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Nigeria may be heading the way of Zimbabwe, if the advice of a business tycoon who suggested that the Central Bank should print more naira notes and flood the market with it is heeded. Mr. Jimoh Ibrahim, the tycoon who has acquisitive interests in insurance, oil and gas, hotel and the news media had recently suggested the printing of more naira notes as a remedy for confronting headlong the current economic meltdown.

But a team of economic and financial experts who met with some top newspaper managers to brainstorm on the global economic meltdown and the way forward for Nigeria, think that printing naira notes and unleashing them into the financial system would plunge us into deeper financial catastrophe that would far worsen our economic plight.
I was among the senior journalists invited.

At the interactive session on the Nigerian economy and the way forward, we re-examined the concept of free market and wondered whether there is an alternative and the verdict we arrived at is: “We would have to get back to free economy, because mankind has not yet invented anything better.”

We looked at Nigerian banks and asked: Why are our banks in this situation where many of them are feared to be on the brink of insolvency with a load of toxic margin account loans weighing them down? The answer we got: “Our banks were leveraging in terms of the foreign capital influence. So the banks were taking money from here and there. So when the parent banks got hit, all those facilities had to be withdrawn overnight. And that brought both the banking system itself and the economy not just to its knees, but also on its stomach.”
The discussion took a humorous twist when a journalist asked the panel: “Jimoh Ibrahim said recently that we should print more naira. I want to know the reaction of the panel...”

He did not finish his question when everybody broke into laughter. The chairman of the panel then said: “He just said it and I could see your reaction. You started by reacting with laughter. You can see the reaction. You are asking me but you first reacted by laughing generally. Your reaction is my reaction.” There was more outburst of laughter to which the reporter said: “Gentlemen, this is no laughing matter. My question is: Do we need to print more naira?”

The chairman replied: “The thing is, I find it interesting. The more you say it, the reaction I get is very interesting. Once you asked it, everybody starts laughing. I was driving home at night when somebody called me to ask: That somebody just addressed the press, he didn’t even tell me who, and was suggesting that the solution to all these things is just for the Central Bank to print more naira and make them available to Nigerians. When he said that, I just burst into laughter. He asked: Are you laughing? And I said, yes. I found it entertaining. He was asking for my comments and I said no, I won’t comment. I told the reporter: That’s an interesting proposal. There is a country doing it now. And the name of that country is Zimbabwe. It is easy. We can make our highest denomination about N100 million. And maybe one dollar would be equal to N100 million.”

A member of the panel then said: “I don’t think Jimoh Ibrahim is serious. Maybe he is being sarcastic.”
Another member countered: “Truly, he is serious about it. People who have spoken with Jimoh knows he is serious about it. He says his suggestion is based on his library research.”

Then the chairman cut in: “Well this is democracy. So Mr. Jimoh Ibrahim is entitled to his view. But I would like to remind him that Zimbabwe is doing it. But they have expiration date on each note. Once the expiration date comes, you offer it to somebody else and he has to look for the expiration date. If it has expired, then it has expired. Actually, you could be in a queue paying for Coke. The man in front pays a different price, the man in the middle of the queue pays a different price, the one at the end of the queue pays a different price.”
So, what can warrant the printing of the naira?, one journalist wanted to know. An expert from the nation’s topmost bank offered an explanation: “You see, you create money. You don’t even need to print notes to create money. Much of the money creation, like we credit the account of banks, we only print to back up the components of the money supplied that is used for cash transaction.

“Otherwise, you could just have money being created. Each month, there is the federation accounts allocation. Much of this money movement is just paper. It’s just the figures being credited. It is just paper. You don’t physically carry the money. The amount of naira in circulation is about 9 trillion or something. But out of that the total currency in circulation is a little over a trillion. That’s the notes. The rest of it is just the crediting of account. We credit this person’s account, you issue a cheque, the person pays it into his account, the person issues a cheque for another one and you never really see naira. And there is money.

“But the point is that each of those movements, you are asking for value. You are getting value for all those movements.” According to the financial guru, what made Jimoh’s suggestion “ridiculous to me was the very banal way it was used in terms of printing. We can create money without necessarily printing money. We can increase the money supplied without printing money. So it is that physical sense of going to print it and we would be carrying it about; that was what actually amused me.

“Money is what money can buy. I think that is the street meaning of it. It is just what it can buy. If we choose as a people to say what one naira is worth today, we want to make it one million, it won’t make a difference. The only thing is that instead of calling the exchange rate today and saying it is one hundred and something to a dollar, you would be talking about one point something million. Or ten million or hundred million.

“So you can raise the exchange rate but it doesn’t change anything about the value that it can command. If you want the nominal value to increase, instead of talking in terms of what we have now, you can multiply by a million so that if we have the exchange rate of 147 to the dollar, then you have 147 million would be one dollar. It doesn’t change anything. So you can raise the nominal value of your currency but it doesn’t change anything in terms of its purchasing power.”

Recession
The group also examined another question: Are we in recession in Nigeria?
And the answer from an authoritative money manager on the panel was: “No. We are not in recession. And it is unlikely that we would be in recession. The reason is that, if you look at the structure, the industrial countries are expected to be in recession. Most of them are in recession already. Somebody loses a job every two minutes in the UK. And in most industrial countries, there is bankruptcy and companies are collapsing every day. There is nobody who doesn’t know a family or a neighbour or a friend or whatever who has lost a job in the last two, three weeks. Every day companies are closing down. This is not the case in Nigeria.
“Recession is a technical term.

You are in a recession when your GDP grows negatively for two or more consecutive quarters. Then you can say you are in a recession. We are unlikely to be growing negatively ostensibly because, if you look at the structure of our production, you ask: Which sector will implode to grow negatively? Is it agriculture, which is 42, 43 percent of GDP, which is mostly peasant agriculture? And except if we have a drought or an inclement weather, if the rains becomes handy, agriculture would still grow positive. Or is it telecoms that is now almost pursuing manufacturing in terms of share of GDP? Telecoms is now 2 point something percent. And manufacturing is about 3 percent. Is it telecoms that would shrink? If you go sector by sector, the sector that is obviously going to grow negatively is oil—as usual. Last year, it grew by minus four point five percent. Last year it fell by about four point five percent.

So this year it is probably going to fall furthermore, relative to last year. But because its contribution to GDP is smaller than agriculture, the growth in agriculture is likely to wipe it off. The industrial manufacturing sector would likely grow at a slower pace from their nine point something percent estimated about last year. Let’s say it grows by half of that or even less, even if it grows 2 per cent down from a growth rate of nine, you would still have a positive growth rate. So if you go sector by sector, oil is the one that you can say clearly would grow negatively.

“Part of the reason we are unlikely going to go into negative growth rate (as compared to what we had in 1982, from late 1981 until the Structural Adjustment Programme came, when the economy was just imploding) is because of one or two key factors. A major factor is the issue of the exchange rate. The most important factor is the difference between then and now.

The exchange rate then was fixed. And of course, we saw what would have happened here now is what happened then. Once we got hit by the shock, the economic agency immediately figured that there is no way you can maintain the reserve level at this exchange rate. October last year, the outflow was about six point something billion. November was five point something. December was five point something.

Then January moderated that down. Then February to even less than three. If it continued at the rate it was going, it was only a matter of months before we would have exhausted our foreign exchange. And that happened when we had the first oil shock of late 1981. Our oil prices imploded. From the peak of 40 dollars a barrel in 1980, it went down significantly. And once it came down, we didn’t adjust the rate of naira’s exchange to the dollar. What that meant was that in the first situation, it became cheaper to import everything than to produce at home. You could sustain that when the high oil price was growing. But once oil prices fell, you could no longer sustain the import armada. But we continued then, until our foreign exchange was just enough to pay for three weeks of imports.

“The Shagari administration came with the austerity measure, banned all manner of goods. We had the essential commodities list where you had to queue for sugar, for rice, for every essential thing. That’s where we went. As at that time, when it imploded, the exchange rate did not adjust. So imports continued to come, we haemorrhaged the reserves, run out of reserves and imposed bans. Import licenses came that never got to the genuine manufacturers.

You had to depend on who knows who. Capacity utilization in industry was below 20 percent. That’s on the one hand. Secondly, the important armada helped to wipe off the nascent industrial base, combined with the restrictions on the access to inputs. Capacity utilization was well under 20 percent. Industries were closing down. Because of the failure to adjust the exchange rate, government revenue fell in proportion to the fall in oil prices. Governments could not pay salaries. People were being owed 11 months, 18 months’ salary arrears.
“State governors used to make special broadcast to announce that they were paying one month of the 12 months arrears.

That was the shock we had gone through before. And exactly a similar thing is what we are facing today. But everybody in the country is behaving as if nothing has happened. People are even talking about salary increase. The memory is so short, that when we had a similar shock, the problem was even how to pay salaries. And when the military took over in 1984, it retrenched 40 percent of the Federal Civil Service. That was what happened then.”

What is the difference between then and now?, the financial guru and economist was asked. He replied: “The difference between then and now is that, first we have a flexible exchange rate regime. And I can tell you, with what has happened this last month, what they shared was barely enough for many of the states to pay salaries.
People don’t fully understand what we are going through and that we could actually face exactly that under this regime, if we don’t manage the exchange rate carefully. So the major difference now is the exchange rate which already you have (at) 30, 30-something percent change, which is helping to make a difference. Which then means that for the general economy, that would then mean that in terms of the money in the hands of people to spend, at least is not falling in proportion to the fall in the oil industry. And that’s why you haven’t heard of massive retrenchments or people being owed salaries. Because if people are being owed salaries, then they won’t have money to spend. Even if the industries produce, nobody is buying. So you have a spiral and there would be retrenchment.”

The financial guru then explained the implications of emptying our foreign reserves. He said: “If you go out of reserves, it would get down to the Ghana situation. Don’t forget that Ghana started once at one cedi to one dollar. And they got to about 10,000 cedi to the dollar. That’s what you get when you run out of reserves. Russia has tried it. They tried to defend their currency, frittered away about 300 billion and then realized it is not a sustainable scenario.

“The exchange rate is the difference between then and now. Another thing is that then we had just gone into our first jumbo loans and we were having difficulty servicing the debt. So debt burden happened to be a major difference between then and now. We are out of debt largely. It doesn’t feature as a major part of the story. If we didn’t have debt relief and you have to spend up to 4 billion to service external debt, then we would be in a big mess.

“That is a major shock absorber for us. The third one is the fact that we didn’t have a banking system then that could absorb the shock. We have a much better one today, with all its deficiency. Then, when we had the shock, we had to resort to external borrowing because there was no domestic infrastructure that could absorb the shock and you had to go and borrow externally. Today, all of our governments are running deficits. And who is the one going to bail out the system? It’s the banking system. They are all going to issue bonds. Those bonds are not going to be subscribed to by you and I. It is the banks that would take up at least 95 percent of the bonds.”

Budget
On the budget, one of the leading discussants declared: “Of course, the 2009 budget is just dead on arrival. It is not doable. And because it is dead on arrival, you would need the banks. Everybody would be going to the market to raise funds, to issue bonds and it is the banks that would underwrite. And this brings to the fore the centrality of our banks today in national economy.”

Bail out
On the bail out of banks, another discussant, a top government economist said: “Today, everybody is talking about bail out. Where would you get the money to bail them out? The money would still have to come from them—from the banks. Unfortunately, I wish we had enough foreign reserves. We are trying to get what we have to be able to meet even basic demand for foreign transactions, foreign payments. That’s what foreign reserves is all about.

“Nigerians were asking: Why didn’t you bring home the foreign reserves to fix infrastructures? That is not what it is for. And much of it—especially the CBN part of it—is money already spent. It has already been monetized in the local economy. Every month you meet under FAC, (Federal Allocation Committee); they say two billion (dollars) is available, the Central Bank would give them the naira equivalent. The CBN would create money. In other words, the CBN simply credits their accounts to the equivalent of the two billion and then take the two billion in the CBN books and keep as a backup for the naira that was created. So that if tomorrow, people come back with the same naira and you bring it all back to the CBN, to take the dollars, they would just exchange and nothing would happen. There would be no effect in the system. That is the whole logic. But because not all of the dollars that have been kept are utilized, the CBN then keep on having positive accretion to reserves. So that is how you grow your reserves.”

It was gathered that if the CBN had taken the advice of the IMF to sell more of foreign exchange as a way of mopping up liquidity, then Nigeria would not have accumulated more than $40billion by the time the shock begun.

“If you want to do a Jimoh Ibrahim, then you can have a Zimbabwe. You wash the place with money, everybody is a millionaire, and a bottle of Coke cost a million. You need a few millions to buy one dollar. Unless we want inflation in the hundreds or whatever, then we can print more money. With inflation running in the hundreds, a man’s salary would not be able to buy a ‘mudu’ of gari. We don’t want to go that far.

Interest rate
“To stabilize the exchange rate, interest rate would rise. For you to stabilize exchange rate and inflation to be kept in check, inevitably, interest rate would rise. Because for that to happen, naira would have to become scarce. It is only when naira is scarce that the pressure on the FOREX market would lessen.
“If everywhere is awash with naira, then the pressure on goods and services would be high. So credit creation would have to slow down and that’s what rate-rise does.

“In Ghana today, the interest rate is in the 30s and 40s. Brazil is in the 40s. It is on their websites. Even in the US, the interest rate on the credit card is about 29 percent. And consumer credit is the dominant portion of the credit in those markets. Consumer credit there is between 19 to 29 per cent.”

Already the amount of naira currently in circulation is said to be in the neighbourhood of 9 trillion. Printing more naira, according to the experts, would definitely do our economy no good. But then, Mr. Jimoh was speaking in all honesty as a patriotic Nigerian who means well for his country. Except that his prescription tastes like a bitter pill that Nigeria cannot afford to swallow. At least, for now.