What Cardoso Cannot Do
By Okey Ikechukwu
The new Governor of the Central Bank of Nigeria (CBN) has, so far, demonstrated a hands-on determination to make a difference regarding the fate and fortunes of the Naira. The forces arrayed against him and his team include the following: (1) A volatile and economically insensitive political environment, (2) Elite consumption patterns, (3) Overall low national productivity, (4) Limited public understanding of the difference between fiscal and monetary policy issues, (5) Incredibly high demand for the dollar and, very importantly, (6) The new-found use of the dollar as a major Store of Value.
The points I made on this page on November 15, 2021, Under the title “What the CBN Cannot Do” are even more poignant today, as the new leadership of the bank grapples with great odds today. Those points are so relevant, and so painfully responsible for the crisises of the moment that the article under reference will be reproduced in large measure here; so that Cardoso does not draw undeserved flack for the systemic, contrived and institutionalized shadowboxing that has taken over the profile of our national currency. Here we go, as was said here two years ago.
“The CBN cannot do much about the value of the Naira, for as long as we produce very little, consume much that is not produced here and retain a monocultural economy that is driven by a leadership elite that focuses on distribution and consumption, rather than production. The calls for diversification of the economy have been on for over two decades now. These calls have been so strident, repetitive, and over-dramatised by successive government. That is why, today, the concept has become all but threadbare, tiring, boring and of little interest to many people.
Yet the point remains, that only the diversification of the economy, redemption of our national road infrastructure, reversal of the current state of insecurity in the land, rescuing the power sector, making realistic and sustainable investments in education and health, among other critical interventions, can save the national currency, the national economy and the people.
Looking at some of the issues in detail, it is a matter of record that general insecurity and banditry have been undermining the massive national investments in agriculture for years now. Banditry has laid waste massive farmlands, reduced farmers’ access to their farms and their farm produce, in addition to outrightly wiping out or chasing away large farming communities. When financial outflows into the agricultural sector do not yield the expected returns due to insecurity, the projected gains in terms of food availability, food security and forex earnings from food exports go up in smoke.
Thus a “silo” conversation on diversification of the national economy, especially with agriculture in focus, which does not also simultaneously address insecurity and national road and transport infrastructure is an exercise in self-delusion. You do not drive foreign exchange earnings by designing wonderful projections and making speeches about them in airconditioned halls, when farmers cannot go to their farms.
It is the same thing, that is, misplaced priorities and wrong leadership orientation, when many states of the federation mistake investments in health and education infrastructure for actual investments in “education” and “health services.” They need to be told that brand-new health centres, schools, new classroom blocks and massive stockpiling of teaching equipment are procurement contracts. They do not translate into investment in health and education unless, and until, these states also have commensurate and possibly higher investments in health workers, teacher recruitment, teacher skills upgrade, training of new teachers and retraining of old teachers.
An investor who spends money setting up new baking ovens and launching them is not a baker. Bakeries produce and deliver edible bread. So, state governments that are awarding construction contracts, importing furnishing material for new public and private facilities, have no idea of how much damage they are doing to their states and to the national economy. They are not offering needed health services or producing the needed human capital for development. When misapplied funds are retired under the heading “investment in health” or “education and human capital development,” the people and Nigeria are swindled. But we are digressing.”
The foregoing, which was said over two years ago, reads like it was written for the first time this morning. The reason it sounds so fresh is simple: Nothing has changed. The problems are still the same today.
The article under reference continued thus. “That the value of the naira continues to plummet, as I write, is not the work of the devil; no! That many big and small businesses have lost value and shut down, is because of high replacement cost for goods sold out and their inability to obtain long-term facilities that would make sense in a Third World economy.
To understand the “replacement cost” narrative, let us suppose that you sell bicycles. If you buy fifty bicycles at twenty thousand Naira each, that would mean that you spent one million naira to stock up your shop. If you sell the bicycles at twenty-five thousand naira each, it will mean that you have made a profit of two hundred and fifty thousand Naira on your current batch of bicycles. It is up to you, whether to keep aside your profit of two hundred and fifty thousand naira, or buy more bicycles; after removing other costs. Whichever way you look at it, or whatever you decide to do, you have enough money to “replace” the bicycles you sold.
Now imagine what would happen if, after selling your 50 bicycles you discover that the price of bicycles has jumped from twenty thousand naira apiece, to N50,000 apiece! That is a 150 per cent increase in bicycle prices. This means that, all of a sudden, you will now need N2.5 million to buy the same number of bicycles! It also means that your “replacement cost” has moved up astronomically. If you do not have the new replacement cost, and your original business capital can only get you twenty bicycles, your business has lost value by a whopping percentage.
Which means that 80 per cent of the shop space may not be needed anymore. Which means that at least 50 per cent of you workforce may have to be laid off. Which means that property rate for shops, and related, real estate will drop at the same time that young traders are becoming jobless and declining income is becoming the norm. Which means that some parents won’t be able to pay school fees, etc., etc. Which then further means that most sellers who still have some old stock will do “anticipatory” mark-up, because of the difference between their original “procurement cost” and the new replacement cost.
That is the reality of the Nigerian wholesale and retail trade economy and situation today. This is in addition to the fact that more is being imported from outside than what we are sending outside for sale. But assuming that, by some as-yet-unknown magic, the CBN grabs the naira by the neck and yanks it back to one dollar to one naira, what then? Will this increase national productivity, diversify the economy, or remove the fact that the problem is much broader than the CBN as such? Will it remove the fact that our foreign exchange problems are connected with our taste patterns, limited productivity, elite excesses and poor integrated national planning? With agriculture, education, health, power, tourism and security in the doldrums as major national challenges, we cannot save ourselves from the avoidable foreign exchange constraints the nation is saddled with at the moment.
A nation with a predominantly consumption-drive economy cannot suddenly catapult itself into the Neverland of foreign exchange El Dorado. You make money from what you produce and sell, or from what you can do and be paid for. You also buy with what you have earned from either goods or services you offered. You get paid nothing when you produce nothing. You spend more than you earn when you produce and sell far less than you buy. The person who produces nothing and earns nothing, but buys a lot, must be getting the money for his purchases from somewhere. If in addition to producing nothing, the person also has some savings, then he must be depleting his savings. But what if this person also has no savings, in addition to producing nothing, that means he must be borrowing. And to borrow is to get credit for present needs, with payment deferred to a future date, right? Well, that is our lot in Nigeria today. And we are still borrowing!
The Igbo man will tell you that you do not borrow money in order to take the Ozo title, or to marry a wife. If you borrow for either of these endeavours, how about maintenance – and other matters arising? But we are digressing, again!
It is largely because we are consuming more than we are producing, and also buying more than we are selling, that the speculation for “phoney money” and profits without productivity have overrun the land. Thus arises the predicament of nations and individuals with “unbalanced” market profile and appetites. Thus also stands the crisis of the Nigerian state and economy today, in bold relief. Thus also shall it remain, no matter the ingenuity and efforts of its central monetary and fiscal regulatory mechanisms, until the right things are done.
Truth be told, our monocultural economy, or overdependence on one major source of foreign exchange revenue, is a drawback that can only be remedied by real diversification of the economy. We are yet to see the alleged gains, or the promised food sufficiency, of the tenure or Adesina as Minister of Agriculture, or the food exports of Audu Ogbe’s intervention.
Are we producing enough to save the Nigerian economy? Is our foreign exchange capacity not constrained because we are not producing, or exporting enough? What is the impact of our energy problems on overall national productivity? If I must buy an industrial generating set in order to set up a big business outfit, and a pepper grinder must also do the same in order to be in business, will the demand for generating sets of all makes and sizes not remain? And will this not mean a continuous demand for forex by importers to buy generating sets from outside the country? And what do you expect when the outflow for all sorts of things, including furniture and kitchen napkins, is not only higher but continues to rise even as the inflow is smaller than the outflow and also dwindling?
As a farmer trying to water and nurture the naira, the CBN “alone” cannot rescue a currency that is surrounded by thorns, dangerous weevils and inclement weather.”
With the above coming from my intervention of two years ago, I conclude today by pointing out that Cardoso is no magician. The man is swimming in very turbulent waters. Besides policy support, he needs resolute political backup as he takes the necessary hard decisions. And take them he must.
