Why ergp is bound to fail-2

The Federal Government’s Economic Recovery and Growth Plan 2017-2020 (ERGP) was designed with the broad objective of restoring growth, investing in social infrastructure and building a globally competitive economy. The second leg of a 2-part summary of Sunday Sun Newspaper’s Onyedika Aghedo’s recent interview with this writer on the feasibility of the ERGP follows hereafter.

By Henry Boyo

Given your projection of failure, what should be the priority of government to make this plan a success?

Government should ensure that the private sector has ample latitude to perform its role as the genuine driver of economic growth. However, businesses cannot perform that role if the tripod of monetary instruments, earlier mentioned remains at variance with best practice elsewhere. Evidently, inflation at over 17% is at variance with 2-3% in successful economies. Similarly, cost of funds at over 205, is also at variance with 4-5% in successful economies. Furthermore, the sustenance of weaker Naira exchange rate despite increasing foreign revenue is also at variance with the dynamics of demand and supply. Unfortunately, Nigerians, habitually take their eyes off the ball on these critical indices.

Available information indicates that government drew the plan in consultation with the private sector. Don’t you think some of the fears you have expressed were taken into consideration?

The reality is that whether they consulted the private sector or not, so long as the product of such consultations or non-consultation still accommodates excess Naira liquidity which eternally sustains an inflationary spiral, invariably the ERGP would fail. In practice, it is not the size of annual budgets that successfully drives an economy; economic salvation will never be significantly induced by the mere size of annual budgets; salvation is normally propelled by the infinite elasticity of the supply of available credit to the private sector. That is the reason why banks and CBN have to work together to make cheaper credit available. The banks are mandated to create money and expand credit; if banks don’t have enough money, they can resort to CBN to borrow and lend out to customers. But if the rate at which CBN lends to banks is already as high as 14%, why would banks borrow at 14% and lend to customers below that rate. Ultimately, banks may lend at over 20%; regrettably, with such high cost of funds, the real sector cannot grow. So, to galvanise the real sector, CBN’s monetary policy rate must fall as low as two percent. Instructively, however, the monetary policy rate will never recede to two percent or below, so long as excess Naira supply remains a perennial burden. It is undeniable that excess liquidity fuels spiraling inflation, while spiraling inflation makes nonsense of any economic plan. So, if indeed, government consulted with the private sector, they (private sector) will tell government that the critical challenges relate to high inflation and cost of funds, and a persistently sliding Naira exchange rate. Unfortunately, ERGP is also in denial of these same factors that led to the failure of Vision 2010, Vision 2020 and NEEDS. There is no plausible strategy in the ERGP for reducing the debilitating level of excess liquidity that drives inflation, cost of funds, high rate of unemployment and also hinders national productivity and competitiveness.

One special feature of the ERGP, is the creation of a special unit to monitor its implementation. A lot of people believe that might ensure the success of the plan…..

(Cuts in) Look, how can you place your hope on the implementation of a project that has failed ab initio? If the factors that should drive its implementation have been ignored, will the Implementation Team monitor a plan that cannot be implemented? Ideally the Team should first monitor if the indices of the monetary tripod—i.e. the rate of inflation, cost of funds and exchange rate, are in consonance with best practice elsewhere. The Implementation Team must first recognize that we will fail to achieve ERGP objectives if inflation continues to remain above 5%, because higher inflation rates will trigger higher cost of funds to most businesses. So, in effect, it is Central Bank’s strategies that should be monitored.

However, CBN’s independence enshrined in the 2007 CBN Act to manage price stability is good in principle, but then, that independence should have been circumscribed with a surveillance Team that ensures that the CBN keeps inflation at best practice levels around 2%, so that consumer demand will improve as the purchasing power of incomes increases, while cost of funds will hover around 4%. Furthermore, with such modest and supportive rates of inflation and cost of funds, the real sector will enthusiastically borrow to grow businesses, especially when they are not crowded out of credit by Federal Government’s competitive bids to also borrow. Thus, the prevailing structure of monetary management, unfortunately condones a pattern of economic recklessness as it remains in denial of those factors that should properly drive economic recovery and growth.

So, in your opinion the plan cannot pull the economy out of recession?

But that is the truth! Our economy has been severely challenged for several years. Factors that should properly define “no-recession” should be increasing employment rate, lower and stable prices, rising consumer demand and productivity and improved social welfare. When last did the Nigerian economy reflect such inclusive growth, and when last did you hear that more Nigerians have exited the poverty trap? So, if bounteous foreign exchange fuelled by high price of crude oil successfully camouflaged most of these anomalies, in reality, increasing employment, export competitiveness, industrial capacity utilization and the level of social welfare of our people have remained severely challenged.

So how soon would the country come out of the present economic mess if the ERGP would make no impact as you have said?

The country can never get out the mess until it accepts the reality of the critical significance of the monetary tripod in driving any economy. No one will build industries to produce anything if there is declining demand for that product. Instructively, higher inflation rate reduces consumer demand, for example, a bakery enterprise with 10 bakery lines, will reduce production to say, two lines and throw people out of job if demand for bread continues to contract. That’s how it goes. So, consumer demand is actually dependent on the level of inflation and the purchasing power of incomes. So, if inflation continues to spiral, it means that consumer demand will also contract and impact negatively on industrial expansion; ultimately, the rate of unemployment will spike and poverty will deepen while social welfare and infrastructure will suffer. It is quite straightforward really.

Save the Naira, Save Nigerians!

 

The post Why ergp is bound to fail-2 appeared first on Vanguard News.