Tinubu’s Economic Reforms: Stability Is Necessary But Insufficient
THE considered vote of confidence passed on the economic reforms of President Bola Tinubu’s administration by Dr. Ngozi Okonjo-Iweala and Prof. Chukwuma Soludo, two notable finance and economy persons, no doubt is a big morale booster to the government. Dr. Okonjo-Iweala, Director-General of the World Trade Organisation (WTO), recently said Nigeria’s two-year-old reforms are restoring stability to the economy. Also, Prof. Soludo, the governor of Anambra State, who is more popular for leading the most audacious consolidation in the country’s banking industry, similarly gave credit to the President for restoring stability to the economy.
Not surprisingly, the commendations came under social media vilification by critics who obviously do not see any stability in the country’s economy, given the running inflation and low purchasing power of generality of the general working class. A top executive of the African Import Export Bank (Afreximbank), who came to the limelight after reinventing the National Bureau of Statistics (NBS), Dr Yemi Kale, took to digital media to tutor Nigerians on how far they deviate from the truth when they equate stability for dramatic improvement in welfare gain.
Kale’s position accentuates the historical misrepresentation and misinterpretation of macroeconomic indicators. Most often, politicians and their followers celebrate improvement in quantitative indicators such as higher output growth, an increase in investment inflow and better exchange rate while they mischievously or inadvertently suppress quality indices such as equality level. While this continues, the national economic managers do little or nothing to explain why the bandied technical jargon do not translate to economic development, or improvement of individuals’ quality of life, which should be the end of growth.
Economic stability is an early or leading indicator of improved economic well-being and not necessarily a pointer to welfare improvement. Dr. Okonjo-Iweala emphasised the necessity for the government to take steps to consolidate stability.
In principle, there is a lag between growth, the end product of stability, and economic development, where the economy must get to before the citizens can begin to benefit from growth. The critical mass must earn more before they can consume more. To earn more, they would need to work – meaning that jobs need to be created to engage them in economic activities.
But potential and existing employers need to see stability in inflation, exchange and interest rates to make final investment decisions (FIDs) that will lead to expanded plants, new factories and other economic initiatives where citizens would be employed to produce and earn money. Indeed, Nigeria is at that point where investors are encouraged to borrow without the fear of losing out to naira depreciation or ultra-high inflation.
For instance, the naira is seeing the longest stable run in over a decade. The domestic currency is currently trading around ₦1,530/$, a moderate four per cent gain on an exchange value of ₦1,590/$ exactly a year ago. The volatility index, which measures the predictability level of the market or otherwise, have also fallen to a multi-year low. The historical wide spread between the official and black-market rate, which has been a source of market distortion, rigidity and manipulation, has slowed to below the five per cent globally recommended margin. In the past three months, both parallel and official segments have been trading at the same rate, eliminating the incentive for round-trip transactions and other manipulative tendencies. Agreed, the foreign exchange (FX) market could not be more stable, which is commendable.
Since the beginning of the year, the inflation rate has been on a downward slope, dropping to below 22 per cent in July. Market surveys have corroborated the official consumer price index (CPI), suggesting that prices of goods and services have been stable in recent months. The World Bank also said the country’s inflation rate would ease to 14.3 per cent in two years. The Central Bank of Nigeria (CBN) Governor, Yemi Cardoso, has promised that his medium-to long-term inflation target goal is a single-digit rate. These are signs that the era of volatile inflation growth is over and that lenders and savers will not likely see unusual value erosion in their financial assets in the near future, which is good news for investment.
Of course, general prices, including the exchange rate, remain considerably high when they are balanced out against the historical trend and 2023 baselines. As much as the naira is stable, it has lost nearly 70 per cent of its value against the dollar since Tinubu assumed office. Matched against specific essential consumables such as rice, beans and yams, the currency has equally lost over two-third of its value in the past two years. It is, thus, understandable when Nigerians would not accept claims that the economy is in a stable position. For many, prices would need to drop to the level they were two or three years ago; otherwise, it is deceitful to lay claim to a stable economy.
Sadly, the axiom of sticky prices is a statement of public good, not an economic fallacy. You cannot, in the same plea, seek more investment and falling prices, a condition technically referred to as disinflation. A sustained disinflation kills an economy faster than inflation. During disinflation, a naira holds less value today than tomorrow, which makes cash holding and saving, public vice, more attractive than investment. This means disinflation neither supports economic growth nor economic development.
When currency loses value, due to higher inflation or exchange rate depreciation (the twin-crisis that caused Nigeria’s current hardship), those with fixed income suffer debilitating loss that pulls those on the fringe below the poverty line. To improve the condition, it is important to raise the income levels of the vulnerable.
Sustained stability could trigger economic growth. But even growth is not enough, for it could be jobless, ruthless, or even exclusive. And the current stability could even break down, leading to another round of macro volatility, if not well-guided. In the meantime, the government must look beyond the façade of stability and offer immediate support to citizens whose income level has not changed from where it was when a family-sized loaf of bread was ₦500.
A stable economy is, first, an invitation to invest and not a call for dinner. National economic managers have a responsibility to guide this trend jealously to prevent a breakdown of the old trend.
Hopefully, a new economic order is in sight. But that will be realised if the current confidence level is sustained long enough and social intervention for the poor is intensified. Nigerians must realise that the country has gone too far from the 2023 macroeconomic baselines to risk another round of crisis.
Already, it is so bad that whatever gains the country boasts of today are a mere broken window fallacy. The least the economic managers can do is to sustain the current trends and improve the well-being of the ordinary, vulnerable Nigerian.
