Managing the Economy out of this new crisis

The COVID-19 pandemic has altered much of the conversation about economies, worldwide. Out go all of the estimates, by year-end 2019, of the possible trajectory of the global economy and its constituent parts, including all of the enthusiasm that accompanied the signing by the U.S. and China of the first phase of their new trade agreement. In come almost prophetic assertions that global trade will shrivel this year ― but no thanks to President Trump’s child-like bulimia for imposing tariffs. Instead, by keeping workers away from their workplaces, the new coronavirus will dampen demand, and throw spanners in businesses’ global supply chains. Policy makers are agreed that three goals must be met if we are to mitigate the negative economic consequences of this pandemic.

First, is to keep financial markets liquid. That way banks and the likes would not act in a way that chokes the flow of funds to businesses ― leading to economic contractions. The second challenge is to tide businesses along until the worst of the crisis is over. Most businesses with direct contacts with customers will be minded to retrench, as their revenue sources dry up ― for instance, the International Air Transport Association (IATA) estimates that airlines could lose as much as US$113 billion in revenues this year. But simply meeting fixed costs alone, including the cost of servicing bank debt, would drive most into bankruptcy. So, banks will be persuaded to restructure most such debt – lower rates and extend tenors – even as governments hurl money at the more vulnerable of such businesses. Finally, consumers must be kept in pocket, even as they have to stay off work. Paid furloughs, and government grants pander to the need to support household spending, while addressing long-term worries about the populace’s quality of life.

Locally, the burden is not from the pandemic alone. Much of what was labelled “anti-government” commentary on the economy (at least until March this year) was concern about how the monetary authority was frittering away the buffers that the economy will need to deal with future shocks and how the fiscal authority simply did not demonstrate a sense of this need to keep some of its gunpowder dry. Now that push has literally come to shove isn’t the time to abandon this dialogue. For the economy continues to offer clear evidence of wrongly structured domestic policy responses and incentive structures.

Take the data on our capital importation for last year. At US$23.99 billion, it was the most we have ever imported. In 2018, another record year, we’d seen US$16.82 billion enter into the economy as capital. Clearly, we were doing something right. Boosters of the government would have cashiered anyone who as much as dared raise questions about this inflow. But only one question mattered then, and now: Why have the capital inflows into the country over the last few years been only of “portfolio investment” and “other investment”? In other words, all of the money which came into the country last year comprised “money market instruments”, “equity”, “bonds”, “loans”, “other claims”, and “trade credits”.

Not much surprise here, given how our monetary authority bent over backwards to please non-resident investors in these instruments. The foreign currencies that these non-resident “investors” brought in helped massage our gross external reserves, even as the monetary authority spent scarce resources hand-over-fist trying to support the naira’s exchange rate, along with diverse intervention schemes designed to boost economic growth – but which ended up leaving the central bank with a dud loan portfolio worse than its most profligate ward.

The naira exchange rate is sliding. Gross external reserves are shrivelling. And beneficiaries of the central bank’s low interest loans will need more forbearances if they are not to go under. So, there was a case for having spent all of that money prudently up to year-end December 2019. Just as there is a case for continually repeating the argument that the major hindrance to doing business in this country is not high interest rates, but a poor infrastructure endowment. Isn’t it self-evident that poor infrastructure – non-existent to epileptic internet access, rutted roads, empty hospitals, shoddy schools, effete law courts, impotent policing, rickety bridges, under-performing railways, etc. – drive high costs, including the cost of money?

Not to those who over the last year have excoriated experts on the economy in favour of the intuition of the leader-visionary. The problem is that this latter reading of how economies work simply ignored the fact that foreign direct investment into the country has remained a minuscule portion of total capital imported annually. And that FDI flows into Nigeria have been trending down since 2004 (when it touched US$2.28 billion), apart from a brief spurt in 2018. Indeed, FDI imported into the country fell from US$1.20 billion in 2018 to US$934.34 million last year.

If, indeed, government’s policies on the economy were as competent as some sectors of the commentariat advertise, the FDI component of capital imported annually into the economy ought to be up and rising. Yes, in order to have invited more of this type of inflows, we would need to have invested in bettering our schools and our healthcare infrastructure. Just as we would need to have de-risked the economy in favour of long-term investors.

The main drawback with commentary of this sort on our economy is that one begins to sound like a vinyl record with the playback stylus stuck in a poor groove. Yet, there is no better time to remind ourselves of the quality of management that our economy needs.