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Recession: Is the worst really over? – By Jideofor Adibe

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Emefiele said that Nigerians had seen the worst of the economic crisis and that the economy would be fully out of recession by December this year and grow

With Nigerians waddling through what is generally regarded as the country’s worst economic crisis in over two decades, the CBN Governor, Godwin Emefiele, has just dangled what some would regard as a ray of hope to suffering Nigerians. 

Speaking while playing host to members of the Newspaper Proprietors Association of Nigeria recently, the CBN Governor reportedly told them that Nigerians had seen the worst of the economic crisis and that the economy would be fully out of recession by December this year and would be on a part of growth.  

The apex bank governor was quoted as saying:  “I repeat, the worst is over, Nigeria’s economy is on the path of recovery and growth. 

“If you are a bystander, you are losing… join the train now before it leaves you.”

The first impulse is to yawn. 

We have heard this sort of apparently ‘unfounded optimism’ several times before from government officials, haven’t we? 

Governments at every level in this country have a penchant for claiming that their policies are the magic elixir that would usher the elusive El Dorado that their predecessors in office failed to actualize. 

I believe that bogus promises are among the reasons for the deep distrust of governments across the world. 

In countries like the US, this distrust of government is one of the bases for their fierce defence of the freedom of speech. 

One of the arguments of free speech advocates is that it is only through unfettered competition of ideas in the political marketplace and the freedom to ‘interrogate all interrogatables’ that the truth can emerge. 

So can Emefiele’s bold assertion that the worst is over hold up to scrutiny?

One of the bases for the CBN Governor’s optimism is his claim that the liberalisation of the foreign exchange (Forex) market had begun to pay off. 

He claimed that the country had recorded $1 billion capital inflows from foreign investors since the market took off almost three months ago. 

In our highly import dependent economy, there is no doubt that the forex crisis (typified by the massive depreciation in the value of the naira against the major currencies) is both a cause and effect of the economic crisis. 

So a cynic can legitimately ask: if there has been inflow of over $1bn dollars since the liberalization of the forex why has the naira not begun appreciating or stabilizing in value?

Another legitimate question is whether the disparity between the official exchange rate and the parallel market rate has not created a huge opportunity for arbitrage and round-tripping, which in turn are disincentives for investing in the productive sectors of the economy?  

Supporters of the CBN would counter that the policy is still working through the system and that the apex Bank is working on the unintended consequences of that liberalisation. 

The point to be noted here however is that every major policy often holds good opportunities of turning things around just as its unintended consequences could also derail such a policy – no matter how sound such a policy may be at the theoretical level.

Despite legitimate grounds for scepticisms over the government’s claims, I have some grounds for sharing in the CBN’s optimism:

One is the apparent increasing self-confidence of the CBN Governor. 

This is typified by the decision to hold the interest rate unchanged at 14 per cent – despite criticisms, including from very influential quarters,(such as the Finance Minister who publicly called for a cut in the interest rate) that such is undermining the need for the private sector to secure loans at cheap rates to reflate the economy. 

In the past the CBN indulged in many policy somersaults – often abandoning policies once they came under barrage of criticisms – rather than having the nerve to see such policies work through the system.  

Though no one can be very sure in an environment like ours with many intervening variables if any policy introduced would work or not, I see the decision of the CBN Governor not to lower the interest rate as demonstrating a new found confidence and therefore commendable. 

It is also possible he had just secured more legroom to operate.  In holding the MPR steady at 14 percent (the MPR is the rate at which the CBN lends to commercial banks and often determines the cost of funds in the economy), the CBN argued that to further lower the rate would worsen inflationary conditions. 

It also argued that in the past the MPC had cut rates to encourage lending to the private productive sectors but found that rather than the banks using the available liquidity to provide credit to agriculture and manufacturing sectors, the rate cuts only “provided opportunities for lending to traders who deployed the same liquidity in putting pressure on the foreign exchange market which had limited supply thus pushing up the exchange rate.” 

On the argument that cutting interest rate would help the public sector to borrow at lower rates to boost consumption and investment spending, the CBN argued that “while it was expected to stimulate growth through aggressive spending, doing so without corresponding efforts to boost industrial output by taking actions to deepen foreign exchange supply for raw materials will not help reduce unemployment, nor would it boost industrial capacity.” 

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