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Nigeria is probably tops on the world’s list of unfulfilled dreams, plans and failed policies. Right from the days of National Development Plans, Operation Feed the Nation, Structural Adjustment Programme, Better Life for Rural Women, SEED, LEAP to Seven Point Agenda, Five Point Agenda, Change, Deregulation (price hiking) of downstream sector of the petroleum sector, Flexible Foreign Exchange Regime, the outcomes are similar – high hopes/expectations at the beginning and massive disappointments after several billions of dollars have gone down the drain. Our petroleum products refineries, steel complexes and steel rolling mills, power plants even road and rail constructions deliver two outcomes unfailingly – disappointments and resource wastage.
The months of April and May 2016 saw the Nigerian economy receive two “shock treatments” that had the potentials to reflate the economy even in this time of low oil prices and low economic activities. The expectations of the positive impact of these policies on the national economy were very high and justifiably so, though with the rider that implementation and commitment of the leadership would be critical. Two to three months into their implementation, where are the initial high expectations? Are they impacting the economy as expected and is leadership’s commitment to these policies focused and convincing? Probably not!
The recent introduction of the flexible foreign exchange regime promised to relieve the crushing illiquidity that had adversely affected businesses and leading the economy into recession. Trading on the FMDQ platform was intended to occur on a daily basis with the CBN intervening from time to time to redirect the market as needed. But presently banks are merely waiting for CBN interventions to satisfy the demands of their customers. Why is the CBN not trading as any other trader in the market while intervention is used at some critical points for stability in the market? Banks are still talking about allocation (intervention by) from CBN- meaning back to pre-new regime. The backlogs of demands for foreign exchange by businesses still remain as they were, simply because of lack of liquidity rather than increased demand. Enquires also indicate no prior demands at N199 have been withdrawn at the new rate of N282 (recently at N330) but most outstanding demands are unmet for lack of liquidity. This is rather a curious situation. This makes little sense as basic economics theory which says that price maintains the equilibrium between demand and supply seem to be of no use here simply because the market is being manipulated wrongly at some point in the chain.
We can either export (earn more foreign while maintaining the current money-Naira – supply) our way out of the ever present shortage of foreign exchange or curtail our imports considerably. But since we are so obsessed with the exchange rate rather than our productive capacity and economic activities, then we might as well cut the money supply in half or by whatever proportion until we arrive at the desired exchange rate of the Naira to the US Dollar, as an economic objective of this country. That would, without saying, stifle the local economy for lack of activities but would achieve what has, over the years, become an overriding “economic objective” – strong Naira!
At the moment, it appears we are continuing to import ourselves into deeper crisis. The best tested mechanism for this market determined pricing is through the interplay of supply and demand. Once demand outstrips supply, prices would go northward and supply would be encouraged and vice versa.
The toughest forces to fight by using fiats, decrees, rule and regulations are market forces. Waging such fights unfortunately usually leave in their trail devastated economies and social crises. Economic history the world over has no contradiction of the results of price control. Price control in the United States of America in the early 1970s failed resoundingly resulting in scarcity of goods; especially of petroleum products with people queuing for long hours at petrol stations. This may have been attributed to the Arab crisis that saw crude oil prices climb to a then record high, but fast forward forty years to 2013-14 with crude oil prices at another record high and there were no scarcity of these products in the US. Also recall the failed foreign exchange control by the EU of early 1970s (Popularly referred to as snake in the tunnel) which also failed as the Nixon’s policies of the US referred to above.
In Nigeria, our so called economic growth has brought little economic development and no noticeable positive impact (on the average) on the living standards of the citizens. The average living standard of the Nigerian today (2016) is equivalent to what it was in the early 1960s. Aside corruption, the major cause of this underdevelopment is government’s inappropriate intervention in price determination in the Nigerian economy over the years. Since prices are the interplay of supply and demand (O Level Economics), the only effective intervention would be to either increase/decrease supply or decrease/increase demand as appropriate at any point in time. These may not happen overnight but must be in a sustainable manner that only free market guarantees.
Rather than fix prices (whether exchange rates or petrol prices which in Nigeria presently is a form of price control) government should concentrate on creating environment that would encourage businesses to venture into areas of high margins which would subsequently moderate prices (the telecommunications sector is a very clear example – GSM, Internet services etc). This would do the economy some good instead of the present circumstances that have elevated rent-seeking to another level, which is allowing the interest of the majority to be subverted by special interests of corporations, trade unions, and more cancerously political cronies. Over time all subsidies in Nigeria have translated to robbing the poor to further enrich the rich – fuel subsidy thieves, foreign exchange round tripping are all incontrovertible examples.
Our over-emphasis on the US Dollars (now a store of value rather than means of exchange) and to a very limited extent other convertible currencies is slowly but assuredly killing the Nigerian economy (and other developing economies) because of the US economically criminal act of printing the Dollar and dumping same on the world in the name of quantitative easing. The catastrophic effects of this act is manifesting on the world economy. Though this is a topic for another day, it is however a clear testimony of the evil of government inappropriate interventions in the market place. Quantitative easing (which is basically a beggar-thy-neighbour policy) is simply an economic crime against the world in general and the developing economies in particular.
The President’s comments on the FX regime (his description of the new regime as simply a devaluation tells a lot of government’s unwillingness to follow through its policies) is quite disturbing and gives little confidence of conviction of purpose nor understanding of the workings of a market economy. The comments by the President that he does not see the benefits of devaluation or floating of the Naira (whichever you choose to call it) underscores the dire economic problems of the country aside the dwindling earnings from crude oil and shamefully no earnings from export of refined petroleum products. Not to understand a policy that you authorized its implementation is not such a bad thing since you probably agreed with what you considered superior argument, with severe adverse consequences of the old policy staring at you in the face. But to declare after a very sumptuous meal that you do not see the benefits of the same policy you signed off for implementation is a terrible signal to the market and warning to all participants to be extremely careful. That may not have been the intention but that is the reality.
Devaluation of any currency could achieve one of two things, and in extremes cases both – encourage export or discourage import.
Economic crisis occasioned by falling commodity prices in the international markets are not new. How nations react to these crises determine how well the economy comes through and the wellbeing of their people are affected.
A half-hearted approach to solving economic challenges constitutes as much danger to the economy as corruption. The two critical areas to reflate the economy and ensure increased economic activities have been dealt with by government in manners that make their benefits are unsustainable and economically inefficient.
At present the reprieve in the petroleum product supply is temporary and scarcity would resurface sooner or later because prices have been fixed at N145 per litre by fiat. I fail to understand the government’s obsession with fixing prices of petroleum products and fixation with subsidies. Everyone understands that what has been done is increase in the price of PMS rather than deregulation of the market which would also incentivize local refineries. (I still wonder how Dangote Refinery would price its products to sell locally). The reason pump prices of petroleum products are rising is not totally because of the foreign exchange rates or fluctuations thereto, but our lack of refining capacity (the supply side is outside of the control of the national economy). When we compare pricing with other countries we must ensure we compare with countries that export their crude oil and import refined products.
In a few weeks (at most a few months) from now the current pricing model of petroleum products would have run its course and product scarcity would return with greater vengeance. Government would engage in another round of excuses and eventually increase pump prices after familiar consequential severe economic disruptions. By using pricing models that do not allow the market to determine the most efficient resource allocations, these cycles will continue ad infinitum and the Nigerian economy will remain perpetually underdeveloped.
Someone asked me the other day why it seems that policies in this country never go the whole hog, and without thinking my response was that “because the decision makers are either the beneficiaries of the status quo or of the new policies”. I may be wrong but am I?
The basic things government should concentrate on while avoiding getting into running of businesses include – provision of environment for high quality education to the citizens, ensure equitable access to education and employment opportunities, provide a tax system that is fair and equitable, set and ensure consistent enforcement of laws, set and enforce effective rules and regulations governing the economy, ensure corruption is at a minimal level, encourage flexibility of markets (labour, products & services, financial markets), ensure adequate and consistent investments in infrastructure, guarantee basic healthcare to all citizens, provide temporary social safety nets and ensure adequate national defence and security. All of these would create an economy that is efficient, sustainable and provides for the needs of the majority at every point in time.
I am hoping that what became of our May 2011 expectations by February 2015, would not be the same of our May 2015 expectations come February 2019. Just hoping!
Vincent Ukoh
