Screeching to a halt! – 3

Today, Russia is at daggers-drawn with the West, Nigeria was unlucky to be the first country the US stopped buying crude oil from two month ago, and we are busy throwing brickbats with the US over Boko Haram and military training.  Which countries are hurting the most from this crude oil price crash? Iran, Russia, Venezuela, Nigeria. Don’t ask me how we got counted with the arch enemies of crazy superpowers.  And which country is the most vulnerable of them all? I’ll give you a clue.  Which country is in Africa, with a GDP like $2,000 per head, which country depends on crude oil for 98% of its foreign exchange and 80% of its government revenues and has 170million people to feed? Your guess is KORRET!
My guess is that crude oil will keep going down, and stay down for a while this time. Maybe around $60, hovering for a year or two. It is a logical guess, pending when these international brickbats will abate.
MACROECONOMIC OPTIONS: The argument is usually between those rightists who say ‘Government should reduce taxes’ and those on the other end of the spectrum who say ‘Government should increase spending’.  But in fact private Investment spending is helped greatly by government investment spending. Advocates of private-sector-led investments have always assumed that the moment government vacates a space, the private sector will generally spring up like gazelles and start investing to make money. Fact is, this has never happened anywhere. Private sector players like to invest on the back of government initiatives. This may be the reason for the slow success in the energy sector in Nigeria. Where is government’s skin in the game? What is government selling really?  Another way of seeing this is when government builds say a bridge.  Businesses spring up, houses are built, and so on, just because of that. But no private sector person will just wake up and build a bridge. There is too much involved if you try and take tolls from people.
On the other end, those who call for government spending in periods of slumps, should know that except private sector investment spending compliments government efforts, all you will have is inflation. Or worse.
So these are the options countries consider at this point:
BORROW: The CME initially said we cannot ‘afford’ to borrow. But the rhetoric and body language is changing.  Now we hear blame games of who spent the ECA – Excess Crude Account.  Well, countries that borrow may have realized that they never get out of the debts. I fear that most African countries are back in the debt trap, Nigeria inclusive. I was in Ghana recently and someone said to me that Ghana was now owing maybe $50billion. I wondered if it’s true and if so, how that country will ever exit the debt. For sure, the country had to borrow its way – temporarily – out of a recent slump in its currency. Those who usually clamour for any arcane economic policy have a lot to learn from Ghana. In 2007, when it redenominated its currency, it was 0.94 Ghana Cedi to 1 Dollar. The Ghana Cedi was then stronger than the dollar.  But today it is 3.3 Ghana Cedi to one dollar, a 251% fall in the value of that currency i.e. the currency has falling almost thrice over. African currencies and economies do not have the needed basis for competition with their peers. And that basis is PRODUCTIVITY in real terms. If you don’t have much to sell, you are a nonentity in global macroeconomics.  
CUT TAXES OR INCREASE TAXES AND THE TAX NET: Increasing the tax dragnet has been stated by the CME as one of the initiatives to be taken. The only problem is that this policy may be procyclical, i.e. it may deepen the problems of hunger, business closures, unemployment and general despair in the land as government operatives aggressively go collecting taxes.  Businesses, honest small businesses are already groaning and the last thing a groaning business wants to accommodate is taxes. Asides from taxes, local governments are now very aggressive in collecting all sorts of rates, and businesses are being forcefully shut. The people are angry. They will protest more easily.
INCREASE OR REDUCE GOVT EXPENDITURE: To be or not to be?  Tinubu says government should just print and keep spending. Pay its contractors off after all domestic debts is like $70billion or so today!  But how about focusing on investments that are scalable; investments that spur other private sector investments?  For me, reducing government expenditure is not an option, except that reduction is geared towards curbing corruption.  Government cannot afford to deepen the problem by cutting down on the provision of amenities that people do not have enough of already. Even the downsizing of ministries at this time is a timebomb waiting to explode!
But let us not focus on the Federal Government alone. This is where the issue of quality investment comes in. When a state government spends its money on building monstrosities like Governor’s House, Commissioners’ Quarters, Legislative Quarters, which they then sell for peanuts to current officials only to build another set in the next dispensation, that is not a wise use of money. Projects like Centenary City, Eko Atlantic City, and many more are mere vanity projects. The Metrolines being built in Lagos, Port Harcourt and Abuja are commendable projects with capacity to touch many lives, if well-managed.
SLASH OR INCREASE INTEREST RATES: Does the government slash interest rates so as to spur private sector investment in order to reflate the economy through this means, or does it increase interest rates in order to control inflation if it decides to keep spending itself to reflate the economy? The CBN has chosen to increase instead. However, what we have seen is that whereas this economy does not respond to interest rates manipulation like other economies, an increase may merely lead to small businesses being squeeze out of the capital market.
DEVALUE, REDENOMINATE OR DEFEND CURRENCY: Redenomination becomes necessary if the currency falls so much as in Ghana’s pre-2007 scenario. Otherwise it doesn’t come up. Devaluation is the option the government has chosen, given the now rapid erosion of the country’s reserves. Now that has many implications aside from making imports – which is almost everything in Nigeria today – more expensive. This means every Nigerian is being taxed.  In the 1980s many parents found that their salary could not take them to the bus stop and those who were retired from the civil service and thought they could survive on their pensions, found out their pension had turned to paper. Many developed stroke and died.  We talk about the ‘appropriate’ exchange rate between the dollar and naira but no one knows what that should be, and if we allow the naira to ‘find it’s level’, whether it will ever stop trying to find it.  For now though, the government has admitted that it will be unable to keep defending currency ad infinitum. It just does not make sense. It is proven, that when a government promises to ‘defend’ its currency, it is only inviting speculators to move against the currency as they know it will shift ground soon enough. Even the UK buckled under the stern gaze of George Soros in 2002.
I say the people have to also stand up for themselves. A 8% devaluation in currency cannot lead to a 100% increase in transport fare, except the people agree to pay.
More next week.