Its fiscal policy, period

Two weeks ago, I wrote to question the underlining economic arguments that motivated the government to suggest we could spend our way out of recession. In the article, I argued that the notion that all government expenditure have neutral, linear and the Keynesian inbuilt multiplier on aggregate demand and production was wrong. It is a myth not supported by data and our macroeconomic experience, especially of the 1980s and 1990s. I concluded by saying that, for the long-term, recovery of the Nigerian economy, and the right approach to the current deteriorating economic conditions does not present a Keynesian moment.

As if I knew, I was shocked to hear that the Minister of Finance, Kemi Adeosun, argued for the reduction in interest rate so the government could borrow more, and cheaply than it currently does.
The argument by Adeosun is underlined by the notion that the ability of the government to borrow more cheaply will enhance the ability of the government to spend more, improve production and aggregate demand and bring us out of recession. It is a continuation of the stimulus argument. However, as I argued last week, this is a short-term argument, and suggests that the Minister’s prerogative is coming out of recession and not the long-term economic recovery of the country.
The interest rates set by banks in the country, as in other countries, is the cost of capital. The rising interest rate since the start of the year, in response to inflation, therefore, reflects the rising cost of capital in the Nigerian economy. There are many factors driving this, including low productivity, declining incomes, and rising government debt. With the benchmark interest rate set at 14 percent, banks currently provide loans at rates above 24 percent, while the risk-free government bond yields are about 19 percent.
The implication of this is that the banks will not lend below 19 percent. Indeed, the banks will take into consideration the additional risks associated with lending to businesses including costs of doing business. These are the issues that fiscal policies can help address: influence the supply side and bring down the interest rates. It cannot be an arbitrary decision. To make it worse, the argument presupposes that monetary policy can still be used to rescue the Nigerian economy in the present circumstances. I think the monetary policy measures are already fairly exhausted.
There is also a wider dimension to the statement that is very disturbing. The timing of the announcement shows that it was orchestrated for maximum impact, leading to the meeting of the Central Bank of Nigeria’s Monetary Policy Committee (MPC). It was meant to apply pressure on the MPC, a group comprising of independent economists and members of the governing board of the CBN. In that context, it was meant to coerce the MPC to do the bidding of the government, and undermine its independence.
As a matter of information, though members of the CBN form a significant part of the MPC, the body was designed and structured to give the group the independence it requires to set interest rate, so it would not set such for political reasons, as requested by the Finance Minister. Also, where the global economy is today in terms of independent central banks and rate setting bodies is a culmination of several years of study and research that shows that political interference in the determination of interest rate contributes to macroeconomic instability because of the disregard for inflation expectations.
It thus gives a very disturbing impression that the government should only be concerned by the rate at which it borrows and not the implications for economic recovery in the medium and long terms.
Given inflation rate at 17.6 percent and the benchmark interest rate at 14 percent, it is ironic that a modern Finance Minister would imagine that the major policy response and requirement should be a reduction in interest rate, which will invariably widen the negative real interest rate, undermine the long-term stability prospects of the economy, and provide a basis for undermining the independence of the Central Bank.
In conclusion, it is good that Kemi Adesoun has been following the calls for fiscal policy to take more responsibility for economic growth and recovery. However, the expectations are of the right policies. Nigeria cannot make significant addition to debt, both local and international without precarious consequences down the line. Indeed, we have experienced this before after building up debts after oil price fell in the 1980s. The debts became our most economic binding constraint in the 1990s until the debt forgiveness in 2005.
So, the nature of the fiscal response required is not fiscal stimulus but fiscal and structural reforms in Nigeria. The government does not have the fiscal space it thinks it has. Indeed, the World Bank said recently that government cannot afford to borrow more significantly because it lacks the capacity to pay, despite the fact that our debt to GDP ratio is reasonably good. I do hope that the necessary policy actions are taken, and not the convenient and damaging ones. I thank you.

Ogho Okiti