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Austerity measures, a waste of time – Rewane

By BusinessNews Staff on February 25, 2015

Renowned financial expert and Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, in this interview with ‘FEMI ASU, speaks about the financial markets, the fate of the naira and sundry issues

What were your thoughts about the economy when you heard about the postponement of the elections?

I was surprised. I thought that it was another sign of fragile democracy, which if not well managed could lead to severe, unintended consequences.

For the financial markets, what are the implications?

Well, it increases the level of uncertainties and the level of risks and the fair premium which we are going to pay and all of those things will translate into higher cost for Nigerians, higher financial cost and higher social cost. The implications are not too far-fetched.

Following the postponement of the elections, the naira weakened to 200 to a dollar, are we likely to see more of this?

Certainly, as long as the uncertainty increases, the risk increases. When the risk increases, the volatility increases. If the volatility increases, then the currency and other variables come under additional pressure.

Since the global oil prices started declining, what right steps do you think we have taken to cushion the effect?

No, that’s reaction. The oil price declined for everybody. So you do that which you have to do, but accepting it that the oil price reduction is not a temporary one and making the mental adjustment to accept that reality is a major thing. There is nothing else; all the other things are tactical. The most strategic thing is to accept that reality, which we struggled with for a long time. But I think finally we have come to accept that it is time to capitulate and that things are not the way they were before and that Nigeria is an oil-poor country, not an oil-rich country.

If you compare the 2008 oil price shock with the current situation, what are the differences?

In 2008, we had $22bn Excess Crude Account balances. We had almost $60bn of reserves. It was a global crisis that affected every country. Today, there is a shift in income from oil producers to oil consumers. We have had our harvest and fantastic years, but we squandered the money. So now it is time to pay for our waste in the past couple of years.

Do you think the austerity measures taken by the Federal Government have yielded any desired result?

It is a total waste of time. It is not austerity measures that are required, you need a strategic set of tools to help recover, to stimulate yourself out of this slow-down and that does not include austerity measures. Austerity measures will come after you have blocked all the leakages. The leakages, the waste and the corruption in the system have to be tackled first before austerity measures you take will have any impact.

Recently, you referred to some structural issues that had not been resolved with respect to the foreign exchange reserves, what are they?

The reserves are below $34bn already and the reserves are just a cushion. The cushion only increases when you have surpluses. We don’t have those surpluses right now. Right now, we are dealing with just making do with what we have. So we shouldn’t be talking about reserves now. We should be talking about how to reduce that which we are spending.

What is your advice to the next government in terms of economic policies?

It doesn’t matter whether it is an old or a new government, the Nigerian situation remains the same. Nigeria will have to accept that it is not an oil-rich country, but an oil poor country.

Some analysts have said that the fiscal deficit which is currently less than 1 per cent of Gross Domestic Product would increase this year, do you think so too?

It is natural. Once your revenue has dropped and your expenditure remains the same, the deficit will increase. But deficit as a percentage of GDP is only one measure. Deficit as a percentage of total revenue — because it is revenue that you use to pay for the deficit — is the more important measure, and that is what Nigeria has to come to terms with. It is a tough situation ahead of us, but it is during wars that generals are made.

[Punch]

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