On Neo-liberal Economics and Need for Adaptation

by Kola Ayeye

“Neoliberalism is contemporarily used to refer to market-oriented reform policies such as “eliminating price controls, deregulating capital markets, lowering trade barriers” and reducing, especially through privatization and austerity, state influence in the economy.” Wikipedia

Price stability and low inflation is central to economic growth. In many economies, certainly in an import-dependent economy as Nigeria, exchange rate stability is crucial for price stability. Put bluntly, price stability and low inflation is impossible without exchange rate stability. Thus, while we need exchange rate stability and exchange rate targeting as an explicit economic policy, neo-liberalism stresses market reflective rates almost to the exclusion of the overarching need for stability. Indeed, it is important for rates to be market-determined. But it is as important that rates are stable. So, the declared strategy should be building the capacity to influence market forces to achieve rate stability.

Interest rates have limited impact on domestic economic agents in a high-poverty economy. NDIC reported that 99.4% of bank accounts have less than N500,000. There are probably less than 100,000 mortgages/home acquisition loans in Nigeria. Most Nigerians with bank accounts are excluded from the benefit of high interest rates because their retail balances attract lower than 5% regardless of general interest rates. Their purchasing power is also unaffected by higher interest since they neither have mortgages nor other forms of loans. In essence, high interest rates only reward three classes. Firstly, the banks which on account of mass poverty enjoy extremely low weighted average cost of funds deriving from huge poverty-driven retail balances. Secondly, the exclusive HNI class that own large deposits. Thirdly, corrupt fund managers in both public and private sector who negotiate corrupt commissions from banks for funds placement. So, how useful is the huge effort invested by a Monetary Policy Committee (MPC) in setting interest rates. How many of us does it affect? While paying modest attention to interest rate objectives is doubtless of some use, might our MPC meetings not become much more valuable if it sets exchange rate targets for the next 6 months and details the supply-stimulation and demand-management actions to achieve it.

In contrast, interest rate adjustments have significant impact in developed economies. Many homes have mortgages and various asset-backed credits. Higher or lower interest rates immediately translate to marked purchasing power and disposable income changes. Our structures are different. Monetary Policy emphasis should reflect this. FX rates affect the average Nigerian infinitely more than interest rates.

It is a fact that high interest rates are key to attracting Foreign Portfolio Investors (FPI) which have proved indispensable for most economies struggling with balance of payments challenges, the situation we currently find ourselves. FPI has been accurately christened as hot money, graphically depicting its downsides. It is extremely selfish, nervous, and impatient money that beats a hasty retreat at lightning speed at the earliest signs of stress. It also demands significant risk premiums ultimately translating to high interest rates for the lowest risk – government securities. FPI thus implies high interest rate levels as all other rates are priced at a level higher than government securities. Low stable interest rates are vital for stimulating real sector growth. Thus while we should focus on how to bring inflation down without spiking interest rates, neo-liberals endorse letting go of interest rates as the price for combating inflation, a total surrender to the classical but questionable theory that high interest rates are the only option for defending exchange rates. 

As earlier pointed out, in our economic structure, interest rate is a very blunt tool for fighting inflation. Exchange rate stability is infinitely more effective. Therein lies another neo-liberal weakness. While it stresses the need for interest rates to be higher than inflation rate so that investors earn a positive real return, it is either a bare whisper or a complete deaf-mute on the need for single-digit interest rates to spur and support real sector growth. It is our pursuit of FPIs that has made CBN increase Treasury Bill rates by up to 5% (500 basis points) in less than 6 months. We desperately need FX, but I respectfully contend that substantially increasing Diaspora Remittances should be vigorously pursued as a friendlier, cheaper, more stable alternative.

Many rightly fear that single-digit Naira interest rates will exacerbate capital flight as Naira holders will fly to FX deposits if Naira interest rates are low. While we must avoid capital flight, it need not be at the cost of high interest rates. The liquidity ratio of banks is around 55%. So out of the N55 trillion Money Supply, not more than N30 trillion is liquid and available to pursue FX. We should also reckon that the banks need to keep up to 20% of the Money Supply in Naira to honour customer calls. So a fair estimate of the risk of a run into FX should be in the range of N5-N10 trillion, not more. At current exchange rate, N10 trillion is $10bn. This is about 50% of current annual Diaspora Remittances of $22bn. So the challenge is working to increase Diaspora Remittances from $22bn to $32-$40bn. This will stabilise the Naira even if interest rates are single digit. I think that is our challenge. How do we provide compelling incentives for Diaspora inflows to be a minimum of $50bn annually for 5 years. It is not a walk in the park, but it is achievable. 

By far, FX inflow is crucial to currency stability with simultaneously low interest rates. For many emerging markets, Diaspora Remittances has become a potential game changer. Sufficient thought is yet to be invested in how to make Remittances more important than Foreign Portfolio Investment in both quantum and consistency.

It is pertinent to restate the now-oft rehearsed crime of the erstwhile CBN Governor who illegally gifted the former President  N30 trillion as Ways and Means loan facility, 100 times the legal limit of N300 billion!!!. This is the root of the devaluation of the Naira, exchange rate pressures and entire monetary system imbalance. You cannot divert over 50% of entire Money Supply into illegal Ways and Means without severe imbalance, devaluation and inflation. Allowing irresponsible and profligate fiscal regime ends all discussions about monetary stability and economic growth. The elite have a lot of introspection and repentance to do. How we all watched while one man, a CBN Governor, damaged the economy so severely is shameful. We must learn to resist impunity.

Reckless lowering of trade barriers hurts domestic production capacity. No reasonable father exposes a 3-year old to rugby with full-grown men. This is another major neo-liberal weakness.

Perhaps one of the greatest weaknesses of neo-liberal thought is the minimal emphasis on the importance of institutions. The institutions that must be built and protected such as institutions that promote pervasive transparency and integrity. No nation grows without them. The local institutions best suited for activating voluntary ethical compliance must be identified and carefully nurtured. The judiciary and police, central to rule of law, must be well remunerated, corruption free, and fit-for-purpose. The Customs Department must transparently and efficiently process imports and exports, collecting punitive tariffs without deals, ensuring exports don’t experience any bottlenecks. Agencies charged with tariff waivers must carry out their tasks transparently under rigorous, visible and pervasive public scrutiny. Then at all costs, education and health must be maintained at continental leadership standards, at the minimum. 

Institutions matter. Integrity is key to prosperity. Neo-liberals take these for granted. These things just don’t happen. They only happen when painstakingly nurtured.

We need to rethink neo-liberal thought and adapt it to our realities in a way that spurs and protects quantum growth.

**Kola Ayeye is CEO of Growth & Development Limited, a financial services group committed to strengthening and expanding the middle class,  set to launch a single-digit home ownership plan in Q1 2024. Previously he served as Executive Director AMCON and CEO National Bank