SMEs and interest rates: another long wait

There was a tinge of excitement among some analysts last week, when the Central Bank, through its Monetary Policy Committee (MPC), made public its decisions, which gave indications that interest rates may fall in 2017. As was the case at its last but one meeting, the committee had retained interest rate at 14 percent.  Meanwhile, the rate of unemployment for the third quarter of 2016 was put at 14 percent. Indeed, more than 500,000 Nigerian workers were reported to have lost their livelihood and transited to the labour market during the same period.

Predictably, the rate of growth of inflation for December 2016 turned out to be lower than the previous period. Clearly inflation is still rising but it is doing so more slowly. This is not the outcome of any wonderful economic engineering on our path. Most informed analysts were expecting inflation to behave that way, for some obvious reasons. First, with more and more workers streaming out of employment and into the streets comes collapsing disposable income. Second, there is a general fall in business optimism, natural to the present times. Certainly inflation can hardly sustain its upward trend under these circumstances. So the observed deceleration of inflation is not unexpected.

The fact that some analysts were excited by the news of possible rate cuts before the close of 2017 is one of those ironies in the affairs of men and, in particular, Nigerians – a people so used to bad news that no news has become for them very good news. Actually there is no cause for cheer in that piece of news. In economics, time horizons are very important because they influence key business decisions. This is why we speak of the short run and long run, as critical time frames during which something may or may not be possible in a production process. We are taught that in the short run there are many things in the production process about which a firm cannot do much. For instance, it is not possible to alter the factory size or capacity of plant and machinery in the short run. However, an industry could vary the quantity of raw materials its employs in the short run. On the other hand, a firm is able to vary any of its inputs over the long run, including plant and machinery. This phenomenon is further complicated by the fact that what is short run in one industry may be long run in another. In this regard, time horizons are very import in the output decisions of producers.

It is on the basis of the above that we should appreciate the implication of speculation and uncertainty in the life of any business, and more particularly small business, occasioned by policy inaction. We know that the present economic predicament of Nigeria was ignited largely by pre- and post-election decisions of both businesses and government, which manifested in delayed take-off of the new government and a wait-and-see attitude of investors.  It is therefore vital that we avoid actions that further the problem of low business optimism, a key fuel for economic recession. We must bear in mind that business, especially small business, is already beleaguered and may not cope with further uncertainties. The next twelve months is indeed a very long run for certain categories of business. It was John Maynard Keynes, the father of modern macroeconomics, who said that “in the long run we are all dead”. I believe, the statement is very insightful, even though some say it tends to pander to the principle of Epicurianism and portrays a nonchalant attitude to the needs of future generations. It really bears a message.

The small business community has borne the brunt of most policy failures in Nigeria.  The political difficulties that followed the transition of power from the PDP to the APC were momentous. Business had to wait for the new government to settle into the job because of one of the very bad attributes of our economy – government is not only the largest spender but probably the only relevant spender – a problem we tried to curtail through privatization but failed. If we remember that several months before the elections, businesses optimism had waned and investing was no longer a flourishing habit, then we know the sacrifice the small business community has made to promote and protect whatever is left of the economy today.  This is more so when we recognize that it is big business that has been favoured, if anything, by this administration. And we can explain this point.

The new foreign exchange policy, for instance, proposes to dedicate about 60 per cent of available foreign exchange to manufacturers, at a rate of about N305 per United States Dollar (Don’t mock and don’t laugh). Assuming this policy gets properly implemented, and that would be out of character, then we find that very little or no funds will come to small business because small businesses are involved mainly in distributive trade. Very few of them are into manufacturing. This means that they are decisively shut out of the provision of foreign exchange in Nigeria today. Although manufacturers have confirmed on national television that there is no such cheap dollar at N305, assuming they get the percentage proposed for them.

The whole idea of this segregation is also hardly deep. Does this mean that only manufacturers create jobs and provide the goods and services we need in the country? Nor can we assume that there is no other way of allocation or distributing the scarce foreign exchange resources more transparently and to accommodate some categories of essential small businesses. Of course not. We often take the easy way out. Examples of such policies abound. Many times we simply throw away both the baby and the bath water (Read ban of car importation through land borders and need to improve patronage of our ports). This makes room for critics who say that a lot of thinking has not gone into some of our policies or who casts aspersion on our transparency.

Just like the evidently failed privatization of the power sector, which has continued to haunt and inflict pain on all Nigerians, but more particularly the SMEs, there seems to be need for a review of this event that has not solved our power problem.  As it stands today, there is little hope that the power sector, and indeed, its key economic agents will play their irrefutable catalytic developmental role in Nigeria, in the near future.

We need new paradigms, based on openness, so that whenever there is need for change, we make change and not persist in error. There is nothing shameful in reversing oneself. Even the Supreme Court overrules itself at times. Accepting one’s error is a mark of honour and integrity. Policy decisions should stand on their effectiveness not propped up and sustained by force. SMEs have been waiting for stable power, foreign exchange and a reduction in interest rates. Who know what next they will be made to wait for.

Emeka Osuji