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The Dean, Faculty of Business Administration, University of Uyo, Uyo, Akwa Ibom State, Prof. Leo Ukpong, has warned against naira devaluation, arguing that it will not help the economy to recover quickly from recession.
Speaking at the weekend in Lagos, Ukpong who is also a Professor of Financial Economics, said the devaluation of any country’s currency could either produce good or bad result depending on the structure of the economy.
He said devaluation is not a policy option for the country now, warning that taking such decision will worsen naira’s woes.
“For an export dependent economy, such as China, devaluation is good. In the case of Nigeria, I believe before we can evaluate the effect of devaluation on our economy, we must harmonise the foreign exchange market and strengthen our ability to produce what we currently import from other nations. Without that, the naira will continue to depreciate way into the foreseeable future,” Ukpong warned.
He said hopes of Nigeria’s early recovery from the economic recession may be wishful thinking because certain parameters that should aid this were not built into the 2017 budget. The Federal Government believes the budget was designed to pull the economy out of recession.
He explained that a careful review of the 2017 budget showed that it was not structured to get the economy out of the woods. According to him, to reverse recession, production of goods and services needed to be increased, and to produce goods and services, production facilities needed to be available while to increase services, production of physical goods is a necessary condition.
“For example, on the expenditure sides of the 2017 budget, recurrent expenditure is approximately N2.70 trillion, while capital expenditure is N1.80 trillion. “This ratio of capital expenditure to recurrent expenditure of about 0:67 per cent is way below what is needed to pull an economy out of recession. At the minimum, this ratio should be about 1:20 per cent and definitely not below one. At the current rate, it will take us a minimum of one and half years to get back to a zero economic growth rate, which will be somewhere around the second quarter of 2019,” he explained.
Ukpong noted that a combination of both short and long-term fiscal and monetary policy strategies should be deployed to stimulate the economy. For instance, for short-term fiscal policy, he said the National Assembly should appropriate funds for investment in capital intensive projects such as road constructions and repairs. Such projects, he further explained, have the potential to quickly stimulate the economy. He also called for bailout or job retaining financial packages designed to help struggling labour-intensive firms to remain in operations.
On the long-term fiscal policy strategy, the university don said a combination of tax, interest rates, and partnership packages should be designed to serve as incentives for both indigenous and foreign investors to invest in the manufacturing and related industries.
For example, he said the government could extend long-term investment tax break to investors who are into building and production of parts for refineries, auto parts manufacturing, and construction equipment in the country.
On monetary policy, in the short term, Ukpong advised the Central Bank of Nigeria (CBN) to use all available monetary policy tools such as Open Market Operation (OMO), interest rates adjustment, among others, to reduce job losses and unemployment.
He said: “For example, interest rates need to be reduced to help reduce short term financing and other operating costs. In the long run, the CBN has to pursue a policy to reduce inflation, long term borrowing rates, and liberalised and harmonised the foreign exchange market to support sustainable long term economic growth.”
He said the pegging of the 2017 budget on crude oil price of $44.50 by the NASS as against the $42.50 proposed by the executive will narrow the projected budget deficit gap. This lower projected budget deficit would be interpreted by the financial markets to mean potential lower borrowing by the government. Furthermore, higher crude oil price benchmark, Ukpong stressed, will also lead to expected higher federal revenue allocation to the different states.