President Muhammadu Buhari’s decision to float the naira was, not to put too fine a point on it, the mother of U-turns! During his first incarnation as military head of state in 1984, Buhari maintained an adamantine resistance to devaluation. The general wasn’t for turning, and not even the ‘almighty’ duo of the IMF and the World Bank could make him shift his position. Since then, he had remained consistent on the issue. Indeed, during last year’s presidential election, Buhari promised naira-dollar parity. But, in office, he dropped the utopia and settled instead for pegging the naira at N197-199 to a dollar, but vowed there would be “no further devaluation”. Anyone who suggested devaluing the currency to reflect economic realities was seen as wanting to “kill the naira”!
In a recent interview to mark his first year in office, President Buhari raged at Nigerian economists. “I challenge Nigerian economists”, the president said, “to tell me what benefits Nigeria has got from devaluation, how many factories have we built by killing the naira?” He goaded the hapless experts: “I am still waiting for you Nigerian economists to convince me why the naira should be reduced to a disgraceful level (N300 to $1) over the last 30 years (since he was removed as military head of state in 1985). President Buhari made it clear the economists had failed to convince him, but admitting being “under pressure”, he said “we would see how we can accommodate” them.
Given that grudging feeling, the scale of his volte-face only a few weeks later was truly remarkable. From expressing deep concerns about devaluation, the president went, just within weeks, for the full monty! To be sure, what was needed, as some of us advocated, was to allow the naira to find its equilibrium level in a free forex market. It was about allocative efficiency, and the idea that when you have any scarce resource, such as foreign exchange, the market is a better allocator than the government. Thus, instead of rationing or any other form of government tinkering, only a market-driven, full flotation of the naira would have solved the forex allocation logjam. And that was what President Buhari delivered in a remarkable row-back on Nigeria’s exchange-rate policy. The forex reformed announced by the Central Bank governor, Godwin Emefiele, on 16th June was not a mere devaluation of the naira, but a fully-floated exchange rate system. Crucially, there will no pre-determined or fixed exchange value, no two-tier forex market or dual rate!
U-turns usually carry negative connotations. But, in politics, they can actually signify responsive and common-sense governance and leadership, which is what Nigerian and international experts have urged on President Buhari and his government on economic policy over the past one year. Thus, I must commend the president for the policy shift, even though it’s not an ideational or ideological conversion! Yet, columnists should always draw general lessons from particular events. And so, for me, the key lesson is about the costs of delaying critical and inevitable policy reforms.
Political economists have always wondered why governments follow, for a long time, policies that are obviously not feasible in the long run. In other words, why do governments delay reforms that are efficient and would increase aggregate welfare? This was the subject of a seminal book, titled “Voting for Reform: Democracy, Political Liberalisation and Economic Adjustment”, and edited by Stephan Haggard and Steve Webb. Based on empirical studies, the authors identified key explanations for delays in policy reforms, of which three stand out.
The first is that the process of economic reforms involves a “war of attrition” between socio-economic groups with conflicting distributional interests, and it’s only when one side prevails over the other or when the resister group is compensated or co-opted that reform can take place. Second, economic reforms may be delayed because of uncertainty concerning the impacts on segments of the society, such as the poor. The third explanation is about the role of leadership and institutions. For instance, a stubborn or dictatorial leader, who has a dogmatic opposition to certain reforms, may prefer to maintain an inefficient status quo rather than carry out much-needed reforms. The degree to which the central bank is politically independent is also significant. This is because politically independent central banks, with competent leadership, tend to be strong economic reformers. They improve policy-making and have a good record of delivering low inflation, without accompanying high unemployment and high real interest rates.
So, what does all this tell us about the Nigerian situation? First, let’s be clear, the government knew or should have known that a radical forex reform was unavoidable. That was obvious and undeniable even a year ago. Faced with rapidly declining oil revenues due to plunging global oil prices, other major oil exporters, such as Russia, Angola and Kazakhstan, almost immediately let their currencies devalue. Was the government waiting “until things get really bad”? Well, if so, that threshold was reached nearly a year ago when JP Morgan removed Nigeria from its emerging market indices and international investors stopped engaging with the country, which worsened the forex liquidity problem. It was thus irrational to delay liberalising the forex market in those circumstances. But that was exactly what the government did at huge costs to the economy.
Now, the “war of attrition” model can’t explain the inordinate delay in the forex reform because the Buhari government is not captured by any interest group. After all, as the president himself said, he belongs to everybody and belongs to nobody! The “uncertain outcomes” hypothesis may provide some explanation because President Buhari was concerned about the impact of devaluation on the poor. But that explanation is weak because if the president had listened to experts he would have known that an overvalued currency and a restrictive forex market would hurt the poor more than a floating currency and an open forex regime. So, then, we are left with two credible explanations for the costly delay in introducing the inevitable forex reform: a stubborn and dogmatic president, who despises economic experts, and a subservient and politically weak central bank! There is, indeed, a troubling rejection of economic expertise by the Buhari government, as demonstrated by the president’s savaging of Nigerian economists, who he called disparagingly “the so-called economists”! Then, we have a central bank governor who is interventionist rather than reformist. When a central bank governor, in today’s globalised world, starts saying, as Emefiele said in one interview, that some people who export goods to Nigeria are “to all intents and purposes seeking to plunder and wreck this economy”, I wonder whether he can inspire market confidence.
Yet, the success of the new forex regime depends crucially on the president and the central bank. The CBN needs to manage the reform competently with small economic costs. It must stimulate and sustain market confidence in the new forex system. And the president needs to recognise that a flexible forex system is not the ultimate panacea for Nigeria’s economic decline; it must be supported by a holistic and comprehensive economic reform. Put it this way, a flexible forex regime is the irreducible minimum condition that must be present in any competitive economy. Think of this in terms of Fredrick Herzberg’s Motivation-Hygiene Theory. According to Herzberg, there are factors that cause dissatisfaction (known as “hygiene factors”) and those that cause satisfaction. Remedying the causes of dissatisfaction will not necessarily create satisfaction. To motivate people, you must first eliminate causes of dissatisfaction and then create conditions for satisfaction.
Thus, replacing the restrictive forex regime with a market-driven one is like eliminating a major cause of dissatisfaction to traders, business people and investors. Now, the government needs to create conditions for satisfaction. To do this, it must make Nigeria one of the best places to do business in the world, remove all barriers to competition, stop protecting import-competing industries and start supporting export-oriented ones, reform the tax and fiscal regimes, put in place genuine anti-poverty and inequality policies, and start loving economic experts rather than disparaging them! In short, it must implement a comprehensive and coherent economic reform agenda. This is urgent and inevitable, and President Buhari must never again delay inevitable reforms!
Olu Fasan
