Buhari, we need to talk

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