CHOP YOUR MONEY
A lot of us listen and enjoy Nigerian music. This is one area we have done very well and our boys and girls keep improving by the day. We have even exported our music and movies to the rest of the world, even though one is not sure we have organised it to maximise foreign exchange earnings therefrom. Those familiar with P Square’s “Chop My Money” will notice that I modified it a bit to “Chop Your Money”. I did that for three reasons. One, I don’t have a lot of it, so “I get am plenty” won’t apply here. Flowing from the first reason, I really care about how I spend mine, so the “I don’t care” line will not fit. Finally, I do not want to end up the way the artist ended in the movie where the one he invited to “chop” his money, after shopping with his credit card, followed someone else home, leaving him shocked with his two hands on his head.
Today, we are not talking about music. We are talking about money and trying to understand when and how to save it and when and how to “chop” (spend) it.
Recently, the former Coordinating Minister for the Economy and Minister of Finance, the very brilliant Dr. Ngozi Okonjo-Iweala, confirmed what a lot of people had thought was a big problem with the immediate past administration. Speaking on the topic, “Inequality, growth and resilience” at the George Washington University, Dr. Okonjo-Iweala had this to say: “This time around, and this is the key now, you need not only to have the instrument, but you also need the political will. In my second time as a finance minister, from 2011 to 2015, we had the instrument, we had the means, we had done it before, but had zero political will.
“So, we were not able to save when we should have. That is why you find that Nigeria is now in the situation it is in…”
She further stated that during the Olusegun Obasanjo regime, we were able to save some $22 billion which was drawn on to issue fiscal stimulus when the 2008/2009 global meltdown hit us. We therefore had enough buffer to withstand the crisis. In her own words: “we saved $22 billion because the political will to do it was there”.
She concluded by calling on the World Bank and IMF to think of ways to include savings in national constitutions devoid of political manipulations. Of course, I am sure she knows that this cannot work. How do you legislate to an independent country on savings? How do you ensure compliance, when some countries implement the laws they voluntarily made for themselves in breach, how much less the one imposed on them by an external party? She also knows that the only way the Bretton Woods financial institutions can give conditions to any country is if the country is accessing loans from them. Most countries just like Nigeria are now reluctant to borrow from IMF and World Bank.
Before we could finish digesting this, her media adviser, Paul Nwabuikwu, issued a revisionist amendment to the earlier statement, insisting that some sections of the media had given a mischievous slant to her comment to the effect that she was referring to the former president of not having the political will to save. He went further to clarify that it was actually the governors that stopped the former president from saving. This rebuttal was obviously a reaction to the outbursts pro-Jonathan attackers on the social media who vented their spleen on Okonjo-Iweala for daring to blame Goodluck Jonathan for not saving during the oil boom. While it is not our intention to join issues with Nwabuikwu, it is pertinent to remind him that what he had done is to give us reasons for Jonathan’s actions or inactions on this subject without successfully deflecting the responsibility because we all know where the buck stops. A few more questions are in order. If the governors refused to allow their portion of the funds to be saved by the federal government, did they stop the federal government from saving its own portion given that we are aware that the federal government gets close to 60 per cent of federal allocation? If by law, you jointly own some money with someone, is it appropriate that at the point of sharing the money, one of the owners unilaterally decides to keep some for saving under his control when you may choose to use it to do something else? With what we now know about how our money was spent, would anyone still vilify those who refused to have theirs saved by the centre?
Whenever someone talks about savings, there is this natural response that gives the impression that it is always good for the beneficiary’s future and wellbeing. The society tends to deride and condemn someone who though is in a position to save failed to save, as a total failure. In fact, such people are called all sorts of names: irresponsible, wayward, profligate, ostentatious, shortsighted etc. Meanwhile, no one wants to understand the rational for his action. I remember growing up with my siblings and one advice our father repeated so often was that what makes one wealthy was not how much one earned, but how much one saved. So, we need to interrogate the concept of saving versus consumption to find out if the latter is necessarily a virtue while the other is a vice. Doing this will help us put in proper perspective, the comment that Okonjo-Iweala made.
Saving simply means that part of income that is not consumed or spent and is kept away mostly in banks for the future. In a perfect system, this should also be the same with investment, subject to taxation. There is quite some literature on savings and consumption starting with John Maynard Keynes to Paul Samuelson and I will encourage those interested to do more extensive work on this. But suffice it to say that the reason banks make money is that there is someone out there who does not know what to do with his money to earn him higher returns. He approaches a bank which in the medieval times, charge him for safe keeping of the money and then finds out someone who it believes has a viable idea of what to do with the money. At the end of the day, the money is returned with a service charge or interest which in turn is given back to the original owner on demand with a little portion of the interest paid by the user. In between may be a complex web of risk and liquidity management issues.
So the first argument to make is that you do not need to save when you are sure of what to do with your money. If I can do what the banks can do or better still what the borrower of the savings from the bank can do, why do I need to leave the money in the bank or why do I need the intermediary. After all, “in business it pays to cut off the middleman” remember the old Airbus advert.
The argument about savings and consumption remains unresolved in economics. Some scholars argue that consumption is the engine that drives economic growth because in most economies around the world, consumption makes up between 65 per cent and 70 per cent of GDP. This position has been given impetus by the fact that the economy is about value addition and productivity and whatever is produced has to be consumed for it to make it to GDP calculation. Some people have tried to separate final consumer goods spending from investment spending to support the debate on this subject. But we intend to keep the divide between saving and consumption simple.
We are not oblivious of the other position that savings and investment which make increased productivity possible and for greater specialisation and trade are the actual engines of growth. This school of thought finally recognises consumption and concludes that increasing consumption is a result of that growth and not the cause. Irrespective of whichever divide you find yourself, I must bring in the American Economist and 2001 Nobel laurate, Prof Joseph Eugene Stiglitz, who says that most economies are unable to maximise their potential because of inequality whereby too much income is concentrated amongst too few rich people who tend to save larger share of their income and thus have a lower propensity to consume.
In the case of Nigeria, I believe that there was actually no reason to save. I don’t think we had the luxury for a whole lot of reasons. Savings were always in foreign currency which exposes us to both the currency risk and political risk of the country in whose currency we were going to save. We can see this in the fluctuation of the euro, sterling and dollar. You can lose up to quarter of the value of your savings in the event of a serious meltdown like the one we witnessed between 2008 and 2009 where we had $22 billion in savings. I’m sure the world was in so much turmoil that we didn’t stop to check the value of the money compared to when we saved it.
Another factor that affects the saving decision is interest rate. It is instructive to differentiate nominal from real interest rates. Nominal rate has to do with absolute numbers while real interest rate is inflation-adjusted. If for instance dollar interest rate is somewhere around 2 per cent pa as it is today and inflation is 10 per cent then the saver is losing 8 per cent of income. This is because your money with the interest can only buy you about 90 per cent of what it would have bought you the previous year. So, you are better spending that money today.
For us in Nigeria, our case is even more pathetic. We are being encouraged to save money when most of our structures have failed. How can we have money in the bank when we cannot refine our petroleum products locally? How much would it cost to fix the refineries and build new ones? And no one should sell the garbage of private sector here as we are aware that licences issued as far back as 2000 to some private refinery operators have not seen the light of the day. How much have we invested in the power sector and how come we do not have power? I’m aware that even with the self-sufficiency of power in developed countries, once an investor indicates intention to go into power generation, the government puts its balance sheet behind the project.
How about job creation and industrialisation? Is it not government’s responsibility to drive these? Someone would be quick to say it is not the job of government and I will refer the person to history of industrialised economies. Government showed the way and the people followed. Should we rather leave our money in the bank and ply dangerous and terrible roads as is the case in most parts of the country? How much would it cost to fix majority of our roads? Can we compare that with the benefits? How come our rails had not been used in 20 years? How come we failed to maintain the ones built by the colonial masters even if we couldn’t build new ones? Thank God we are looking at rails now, but I must use this opportunity to call on all concerned to ensure that we are not building the outdated and slow narrow gauge rails in 2016. The acceptable minimum should be the standard gauge. We can continue to wait if we are unable to finance it. Still on what to do with our money than leave it in a savings account in JP Morgan Chase, we need to invest in our waterways, Education, healthcare delivery and security. Until we have sorted out ourselves in these areas to guarantee minimum standards in quality of living, any savings we are making is simply meaningless. It can be likened to a man who puts all his earnings in the bank while his whole family is being ravaged by hunger and deprivation.
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