POLICY BACKGROUND:
The coronavirus has changed the modern world with a velocity un-foretold. To protect their populations, nations have taken unprecedented steps in closing down cities, halting socio-economic activities and quarantining vast numbers of people.
Given the lethality of the disease, the public health measures have been prudential. If such action were not taken, the toll of this pandemic might rival the 1958 Asian Flu which took over 1 million people or, worse, the 1918 Spanish Flu where an estimated 50 million people passed away.
While the public health measures may save lives, their economic consequences have been brutal enough to place large numbers of people in a different form of jeopardy. We face a trade-off between certain pandemic and possible widespread depravation. Having to make this dismal trade-off between a currently incurable sickness and significant economic contraction is a dilemma no nation wishes to face. However, it is the one upon us.
The Nigerian government acted wisely to suppress the virus. Our health system and medical facilities simply cannot cope with legions of cases. The capacity and aptitude of government are more suited to dealing with the economic fallout of the public health restrictions than in dealing with the medical complexities of a contagion no one fully understands.
The economic pain suffered by the private sector can be counterbalanced by government fiscal and monetary policies that stimulate the flagging economy. We dare not underestimate the twin dangers posed by the virus itself and the economic consequences of the public health response. Our goal must be that the people live neither with disease nor in hunger. This situation presents a historic chance to establish a more beneficial social contract between government and the governed. If we so utilize this moment, it will be recorded as a pivotal one in our national history. If we allow this moment to slip, history will not be obliged to treat us with great mercy.
THE ECONOMIC SITUATION
To stop the viral spread, the world has gone into self-induced economic contraction. Most recessions have their roots in crisis born first in the financial sector. We should sound an even louder alarm when contraction befalls the financial sector and real economy at the same time. When both experience steep downturn simultaneously, there exists the true danger of descending into something worse than recession.
The global economy has turned against us. Oil prices have steeply fallen. The price may rebound but not nearly enough to return to customary levels. The resultant revenue loss impairs the naira exchange rate. In general, the price of imports per unit has become dearer. Thus, wise policy suggests limiting our imports during this emergency in order to save hard currency and protect the exchange rate.
Nigeria’s private-sector economy can be divided into three broad sectors: 1) Agriculture, 2) Service and 3) Industry. Each sector has been affected by this crisis but with different degrees of severity and, in some instances, in entirely different ways.
Most Nigerians are engaged in low-level agricultural production in rural areas. Thus far, the coronavirus is mostly in urban areas and not in rural communities. Because of their relative isolation and the nature of their work, most farmers can continue their vocation. This means the supply of domestically produced food staples should not materially fall. With the reduction in imports, demand for their crops should accordingly rise. Unfortunately, that increased demand cannot translate into actual sales because of the drop in aggregate income suffered by the urban population. This loss of demand, coupled with restrictions on movement and on public marketplace hours, creates great uncertainty for farmers. The uncertainty means farmers and consumers cannot engage in adequate and rational price discovery. The cost of the same item may vary significantly from one location to another. Additionally, farmers engaged in non-food crop production will suffer much greater uncertainty as well as greater lost demand for their products than those who cultivate staple foods.
The farmer is burdened with too much uncertainty for any good to come of it. Government can do a lot to diminish the uncertainty by assuring farmers a minimum price for select staples. This can be done through reestablishment of commodity boards. See Recommendation 3 below for more detail.
The urban work force is mostly engaged in the service sector with a minority of workers involved in industrial manufacturing. Much of the urban labor force has been made idle. Hiring of services such as hair care, taxi driving, artisanal crafts, tailoring, etc., will be substantially deferred at this moment. These people work in businesses that are mostly small and medium-sized. The firms do not have ample cash reserves nor can they borrow funds given the high interest rates.
Unemployment has quickly skyrocketed to levels only witnessed in economic depressions. Many families have no money at all. Other families have very little money, perhaps enough to last a few more days. Yet, real life is not some abstract economics book where a person can immediately adjust his demand for goods strictly correspond with his supply of money. Despite the paucity of money, demand for life’s essentials cannot fall below the minimum required to survive. The money-less family still needs food, water, shelter and, to a lesser degree, utilities. In a compassionate society, they should not be made to do without.
Most families need relief. If relief is not forthcoming, these families risk hunger and its attendant suffering and woes.
SITUATION WITH BUSINESSES
Most businesses are small, service-sector oriented ones that have been roughly battered by the crisis. Without relief, many of these small businesses will permanently close even when things begin their return to normal.
The financial sector too has suffered. Foreign investment has shrunk as has domestic borrowing. Large businesses also struggle because aggregate demand for their products and services has fallen. Yet, help to banks and large business is relatively simple. Such aid can be rapidly provided by the CBN. The CBN can lend large amounts of virtually non interest loans to these firms with the proviso that the companies maintain their existing payrolls.
If we must hold to the restrictive public health measures, the people will need economic relief. Activating Trader-moni and other programs will help many small-scale traders but not the average wage earner who just lost his job. Resort to the strategic grain reserves will blunt hunger but the finite reserve cannot cover all who are in danger. If we do not take additional steps to stimulate the economy and answer the demand for food, we risk a deep economic contraction that will prove difficult to cure. The worst of this dark potential can be avoided if government is prepared to act in ways that not only feeds people but protects the basic contours of our private-sector economy so that it can more quickly revive once normal conditions return.
POLICY RECOMMENDATIONS
Recessionary forces outweigh inflationary ones at this time. The agricultural sector mostly intact but hurt in part. The service and manufacturing sectors have been weakened and urban employment severely battered. The economy will suffer palpable contraction unless government enacts countervailing measures.
1. SUSPEND/AMEND 5 PERCENT DEFICIT LIMIT OF THE FISCAL RESPONSIBILITY LAW.
The Fiscal Responsibility Act prohibits fiscal deficit of more than 5 percent of GDP. This provision was fashioned after the Maastricht Treaty governing membership in the Eurozone. Eurozone members never honoured the deficit ceiling even in normal times; it was too impracticable and deflationary to abide. Given the exigencies of the current moment, the Eurozone has completely ignored the Maastricht limits.
The fiscal responsibility limit, while perhaps well intentioned, is, to say the least, inapt for a nation in our economic situation. The provision is based on two inaccurate assumptions.
The first myth is the belief that national government fiscal deficits are always harmful. The second is that economic conditions will always be “normal” even for the long-term.
Deficits run by a national government in its own currency are part of modern governance. The United Kingdom has run a continuous, ever-growing deficit since 1694. It is not the worst for it. Running that deficit wisely was instrumental in turning the island kingdom into the pre-eminent world empire. For 90 percent of its existence, the US has run annual deficits. During this extraordinary time we face, both the UK and U.S. will record the largest yearly deficits in their histories. China and India follow suit by implementing unprecedented stimulus packages.
A government deficit serves to enrich the private sector. A deficit means government spends more than it takes in. That extra amount goes to the private sector. As such, national government deficits boost private sector growth and activity. The only legitimate concern with deficit spending is inflation. However, in the present case, the threat we face is more recessionary than inflationary. A bit of inflation is the cost we should be prepared to pay to avert severe contraction.
Second, the efficacy of the law unduly hinges on the long-term clairvoyance of the legislature that wrote it and on the questionable soundness of the assumption that times will always be normal. No fiscal legislation can predict the future in perpetuity. The best fiscal rules provide sufficient leeway for future leaders to respond to the conditions of the day. Since the Fiscal Responsibility Act was first passed in 2007, Nigeria has already experienced three abnormal periods. The 2009 financial and banking crisis heavily affected us. The 2015-16 oil price recession heavily affected us. The present crisis is now heavily affecting us.
In normal times, the provision constitutes a handcuff on the federal government’s ability to stimulate economic growth. In the current situation, the provision is a mean straitjacket blocking the federal government from taking the steps required to salvage the economy at a time when only the federal government can do so.
The best step would be to suspend the 5 percent budgetary limit for this fiscal year. Alternatively, the limit should be raised to 25-30 percent to allow the federal government more room to make the minimum expenditures necessary to save the economy and the people.
2. EMERGENCY SUSTENANCE PAYMENTS
With the fiscal latitude provided by lifting the budgetary limit, government can render emergency sustenance relief to most Nigerian households, especially the recently unemployed, via cash payments.
This will blunt hunger, maintain aggregate demand in the domestic economy and help sustain private-sector markets to the extent possible. Directed towards needy and modest households, such expenditure must be heavily weighted to local produce, not to imports. This will help mute inflation.
Such payments can be done in either one or in a combination of three ways. First, we can designate a stipend for every household. The amount should be enough to pay for the monthly needs of an “average” household for food and other basics. While this may somewhat penalize larger families, perfection cannot be had at this time. Second, the stipends could be given as a form of emergency unemployment insurance to those who can prove they were relieved of employment due to the crisis. This would be more targeted at the actual victims of the crisis but harder to administer. This stipend would also have to be extended to owners of small and medium- sized businesses.
Third, we could render some form of payroll support to companies and businesses that seek to retain workers albeit they may not be fully employed. The stipend could help companies stay in operation while maintaining workers on their payroll. By maintaining workers, the company can more swiftly return to full operation when normalcy returns.
Payment of these stipends will require hiring additional government workers to augment the existing bureaucracies to implement this program. This administrative requirement will help boost employment and aggregate consumer demand.
Payments can be made quickly by using the BVNs of prospective recipients to make direct deposits into individual bank accounts. This will encourage those without bank accounts to establish such accounts. This process will bring millions of people into formal banking. It will also be safer and not lead to the types of violence and crime that might follow physical cash transfers.
3. AGRICULTURAL MARKET AND COMMODITY BOARDS
The agricultural sector is perhaps the least affected by this crisis. This is fortunate as it is the most important tool in mitigating the threat of widespread hunger. Yet the agricultural sector is still beset by uncertainty over prices and supply.
To maintain adequate supply of food and ensure price stability, government should re-establish commodity boards for strategically important crops. These boards will specify a guaranteed minimum-maximum price range for these crops in order to maintain and stabilize farm incomes as well as consumer prices.
4. FARM TO MARKET FACILITATION
In addition to the work of the boards, the government and the boards must take additional action to improve the transportation of goods from farm to market. Constructing new storage facilities in major urban centres will help maintain supply, keep prices lower and also provided employment for those constructing and maintaining the storage berths.
5. IMPORT SUPPRESSION
At this time, imports generally hurt the economy because they siphon much needed hard currency. It is imperative that we drive down our level of imports. The sole exceptions to this rule are medicine, essential raw materials and vital products such as petrol imports that we do not produce in sufficient quantities. On some essentials, we may even lower taxes and tariffs.
All other imports should be strictly discouraged through a mixture of policy measures including luxury taxes, higher tariffs and higher import processing fees due to the partial closure of ports of entry due to the coronavirus.
6. MAINTAIN AND EXPAND SCHOOL FEEDING PROGRAMS
Even with schools closed to classroom instruction, we should continue the school feeding program at participant schools. But we must also do more. The program must move beyond its pilot status by expanding it to as many schools in as many states as we can, consistent with applicable public health measures. By expanding this program, we help feed our most vulnerable children while creating extra jobs and bolstering food production and farm incomes.
7. DIPLOMATIC PUSH FOR DEBT RELIEF
African Finance and Foreign Ministers should join a coordinated effort for debt forgiveness, a “Debt Jubilee.” Alternatively, the World Bank and other DFIs should agree to a wholesale rollover of the debt of African nations by reducing the interest rate burden of African nations by at least one half.
8. FINANCIAL SECTOR MEASURES
The CBN should lower interest rates to single digits. This may spur some private sector and will lower the charge on government deficit spending.
To ensure the health of commercial banks, the CBN should give liberal access to its discount window at a virtual zero interest rate policy. To assist large businesses maintain operations and their payrolls, the CBN can give conditional interest free loans. Conditions could include firms maintaining their work force and even hiring an extra 10 percent for 2-3 months but at more reduced wage. These additional workers should be youth hired under a temporary internship or training program.
