Understanding the Buhari approach to the exchange rate
By Baba Grumpy
As an individual of Ekiti origin, I bristle at dishonesty and arrogance. I believe legend has it that the Ekiti man will rather suffer than kowtow to the rich man. Of course, many Nigerians will beg to differ considering how Stomach Infrastructure contributed to the election of the current governor of the state.
I benefited immensely from the Nigerian State. Some of my education was free. University was free too to a certain extent. I was grateful for the award of a degree in economics. I have gone one step further by gaining a finance related Masters degree in the United Kingdom. I believe I understand basic economics and I make a fair attempt at understanding the bigger picture. My day job affords me significant insight into how government policies translate into action on main street and how it impacts small businesses and the common man.
Part of my secondary education was in Ekiti State when I lived with my grandfather. As a result, my political antennae was somewhat better tuned than that of my mates. I considered myself very much aware of the political issues in Nigeria.
Just like we have recently experienced in the 2015 general elections, the profligacy leading up to the 1983 general elections was legendary. The kind of money reportedly released to the Omoboriowo group was unheard of and considered obscene.
As it was now, so it was back then, things were tough. Back then people were queuing up for essential commodities as our foreign reserves had been depleted and oil price had tumbled. We were massively in debt as a country. The outgoing government had already implemented austerity measures. Living in Ekiti, I felt immune. Food wasn’t a problem. We grew it including Igbemo rice. Housing wasn’t a problem; Grandpa owned his house since 1933. Buying petrol wasn’t a big deal, Grandpa had a pension, Grandma had a thriving business selling textiles and they both had children doing very well and sending them money.
I remember the years after 1983, as a great admirer of Papa Awo; I was delighted the cheats had been kicked out. I didn’t give a toss about democracy if this was how it was practiced. To be fair, the Buhari government appeared heavy handed although I thought the queues to enter buses at Yaba was a very good thing. That queue endured well after Buhari was overthrown. The corruption trials appeared lopsided in favour of one section of the country.
On the economic front, Buhari appointed people who were relatively unknown but who appeared to master their briefs. The government of the day was determined it wasn’t going to devalue the currency and liberalize the economy as the IMF & the World Bank wanted. Buhari wanted to chart a different course of action and was making some head way. You can read this recent interview by Buhari’s then minister of finance to realize that the end of Buhari’s government happened not because his economic policies were a failure but for various reasons (http://sunnewsonline.com/new/dont-expect-miracle-from-buhari-soleye-ex-finance-minister/)
You have probably heard how bad the Buhari Mark I government was. I’m sorry I will have to disappoint you with the following facts.
In 1982 and 83, the last two years of the Civilian Shagari government, Nigeria’s economic growth was negative – (-1.053% and -5.05% respectively). In the only full year of Buhari’s government, the equivalent figure was -2.02% which somewhat indicated that some of the issues were been tackled. In the immediate two full years after Buhari was overthrown (1986 and 87) economic growth was – 8.75% & -10.75% respectively. (http://www.economywatch.com/economic-statistics/country/Nigeria/year-1984/)
It got significantly worse before it got better and back then I dare say the safety net was a lot better, we were fewer and looked after each other better. Many lives were ruined especially when Buhari’s successor started to liberalize the economy. Many people who were a lot younger than the 13 year old me in 1983 have filled the Nigerian Twitter waves with irresponsible comments about Buhari Mark I. Things they read on the pages of newspapers. My recollection of events is that things were worse in the post Buhari years and before money started to flow again largely because of the upturn in Oil prices. Before Buhari, oil accounted for over 90% of Nigeria’s foreign exchange earnings. After Buhari and post the liberalization of the economy and till today, the ratio has not changed. The proponents of devaluation are asking Buhari to keep doing the same thing in the hope that we will get a different result. There is a swear word for that.
In writing these few words, I have once again come across this article written by the gentleman who is now the Emir of Kano. You can find the full article athttp://www.gamji.com/sanusi/sanusi27.htm If you want to understand the theoretical underpinnings of the steps taken by the Buhari Administration, please make sure you read Emir Sanusi’s words.
The sum total of Emir Sanusi’s words is as follows: NOTHING HAS CHANGED. BUHARI MARK I IS FACING THE SAME ISSUES AS BUHARI MARK II AND HE IS ADOPTING THE SAME METHODS.
Fortunately for Buhari, he will live and die by them. In 1985 he was taken out before anybody could determine if his economic policies worked or not, in 2019, the masses will decide whether to take him out or not. What amazes me though is that Emir Sanusi has changed. What has changed the Emir? His time as CBN Governor? His ascendancy to the thrones of his forbears? Or my cynical self tells me there is something we are about to hear very soon knowing Nigeria’s elite.
What do I think about the prospects of Buhari’s administration? If the following were to happen:
- Implementation of the pro people policies advocated by the regime
- No military or foreign government intervention
- Reasonably good health for a man of his age
- Subject to any agreements about terms in office with the 5 PDP governors and the ACN
Buhari will be re-elected in 2019 without all the profligacy that we witnessed with the 2015 elections.
I have nothing but disdain for the people advocating for devaluation. I have tracked some of the arguments and I have seen the shifts in position to suit what I perceive to be an agenda driven by the same interests who objected to Buhari Mark I. The following are my understanding of the different strand of arguments advocating for devaluation:
- Black market is the real reflection of the Naira exchange rate
- Government should not block access to CBN forex for certain goods. It is wrong to restrict importation as it is cheaper to import those goods than to make them in Nigeria
- For the economy of Nigeria’s size, we are not importing enough
- Devaluation is the solution to Nigeria’s current economic problems
- (3 has now been amended to) devaluation is not the only solution, it is the starting point. (We have not been told the next steps)
- Nigeria is subsidizing some industries using its current exchange rate regime
- We don’t know what will happen after devaluation but it is worth a try
- Devaluation will help us diversify the economy
- Buhari failed in his first coming and will fail with the same economic policies in his second coming
- The current exchange rate policy is restricting the flow of foreign inward investment
And it goes on. You can add your own variant of the argument if you wish.
What you must realize is that even economists of the same persuasion don’t agree on the same policy prescriptions because economics is not an exact science. The IMF has apologized in recent times on its policies in Greece and its evaluation of the British economy and if you read Emir Sanusi’s comments above you will notice that it apologized on its Structural Adjustment Policy prescriptions in Nigeria as well.
Those advocating the devaluation option to Buhari are theorists, paper theorists. They are like Gary Neville of Sky Monday Night Football. When you elect or appoint them into the driving seat, they freeze and are unable to translate their theories into action because real life does not always obey their theoretical postulations.
Why wont these people run for elective positions? But they want someone who had the courage to stand for elections to adopt their paper theories whole scale.
Just so we understand the issues at stake here. Lets go back to the Occupy Nigeria movement. The government increased the price of fuel by c117%. The reaction was spontaneous and the country was effectively shut down and rightly so. In my opinion, that was the beginning of the end of the Jonathan administration. People suggesting devaluation assume that Buhari is not politically astute even if you discount his economic credentials. He is rightly considered a populist and knows fully well that the devaluation policy is anti people.
If for example, Nigeria were to devalue, while the retail cost of a metric tonne of petrol will remain at c$589 (as per PPPRA pricing template) the naira price per litre will increase to N171 at the current naira dollar exchange rate of N400. So gentleman, why don’t you load a gun and give to Buhari instead. Your wish will come true faster that way. By the way, economists don’t have a theory for the loss of political goodwill.
And for those who don’t like populist arguments. We know you ‘allright jacks’. The poor people can go to hell as long as you are all right. As long as you have access to your dollars. As long as some of the dollars looted by Jonathan’s administrations are still in your pockets so that you can buy up the remainder of Nigeria you don’t already own. We know you and we look forward to the day when the poor people have nothing more to eat but the elite. I genuinely hope the poor will be kind enough to eat you the devaluation proponents first.
The latest numbers I have read from one of the devaluation proponents made the point that by not devaluing, Nigeria was giving up cN500 billion in lost earnings. Please listen to this interview by Emir Sanusi (again) (http://www.bbc.co.uk/news/world-africa-16416861) and realize that in 11 months only in 2011, Nigeria spent / lost N1 trillion on petroleum subsidy alone. Do the maths yourself, not devalue and give up N500 billion on everything or devalue and give up N1 trillion on one budget item only. You might say that was 2011 and Oil price was a lot higher. But I did some number crunching (41 million litres per day as per NNPC figures) and arrived at a bill of N1.3 trillion if Nigeria devalued to the current black market levels and kept petrol price unchanged. Yet these are the argument postulated by people who consider themselves bright minds on Nigeria twitter. I suppose its okay for someone to think very highly of themselves but when a former minister and a World Bank Executive praise the same people for serving a garbage of opinion to the misinformed masses. You must worry about the level of discourse on Nigerian Twitter and wonder if it is the right place to be informed. So yes I despair for these people and I have nothing but disdain for them.
Just so we are clear, there is no ban on any items in the Buhari Mark II years. Nigeria has always maintained an import prohibition list (https://www.customs.gov.ng/ProhibitionList/import.php). The Buhari administration decided that some other items will not have access to the country’s forex. So what’s the problem? Why are people complaining? If you import and sell designer toothpicks and your business model and strategy is robust, you don’t need official forex where there is too much ‘Dogo Turenci’ and form filling. Buy your dollars at the Black Market, import your goods and sell. What’s the problem with that?
By the way, how can the black market be the real reflection of the naira exchange rate? The black market is a much smaller market in comparison to the CBN market.
On the issue of job losses because of the current forex policy. Will devaluation too not lead to job losses?
Some talk about CBN / government favouring Dangote’s business and gave the example of the FX sold at CBN rates for his Congo Cement factory. How is this different from that diversification of foreign exchange earning people have been crowing about. If Dangote’s Congo Plant declares dividends, guess where the FX is coming back to?
With respect to the subject of Nigeria subsidizing those who have access to official fx. As I said previously, we can do this or go down the alternative route of subsidising fuel imports. And what is wrong with a populist government subsiding manufacturing as opposed to petrol retailers.
Some devaluation proponents claim that the forex policy is discouraging foreign investment. To make light of the situation, ‘who their FDI don epp’. FDI in Nigeria has been largely in the Oil industry. With the state of that industry good luck with that FDI at any rate of exchange.
To those who think we shouldn’t be discouraging importation because we are under imported. I suspect these people don’t understand how desperate the situation is. We are broke and we don’t have enough to satisfy your need for imported toothpicks.
By the way not all countries in the West operate a free market for their currency. A recent example is the Swiss Francs, which was pegged to the Euro – a free market currency. When the Swiss government noticed that the value determined by the market was hurting their economy, they unpegged the Swiss Franc from the Euro to reduce the value.
The devaluation proponents have not said where the devaluation will end. At N400 to the dollar or when it goes to N800 or N2000. Do we then put a peg at N5000 to the dollar? If we put a peg at that stage, will it still be the free market or a mélange of both?
The devaluation proponents also say that we shouldn’t be worried about inflation. This is bonkers. Economist and policy makers in the West obsess about inflation.
On final note, the Buhari administration has set out the following as part of its key priorities:
- Security of the country
- Conditional Cash Transfer to vulnerable people within the society
- Fight Corruption
- And a host of other policies specifically targeted at the economy.
If you object to any of these priorities, kindly wait for the administration and ambush them in 2019. Goodluck to you.
For those who think the Buhari administration does not have an economic strategy and they are only waiting for oil prices to rise. Waiting for oil prices to rise is a strategy too. It is called sitting it out. What ensured IBB had any legacy of note (generosity and corruption or generous corruption) was a rise in oil prices.
If you want to read a bit more about SAP in Nigeria – please read this article.
Baba Grumpy works in Financial Services in the United Kingdom. He blogs mostly about football at http://babagrumpy.blogspot.co.uk. His Twitter handle is @BabaGrumpy
Views expressed by contributors are strictly personal and not of TheCable.
What you are prescribing as solution to Nigerian economy has not worked where else it has been tried. Check out this link about Venezuela, an oil producing country like Nigeria; http://goo.gl/OIN4ye. This issue is not about devaluation, it is about allowing a Committee at CBN to fix exchange rate. Better to allow the rate move based on demand and supply and find its own level. It is more likely that this level will be between the CBN fixed rate and the parallel market rate. The good thing is that it will be available for everyone and will respond to demand and supply. As it is now, when there is large inflow of dollars, the CBN rate does not change because it is fixed.In a proper market the naira will be expected to appreciate. A small country like Uganda, has no oil revenue, is land locked and imports all its fuel requirements, yet she does not fix her exchange rate. There are no fuel queues and fuel is sold at appropriate price without subsidy. In any government policy, there will be losers and gainers. All the government needs to do is to determine the losers and provide them relief through fiscal policies. For example, government can exempt all workers on low wages from income tax payments. Companies that need to import raw materials may be given rebate on tax for 5 years while they make alternative arrangement for local sourcing of their raw materials. Money spent by such companies in research and development for local sourcing of raw materials should also be made tax deductible. The pegging and unpegging of swiss franc is not the same thing as fixing of currency rate. It was pegged to the euro and fluctuates with the euro and other currencies.
Sawstonite, the problem with comparing allowing the “market” to determine the value of dollar-naira is that the “market” can easily be hijacked by evil forces. If the naira is allowed to float today, black marketers can easily do what petrol marketers do when there is a scarcity of that product -hoard. This will unnaturally drive up the exchange rate against the dollar and make it expensive to import legitimate items into the country.
You’re right here! Our economy needs custom made policies with a street view focus. Too many opportunists waiting to unleash their evil manipulation on free-swinging and loosely held commonwealth. Too much economic theories with few worthy interpretations is the bane of our economy.
How can it be available when you don’t have it. The fact is if nigeria still earn as much as it used to, the government would not have taken this measure. It’s would have been perfect to engage in this type of policy in time of surplus but we have no FX. The little we earn will have to be careful managed.
As fr BL submission, what we must understand here is that though in a sound economy where people who actually vote are so well informed, it would make sense but with holistic elite who want to take power by fire by force, should Buhari agree to devaluation, that’s the end of his government. Dean or no demand, this problem is an invention of cabal in Nigeria. They are the ones who want or need the dollars. They are re the ones who are so intended on bringing the government down and restricting access to governments FX is considered a target.
The common man on the street would nit listen to all the grammes. U guys are speaking here. Naira not devalued, they are already saying ghis is not the change they voted for. What would then happen if we devalued and their landlord now says they have to pay 100% more on their rent. What will happen then if a loaf of bread becomes 1000 naira? What will happen when a transit from Ikeja to lagos becomes 5k? Whether you like it or not, this is what’s gonna happen if the government agree to devalue. You can’t explain why during th campaign, he promised petrol at be N40 and now we have to pay N200 because we devalue naira. He would have given more arms to PDP and simply put, Nigerians will ask him to resign. People like Fayose, Dasuki, a the wailers, FFK and their likes will be heroes. Fir me we need to sir this out. No devaluation end of story.
Pro devaluation proponents haven’t proven their case. Devaluation theoretically will stimulate local production, encourage exports and import substitution. The problem with this is that there is yet no enabling environment to support increased local production. Infrastructure is still quite poor and inadequate. Any gains of devaluation will soon be quickly lost in my opinion.
I also suspect (in absence of formal statistics) that the gains of any devaluation are already in play since a large quantum of the economy is serviced by the black market!
In effect, I’d advocate status quo with the addendum that CBN and the banks be watched very closely to forestall any rent seekers taking advantage of arbitrage opportunity between official and parallel market rates.
The current system is the one that encourages corruption and arbitrage. The well connected will get access to dollars at CBN rate and sell it at black market for a hefty profit. The huge differential is too tempting. A manufacturer can get the dollars at CBN rate, use 25% to import raw materials, bring back the remaining 75% at black market rate for a 40% profit. The manufacturer will lay off staff and claim lack of consumer demand because of the economic difficulties in the country. The CBN tries to stop this through pre-shipment inspection which costs money and increases cost of imports. The pre-shipment company will be paid in dollars which CBN is trying to conserve. The problem with controls is that you have several agencies set up to enforce them which costs more than you plan to save.When the differential is small, many that bring in dollars through black market will do so through the banks and CBN thereby making more dollars available to the CBN for use of the productive sector of the economy.
Did this writer claim he got a master in Finance? His thoughts are so incoherent and his arguments pedestrian. At best, he tried to highlight the challenges of devaluation but he has not done anything to highlight the risks of the current fixed exchange rate system. The current fixed exchange rate system cannot stand the test of prolonged low oil price neither is devaluation by simply changing the official band. The solution will be to allow the rate respond to demand and supply pressures. This will even out the true value of the naira somewhere between the official and parallel market rates. At this time, the official rate is not the true value and the parallel market rate does also not represent the true value because uncertainly and speculation are all priced into it. Eliminating the currency controls and allowing market to determine it will reduce or eliminate speculative attack on the naira
The question is Devaluation and / or Fixed exchange regime which is of a lesser evil in terms of inflation. This what the writer should address.
The piece is just about populism not rooted in reality. Our supply is less than $1b while our demand is about $4b monthly, somehow something must be done to the supply side. Whether you call it devaluation or adjustment, you have to find a way to increase supply. We are not the only monolithic economy in Africa. Oil accounts for 97% of Algerian foreign exchange earnings, oil accounts for about 93% of Angolan foreign exchange earnings, oil accounts for over 90% of Equatorial Guinea’s foreign exchange earnings yet they aren’t going through this cos they adjusted early to balance their balance of payment. I find it funny when people always talk of toothpicks and wheelbarrows. The 41 items that can’t access the official forex window are actually 680 items many of which are raw materials for manufacturers. Perhaps the writer doesn’t know that the average percentage of raw materials imported is 52% and this has huge effect. In any case a nation of about $570b economy is bound to import. Our import to GDP is actually 12.5 compared to Ghana that is 48.9 or even Ireland that is 95%. Our problem isnt much of import but that we have nothing to export but oil and to be honest what comparative advantage do we really have? Those who are against devaluation have the right to oppose it but what are they suggesting we do? Continue on this path that has burnt over $6b in just a yr? Our reserve is at about $27.8b now. May be he should learn from the Asian financial crisis of 1997 where Thailand defended Baht with about $33b and yet still devalued. Does he want to raise interest rate in a fragile economy? They ought to come up how to go forward not just be against something. Inflation due to structured devaluation is blown out of proportion. Nigeria devalued by about 25% in 2014 and 2015 yet inflation didn’t go beyond 1%, South Africa devalued Rands by over 30% yet inflation was less than 1% but the swing in Naira now is worse than official devaluation. Food has gone up by 20-50% in nigeria yet food is 7 year low across the globe. N2.2 tr was lost last year, taken out cos of this. Capital flight unprecedented, and manufacturers losing N1.46tr, that’s y we have mass retrenchment everywhere. You can be against something but prefer solution