The CBN Governor’s warning

LESS than a week after the soothing news from Mrs Kemi Adeosun, Finance Minister, that the country had already exited recession, came the scary warning from governor of the Central Bank of Nigeria, Godwin Emefiele, of the country standing the risk of relapsing into a protracted recession. The CBN governor, who spoke at the end of the Monetary Policy Committee meeting in Abuja last week, had expressed worry over the N2.5trillion budget deficit recorded by the government over a period of six months. He, therefore, recommended the activation of strong and bold monetary and fiscal policies to guard against the economy slipping into another recession.

We are of the firm conviction that the Federal Government should take the CBN governor’s warning seriously because it is coming from an insider who understands the way the economy runs and the pitfalls to avoid. If there is any institution that can speak authoritatively on the state of the economy, it is the CBN. Therefore, this warning should be heeded and not dismissed as ‘the ranting of a doomsday prophet’.

Of particular interest to us is the rising debt profile of the government, the bulk of which is local, and the inherent danger of crowding out private sector investment. Of late, the Federal Government has been raising local bonds. At 13 per cent interest rate, the local bonds hold more attraction to banks than foreign bonds which yield just between 2 and 7 per cent interest. But, unfortunately, the lure of local bonds deters banks from availing local investors of facilities that are needed to stimulate economic growth.

The drawback of this is that unless the economy is energised through continuous investments that do not only create value but can also create jobs, the fragile growth recorded by the economy lately would be unsustainable and there might be a relapse. The banks must be encouraged to lend money to local investors so that all the companies that have scaled down their operations can return to full production and those that have shut down can spring back into operation. This, we believe, is the kennel of the CBN Governor’s warning.

We must reiterate that the Federal Government, especially, needs to scale down its borrowing to give the economy a new lease of life. While it is trite knowledge that countries that find themselves in recession have to spend to get out of the rut, it is also public knowledge that spending on consumption during recession only exacerbates recession. To exit recession, countries spend on value-creating and employment-generating activities. In times of recession, countries spend less on consumption and more on production. During recession, countries deploy resources to building infrastructure and activities that will inspire creativity and stimulate productivity. However, the situation in Nigeria is that the bulk of government borrowings is expended on consumption. In spite of recession, there has not been any increased spending on production. Rather, expenditure on consumption has been scaled up. Despite recession, the Federal Government borrows to pay political aides, to pay civil servants, to fund the extravagant lifestyle of political office holders as well as their families and to oil the bloated bureaucracy. These are some of the factors that got the country into recession in the first instance. To fully exit and travel far away from it, Nigeria has to purge itself from the practice of borrowing to fund consumption.

So, instead of borrowing to fund its bloated bureaucracy, the government should trim its size, reduce its overhead and deploy the savings from the exercise to build the necessary infrastructure. Borrowing to pay salaries or to maintain an unsustainable structure is subjecting the future of the country to jeopardy. This is why there is the need to emplace bold monetary and fiscal policies that would encourage production and dishearten consumption. Change in results is a consequence of change in actions. To prevent a slide into another recession will require taking the right actions. The time to act is now.