…over the last five years, our monetary authority has spent a king’s ransom pursuing a foreign exchange rate policy designed to keep our affluent in fine fettle in good voice. To no avail. For, over the list six months the naira has daily plumbed new depths.
Now that it is official ― the World Bank is dragging its foot on Nigeria’s request for a bailout loan because Nigeria is balking at implementing reforms, especially to its exchange rate regime ― we will do well to consider both alternatives. Posed as an “either or” problem, it really doesn’t make that much sense. Truth is, both needs are all inclusive in one and the same response to our current existential challenge. Yet, there are downsides and strong arguments for either. First, a few myths need to be put to rest. Nigeria is not an import-dependent economy in the sense in which imported goods make up a disproportionately large share of its domestic output, or in the relative sense in which its import-to-GDP ratio is higher than the median for countries at its stage of development. Similarly, at the lower end of the economy’s income log, imports are not a big feature.
Despite these, the depreciation of the naira that will accompany reforms designed to reduce the cost to the monetary authorities of its current exchange rate management regime will hurt. Especially through its effect on the pump-gate price for petrol ― our main import. A naira that exchanges for fewer dollars will also dig craters in the pockets of Nigerians with children/wards in school outside the country. It will also reduce the number who may travel for “summer” annually.
Back out the pass-through from higher fuel prices, though, and the main impact of a weaker national currency is on the affluent and the rapidly thinning ranks of the upper middle class. If the latest numbers on unemployment/underemployment from the National Bureau of Statistics serve as a guide, both of these cohorts are near extinction in the country. Until the last of the affluent Nigerian chokes to death in the vomit of our growing poor, however, the former’s voice will ensure that public policy remains skewed in its advantage.
Another source of our current crisis is our inability, over the years, to change how our economy works. In other words, to wean it off oil export earnings and move it to a market-led, private sector-driven model where costs and the relative benefits of consuming products/services matter in the making of choices.
Thus, over the last five years, our monetary authority has spent a king’s ransom pursuing a foreign exchange rate policy designed to keep our affluent in fine fettle in good voice. To no avail. For, over the list six months the naira has daily plumbed new depths. In part, this is because COVID-19 turned off demand for crude oil ― our main export and source of foreign exchange. But even before the pandemic, we were in an unbelievably bad place ― struggling to find buyers for our cargoes of crude oil. Another source of our current crisis is our inability, over the years, to change how our economy works. In other words, to wean it off oil export earnings and move it to a market-led, private sector-driven model where costs and the relative benefits of consuming products/services matter in the making of choices.
This latter need is the central argument of those who would have us reform the economy as a central condition for granting us new loans. Take the conversation around the naira’s exchange rate. A market-determined rate would mean that the central bank does not have to break the bank maintaining the naira’s exchange rate at some artificial levels. If reports that the cost of doing this was circa US$40 billion in 2018, then we know what the opportunities were that we gave up just to feel our currency virile and strong. Beyond this, a market-determined rate would also translate into more naira spend for the three tiers of government.
A key reform need, then, is a more efficient public expenditure management process, supported by a free exchange rate pricing system. Properly implemented, the latter should leave the central bank free to focus on managing domestic prices in a more transparent manner.
This is where the case for reform is both urgent and more complicated. Our governments’ spending, at all levels, is not the most efficient. Yes, in part because two-thirds of it goes to paying salaries and overheads in the civil service. But even more importantly because the civil service’s purpose is no longer as clear as it once might have been. And even if we were to define its task as simply keeping the bureaucracy chugging along nicely, it long ago lost the capacity to do even this efficiently.
This is one reason why inflation has remained the economy’s bugbear: Non-purposive fiscal policies simply feed into higher domestic prices. The more so when one effect of an effete bureaucracy is to mute private sector supply responses. A key reform need, then, is a more efficient public expenditure management process, supported by a free exchange rate pricing system. Properly implemented, the latter should leave the central bank free to focus on managing domestic prices in a more transparent manner. And ensure that the poor and vulnerable have a fighting chance of winning the ongoing war on their pockets.
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
