This past year has been marred by economic downturn that will dictate the future of the Nigerian financial security. The oil price drop caused a snowball effect that has dampened the GDP growth from close to 7 percent to 4.8 percent for the 2015 year. The oil drop caused the Central Bank of Nigeria to remove its leverage of artificially supporting the naria with respect to the strong dollar by spending federal reserves leading to the dramatic drop of the naria by 10 percent, increasing fear of foreign and domestic investors’ confidence and downgrade in credit rating to BB minus. Regrettably, I still expect the currency to fall to 230-245 Naria to dollar in the coming months. Ratings downgrade is also attributed to the Boko Haram insurgency (which is on the dwindling recently) and election instability (relatively peaceful transition). Nigeria, Iran, Russia and Venezuela has been heavily hampered by the drop in oil prices, weak demand from Asian countries especially China and petroleum oversupply from United States. As the this coming year marks the return of Muhammed Buhari as a democratically elected president over the outgoing Johnathan Goodluck. Buhari has to debate either to apply three methods of resuscitating the economy either passing austerity measures, conducting Keynesian economics or implementing mixed economy policies. Here are some key facts, suggestions and insights:
1. Total debt in Nigeria ($67.73 billion) is summation of external debt ($9.71 billion), federal domestic debt ($47.05 billion) and states domestic debt ($10.97 billion) with Lagos state leading the charge of over $600 million. The numbers might look small in comparison to United states with total debt sitting close to $18 trillion. The fact is America although in a recessive economic state generated $16 trillion in GDP while Nigeria generated $526 billion in GDP in 2014. The American invariably can sustain and accumulate more debt than Nigeria because of the simple word called “diversification”. Nigerian economy has primarily focused its revenue generation from petroleum production (roughly 70 percent) which is showing the over-reliance of a certain commodity on the economy therefore the Nigerian economy should mirror the periodicity of oil prices. The American economy is diversified in retail markets,energy,tourism, mining markets, healthcare, military, food, entertainment, financial services, construction, agriculture that generate revenue internally and externally. Diversification encourages healthy competition, revenue generation, privatization, job employment, expansive and emerging markets and increase in foreign investments. The Nigerian debt to GDP ratio might be low sitting at 11% but its credit rating disallows Nigeria from borrowing and reduces yields from government bond in comparison to USA’s 102% debt to GDP ratio which is offset by diversified economic portfolio and strong Standard and Poor ratings (AAA).
2. Inflation rate – Central Bank of Nigeria (CBN) controls both the monetary policy and the federal spending unlike the European countries that has European Union/European Central Bank (EU/ECB) control its monetary economy and its individual countries control its spending power. Nigerian system is advantageous because our debt policy can be managed concurrently with our government spending avoiding crisis similar to Greece. CBN currently runs an interest rate of 13% in comparison to USA Federal reserve rate close to zero percent (0.25%). At Nigerian current interest rate, it disallows loans and borrowings for small businesses and expansion of projects by current private companies. I am not advising that we should mimic American interest rate which is inappropriately too low that could cause another financial bubble that caused the 2000 tech crash and 2008 real-estate crash-globalized debt obligations (recession). An interest rate of about 2-8 percent is ideologically a safe bracket where the federal government keeps stimulates privatized sectors’ and public lending while encouraging a competitive capitalist atmosphere. The Nigerian inflation rate has been increasing rapidly over the past few years sitting currently at 8.7 percent and projected to sit around 11% this year compared to United States that hovers around -0.10%. Americas’ extremely low inflation rate is associated with weak demand from industrialized countries, low employment, weak exporting power and strong dollar. Nigerian inflation has been on the upswing unexpectedly due to the oil price drop with no direct effect on wage increment to match the inflation trend causing the middle class to decrease, reducing purchasing power, encourages public savings and poverty increase. If there is an increase in goods generated by the government as a result of diversification, it creates more demand with a reduction in money supply will minimize inflation rate thereby stabilizing the effects of the oil prices. It was expected the Nigeria to deflate with the worldwide oil glut and national currency drop but the internal and external demand has been stagnant, rising unemployment and stagnant wages growth produces a counter-effect of inflammatory and unexpected inflation. There has to be a balance set by the Ministry of Finance and Central Bank of Nigeria between interest rates and inflation rate because lowering the interest rate might irrevocably cause inflation to increase rapidly.
3. Financial policies has to institutionalized to be passed and implemented to face the dire circumstances that coming in the facing years. We cannot adopt full austerity measures that will cripple federal spending, increase employment, increase tax cuts especially to the wealthy (trickle-down economics), lower interest rates, constrains structural microeconomics, private sector driven, stimulus deterrent,cutting social benefits and programs, crowding in financial phenomena but inadvertently expect debt reduction thereby reducing debt to GDP ratio. Taking Keynesian economic approach increases federal spending, lower interest rates, expands structural microeconomics, stimulus allocations, increases taxes, retains social benefits and programs, crowding in and increase in government regulation leading to market simulation and restoration of investors’ confidence but erodes the debt to GDP ratio by increase debt. Austerity measures are seen as “conservative” while Keynesian is seen as “liberal” approach to handling financial crisis. The common key for both financial policies is that they both increase demand but austerity causes economic strangulation and Keynesian policies increases debt and government over-dependence . It is evident that looking at the recovery from the 2008 world recession that America using more of a Keynesian approach outperformed the European austerity measures both are both still in financial strain. Nigerian can use this playbook to ply a more “mixed economy” approach that uses the best of austerity and Keynesian economics to simulate our economy in the upcoming months. Currently USA runs a mixed economy system which should be used in Nigeria. “Socialized capitalism” is my pseudonym that defines mixed economy. Nigeria runs a corrupt- laden and bloated federal system resembling a more socialist leaning capital economy. Nigeria has to become more capitalist, the government is bloated and privatization on the ideals of diversification is the key to economic growth. Nigeria has to create external aggregate demand from other countries to boost more exports and create a more balance of demand. Diversification and raw material exports under Keynesian principled financial policies are keys to gates of economic success.
In conclusion, Nigeria often deemed as an emerging market but corrupt has to appropriate its financial policy to mirror a more Keynesian-mixed economy that will encourage increased federal spending,marginal increase in taxes, closing tax loopholes, reducing wasteful expenditures on unscrupulous projects, reducing executive, legislative and states’ arms of Government’ salaries and benefits, encourage corporate profitability under government oversight on corruption, cutting pensions on past politicians, increase financial accountability on petroleum industry, promote trade unions, reduce interest rate, fight unexpected inflation, adopt socialized capitalism, encourage states revenue, increase oversight of federal financial allocation to states, create a surplus, invests in education and infrastructure, increase financial market liquidity with investors’ confidence, create a diversified financial portfolio, attract more domestic and foreign investors, avoid trickle-down economics and balanced federal oversight on increasing privatization. It is well quite ostensible to see Greece financial implosion and its domino effects on the fragile Eurozone without considering the economic model of Keynesian-mixed economy.CBN has to history match inflation rate, wage increase, employment rate and GDP growth in project a balance system to avoid excessive inflation, stagflation or excessive deflation.
Neither a free market capitalist state nor socialist state does not create a strong middle class but a socialized capitalist system does!!!
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