—current structure was designed to share, consume the oil rent
—–Ministers of finance, trade, investments and CBN need to develop alternative scenario buildings
Professor Chukuma Soludo at the IMF/World Bank 2016 Annual Meetings in Washington DC spoke to journalist on issues affecting most CommonWealth Countries including Nigeria. Though he would not want to make specific comments on Nigeria, he said that aligning monetary and fiscal policies toward set goals is key if Nigeria is to achieve economic diversification.
You just made a presentation to Central Bank governors in Commonwealth nations which the media was not allowed to cover. Can you just give us the highlight of your presentation?
The focus of the presentation was actually on monetary policy under uncertainty and they asked me to speak on the Brexit to governors of central bank of the 53 Commonwealth countries. The concern was about the possible implications of the Brexit on the economies of the Commonwealth and being governors of central banks, what this could mean for monetary policy. The major hypothesis there was that Brexit can only be seen as just one of the many sources of uncertainties in the global economy today.
If the worst case scenario happens, Brexit can only heighten the state of uncertainties. But the global economy itself is almost in reset button mood. There is an uptick in the level of uncertainties in the global economy. We haven’t gotten over the legacy issues as a result of the 2008-2009 global financial crises.
You can see that Europe and America still have tepid and sluggish recovery. There is a potential of China having a hard landing and there are fears about that, which could unravel quite a lot of things in the global economy. You can see the price shocks on primary commodities dependent economies, such as Nigeria and so on. Several of them are in trouble. And they are in trouble as a result of the oil price shock as well as wrong policy choices to respond to the shock. As a result of the old shock, many countries have reached the limit of the policy squeeze that they have. Many have accumulated huge public debts because they ran excessive deficits.
For monetary policy, interest rates are almost at very low end and many of these countries now have negative real interest rates. So, there is not much. Where again are you going to go to stimulate these economies? Some have raised interest rates in order to attract portfolio flows, but how far are you going to raise it without compromising growth?
So, many have reached much of the policy handles. So, the emphasis of my message to these governors is that this is the time to take preemptive, proactive contingency planning, in anticipation of the next global crisis. The latest global financial stability report 2006, talks about the uptick of uncertainties and vulnerabilities and the potential risks that the global economic system faces. Therefore, even though Brexit is unlikely going to have any major adverse impact on the global economy, it would have impact on Britain, but we still do not know the magnitude and duration of such effect, whether positive or negative. I also discussed the opportunities of Brexit.
But, the key thing for central banks and policy makers over the world to be concerned about is the state of affair of the global economy and the financial system. There is a whole lot of uncertainty and risks everywhere. It just takes one major crisis in some place and it will snowball inpatient another crisis. So, what are the contingency plans that countries are putting in place? Otherwise, what you find is that people are going to be perennially reacting to the shocks as if they were not anticipated.
Just like in the case of Nigeria, in 2010 I wrote a piece, exclusively published by THISDAY, in which I drew attention to the fact that we were having an unprecedented oil boom and we were actually saving nothing. We were actually depleting the reserves even at the peak of the oil boom. Like I always say, I met $10 billion when oil prices were around $30 per barrel. By the end of the year, oil prices was still around $30 per barrel, but we grew reserves by more than 50 per cent and kept growing it until we reached about $60 billion.
I had an average monthly oil price of $59 per barrel throughout my 60 months in office and we were building reserves, almost doubling it every year. And we had to do the consolidation of the banks before the world crisis came. So, it is this kind of preemptive policies. You do it before it comes, you don’t do it when it comes. You need to anticipate that the global economic and financial system, given the globalisation, is inherently unstable and it is inherently crisis prone.
Therefore, periodically, you will be having cycles of crisis and shocks. So, when policy makers react as if they didn’t know it was because of the shock, I say, but they knew it was coming. It is like someone say oh, the rains have come. Of course, you know the rains would come after the dry reason. During the dry season, you knew the rains would follow the dry season. In 2010, I was warning Nigeria that this oil price thing would soon come down. After that my publication, they had a Federal Executive Council meeting and i remember it was Labaran Maku who addressed the media after that, and I was the subject matter.
I was berated, abused and I was described as someone who is out of office and is unhappy. Well, the rest is history. Of course in the paper, I discussed quite a number of other things, about how the ministers of finance, the governors of central banks and the ministers of trade and investments, need to come together and develop what I call alternative scenario buildings. What if this happens, how are we going to react? What if this happens, how should we react? So, you have menu of options. I said to them that what we did when oil price was rising in Nigeria has not been replicated in most parts of the world when they are having commodity and export boom. And that is to maintain an undervalued real effective exchange rate.
What you have is that when you have an export boom, countries have overvalued real exchange rate. But we have a singular record of having maintained an undervalued real effective exchange rate regime even during an export boom. We deliberately did not allow the naira to appreciate as it should have, otherwise we could have had the naira below N100 to the dollar and that would have been catastrophic. You wouldn’t have been able to accumulate the reserves. People think it was because oil price was rising, that that is how you accumulate reserves, no! Even at that time, it was still expensive to bring in goods relative to what it should be. It made better sense for people to bring in money into the country, change it into naira and do business. And because of that inflow, there was a time when the central bank could not sell more than $20 million per auction. We would offer $200 million, and the banks could not take up to $20 million.
That was because the system was a washed with private flows. So, the CBN at some point became a minor player on the foreign exchange market. Anyway, I don’t want to speak beyond that. But the significant point to leave you with is that, I know people are pre-occupied with today’s crisis, but, what they are facing today is like, take the Hurricane Mathew in some part of America today, it is like some parts of the house facing leakage, and you are busy fixing it, but the hurricane that might actually take out the entire house is fast approaching. So, it is how you prepare for all of these uncertainties that matters. As I said, it is not a question of ‘if’ but ‘when’ the next global crisis would hit the world.
So, you foresee a global crisis?
Like I said, the global economic system is inherently crisis prone.
So for several countries facing commodity price shocks, in the short run, what did you advise them to do?
In the short run, I have told many of them that this is the time to rethink some of their policy instruments. Some of those countries have fixed or quasi-fixed exchange rate systems. That in theory and in practice, in a time when you have negative terns of trade shocks, is a no brainer. If you fix prices, if you fix the nominal variables, the real economy would adjust. Something must adjust. You cannot fix price and fix quantity. I said this in a lecture that I gave in November last year, when I was commenting on the exchange rate regime that we were operating, and to some extent, still doing now.
The mismatch of what we have today, we call it flexible exchange rate regime. Of course, it is a quasi flexible exchange rate regime, creating all manner of distortions in the system. I did make the argument forcefully, that if we are fixing the exchange rate, then in the real economy, the quantities would adjust, and that is output and employment. So, when you see unemployment escalates and the economy going into recession, that is what we should expect. You can’t have your cake and eat it.
So the major message I left with them as Central Bankers, when you talk about the short term, is to look at the menu of policies handles that they have. That some of their policies was for an economy that no longer exists. Those quasi-fixed, bond issuance, and so on and so forth.
Yes, good enough, that actually encouraged them to borrow excessively externally. Since they have loaded that, they are now locked in to keep the fixed exchange rate, so that it helps them to service the external debt.
IMF Managing Director has said the Fund will start giving zero interest loans to countries facing challenges. Does that tarry with what you’re saying?
Well, the IMF can give – they’ve got all kinds of concessionary lending facilities. You can give whether it is zero or it is at whatever interest. What does that really mean for many of these countries? The fundamental thing is to have a healthy balance sheet, that is sustainable. Otherwise, if you are in an unsustainable path, whether it is zero or whatever thing, it is unsustainable, you get one today, you need it tomorrow, because you still have to pay back the principal. If you are in an unsustainable path, you can’t even pay back the principal. So the point is some form of adjustments that get these countries to be on a sustainable path, that you’ll even be in a position – the IMF does not give grants, it is still a loan. It still has to be repaid. The interest thing is on the margin as it were – it is still a loan; a loan is still a loan. It could help some highly distressed economies to tide over their circumstances, but that is not the way. People must think of those as short term. The fundamental thing is the adjustment that gets you on a sustainable path, and that is where I think the central banks need to re-examine their instruments. I’m talking about the Central Bank of the Commonwealth. We talked about the instruments that they are using, and also called on the need for supra-national coordination. What needs to happen at the G-20, group of 20 countries that account for about 80 percent of the world GDP. Coordination of monetary and fiscal stimulus package in these countries could actually help to avert or at least postpone the crisis that we are talking about. That’s what we did, that’s what happened in 2008, 2009 as it were.
The global economy is already in some huge risks, everywhere. It has not turned into a recession. The global recession; we are out of it, but still wobbling, everything is still in a wobbling mode, and that is why everything else is going down. Commodity prices have crashed, America is not growing fast, the European Union is not growing really fast – you have the Brexit. China is slowing, its cooling off, and so on and so forth. These are the sources of uncertainty and anxieties around the world.
A lot of currencies are under pressure around the world. You once proposed Naira re-denomination, looking at low income countries like Nigeria, would you advise us to redenominate our currency?
Let me tell you, like I told you, I do not want to come to start doing interview about what Nigeria should do, or not do, I told you, if it is about the annual meetings, fair enough. It is a gentleman agreement to focus on the annual meetings, because if we are going into Nigeria, we have a saying in my place, it is not the kind of talk you get into without having a breakfast. Nigeria’s thing is not the kind of conversation you get into. You have to get breakfast. So let’s leave that one for now.
You have reservations talking about Nigeria. Let say the President contacts you privately; will you be willing to offer him some advice?
Did you see my reaction? It is only Baba who laughs, me I’m just smiling at what you’re saying. I do my own citizen duty, as a citizen of Nigeria. I love Nigeria, and I have also done my own beat in public service. Those six intensive, intense years; we were almost running it 24 hours, I mean, doing what you should do in 72, 96 hours in 24 hours.
I think it is time for some of us to – the public sector is like a revolving door, you enter, it turns the other side and you continue to work, others enter. We have almost 200 million people in the country. Largely endowed country, and I believe that there are enough people, even within the government and outside of government. There are enough people with all the ideas. There are people, there are Nigerians, who can do this, so leave me, let’s not talk about me.
When you left office as CBN governor, you attempted to become a state governor. If you had become a state governor then, since then till now, what has been happening in the political space, how would you have coped?
We would have coped, extremely very well, I can tell you that. Even though at the state level, much of what you have, people get to face the same shock, it ripples back. The federal government in Nigeria is a major constraint to the states, and that is why some of us believe that the current structure that we have is for a time we no longer live in. The current structure was designed to share and consume the oil rent, and I have argued that the structure that is designed for consumption cannot be efficient for production. So we know that it would have its own ripple effect. But if that happened, by now, I should be finishing my second term. So that first term thing, when things were still going, I’m sure we would have. We did it at the aggregate level; we would have been able to do it back in my state.
We prepared Nigeria to weather through the worst financial and economic crisis since the great depression. Nigerians took it for granted, but we still recorded six points something percentage growth at the end of the year. People took it for granted – that is how it is supposed to be. We did it at the national level, we would also have done it at my state, and that is the message, passed on to this government. The key word is seeing beyond today. When we were doing consolidation, people said impossible, why, how. Then, when the global crisis came, every country was then recapitalising, but we had done that several years before. The key thing is that we should be able to see beyond today, and that is the message I delivered to the governors of the central banks.
While they are pre-occupied with today, running in circles, the major thing is coming. That contingency planning, or futures mapping, what if this happens, this is how we react, what if this happens, this is how we react. It is those kind of things that help you stress test the system, and you then know how. If this one crystallises, it doesn’t come to you as a shock, because you had anticipated it, and you have prepared the instrument to respond. You don’t wait until it hits you, otherwise, you’d be going in circles.
Do you see the governors’ preparing for the future?
After my presentation, many of them responded by actually sharing experiences of what they are doing in their individual countries, and some actually reacted in anticipation. For example, I was impressed at what the governor of Mauritius responded in terms of the reserves, because I told them that to see the depreciation of the pound sterling as an opportunity in terms of diversification of reserves. It is down now at 30-year low, but it could also rebound tomorrow. So if you take a position today in pound sterling, from dollar, you get a lot of pound sterling and then tomorrow, when it appreciates, you can also get more dollars. For every bad thing, there is an opportunity.
He said once the debate on Brexit started, they took the position that it would happen, and so they did the adjustment in anticipation of the worst case scenario and they got it all right.
You’re still going back to that. Like I said, for me, as a Nigerian, I have tried to intervene on this matter, doing my own duty as a patriotic citizen who loves that country. Also, as somebody, with every sense of modesty, has also paid his own dues. To put it on an even kill, when we were debating the exchange rate thing, I thought it was… I mean, I have never seen a thing like that.
There is this philosopher that people were going to for advice. He would advise the first step and people would come for the second time with another problem, and expectedly he would offer advice. But the third time that people came, he asked: Have you done the first and second that I told you and they replied No. He now concluded that the third advise was not necessary because the first and second, which are the basics for the third have not been followed. You see, you don’t need to be an economist, but common sense, to know that if you are a foreign investor, or even a local investor and you have $1 million, but when you bring it into the country, you get N312 per dollar from a bank.
But then, five meters across the road, you get N480, an amount of N160, which would you follow. This is just basic logic. To diversify the economy with restriction does not happen anywhere in the world. Those you are trying to help will even know that it is more profitable to deal on foreign exchange than the real manufacturing. If you can make 40 to 50 per cent profit in a week, why would you not retail the foreign exchange.
The manufacturing may not offer them 30 per cent margin in two years, so why would they manufacture and not follow the shortcut. I have said it more than once and I don’t like repeating myself. The restrictions cannot work for the foreign exchange. The policy makers need to go for the low hanging fruits first; otherwise it would be difficult process to get other one. There are immediate issues that need to be fixed and it is just the application of common sense. I have made my position known in the proposal for the sale of national assets and I did it in writing.
Government said that some of those items banned are now being produced here, like the toothpick, rice, tomato paste, among others. Still, what will make those items not to come in is not that they are tagged ineligible for access to official foreign exchange, but if it is cheaper to import them, no matter what you do, they will come in. That is why we use two things- exchange rate and tariff, not eligibility criteria.
If you import under market determined exchange rate and it is not feasible in price consideration, then it will be obvious that the importer will switch over to the locally produced one. But if the domestic cost structure is such that producers can produce at far cheaper price relative to the imported one then it goes that way. Take as an instance, where a bag of rice is produced at a cost of N5000 and somebody sells it at between N10,000 and N15,000, while the imported one is going for N20,000, nobody will teach the basic economics here that people will go for the locally produced one. You will see huge demand and you will notice that because these ones are producing at N5000 and selling at that margin, they would massively expand domestic production. This is not a preaching matter. Go and check the history of banning things in Nigeria and see what has been the outcome.
It was expected that government would have supported from the fiscal angle of tariff.
No. The first one is patently wrong, because once you have done that prohibition, the exchange has totally become misaligned and that distortion of the premium between the official and the parallel market is going to drive everything else in the macro-economy. The harm that it has caused through the premium is more than anything you are going to gain from any other thing. Nothing else will happen when you have that level of distortion in the macro-economy. It stops everything, because even the man you are giving incentive to produce is finding it better to trade in foreign exchange due to what has been created. What is the fiscal incentive that will create more than 30 per cent return in a week none? This is why you have greater demand at the official window because everybody wants to get huge allocation so that you can round-trip some. It is a road to nowhere.
What about the African Heritage Institute?
It is getting stronger by the day. We now have a new leadership team. It is an institute for Applied Economics. We think the vision of it is the African Brookings institution. You know I spent about two years at the Brooklings and we visioned to have the African Brooklings then. We have broadened the reason for the change of name to go beyond Applied Economics to governance, politics and strategic studies. We are now ready to be actively involved in thinking the future, not just for Nigeria, but Africa and that for me is the kind of things I have passion for. The institute is on course. This month, the institute is organizing training for people who are teaching Applied Economics. It is sort of training the trainers.