US CHAIRMAN OF THE FED RESERVE BANK BOARD RAISING THE INTEREST RATE: IMPLICATIONS FORTHE NIGERIA ECONOMY

The Fed Reserve bank in US has just raised the interest rate in US. The implications are mixed.

On one hand, it is a sign of recovery of the US economy with unemployment rate as low as 5% as at today. The Fed reserved had largely archived  at this working with the US government and had injected as much as over 4T dollars into the US market since Obama came to power through a series of quantitative easing (Printing dollars LOL!)

What is of real interest is that the US economy is on a sound footing on recovery. You can’t contemplate telling Nigerian government to print Niara anyway. The clear message however is simple, if you have rising unemployment, you cannot afford to deflate the economy. You can’t squeeze what is already squeezed.

What are really the implications for Nigeria?

1.       Foreign investors will pull back their resources and move back to the US economy. Business is all about “Where will my money be safe profitably?” These investors that have been scouting around the emerging economies will now pull back. That will eventually impact negatively on the current government drive towards diversifying the economy through mining.

Let’s look at that closely:

The mining sector in Nigeria will require foreign capital and foreign expertise. At present, it does seem to me that isn’t going to happen except of course we are ready to give away our lands at penny penny with the attendant environmental consequences and death.

Financiers will find it unattractive to invest in the virgin Nigeria’s mining sector for just three reasons I think.

The first one is that they have a better place to put money. US of course

The second is that the mining sector is in decline globally. It is not really a profitable venture as at today and so not very attractive except if we are ready to give away our lands for free. LOL! Oyibo like awufuoo!

The third reason is of course the risk factor in Nigeria. Nigeria remains a very high risk country particularly for mining activities. There are security issues, undefined laws of land ownership and of course the one we know too well community issues.

The other reason that works against the mining sector in Nigeria is the market space. Nigeria is not a consumer of mining outputs. We don’t have the institutions or agencies or corporations that will consume what we produce through mining locally. Yes Ajaokuta could take in the iron ores if it is working “if”. Aluminum ores could be taken by the smelter plant in Ikorobasi Akwa Ibom “if” it is working. The rest is simply not there. So we will have to sell in the intentional market. Namely: China, India, etc., if we can compete favorably. But these countries are not buying as much anymore, Australia, Russian, etc. are supplying more than they require and the market is already in a glut.

Of course there are some sectors of the mining that will require serious considerations to meet local needs and demands.

Granite for example can service the expected housing boom by the new administration. And the entire Benue trough, from Kogi state to Jos to Taraba is sitting on pure granite that is more than enough to feed the whole of Africa for centuries. Therefore developing that sector will be with the view to service the housing needs. That is doable and also profitable.

The point I want to make is that the attention that the government want to pay to mining as the anchor point to expand the economy, may require a total risk assessment. In my view, without a very comprehensive study and analysis, it will just be another DOA endeavor giving what is happening at the global stage.

2.       The return of huge investable capital in US will mean more economic expansion and increase in consumer spending. It will then impact positively on manufacturing nations, and we are not there. We couldn’t even take advantage of the AGOA initiatives. Our Neighbors GHANA did quite well there and we didn’t.

3.       The borrowing cost for Nigeria will increase. As a result of an increasing value of the dollars over the Naira, the cost of borrowing for the government will increase. Invariably, there will be much more pressure on the Naira increasing the aggregate cost of funds. That will also lead to more job loses and increases in enterprise closures.

The government economic team, if they exist, will need to think hard and fast as well now. I suggest they begin to look creatively at innovative economy and see how we can make it work for Nigeria proactively now.

 The innovative economy will be:

·         Telecommunications beyond what we have today. NCC is just sitting there like a lame duck with all the money at their disposal. It is not enough to slam MTN with $5.3B, we will need to find ways to produce things in this sector.

·         E-commerce and E-logistics

·         Innovations in food processing and preservatives

·         Innovations in Housing delivery

·         Innovations in power generation: For instance, should we continue with this antique grid system or should we begin to power our people through green energy off grid systems, solar, micro hydro, wind etc. What about producing all the ancillary products to drive them?

Talk is cheap ooo!!!!!