President Buhari need to understand that if barking orders at markets
did not work in the 1983-1985 era, it will not work now either. In as much as
he is right that devaluation will precipitate inflation, his current policy of
limiting imports and creating artificial scarcity will be even more
inflationary. A weaker currency would revamp domestic production and spur growth
more than import bans can, and will hurt Nigerian consumers less in the long
run.
“At home we face enormous challenges,”
said President Muhammadu Buhari during his 2015 inaugural speech as Nigeria’s
newly elected president.1 I think he is right. When he came to power
in a military coup more than 30 years ago, the country he inherited was a mess:
the economy was collapsing due to falling oil prices and its treasury was
looted by pilfering politicians. During that period, which spanned through 1983
to 1985, Nigeria’s export earnings fell by more than 50 percent. The Nigerian
economy went into deep recession and, while he was trying to restore public
accountability and re-establish a dynamic economy, he was overthrown in a coup.2
Last year, Muhamadu Buhari won a
fair election to become Nigerian president again. The problems he has inherited
are, to a very large extent, identical to what he had more than 30 years ago: oil prices have slumped, from $64 a barrel in
February 2015 when Buhari’s government came to power to about $32 today. The
country’s growth rate fell from 6.3 percent to about 3 percent, a value that is
almost half the rate of 2014 and is also barely enough to keep pace with
Nigeria’s population. The country’s stock market is also down by almost 50
percent of its peak in the year 2014. It should be noted here that as much as
70 percent of Nigerian government’s revenue comes from oil. Not only that, oil
accounts for 95 percent of the country’s export earnings. Given that the
country’s economy swoons along with oil price, the government deficit will
widen this year to about 3.5 percent of GDP if oil price continues to fall. The
country’s currency, the naira, is under pressure: as of last week, the dollar
sells for 300 naira or more in the black market, even though the central bank
insisted on an exchange rate of 179-199 naira to the dollar.3
When it comes to the naira, the
appropriate policy would have been to allow it to depreciate to reflect the
country’s loss of purchasing power. Doing this will boost domestic demand since
exports will become cheaper and more competitive to foreign buyers – a factor
that can create jobs in the export sector. In addition, allowing the naira to depreciate
will help to increase export volumes and aggregate demand which will, in turn,
improve the country’s current account deficits and its economic growth rate.4
Buhari’s government, however, have a different plan: The central bank is trying
to keep the naira aloft by restricting the supply of dollars and by banning the
import of a long list of goods, from toothpicks to shovels and rice. Their
logic for this approach is that banning certain imports will help the
government to maintain its foreign reserves as well as stimulate domestic
production.5
Ideally, when a country devalues
its currency, all imports becomes expensive. But under Buhari’s systems,
imports are restricted by government fiat, which makes it artificial. So far,
the restrictions on imports makes it very difficult for factory bosses to
import key raw materials such as chemicals. This means that some of these
factories may be forced to shut down if this trend continues. Many of them has
no other choice but to turn to the black market to obtain dollars.6
And it will not be an exaggeration to say that they might also be smuggling in
some of the goods that have been banned by the Buhari’s government.
As every economist will tell you,
history is usually a good place to look for answers. Buhari’s current economic
model is not new to Nigerians. As a matter of fact, Buhari did something
similar around 1983-1985 - the last time he was president. At that time, he
rejected the option of devaluation and the result was catastrophic: the
country’s supply of foreign currency depleted significantly and Buhari
responded by rationing it and by slashing imports by more than half, just like
he is doing now. This pushed Nigerian businesses to turn to the black market for
foreign exchange. Buhari’s response this time was more draconian: he sealed the
country’s borders. With limited access to foreign exchange, Nigerian businesses
could not imports vital raw materials, which decreased their volume of trade
and forced many to lay off their staff. With the country facing a surging
unemployment at the time, Buhari expelled 700,000 migrants.7
President Buhari need to understand
that if barking orders at markets did not work in the 1983-1985 era, it will
not work now either. In as much as he is right that devaluation will
precipitate inflation (as it has in other countries that make their money by
digging stuff from the ground), his current policy of limiting imports and
creating artificial scarcity will be even more inflationary. A weaker currency
would revamp domestic production and stimulate growth more than import bans can,
and will hurt Nigerian consumers less in the long run. What is certain is that
Nigeria needs foreign capital to finance its deficit. From a realistic perspective,
the country will struggle to get any under Buhari government’s current
policies. Foreign investors, who are already nervous over Nigeria’s economy and
political situation, assume that any of the country’s assets they buy in naira
now will cost less later after the currency has devalued. Since investing in
any Nigerian asset now will expose them to foreign exchange risks and potential
loss of value, a lot of them are pulling out from naira-denominated assets,
which include stocks and bonds.
What Buhari must do now
Many of the things Mr. Buhari has
done so far are in some ways very impressive. In the northern Nigeria, which
was overrun by Boko Haram jihadists, he has restored a semblance of security.
He is winning the battle against corruption, which had flourished under the
previous president, Goodluck Jonathan – an ineffective buffoon who allowed
Nigerian politicians and their friends to dip their fingers into public funds
with impunity. Some of his economic policies are laudable too. For instance, he
is trying to use a mildly expansionary budget to stimulate the economy. His
proposal to remove the fuel subsidy and sell petroleum products at market
prices is equally commendable.8 With fair justification, his move in
that regard is indeed a brave one, given that fuel subsidies are popular in
Nigeria, even though they have produced nothing but disaster: the cheap fuel
are often smuggled out of the country and sold at the neighboring countries
while Nigeria’s petrol stations frequently stay dry.
My argument here is simple: Buhari
should continue with his bold stance and implement more sound economic
policies, since at this time, Nigeria’s economic success cannot co-exist with
political weakness. In line with this he should apply the same boldness that
made him to let petroleum products cost what the market says it should to the
management of the naira, the Nigerian currency. Simply put, he should allow the
naira to gradually depreciate so as to improve Nigeria’s export competitiveness
and trade deficit. He should also reduce the size of the government. Nigeria is a country where the government has
a strangle hold on the key sectors of the economy, especially on the energy, railway
and the seaports – a situation that leads to corruption, gross inefficiency and
loss of significant revenue from these sectors. President Buhari may be unlucky
in the sense that he became the president at the time when Nigeria is going
through a near-death experience with respect to its economy. However, Nigerians
can forgive him for being unlucky if he can implement policies that can create
jobs and give the country’s economy the shock it needed to spark a period of
urgently needed economic growth and development.
References
1President
Buhari’s Inaugural Speech . (2015, May 29). Vanguard. Retrieved March 1, 2016 from http://www.vanguardngr.com/2015/05/read-president-buhari-inaugural-speech/.
21983 Coup. (2016). Global Security. Retrieved
March 1, 2016 from http://www.globalsecurity.org/military/world/war/nigeria2.htm.
3Nigeria's
Economy: Hope the Naira Falls. (2016, January 30). The Economist, p. 10.
4Pettinger T. (2013). Advantages and
Disadvantages of Devaluation. Economics
Help. Retrieved March 1, 2016 from http://www.economicshelp.org/blog/1299/economics/advantages-and-disadvantages-of-devaluation/
5Nigeria's Economy: Hope the Naira Falls, op. cit.,
p.10
6Ibid
7Associated
Press(1985, May 5). Expelled Foreigners Pouring Out of Nigeria. New York
Times, pp. Retrieved March 1, 2016 from http://www.nytimes.com/1985/05/05/world/expelled-foreigners-pouring-out-of-nigeria-by-the-associated-press.html.
8Nigeria's Economy: Hope the Naira Falls, op. cit., p.10
