A former Secretary to the Government of the Federation and ex-Minister of Finance, Olu Falae, is in full retirement after he recently pulled out of partisan politics. Although he is 81 years old, he speaks with passion and fervour in this interview with PREMIUM TIMES, as he relieves his contributions in public service and his views on Nigeria’s economic policies.
PT: Not a few people doubt that the federal government is driving the country in the right direction economically. What is your view on the state of the economy and the policy direction?
Falae: I am sorry the government doesn’t seem to have a guiding philosophy. I told you earlier that we used to have development plans and the foundation of each of those plans consisted of the body of fiscal and monetary policies. As well as the core programmes as regards the economy for the next five years. I am not aware of what are the core values of the economic development of this administration. Because it should be clear to them that the first thing to do is to lay a sound foundation of infrastructure. If your roads are not good; intercity, urban and rural roads, if they are not sound, the economy is going nowhere. If there is no electricity …; power, in my view, is the most reliable indicator of development. Power consumption per head is a reliable indicator of how developed that society is. Because if you want to grind pepper, you need power, if you want to run your farm, you need power, if you want to run your factory, you need power. If you do not provide roads and electricity and security and education … those things are basic that the government must provide everywhere and anywhere. If such a core programme is not in evidence and you say this economy is private sector driven, we are deceiving ourselves. In the past, the federal government used to have investment in alcohol, in yeast, furniture, in shrimping and shipping. There was a time the federal government was investing in these things. That was considered understandable at that time. Over time we have moved away from such activities into strategic infrastructural investment and allowing the private sector to do the downstream. But if you don’t provide the foundational, then nobody can drive the economy. All the factories will remain closed. I believe that if power is supplied today in quantity sufficient, affordable to the industries, our industrial production can rise by 10 to 20 percent in a year. Many factories that ought to be producing are shut down because there is no power. That is the most important single item that this government should provide to revive the economy. If there is no focus on such a strategic element, plus the road and security, we are going nowhere.
PT: You served under the IBB military government, and one of the notable policies of that time was the controversial Structural Adjustment Programme (SAP). Would you say it was the way to go?
Falae: The SAP became a necessity because the economy was in crisis. The preceding Shagari government had pushed Nigeria into a huge international debt which we could no longer pay or even service and the country had got to a point where it was almost impossible to import anything from abroad. Because the dollars we were earning from oil exports and all that could hardly pay the interest on external debts. They were not loans, they were debts. How then do you finance current import? Every day we were importing machines, medicines, books and wheat to make bread and all that. Our foreign exchange need was three, four times what we were earning. We were in trouble. It is like you are earning a million a month and what you are to be paying to your bank on your existing debt is N5 million. That was where Nigeria was. We got to that point because the Shagari government was issuing import licenses as something going out of fashion. In three, four years, we had imported goods we could not pay for. The private Nigerian companies which imported those things, paid Naira to their banks to be remitted to their customers abroad. But the CBN did not have the dollars. The volume was far in excess of what we were earning from exports. That was the crisis we had. Those who were shipping goods for us said unless we paid our debt, they were not going to send more goods. International commerce is based on short term credit. The letter of credit is usually three months to six months. But six months, nine months, one year, we could not pay. And so our creditors then told the IMF, which then manages the international financial system that they should intervene to get their money for them. We did not have the dollars to pay. We could print naira, but you have to earn the dollars. The IMF was there to advance us the money, to pay the creditors, and then gave us their conditionalities so we do not stumble or repeat that same mistake in the future. That was what happened.
PT: So how did you approach the problem in the efforts to deal with it?
Falae: Shagari created the problem; when Buhari came as military head of state, he slowed down the rate of importation, but continued the issuance of import licenses. When Babaginda came in, initially we did not know the size of our debt. We owed exporters in India, in Singapore, in America, in Korea, in Italy, all over world. We traded with all the countries of the world and we owed these countries. Some debts were in Sterling, some in dollars, some in Swiss Francs. We needed to convert the various currencies to the same base, the dollar. The dollar rate changes everyday. We had to choose a date which we will do all the conversions and add them up and say this is the debt of Nigeria as of that date. By the second day, it had changed. It was an ever changing entity. That was the reason the figures kept changing. Sometimes it was 28billion; 24billion and 32billion. We had to find out how much we were owing and to whom. We also found out that there were debts that were not acceptable. We hired Chase Manhattan to verify these debts. A lot of them were not acceptable. Some people shipped cartons of sand to Nigeria and we paid dollars for them. It is very bad, horrible, but don’t forget that the Nigerian company paid the naira equivalent for the dollar claim for the sand.
PT: Why were they doing that?
Falae: They were doing so because with the dollar they were getting, they could get more naira from what the Nigerian company has paid.
PT: Are you saying that sand was actually shipped to Nigeria for which dollars were paid?
Falae: Yes. I was not the one that did the verification. They did tell us that scrap, sand, junks were shipped … because the exchange rate was not right. If it was right it would not make sense. The official rate was subsidised rate, that is why they were doing that.
PT: So, how did the government handle this?
Falae: After we computed the debt figures, we had to work out a way out of it. The debts could not be rescheduled because they were already overdue for a year or two years. The creditors would not agree that it should be paid in the future, because they were not sure it would be paid. That is why they wanted IMF to guarantee. But IMF would not guarantee if we did not accept their conditions.
PT: But the impression by most Nigerians was that the SAP was an IMF imposed impoverishment programme?
Falae: Babangida threw the thing open and Nigerians debated it for weeks on radio and television. In December 1985, Babangida made a broadcast and said that it was clear from the debate that Nigerians have rejected the IMF loan and that his government would not take it, but that since the debt still had to be paid, the hard conditions that the IMF wanted to impose on us, we will impose on ourselves. There was no getting away with it. What you are owing you have to pay. You must satisfy your creditors by imposing on yourself conditions that would not go into debt again. If we did not agree they would not sign the agreements. We would be in trouble because there would be no imports anymore. If they delay shipment of wheat for one month, there would be trouble in Nigeria. If they refuse to ship raw materials for your industries, millions would be out in the streets; we would not be able to produce. That was where we were. We did not want the foreign entity to impose the hard conditions on us to settle our debt, but because we must settle the debts we had to impose them on ourselves. That was the choice we had to make.
PT: Tell us some of the critical areas of the adjustments that were made in exiting this predicament?
Falae: First of all, it was because the exchange rate was cheap, and we were importing and importing. That was why sand and other rubbish were being shipped into the country. If the exchange rate was right, you won’t ship sand. Because if you ship sand and it is 1million dollars, and if the exchange rate was 10 naira to the dollar, you will pay 10million naira to get the 1million dollars. The exchange was the error. The exchange was traditionally administratively determined. In other words, there was no official mechanism that was professionally sound that was being used to set the exchange rate of Nigeria. We followed what was happening to the British pound. Not mechanically, but closely. There was an exchange rate committee at the CBN which met regularly to determine the rates. The method for determining the exchange was not rigorous or professionally driven. So over time, that kind of committee, was also subject to political pressure not to make imports expensive because Nigerians wanted to pay low prices for cars, for champagne and lace and therefore with time, the Nigerian naira became over-valued. When that happens you flood your market with imports and kill the manufacturing industry.
PT: If the naira was overvalued, what did you do with it in that case?
Falae: We had to tackle the exchange rate. The devaluation used to be an administrative fiat by the Minister of Finance, that was not what we did. What we did was to for the first time allow a semblance of a market mechanism. Let’s allow the laws of demand and supply to interact, not to determine a hundred percent, but to have a role to play. Nigerians who wanted to buy dollars applied to their banks. The applications were collated and sent to the CBN. At an agreed date, banks go to the CBN and bid for the available dollars. Each bank made bids and a rate would emerge. That rate was not hundred percent market determined, but not totally divorced from the market. That was the mechanism used. Not administrative devaluation. The first bidding threw up a price of N5.55 to a dollar. It was realistic because the banks knew that the demand for the dollars was far higher than what was available. Before we had the rate at N1.2 to the dollar, even when we were in crisis. From 1987 to 1990 when I left government, the highest rate for the dollars in naira, was N5.55; that curtailed the amount of dollars being demanded. Where did N50 to the dollar, N200 to the dollar, where did it come from? I cannot answer that.
PT: What were the other steps you took?
Falae: We tried to make up the deficit in exchange earnings. The price of oil had collapsed in the international market. It came to $10 to a barrel from about $25 or $30. So we had to earn dollars from other sources. Nigerians were encouraged to export whatever they could and keep the dollars. Keeping the dollars for their own use was the incentive. Before then you had to pay naira to the CBN, when you earned the dollar, it is kept by the CBN and when you needed it for imports, you applied to the CBN. But we had to change that. So if a person exports shear butter and they earned their money in naira or dollar, let them keep it. It is their money. It was a huge incentive to Nigerians to export.
READ ALSO: EXCLUSIVE: Besides $9 bn P&ID ruling, Nigeria dogged by other huge contractual judgement debts
We also had to increase the volume and also the value of export produce. Produce was the main source of foreign exchange for Nigeria before oil came. Cocoa, palm oil, rubber, cotton, ginger, groundnut etc. when oil came, the government neglected all that. By 1960, Nigeria was exporting 240,000 tonnes of cocoa. As of the time of the structural adjustment, we were exporting 80,000 tonnes. Only one third. Our dollar earning from cocoa went down. We had to remove the barriers for farmers; that was the Marketing Board. The Marketing Board was set up by the colonial masters during the 2nd World War, principally to deny the enemy, Germany, African produce and used by the British government to support the war efforts. When the war ended, our own government found it useful to them because the Marketing Board was empowered to pay only a fraction of the price of produce to the farmers in the guise of building up reserves against the raining day. The price of cocoa was 100 pounds per tonne. By law the board would pay the farmers 40 pounds or 50 pounds and keep the rest in a reserve against tomorrow should the official price in the market fall. Sounded good, but there was not a single year from 1945 to 1986 when the marketing board took N1 from the reserves to shore up the price when it fell in the international market. So that the farmers suffered the fluctuation which the reserves were supposed to cater for. So what they do with the reserves they built. The bulk of it was given to the state governments for development programmes. Sounds good but unfair. They were taxing the farmers at a rate they could not lay on the manufacturers. The economic consequence was that the farmers abandoned the cocoa farms and came to the town to become night watchmen and others. The farmers left and cocoa no longer paid. To increase the production of cocoa, we lured the farmers back to the farms by “killing the enemy” the marketing board. It was freedom for the farmers. They were free to produce the cocoa and sell at a price they could negotiate. The price of cocoa jumped from N4000 per tonne to N16000 in one single year. The structural adjustment programme succeeded in getting the farmers back to the farms by scrapping the marketing board.
PT: You said SAP succeeded, yet it brought much pain, why was it so?
Falae: It was the exchange rate. We had allowed the naira to be overvalued. We were also importing too much non-essentials. So the Peugeot car we were buying for N10,000 had gone up to N25,000, when the bidding for the dollars started. that was where the pain came from.
PT: Some of the elements that necessitated the introduction of SAP appear to be still with us: overdependence on imports, unpredictable oil prices, poor foreign exchange earnings from non-oil exports. Would you suggest we have something like SAP, even if we don’t call it that name for the country again?
Falae: Absolutely, it is a continuous process. We need an economic power house to on a daily basis look at the various segments of our economy critically to ensure that partisan politics does not interfere massively. It is doing so now. Government funds are being used not for the welfare of the people, but for partisan political purposes.
PT: What is your take on our budgeting system?
Falae: Another major thing and one of the greatest problem is that total government spending is a substantial proportion of the total money in circulation. And when you make a budget, and that budget is not approved until April or May, of course, the capital expenditure takes several months before it is disbursed even after approval. By the time we are disbursing capital funds, we are in June or July. We are only going to disburse 50 per cent or less of what is budgeted. The 50 per cent we would have done between January and June is gone and lost. The answer is to shake up the budgeting system. Ensure your budget is ready and approved and lunched by 31st December, then implementation starts by January.
PT: Don’t you see this happening now with the current budget already submitted to the National Assembly?
Falae: It should have been approved by the end of November. Final adjustment in December and by the 1st of January, implementation starts. I can see them still struggling by the end of March.