A better use of government’s resources (whether at the national, regional, or municipal levels) would be to improve the resilience of domestic economic actors, including through promoting competition that ensures (1) that households are spoilt for choice; and (2) barriers to exit and entrance across industrial activity sectors are as low as possible.
One (guaranteed) outcome of the Buhari administration’s decisions to restrict access to official foreign exchange markets for the import of certain goods, is the extensive debate that these will stir around the usefulness of this manoeuvre as a policy tool. With the 41 items which first came up against this restriction, the central question was around how the affected items were arrived at. Much ado was made about how the import of toothpicks betokened how unserious the Nigerian is as an end-consumer. As were arguments for the protection of commodities whose production some believe we have a clear, competitive advantage in.
As always in such matters (aside the liberal worry about how much intervention by the public sector in private spending decisions is consistent with individual liberty), the main worry was that our government requires far more information than is ever available to decision makers to take decisions as far-reaching as these on the economy, including their longer-term outcomes.
For milk imports, the worry was both with the facts — in marshalling its arguments for restricting domestic importers of milk products’ access to the official foreign exchange market, the central bank looks to have exaggerated the nation’s milk import bill — and with the health implications for a country with high infant mortality rates. The decision to ban food importers from sourcing hard currency at the official markets has not fared better. Government’s justification for this latter decision, essentially that the economy has achieved food sufficiency, has been met with derision in certain quarters. And you only need to remember that much of the low-intensity warfare that is going on in the country to date has had the nation’s traditional breadbasket for its theatre, to worry about how factual government’s claims are.
There are worries of a conceptual nature, too. Easily the weightiest is the one that speaks to public concern over the extent of government’s subsidy of the foreign exchange market. By regularly denying access to this market for certain categories of domestic imports, government simply admits (through the back door) that the price at which domestic importers obtain their hard currency is less than it would have been were they to source these from the markets.
One test of the propriety of this subsidy regime, then, would be to estimate the gains to the people (lower product cost, including through keeping domestic price increases below single digits), against the cost to the government of providing the subsidy.
The questions this admission raises are plenty. But the most immediate are: (1) by how much is each importer subsidised by government?; and (2) why? Both of these questions, incidentally, are related. But first, the latter. To use up scarce government resources in aid of any economic activity, there must be clear gains to the people therefrom, yet a large portion of the benefits (lower operating costs, to take but one example) arising from the operations to which these subsidies are extended are however appropriated as profit by private entities.
One test of the propriety of this subsidy regime, then, would be to estimate the gains to the people (lower product cost, including through keeping domestic price increases below single digits), against the cost to the government of providing the subsidy. At the heart of this conversation is not just that government could find more impactful uses for the resources it currently expends in subsidising the foreign exchange market. There is also the possibility that these subsidies continue to prop up inefficiencies in Nigeria Incorporated.
Without the subsidies, the prices of the products that the foreign exchange is spent on (as input costs, hopefully) will go up. Demand will fall. Ideally, businesses should then seek more efficient ways of delivering the same goods to the markets. Or they will fail. Both a contraction in domestic demand and failed businesses doubtlessly hurt domestic production. But the solution is not to keep inefficient businesses running.
Our problem with policy making is that even in this area, competence is a major problem. We are unable to describe the outcomes that we seek through providing support. Nor the timelines over which these outcomes may be realised.
A better use of government’s resources (whether at the national, regional, or municipal levels) would be to improve the resilience of domestic economic actors, including through promoting competition that ensures (1) that households are spoilt for choice; and (2) barriers to exit and entrance across industrial activity sectors are as low as possible. In the case of foreign exchange subsidies, this will mean moving just about every economic activity on to market-based platforms. At which point, it ought not to matter whether I spend my hard-earned foreign currency importing pizza from the U.K., or exporting human resources.
If nothing else, this transition will eliminate doubts about how businesses currently qualify for access to foreign exchange — because of their economic clout, or because they have connected persons promenading the corridors of power? Admittedly, arguments will be made for supporting industries that have proven impacts on domestic productivity — education, health, and increasingly, the provision of broadband internet access. But there are more transparent (and hence more efficient) ways than subsidising access to the foreign exchange market to support businesses in these areas: tax holidays, lower tax regimes, etc.
Our problem with policy making is that even in this area, competence is a major problem. We are unable to describe the outcomes that we seek through providing support. Nor the timelines over which these outcomes may be realised. Inevitably, even these more transparent routes to a healthier economy then become a burden on the public purse — supporting “Peter Pan” establishments (he never grew old, remember), with no sunset clauses.