What's wrong with Nigeria?

If Nigeria were to be a company…

Out of curiosity, permit me to ask a question that is bothering me. If Nigeria were to be your own company, given her current mess, what would you do to your Chief Executive/Operating Officer? Please don't answer now.

Many business owners are actually intolerant. They love performer and detest anyone otherwise. Aero contractor just take a very high level decision that will impact the labour market negatively now henceforth. Tighten your seat belt if you're a job seeker.

From September onward, you'll be seeing some ex-cabin crew jostling for jobs outside aviation industry. Nigeria Bureau of Statistics will also update its unemployment rate.

Why all this economic displacement hullabaloo? Nigeria problem comes from fiscal authority but monetary authority is not anything different.

 From economic point of view, what do experienced monetary policy makers do to an economy in recession? CBN did otherwise. Perhaps, the apex bank is re-writing economic theories that will guide the nation into the future.

But I know for sure, Ben Bernanke won't be using open market operation to withdraw money from an economy in recession. Alan Greenspan won't hike benchmark interest rate because new FX regime fails to attract foreign investors. Who regulate the regulators when they miss it?

What the market expected from Uncle Emefiele is to stimulate the economy, jerk up demand and allow some level of inflation. Instead, CBN is withdrawing cash from the economy, hike interest rate in a bid to searching for dollars when the nation has less to nothing to export.

Emefiele does not need to be Alan Greenspan or Ben Bernanke or even Sanusi Lamido Sanusi to alter the economic direction the nation is tolling and apply some high level of "what ifs". What if CBN allows some level of productive inflation?

Wait a minute! I wish to actually ask if it is too early to assess the present administration's performance. It is not please! Out of PMB 48 months, 15 months seems to have been wasted.

Leaders, policy makers and politicians need to learn how to run Nigeria like a business that is accountable to shareholders, in this regard; the citizen.

It is however not easy to quantify the side effect of various policies somersaults or the lack of master economic plan thereof. There is a bigger task ahead of Emefiele, as global economy remains unstable. Permutation and combinations policies strategy approach won't work. At least, failed FX regime provides an indicator things have long fall apart.

Have you consider what will happen if Fed eventually hike rate in 2017? Please take cover but don't die, heaven will not let loose!

What's wrong with the economy?

A boss recently asked what's wrong with the economy. Well, maybe Nigeria needs to learn how to identify a problem before we try to fix it. What's wrong with proper working of the economy can be spotted and fix with simple economic model.

This is what I call simple vanilla analysis and it provides an insight. Trust me, I can go on and on expanding the variables but let's keep it simple. The problem with the economy can be modeled.

Nigeria's gross domestic products (GDP); a measure of productive capacity of the country (You can say Nigeria's balance sheet size) is equal to = combination of aggregate consumptions, aggregate investment plus aggregate savings and the nation's net position in international trade (often unfavourable).

GDP=C+I+S+(X-M).

Now, let's see the variables through simple analytical lens and consider how the story goes. Meanwhile, the model can be expanded but people without background in economic may not get it right.

So, these variables (C+I+S+(X-M) that define the nation's balance sheet size started facing both controllable and uncontrollable threats since June, 2014. Planet earth is spherical, that's why it is not always easy to get rid of problems so easily. Therefore, being a country that rely heavily on foreign receipts, fall in price of oil really cutback the nation's earning capacity.

Imagine that CBN went offshore to practically market the economy to foreign investors to bring dollars we so cherish. So, the nation's aggregate consumption has gone down (the larger component of the gross domestic product).There's an upsurge in price of basic household items including food.

Nigerians ability to buy has reduced. Consumption answers to purchasing power and follow the same direction therewith. This is an unproductive, useless inflation that is driven by cost rather than demand. As at now, household disposable income is not comparable to what it used to be early 2014. In the last fifteen months of President Buhari, life has not been the same. Free lunch has practically stopped; and 36 Freetown cannot even pay workers emoluments.

It is also noted that people spending cultures have been adjusted, and priorities have changed. But none of these will stimulate economic growth especially for an import savvy nation. The best the economy will witness is contraction in its size because of lack of productive base. GDP declined by 2.06% in second quarter 2016 compare to a year earlier. The direction of policies strategies is robust but there are buts.

So, time value of money has been reduced with rising inflation and worsening interest rate environment. Saving has become so injurious in the market economy where people specialized in productive activities and meet their needs in an exchange voluntarily agreed upon. And investment side is not doing any better.

Consumers’ purchasing power is down, and continues to move down the hill as Naira continues to lose weight in the local and foreign market. Thus, this further explains why fast moving consumers goods operators are finding it difficult to turn out strong earnings. Corporate revenues growth recorded in the first half (albeit marginal) is not real if we index it with inflation rate.

Inflation is however soaring since uncelebrated exit of Sanusi Lamido Sanusi, erstwhile CBN Governor. SLS saw inflation as a risk to the economy. GDP and inflation tango very well then as average price of oil was around USD100. Thus, it is very safe to say that marginal propensity to consume is negative as inflation has already eroded household purchasing power couple with dead Naira.

Taking performance of companies like Unilever, Nestle, UACN, Cadbury, Nigeria Brewery etc into consideration, you will agree with me that it has not been an up trend all the way. Tightening economic environment brings about unholy business practices. As you can see, NB Plc may be crowding out on competition just like there duopoly nature in the cement industry. Price of cement has gone up by +40% while banks are carrying houses they cannot sell because their debtor defaulted.

Nigeria's investment climate is cracking and value lost is far above adjusted fair value on existing investment base. Investment is going down. Infrastructure investment has nosedived at all level. Cement companies like Lafarge, Dangote etc are not finding it easy to sell in the market. Consumers’ sensitivity to price is very high now.

There are two major sectors that drive investment in the economy. Government spending on capital projects and private investment which more than often sponsor by banks are not there. Since June 2014, government revenue has been on decline compare to period of affluent when price of oil was at all time high.

Though, FG revenue despite the fact that the economy talks about diversification, accounts for more than 90% of export receipt. In the last 15 months of PMB administration, I can tell you that both FG and private sector investment is not encouraging. Foreign investors continue to wait on the sideline because of the feasible absence of economic plan.

Yes, political risk is high and investors couldn't price uncertainty well enough without gambling their way into disaster.

So, it is quite simple to observe that investment are bearish than as it were when the economy were opened. Bulls have escaped the impending economic wrath. Instead of policy shift, adjustment or follow up that often follows change in government. I think the master of all; the self righteous specie will be running Nigeria base on emotion rather than being logical.

Except for outright ban placed on 41 items by CBN, there has not been any shift in focus. But there is clearly different between Okonjo-Iweala and Kemi Adeosun as Ministers of Finance. Madam Iweala seems to be pro-Keynesians in action while Adeosun is Keynesian disciple in thought. That did pay off in the past administration than it is now.

Why? Iweala commands her units without been afraid of her master while Adeosun is playing the game not to hurt the master. She doesn't want to make glaring mistakes like the Central Bank Governor, Godwin Emefiele.

To complement domestic investment, CBN has tried without success to provide juicy return on investment in baskets to greenback surplus spenders. Demand for dollars in the economy is Emefiele's headache.

Because of their sophisticated analysis, cost and benefits of their investment decision, foreigner still stay on the sideline. Two juicy offers - floating FX and increase monetary policy rate - could not bring dollar in the economy.

Then, Naira continues to be exchanged under pressure. The nation has given Naira heart attack apart from its existing ailments. Adeosun ought to come to his aid with some palliative fiscal measures to open up the economy and increase productive base. All the Minister is giving the people is hope - maybe that enough for now.

In all, investment side has not contributed significantly to growth in GDP. We return negative in two consecutive quarters and fundamentals are not changing. That's an indication that we may go negative again.

Savings side of the economic growth equation has gone down. At least, FG has technically reduced banks capacity to creating money through lending. Single Treasury Accounts (TSA) has withdrawn N3 trillion from banking coffer and banks are now leveraging heavily.

In their 2016 financial scorecard, it is expected that cost of leveraging will affect funding cost. Banking sector funding mix is changing; I sure hope Modigliani & Miller won't be wrong about leveraging this time. Then, monetary policy committee thought it through and hike benchmark interest rate which is disservice to humanity- not necessarily humanity but Nigeria investment climate.

This is happening at the time when banks are wary to lending as their existing exposure to energy sector is increasing weight of toxic assets they are carrying in their book. Banks currently increase investment position in fixed income market to about N2 trillion.

Meanwhile, slope of savings function has followed south, and it is going down as the working environment become so tough. Companies have resorted to cutting cost through down sizing, the easiest part of strategic management.

It is a no-brainer approach to managing rising operating expenses. Unemployment is fast growing while rising inflation is on cost driven rather than demand driven.

Net receipt from international trade remains unfavourable. External reserves have been used up from more than $40 billion before Goodluck Jonathan administration emerge. When people say GEJ administration provide stable economic environment, it is a cheap opinion. Let's look at the numbers fundamentals.

Oil market was strong, so also was the nation's external reserves. There was no restiveness in Niger Delta, the region that is mainly the economic power of the nation. Boko Haram has little impact on the financial market except for increase political risk which yield on gilt edge has been taken care of.

GEJ had money to spend and he spent it but not to put the economy on sustainable growth. Buhari on the other hands, inherited weak fundamentals. The mainstay of economic survival has been hit while he's no Keynesian disciple.

At the time he was elected, a command economist with welfarist nature is expected to spell doom for a consumer economy that depends heavily on imported foods to feed about 200 million people (Half of which are youth).

Net export is unfavourable given the current data. By extrapolation of underlie fact, demand for FX has increased the burden of Naira while CBN is yet to attract sufficient volume as a dose for relieve.

By BCG matrix, the real sector of the economy still remains a star that needs to be heavily support. It could well serve as cash cow for the nation as it has ability to generate dollars.

If the government is sincere enough about diversification of foreign earnings sources, issues in the real sector should be addressed. That said, the current economic structure should be review and PMB should see Nigeria as an entity with life of its own.

Nigeria cannot be equal to Buhari or Buhari cannot mirror Nigeria in perception, perspective and performance! PMB fails his economic class woefully in the first fifteen months! Hunger here and there, in history; these could trigger economic revolution – a negative one for that matter. No one gives free money (I think that's fine) but how do we explain a working class that cannot meet basic things of life (that's not fine by me). Nigeria is in a fix today, who will fix her?

Julius Alagbe

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