Economy: What Tinubu Should Have Done –Kalu Idika Kalu

 Dr Kalu  Idika  Kalu is a former Minister of Finance, Budget and National Planning as well as an Economist and director in some financial outfits. He was one of the egg-heads that managed the nation’s economy under President Ibrahim Babangida.

In this interview, he speaks on macroeconomic variables, subsidy and the unified forex window and their effects and how they could better be managed. He says the fuel subsidy should have been phased out not removed. Excerpts.

Why has the expected post-COVID bounce back of the global economy  encountered a bit of a glitch and how has that affected the economy here in Nigeria, which is already in dire straits, in other words, why are there so much uncertainty about the trade outlook?

Thank you very much,

We know macro  economics is a whole bag of pluses and minuses, we are talking about post- Covid but there are also lingering ideas about post- Covid diseases particularly in some of the advanced countries and, of course, when they say that, it means it is not going to be opening up as one would have thought, with the reduction of regular Covid that we know about but more importantly those who manage these countries have to strategize even though there might be a global reduction as  World Trade Organisation,WTO is projecting. For countries like Nigeria, we have always known to be full of potentials there are so much under capacity utilization, there are so much let down in certain sectors because of some of the macroeconomic issues that we have had.

 So, I think the first thing to be said is that we should not be so pessimistic, we can’t draw a lowering of our height just from the general slow- down that the WTO is projecting. 

Whether you are looking at the agricultural sector, manufacturing sector and certainly, we all know about the oil sector, we have been way under the Organization of Petroleum Export Countries, OPEC quota when we should be striving to even top it and give very good reasons why we can top it, we can’t even do that, we are producing well under.

So, when a country like Nigeria has all these potentials just about in every sector, I am not even going to mention the service sector, of course we have to also understand the constraints of infrastructural facilities which affect all the real sectors as we call them but we don’t necessarily have to expect ours to be down by 50% in fact, some countries by just playing the macroeconomic situation properly might actually make some gain while others might make some losses, we are not going to be talking about who and who is going to be making gain and losses but if you had to take a bet, you would have thought that given our situation, our heavy unemployment rate, how long we have stayed way below our capacity, it’s easy to see why there are all these dislocations but we can also make the most of it, like our oil sector for instance, there’s no reason why our refineries shouldn’t be producing, we just missed the right policy at a time it came, we should have exploited the relatively empty and cheap refining in Europe while we are building up green fields that were recommended.

For manufacturing we have created a little bit of a harsh conditions rather than stabilize and move forward, we know that a few actually pulled away so by taking some fiscal measures we can also attract some of these things back and give incentives, as we are now hearing little incentives will be offered to manufacturing, to make some forward moves in terms of re-engaging and improving their capacity and of course meeting domestic needs.

Beyond things like tight monetary policy that we see many countries imposing and perhaps that China hasn’t recovered quite as quickly as had been hoped from Covid restrictions that they imposed in 2022, are we seeing the continuing effect of the war in Ukraine?

Definitely, you know you can’t really abstract totally from the domestic scene because we should be riding on the Indians and the Chinese. I have always said that rather  we are expecting to be importing from them. We should be riding on their large economies who form such significant part of our import, but beyond that, all the monetary indicators will show some sort of constraining effect on importation by some of these major countries and of course this is very likely to affect Nigeria but we should not paint that too broadly. What do we really export to some of these countries beyond oil? There are other products in the manufacturing sector, some products in the IT sector that in fact, give a sort of leeway to break into some of these markets but there is no question of any cutback  by these major economies rather than where they are expanding to locate their production chain in our own economy which will be encouraging. All that will be bound to affect the growth of Nigerian economy and the rebranding of those sectors that should have created more demand for our production and also created domestic jobs and capacity which you should expect. 

So there’s a direct relationships but I think when you try to paint the brush too broadly you forget that really we have not been as big a player as you should have thought to have that effect but from their own side of course, when they have all these tight monetary   policies, they are bound to affect our own performance.

What are the biggest causes for concern for you as the Nigerian economy goes, I know you’ve talked about the fact that subsidy for example should have been phased out rather than been removed?

Well, I might as well start with that, I think it was a bold move but it is clear to us now. I said this few months ago that we should have taken a strong stand by acknowledging the shear inefficiency, the import of corruption within the sub sector of the subsidy which arises from the difference between imported prices and domestic administered prices. We should have may be had a much better feeling about our position now, if we more or less did the calculation of the kind of burden that will now befallen the consumer and spread it out a little bit.

 Essentially, you can interpret that as sustaining the subsidy but on a reduced level or a sort of lower scale over 18 months or two years budget period or even a little bit more. So, that generally would have been the way to have handled that, particularly after we’ve allowed it to fester for so long. We had the same experience in 2012 where the same issues were raised and it was thought that having written some of these papers myself, that I would have been clapping for the way the two previous administrations tried to do it but I said no, there’s no disagreement about the need to reduce this distortion. Even as we say so, I think this should be clear that this is not the end of subsidies. As we know, most countries have subsidies but it has to be planned such that it doesn’t distort the  macroeconomy that contributes to efficiency because they encourage growth and it’s really a good way of administering your resources but it’s a more active way of administering subsidy rather than where you are like a hostage because of the differential that arises when your domestic prices are kept at a certain level and importers are facing external prices that they cannot do much about but someone has to pay the difference, so that is one thing. 

Leaving the subsidy issue, I think clearly the issue of security in a general sense. Well, we can see that the government is rising to the occasion, we have statement from the military directly that they are going to deal with insecurity. Well, it easier said than done but the citizens really needs to feel that alot is being done to create a situation where people are going back to the farm, to the market, travelling across to sell their products as cheaply as they device and they are able to produce and keep their staff in place, so security is another issue. 

One of the things that a lot of people have talked about is the exchange rate, what about unifying the exchange rate so that you don’t have so many windows because you raised that point yourself some time ago?

Yes, I was a little bit miffed that we have been talking about this for about five decades almost since the 80s and I had a very knowledgeable journalist, he said something, when you start talking about unifying the exchange rate and that was like one of the IMF conditionalities and I said oh my God. But clearly just like we are removing subsidy, some of these subsidies have been administered principally through these disparate exchange rate.

You may want to encourage certain lines of production but you have to be very clear by what means you give this incentives. Certainly, when you distort the exchange rate by the kind of dimension that we saw, absolutely unheard differentials between the so-called official window and other so-called productive window and so on and so forth. You create other distortion so there’s no question that unifying the exchange rate is one of the instrument  that you will have to use to restore efficiency and also restore a sense of a level playing field for all investors and producers and so on and so forth but again having left it for so long and having aggravated that distortion over so many sector over time, you also have to know how to do that so that it does not create a heavy impact on the price system, secondly, that is where the debt resource mobilization comes in.

Should Nigeria be borrowing, given that it is in such debt or should it borrow to get out of debt?

Yes, we should borrow given our level of income, given our potential like we said over the years. In other words, the possibilities of creating wealth. So what is important is not really the issue of borrowing, it’s a kind of analysis that you have to bring to bear not only in terms of the overall program and the balance of payment support that you need to support the import content of that program but at the project level, what you need to implement a project profitably involves setting out the interest cost, the grace period and the amortization period. Once these are right, you can continue to borrow until you get to a point where the cost of borrowing now comes close to the overall rate of return on borrowing. So given the rate of unemployment, given the work that we need to do in the oil sector, agricultural sector, manufacturing sector, name them, just about every sector. In fact, we need to be funding our IT sector including our film industry, they are always perpetually short of the kind of funds they need to get a few capital issues sorted out. So, at the level of Nigeria, we shouldn’t be talking globally about borrowing, we should be talking about why we are borrowing. Certainly having said that, it is very distressing to  talk about borrowing to pay salary, it is also distressing to talk about borrowing for non-exhaustive expenditures, which should come of government revenue but for capital expenditures surely that is why there are banks locally, that’s their business to look at project at an individual level, at the local government level, at the state level and so on. So we should not be talking about borrowing in the abstract.

Let’s look internationally at the IMF for example, we’ve just seen Ghana going to the IMF for money, to use your language,  should Nigeria swallow it’s pride and take an IMF loan or is it not about pride and should be more about strategy?

Well, clearly I would never have said we should swallow our pride, we are the one in the deep waters. We have talked about the Asian tigers, those who have grown at about 8% to 15%, in real time it’s a lot of time. It’s supposed to be part of your strategy . I think most people don’t really understand when we talk about IMF conditionalities.  The IMF as somebody said is the first line of contact for developing countries because their funds are relatively low in terms of interest cost even though they are not long term but they are medium term and as members, you try to get as much of that as possible. Nevertheless, in Nigeria we always look at it in negative term and  start talking about swallowing our pride. It’s part of the strategy, actively seeking to get a soft term in your first transaction before you start getting forward to the ADBs and the world bank and then the bilateral and so on before you now consider commercial loans but of course commercial loans may less likely be asking you for the kind of stringent policies that will make sure that the funds are utilized properly. So when IMF ask that, it’s not for their own use but for the use of their member countries and also to encourage other multilateral and bilateral  to join in helping the country recover, so that is really the strategy.

A positive strategic decision to go and borrow and make the best of what you can get back for the money you pay as members and you subscribe to funding other countries so why not. So it’s about time we put that sort of fear out of our citizens talking about me swallowing my pride, there’s no pride to swallow in fact, it should be a deliberate strategic planning.

What would you say is the best macroeconomic targets to set for Nigeria today, given the way things are?

Well, theoretically you can always throw out a number but that number is the weighted average of growth and target you set for your rural development, for your manufacturing, for your mining, for your infrastructure. So we can toss out a number say, 5% to 6% real growth but by the time you break it down, you should be able to explain how you aggregate the sectoral growth to the overall growth of the economy. I know it sounds very nice to have a rounded figure and so on but an economy like Nigeria with the kind of unused capacity that we have, with the kind of underutilized labour, not to mention material resources, we should be setting much higher target but as an economist I don’t think that’s fair for me to just toss a number I like. When I worked in Korea, they were growing at 12% to 15% in ratio and I know that at various board meetings people were always astounded how they were growing so fast. In some years past, Nigeria manufacturing were growing at 16%, 17%.

We can get back to those growth rate but we have to address the issue of road transportation, power, of course security, which I have already mentioned and then mobilising the right mixture of domestic funds and international funding, so when you have all these things in place,  then Nigeria should be growing a lot faster. It was even envisaged in those days that Nigeria was going to emerge as the new Korea or Taiwan. The potential is still very much there.

The political environment in Nigeria affects the economy because it’s the politicians who make decisions about which direction the economy should go, so away from macroeconomic policies and global economy, what is making the news for you right now in Nigeria?

Well, for me personally, yesterday the positive news I saw was a meeting of the southeast governors, you know for many years back, many of us have been worried, we have talked about this, that the southeast just like the northeast, northwest and the rest of the zones of this country, their governors should be working together, pressurizing the federal government for policy changes that they need, that would make their situation more comfortable, so that is one positive news. The other positive news of course is, we seems to be getting to the end of the judicial process, looking at the problems we’ve had with the last election, so long as we now begin to pull that together and the sense of all the politicians coming together, I know there are outstanding issues, in the last few days some of those tended to be exacerbated but my impression is that we are moving towards some kind of closure and then of course as I said earlier, if the security situation improves, we have enough domestic impulse to move us forward  politically and economically provided we stay on that course and the real sign there is a deceleration of the fear, getting all these issues of banditry and so on that are really affecting the ordinary saver for consumption, trader and business men.

Once we get all these under control and we require alot of political will to sustain them. So there’s a lot to hope for and I hope that our politicians will focus on that, to create that free environment for maximum resurgence of the  Nigerian economy.