Nigeria’s economic hardship led to a 10-day national protest, which began August 1 and ended August 10, 2024. The agitation forced President Bola Tinubu to pledge several palliative programmes to ameliorate the hardship induced by his economic reforms.
In this interview with Ukpe Phillip of NewsNGR, the Senior Partner and Chief Economist at SPM Professionals, Paul Alaje spoke about how hardship can be addressed among other economic issues.
EXCERPTS
You said the hunger crisis could end in nine months. How can this happen considering economic realities?
So, first of all, how did we get here? I’ve seen a lot of people say that we increase the minimum wage. We would not have increased the minimum wage if we did not devalue the currency, and if we did not remove the subsidy, nobody would have said to increase the minimum wage. Labour only came out when they saw that their purchasing power had reduced. Unfortunately, policymakers and governments are looking at the effects, but not the cost. The real problem we have, even though we have already had food inflation, is that we are combating inflation with the wrong medicine.
What we are doing is to share palliatives. It will never work. And it will not work because Indonesia tried it. It failed. China tried it in the 60s. It failed. Russia tried it between 1980 and 1998. It failed. In fact, the worst of the countries where it failed was Argentina. They all failed. Any time, developing a nation, and I underline the word developing nation, adopts an austerity program it will all fail because the assumptions are wrong.
But what should we do? First of all, let me highlight the policy option we took and what we should have done. So, policy option number one that we have done is that we remove fuel subsidy. Fuel subsidy should not have been removed when you are floating your currency. So, if you remove subsidy, your currency should be either fixed or managed float. So, what we should do first is to go back and peg the currency. If you peg your currency today to N1000, some of the things that are expensive within 6 to 9 months, the prices will come down. We are importing everything. If you want to buy your phone today, check how much it will be. The exchange rate is a problem because we are not producing what we are consuming.
Some will argue that if you peg your currency, investors will not come in. What are your thoughts?
How many investors have come with this floating? It is not about fixing. It is about confidence. Whether fixed or floated when there is no confidence, investors we still not come. Why did people invent in Nigeria when Olusegun Obasanjo was there? Why did people invest Nigeria when Jonathan was there? And there were no floats in the currency.
When people lose confidence in the capacity of the financial system of any nation, they will not invest. If you say that your currency is N1 to $1, they will not invest. When they have concerns about the security of the country, they will not invest. Investment in a nation is about stability. Let me also say this. Do you know that immediately after the Second World War, Germany floated her currency. That brought untold hardship to the same German that we know today. Until Germany took two steps where it first pegged their currency against the dollar, there was stability. Because actually everything you are importing in dollar. So, if you are importing against the dollar and allow it to flow as you are importing, is that not suicide? Is that not deliberately eating rat poison? But those who advise us, we are not the first they have advised.
They also advised Indonesia that they have advised Taiwan that all of the countries followed them between 1980 to 1990. Because the policy kept failing, they left them alone. They advised Japan, in the 60s to 70s, and Japan also abandoned their policies and followed their mind.
Let me give you a classical example. Vladimir Putin did direct opposite austerity program. Remember, this was done in Nigeria before in 1986 under the Structural Adjustment Program (SAP), which was an austerity program. Vladimir Putin saw Russia became so poor that the factory could no longer pay their workers. They were giving people tissue papers as salaries to go and sell in the black market. In this same world, there was a global crisis between 80s to 90s, and the agency of the world that was advising people was the International Monetary Fund (IMF).
Do you mean Nigeria should stop following IMF advise?
So, how do you advise a country that is bleeding to increase power tariffs? And you want production to happen when the price of petrol is increasing due to subsidy removal, and you still want production to grow? Productivity is what can bring you out of the mess. If we must take painful decisions, the decisions must be sensible, not painful and senseless decisions. If we continue like this, it can only get worse.
So, we need to stop borrowing from IMF in foreign currency. Before Buhari left office, the Minister of Finance said we spent over 90 per cent of our revenue to service debt. We devalued, we stop subsidy, so that freed up government revenue. The amount we are using to service debt reduced about 40 or 50 per cent of revenue.
It’s back in 64 per cent and do I think it will go up? Yes. Do you know why? It is penny-wise pound foolish. Why you devalue your currency, all the money you are owing in that currency will also be devalued. So, you need more of your Naira to service loan. Imagine when you are not paying back. Economics has two sides, for every demand, there must be a supply. It’s like posting an item in accounts. For the credit side, it must have a corresponding debit. But when we want to make policy in this country, we assume the other side does not exist. It’s a sign of insanity.
What is the role of monetary authorities in all of this?
Monitory authorities are increasing interest rates because they want to mop up money in circulation. That is economic theory. But they forgot the assumption. The assumption is that money that you withdraw from the economy should not go back to the economy. Do you know that since the time of Godwin Emefiele till date, when we raise interest rates, when we mop money from circulation, it now goes to governments in form of ways and means and goes back to the economy. If we have been mopping up over time, should the money supply be increasing? Why is it increasing? So, we should not just be doing it because, when we raise interest, automatically inflation will come down.
At least since 2017 to date, we have been expanding expenditure claiming we are saving and when you increase interest rates, and you are now reducing money supply, instead of the economy to grow, it will be stunted. If you check in the last five years, the GDP growth rate has been around 2-3 per cent on the average. That is nearly our population of growth. It is a stunted growth. What happens to investments? if the flow of investment should come, why did it not come? The government is even crowding out local investors because people will prefer to give money to the government at higher interest rates. Also, the investment you are seeing, they are portfolio investment. Anytime there is a crisis, they leave the country. You now crowd out employment. Because if there is no investment in the real sector, you can’t have employment.
So, increasing interest rates is correct in economics theory, but it is wrong in applied economics. The challenge we have is that when you have people who are quacks managing your economy, you are going to get administrative or political results.
How should the government manage inflation?
The government has been fighting monetary and non-monetary inflation with the same dose. So, if the government wants to be serious, it needs to start programs. It takes only four months for rice to grow, and the program is not just for the government to say that they are giving fertilizers to people. No. They have to show us the land.
You have to make a projection of what the output will be. It must be centrally controlled, at least if we don’t want to do national at the state level, so that we can project and monitor what the expectations are. You must vote money directly for agro-outputs. The food inflation will come down. But if food supply increases and the value of money deteriorates, the price will still be high. So, there is something about the value of money, which affects monetary inflation. There is something about scarcity, which affects non-monetary inflation. So you have to deal with it.
But the government is giving out palliatives as a quick fix. Is it not advisable?
All the monies we are spending on palliatives could have brought us out of this economic crisis. The amount the government has voted will set up farm hubs in the various states without corruption. I’m not saying that we’re going to solve all the problems in nine months, but this hunger challenge, we can solve it in nine months.
We still have a challenge of electricity, which, of course, will we take about two to three years to solve, but hunger is the most basic problem that we can address in nine months as a nation.
How can the hunger challenge be addressed in nine months?
Number one, stop collecting foreign loans. It is destroying the economy more. And let me put it this way. Do you know why the government works? It is not that the government is not making efforts. Former President Muhammadu Buhari made a lot of effort. Tinubu is making a lot of effort, but the truth is that it will never show. Look at the revenue the government is making. Under Buhari, between 70 per cent to 90 per cent is used to service debts. So, the remaining small amount of money is what is going to be used for recurrent expenditure and for any capital expenditure. We have to borrow. So, how will the effort show? For Tinubu’s government, 65 per cent of revenue will be to service debt, and we now have the recurrent expenditure of about 30 per cent. How do you invest in capital? We have to borrow. So the money is able to see going into the palliatives. The economics is not making sense. I don’t blame people who think the solution is to protest. The people you are protesting don’t understand what is happening to them.
The solution for Africa lies in output. Productivity is extremely low. That is why when an African, especially a Nigerian, gets to another terrain, they excel.
Obasanjo achieved this because he got debt freedom, which helped the government to have a lot of money to invest directly in the economy. President Tinubu will have to face this debt crisis. This is number one.
Number two is to stop continuous increase in interest rates. Number three is not to increase any form of tariffs again, be it electricity or anything. In fact, what they should do to boost productivity is to bring it down. If tariffs keep going up, productivity will keep going down, and poverty will keep increasing. Number four, which is perhaps one of the most important, is for the CBN to peg the naira before it is too late and we get to the situation of Zimbabwe. We don’t want anyone to get to a point where it will be a mess, and it’s getting close to it.