ECONOMY: THE PERILS OF UNHEEDED ADVICE
Some ironies of life are too hard to take. Until May last year when Umaru Musa Yar'Adua as President failed to reappoint him for another tenure as the Governor of Central Bank of Nigeria (CBN), Prof. Charles Chukwuma Soludo was arguably the hottest banker in Africa.
He was praised and honoured everywhere he went. Red Carpet was always rolled out for him. He was described in some quarters as a 'five-star general' on the economy. Listening to him speak on micro and macro economic issues was always something many people looked forward to. It was like receiving lectures on contemporary economic matters..
Whatever he said was bound to determine the direction of the economy. He was seen as Nigeria's equivalent of America's Alan Greenspan, former Chairman of the U.S Federal Reserve Board (our equivalent of CBN).
During his tenure, some of the policies introduced by Soludo were breathtaking. The recapitalization of the banking sector in 2005/2006 was one of such milestone reform measures.
Let's be real: Soludo is not an ordinary economist. He was regarded as perhaps the brightest and brainiest of his era. Maybe, not anymore. Why has he fallen from super hero, to zero? In the last 18 months since he left the top seat of the apex bank, and nine months after he was thrashed in the governorship election in his home state of Anambra last February, a contest he should not have thrown his hats into, revisionists have been at work to tear into pieces his accomplishments.
He has lost a hefty salon of admirers who once described him in superlative terms. Even advice he gives on the economy is now scoff at. He is being blamed for the current economic woes of Nigeria. How time changes everything.
Only last month he raised the red flag that the economy of Nigeria is sinking and therefore needs urgent rescue measures. His concern was over the rising domestic and external debts profile.
'Something', he warned, 'will have to give', if urgent measures were not taken by the present administration of President Goodluck Jonathan. The administration, he warned, has done little to push through anything resembling a national economic plan that will check the rising debt profile, especially on the domestic front. If urgent measures are not taken, he said, the concomitant consequences might led to a much worse Structural Adjustment Programme (SAP) that anyone in the country can imagine. He reeled out pieces evidence to support his fears.
He said that contrary to government's claims, all indices on the economy are pointing in the negative directions, and government is not consolidating on the gains of the past administration. The current situation, he said, is capable of landing Nigeria into debt overhang and a depletion of both the excess crude account and the foreign reserve. This is foreboding, he said. Government has simply described his claims, calling him a 'prophet of doom.'
But last week, Soludo's alarm resonated even more passionately and fiercely. This time around, the alarm bell came from another renowned economist and apolitical fellow. She is Dr Ngozi Okonjo – Iweala, erstwhile Finance Minister and currently, Managing Director of the World Bank Group. At the just -concluded annual meeting of the Bank in Washington, DC, USA, the World Bank MD said cautioned the Federal Government to be careful of its rising domestic debt stock and to stop further accumulation or face unpleasant economic and political consequences. She noted that domestic debt can choke economic growth and constrains the private sector. She said the present government seems to be deluding itself that domestic debt cannot harm the economy.
This is not true, she said. On the contrary, she hinted that when a country's domestic debt begins to spiral out of control, it starts crowding out the importance of the private sector which drives the economy. Not too long ago, the Manufacturing Association of Nigeria (MAN) alerted the Federal government that the economy is drifting dangerously. The rising debts, at home and abroad, cast serious doubts about government meeting its promises and making the nation among of the 20 top economies in the world.
Taken together, the advice from Soludo and Okonjo-Iweala is a sort of ringing bell that only the deaf cannot hear, until death comes. These warnings had even come from the Debt Management Office (DMO) which posted on its website mind-boggling figures of Nigeria's potentially crippling public debt stock. According to the DMO, Nigeria's domestic debt has risen substantially in the last one year by over 21 percent to about N3 trillion.
And still rising. Last year, the figure was N2.1 trillion and in 2007, it was N1.7 trillion. This means that the total domestic debt stock as at today is about 16 percent of Nigeria Gross Domestic Product (GDP). This is about 40 percent higher than the ceiling allowed for developing countries such as Nigeria. Though recently the Finance Minister, Mr. Olusegun Aganga announced that henceforth, government has put a cap of 25 percent of the total GDP on external borrowing, the worry is that it is the domestic borrowing that hurts most.
The unpleasant implications are as risky to the economy as they are bad for the political system itself. The most dreadful consequence is that there is no way the domestic debt will continue rising as it is doing currently without bringing the political house down. The country risk of such debt is equally calamitous. The worry here is that unlike other countries, where the broadest shoulders – the rich, take the large share of the consequences, – in our own case, it is the poor that bear the brunt.
Ordinarily, there is nothing unusual in borrowing, either from within or external, if the money borrowed is properly utilized. For example, Brazil and Chile have $100 billion and $105 billion of domestic debts, respectively. But their domestic debts have been invested prudently in productive sectors of the economy that their impact is repaying the principal amount plus interests without choking up their economies. The reason why external debts is less threatening than domestic debt, is that repayment of external debt may require the debtor nation to slow its growth.
The implication here is that if a country uses external debt to fuel its growth at a rate that its citizens would demand, that country may be unwilling to accept the political risk of an abrupt slowdown. In these circumstances, the debtor nation may prefer to default on its debts. Domestic debt is not like that. It is akin to taking poisons in small measures which kills subtly, but steadily. The greater risk in our own case is that our governments are fiscally irresponsible, and in most cases, the loans they often take used to service personal interests rather than anything else. The biggest problem is that at this level, our economy doesn't have the lever to soak up the pressures. Which is why ignoring the advice from the World Bank comes with serious implications none of which will be healthy for us all.