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Why ERGP is bound to fail (1)

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Economic Renaissance by Henry Boyo

[email protected] 08052201997

The Federal Government’s Economic Recovery and Growth Plan 2017-2020(ERGP) was designed with the broad objective of restoring growth, investing in social infrastructure and building a globally competitive economy. A summary of the Sunday Sun Newspaper’s Onyedika Aghedo’s recent interview with this writer on the feasibility of the ERGP follows hereafter.

Is the Economic Recovery and Growth Plan 2017-2020 achievable?

As they say, history serves as a very good guide for the future. Consequently, it is appropriate to ask if we have had a plan of this nature before.  If so, what were the expectations? What was the reality?

When the question of feasibility is examined from these perspectives, we will make a better prediction on the ultimate utility of the present ERGP, which is really a rehash of similar earlier plans, such as Vision 2010, NEEDS and Vision 2020.

These economic blueprints have the same objectives of inclusive growth, increasing employment rate, improved social infrastructure and welfare, as well as a diversified and competitive economy. So, basically, in terms of intent and purposes, this particular plan is not different from the previous ones.

How successful were the past economic plans?

The undeniable fact is that the economy has always been run without recourse to the critical enabling benchmarks required to drive in these plans. Ultimately, these plans failed to achieve the objectives of revitalising and diversifying the economy, while the expectation of a meaningful increase in productivity, job opportunities and social infrastructure still remain a distant dream. These unflattering results should trigger the next question: why did they all fail? The truth is that they all failed because they were in denial of the critical significance of best practice management of money supply in any economy.

Government’s fiscal and visionary plans are not implemented in a vacuum; such plans must be founded upon the same standard platforms that have driven successful economies everywhere. The necessary platform for inclusive growth, increasing productivity, employment and export competitiveness, cannot be consolidated by mere fiscal interventions, such as our futile hope on increasing annual fiscal expenditure as the main driver of economic growth.

For example, the 2017 N7tn plus fiscal plan is currently celebrated as our highest ever annual budget. But we fail to also recognize that in real terms, N7tn today commands a purchasing value that is equivalent to possibly N3.5tn or N4tn three or four years ago. Thus, despite the huge nominal increase in real value terms, however, expenditure did not expand. Evidently, the nominal sums spent increased, but in real value terms, the fiscal injections may have remained absolutely static or possibly retrogressive. So, the expectation that you would get improved economic performance from a simple expansion in the amount of money budgeted is obviously unfounded.

Besides, in our economy, where the requirement for power infrastructure alone, is speculated at over $100bn, while the 2017N7tn plus budget is only about $21bn – $22bn, it should become clear that even if the whole budget was expended on power alone, our power needs would still remain largely unsatisfied, while the rest of the economy would remain prostrate, as there would be no funds left over to cover even the salaries of public employees.

Furthermore, as long as the rate at which prices rise annually continues to be in double digit, with the naira exchange rate persistently sliding, our economy will probably also be static or recede in terms of real net value, even if the expenditure budget quadrupled in nominal terms. So, the reality is that fiscal injections or concessions that facilitate operations in certain business sectors may barely tickle the economy, but it is certainly a misplaced hope that our economy would ever grow with nominal rather than real value increases in budget expenditure.

Where then will growth come from?

In reality, growth is best predicated on private sector enterprise. This is because there is limitless amount of funds available in the private sector for investment and growth. So, if the real sector has access to lower priced and loanable funds, which can be induced by better management of money supply with a supportive mandatory cash reserve ratio set for banks, these money lenders would have increased leverage to create more money and lend to investors who would put the loans to work in order to create more goods and services and increase job opportunities.

If, conversely, the regulatory rate at which banks borrow from the Central Bank of Nigeria is above 10 per cent (even when such rates rarely exceed two per cent in successful economies) with a mandatory high cash reserve ratio, that also reduces the banks’ cash base for onward lending, industrial output and employment opportunities will inevitably and rapidly contract. Consequently, it is a misplaced expectation to keep extolling the virtue of bloated nominal budget figures as the driver of real economic growth. Evidently, what drives a successful economy is the gamut of activities that are made possible when cheap and loanable funds are available from money deposit banks for onward lending to genuine investors across all sectors.

For example, if the subsisting cost of funds hovers around 20 per cent or more, it would be crazy to take loans at that rate because you would clearly have serious challenges to repay the debt, particularly in the face of the abiding challenges of epileptic power, decaying infrastructure and multiple taxation. But, if the cost of funds is modest at say between four and five per cent, for example, as in successful economies, investors will be able to access loans at a much cheaper rate and invest those funds in viable productive ventures that would make loan repayment less challenging.

However, when an inflationary threat from excess money supply perennially subsists simultaneously with high cost of funds, the result is that government and the CBN will begin to crowd out the productive real sector from the loanable funds in the market. The CBN, particularly, will be kept busy borrowing aggressively to reduce the inflationary impact of the perceived surplus money by continuously offering to pay higher rates of interest (as high as 18 per cent plus) to distract banks from lending to anyone. Expectedly, the banks are happier with the bountiful rates paid by government for what are clearly risk- free sovereign loans. Indeed, there is not much inclination for any bank to offer loans with over 20 per cent interest to private sector industrialists, who can hardly survive, or remain internationally competitive with such oppressively high cost of funds. Indeed, if non performing loans increase in the banking sector, the survival of the banks themselves will also be threatened.

Consequently, the economy can never grow, no matter the kind of EGRP you design, as long as banks enjoy the bounty of lending to government at double digit interest rates to fund budget deficits or in order for CBN to remove and sterilise part of the burdensome surplus money in the market and restrain a disruptive and disenabling inflationary spiral. Have you ever heard of any commodity that becomes more expensive the more surplus it gets? It is clearly logical that commodities that are in surplus will invariably be cheaper. Why then is it that when the naira becomes surplus in the market, it becomes more expensive to borrow. That is an odd reality. This is a contradiction that suggests a fundamental flaw in the management of the economy.

Consequently, the reality is that even if you design the best EGRP, but ignore the critical significance of enabling indices of the monetary tripod described above, that is, lower single digit rates of inflation and cost of funds and truly a market determined exchange rate, … it will be a miracle if any fiscal regenerative plan or vision succeeds.”

To be continued next week.

Save the naira, Save Nigeria.

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