal Budget, it is between 30 to 40 kobo to N1 for every revenue.
This means as long as government generates more revenue, more and more revenue will be used to service debts from foreign loans the country has collected.
The money is not going to be spent on what can be called “economy of all”. How do we significantly spend more of our revenue directly on capital or infrastructure and not on debt servicing and recurrent expenditure?
So, the argument that more loans is not a concern to the country leaves me wondering what the International Monetary Fund (IMF), the World Bank and other lenders around the world warning Nigeria to be wary of taking more loans?
They are saying that the country has met that condition, which is the debt-to-GDP rate. But, the government and those who want to borrow should not stop there.
They should proceed to the next level called sufficiency level, which is whether the country’s revenue generation is sufficient to service the country’s debt?
When we look at the revenue generation of several states in the country, they are in total bad shape. There are states owing over N140 billion and are servicing with approximately N2 toN3 billion per month. They don’t borrow. It becomes cumulative. They are still borrowing and are paying interest upon interest.
My advice to the Federal Government is to charge some of these monies from source, so that they pay some of the debts they are owing commercial banks, so that the states will not be in very bad shape.
When one looks at what they are generating internally, which is less than N1billion, and people are wondering what is happening to state of roads in most of these states.
People hardly point accusing fingers at their governors. They still come to the centre to hold President Buhari responsible.
I have advised a number of times that let truth be told, we need to find alternative means of revenue generation.
For me, it is to allocate 100 per cent of everything that comes from crude oil into capital expenditure, so that the portion that goes to the states, and a meaningful portion that goes to the South-South region of Nigeria, there must be an agreement among their governments that monies released to them should go directly to contractors of projects.
If they are building schools or roads, the monies should go directly to contractors building schools or roads, so that we can say that the crude oil revenue is for the benefit of all Nigerians.
When people say they are lending to Nigeria and they can see the value of the money in the form of light rail system or roads, which can generate revenue for the economy, people can believe the government. If this is done over 30 years, the government can recover the money and the business of building other infrastructures can continue.
This is one of the things that government, as a matter of urgency should consider.
In other words, what government has started doing in recent times is to look for huge capitalists within the country to sponsor the construction of roads they consider a priority to them, and they will be given tax holidays based on the total monies they have spent on such projects.
That is innovative. I think the government should look for more and more companies who love the country who want to invest in the country to be involved in this arrangement.
They can even extend to non-Nigerian companies doing well in Nigeria in the areas of oil and gas and other sectors of the economy.
One will see that the roads will be of better quality and international standard, because the private sector will not be willing to give kickbacks to a private sector, because it wants to construct roads.
It will not make economic sense to them. Government should do more and more that and bring more private sector on board in that initiative.