When CBN Closes A Window….

There’s no punchline. Sorry.

CBN actually just closed the rDAS/wDAS window via a press release today. But what is rDAS/wDAS anyway?

Retail Dutch Auction System is the method by which CBN sells foreign exchange to those who need it. The rDAS system is the main system the CBN has been using for a while now so perhaps that’s what needs a definition.

If you need US Dollars as an end-user, you go to your bank and ask for it. You tell the bank what you want to use it for and the bank then takes that request to the CBN asking to buy on your behalf. The bank then collates all the requests from its various clients and takes it to CBN. From  the point of view of the CBN, this system allows it know who is demanding for foreign exchange and what they are using it for. In theory, it can then refuse to sell to certain people if it feels their demand is not ‘legitimate’. Of course there is an advantage to buying from the CBN – the rate at which they sell dollars – the official rate – is always much better than what you find on the streets or Bureau de Change.

The more requests submitted by banks, the more pressure on the Naira naturally – people will be willing to pay more Naira to get the dollars they want given that the dollar is the scarcer item in that equation. And given that CBN wants to keep the Naira from devaluing, it has to supply more and more dollars to meet requests – It has been supplying over $100m/day in recent times.

So we go to the press release from today.

The managed float exchange rate regime, which the Bank had adopted following the liberalization of the foreign exchange market, has for the most part been successful in ensuring exchange rate stability in line with its mandate.

Think of this as one of those obituary statements in the newspapers where they say ‘it is with a heavy heart that we announce the demise of Chief so and so’. The managed float exchange rate regime that the CBN is talking about is all the ways it has been supplying dollars to the market over the years.

It is saying it has been mostly successful in keeping the Naira successful. But when a statement opens like this, you know something else is coming…

In recent times, however, with the sharp decline in global oil prices and the resultant fall in the country’s foreign exchange earnings, the Bank has observed a widening margin between the rates in the interbank and the rDAS window, thus engendering undesirable practices including round-tripping, speculative demand, rent-seeking, spurious demand, and inefficient use of scarce foreign exchange resources by economic agents. This has continued to put pressure on the nation’s foreign exchange reserves with no visible economic benefits to the productive sector of the economy and the general public.

Ah, here we are. Given all the challenges that the Nigerian economy is going through, the CBN has decided to vote for change.

There is rDAS – which I described above as the rate that CBN sells to the banks, presumably on behalf of its customers. There is Interbank – which is the rate at which the banks sell to themselves. This Interbank rate is of course higher than the rDAS as you can imagine. Why buy from CBN and then sell to another bank at the same rate? even Mother Theresa would not approve of such charity.

CBN is thus saying that the difference between the rDAS and the Interbank (which is closest to what you get from your Mallams) is widening. Given that the CBN is the number one source of dollars in the economy it’s not hard to understand what they are saying – people are buying from CBN and going to sell at Interbank for a profit.

There are two issues here. The first is that CBN is saying some of the requests being submitted on behalf of customers are clearly fake (“spurious demand”). Otherwise why would banks buy from CBN and go and sell to other banks if they were buying strictly for their clients? But you didn’t hear that from my mouth. The second issue here is that dollars are obviously getting scarcer relative to demand. If CBN supplies $100m this week out of say, $150m demanded but then the next week it supplies $120m out of $200m demanded, the dollar is getting scarcer even though CBN has increased the amount it sold (“scarce foreign exchange”).

As the final evidence that this is the work of “economic agents” (a nice name to call people you don’t like), the CBN is saying it cannot see any evidence that the dollars it is selling is being used to import things like agricultural equipment or industrial machines etc (“productive sector of the economy”). In short what is going on is arbitrage by “economic agents” – when you see something available to buy at one price in one location and also see people paying a higher price for it at another location. It will be rude for you to pass up such a profit-making opportunity by connecting price A with demand B. The wider the gap between rDAS and Interbank, the more money people are making obviously. Not nice says CBN.

In view of the foregoing, it has become imperative that appropriate actions be taken to avert the emergence of a multiple exchange rate regime and preserve the country’s foreign exchange reserves. Consequently, we wish to inform all authorized dealers and the general public that, with effect from the date of this press release, the rDAS/wDAS foreign exchange window at the CBN is hereby closed. Henceforth, all demand for foreign exchange should be channeled to the INTERBANK FOREIGN EXCHANGE MARKET.

Is this starting to sound like a coup plotter’s speech or is it just me?

The CBN is now saying it has had enough of your bad behaviour. It no longer wants to be the guy you have put in your friendzone who is funding your other boyfriend…the guy you truly love. You are taking CBN for a fool and it will no longer stand for it.

It has now cancelled the rDAS window. Slammed shut. Banks can no longer come to the CBN every week saying ‘my client asked me to buy $100,000 dollars for them to buy tractors from China for their farm’. CBN is no longer that guy – go and meet the guy you obviously truly love.

Now, if you need dollars, go to the Interbank. Well, as an end-user you really can’t go to Interbank per se. This is simply the market where the bank that has dollars sells to the bank that needs dollars. Because the banks know whats up, it is hard to see how “economic agents” will come and play the same games they have been playing here. We can conclude that the demand at the Interbank will be pretty close to reality.

What does this then mean? Well, we can imagine that even if the bulk of the demand under rDAS was “spurious” as CBN claimed, surely it could not have been all of it? The people who were genuinely demanding dollars through their banks will suffer. They are now as good buying from the black market. If you were going to import machines worth say $10m, the difference you will have to pay now will probably be up to N10/dollar. That’s an extra N100m you have to find.

But the move will strike a blow against speculation – this is like abruptly ending a party and telling everybody to go home.

Most Nigerians have been buying dollars at Interbank rates anyway so on the surface it should not affect them. But it will. Because the Interbank rate is likely to increase given that banks don’t have as much dollars as the CBN has and are likely to sell for as high as they can to each other. This higher rate will probably feed into the economy. But again, the effect might be counteracted by eliminating all those “economic agents” which means demand will not be as high as before, in which case the Naira might not lose value as expected.

We will soon find out either way. If the Naira gains value as a result of this rDAS closure, then we will be able to conclude that the whole thing was to the benefit of “economic agents” in the past and the CBN was right in closing it. If the Naira loses some value against the dollar, then we might also say that genuine people who need dollars are suffering as they have to pay more for what they need.

So what if dollars are so scarce in the market that banks now start selling it for N300/$1 to each other?

For the avoidance of doubt, all authorized dealers and the general public should note that the CBN will continue to intervene in the interbank foreign exchange market to meet genuine/legitimate demands

CBN says calm down. It will still enter into the Interbank market and put dollars up for sale if and when things start to get out of hand i.e. if dollars start to become scarce. If Bank A wants to buy $1m from bank B and bank B says it wants N250/$1, the CBN can get in touch with bank A and offer to sell to it for N225/$1 or something. That will stop bank B from being able to sell for N250 and thus devaluing the Naira further.

What’s the moral of this story? There is none. Let us wait and see.

FF

 

Stealing And Corruption (Book Recommendation)

I am not going to waste my hard-earned education on a useless debate about the differences between stealing and corruption. Much of a muchness.

Between the media chat in May 2014 and the one yesterday where he tried to ‘explain’ what he meant, the difference between stealing and corruption is now as clear as mud to me. Here’s the one from last year (start around 1:05:00):

 

To be fair, he says he was quoting someone else even though he agreed with the quote. He went on to say a ‘common thief, they say he is corrupt’. He also used ‘just’ to refer to stealing a couple of times…’clear cases of where people just stole money’. You can see a thoroughly bamboozled Cyril Stober struggling to hold his laughter.

From this interview, one is tempted to conclude that he was trying to say stealing is perhaps something lesser than corruption. Or maybe not. I honestly don’t know. So let’s move on to yesterday’s chat:

 

This is the long-awaited ‘clarification’ as prompted by one of the journalists. He does not disappoint – he went full ham and by the end was merely one sandwich short of a picnic.

This time it appears he’s saying stealing is actually worse than corruption in our culture.

As an example, if you kill someone, you can go to court and try to hide under Grievous Bodily Harm (GBH) to get a lesser sentence, if you can get away with it. But surely the reverse cannot be the case? You won’t punch someone, land in court and then try to hide under second degree murder. I think this is what he was trying to say – that people hide under corruption to get away with stealing. He didn’t use ‘just’ or ‘mere’ to qualify it this time, so we can conclude he has upgraded the crime from a year ago.

Further, he went on to finally give an example of corruption – ‘two unmarried men sleeping together’. I am not sure but perhaps the President was channeling the words of Peter in 2 Peter 2:7-10 in coming to this definition:

and if he rescued Lot, a righteous man, who was distressed by the depraved conduct of the lawless (for that righteous man, living among them day after day, was tormented in his righteous soul by the lawless deeds he saw and heard)— if this is so, then the Lord knows how to rescue the godly from trials and to hold the unrighteous for punishment on the day of judgment. 10 This is especially true of those who follow the corrupt desire of the flesh[a] and despise authority.

That verse is referring to the things that brought God’s judgement on Sodom and Gomorrah – another version refers to men going after ‘strange flesh’. This definition of corruption makes me wonder about the sexuality of some of the people who have been found guilty of corruption in Nigeria. But let us not speculate wildly.

Finally, the President is clear that we should stop calling people corrupt when they have stolen money, maybe. So next time you see a corrupt government official in the streets, you know what to do.

Be that as it may, weapon is not groundnut. So let’s get serious.

I’ve been reading Sarah Chayes’ book – Thieves of State. Nothing has ever made me think deeply about corruption as this book has. The way she uses history to trace the structure of modern-day corruption and more importantly, the effects on the lives of people who are on the receiving end of it, is very skilful indeed.

51cInr3XtjL._SY344_BO1,204,203,200_

You can start off by reading this piece in the New Yorker magazine that interviews her and talks about some of the points she makes in the book.

Corruption is no joke and regardless of how the President tries to confuse by clarification, it is something that should be as clear as possible in our minds precisely because of the lasting, and possibly, irreparable damage it can do.

Please get a copy of the book as soon as you can. If you read it and don’t like it, come for a refund from me. But if you do that just to get money from me, that is corruption.

Or is it stealing?

FF

Broom Business: The Supply Curve of Jabez

“Oh that you would bless me indeed and enlarge my territory” – From The Prayer of Jabez, 1 Chronicles 4:10

The Tribune carried a report today about how the broom business is booming on account of being the symbol of the APC. Several other papers have reported variants of this effect and we can at least agree that there isn’t much of a surprise here. However, there is something it can tell us about the kind of economy we are and the kind of economy we want to become.

Let’s start with some basic economics. Please don’t be put off by the graphs.

Supply Curve

That’s a fairly simple supply curve (actually it’s a line in this case but let’s play along). The graph illustrates one of the simplest points in economics – the higher the price of a product, the more suppliers will supply. Using the figures above, if the product in question sells for N70, only 70 units will be available for sale in the market. Why? Well, there’s obviously less profit to be made at a lower price so suppliers won’t be motivated to produce more for sale.

But if the demand is actually more than 70 units, then you have more people demanding more than the amount of the product available. This will push up the prices and in turn, encourage suppliers to supply more of the product. Ergo, using the example above, the price goes back up to N100 and 100 units are once again available.

It’s tempting to take this supply curve as a full and simple explanation of what goes on in a market place. Indeed, it’s pretty much correct except that it is somewhat limiting as an explanation. One can conclude that an economy or a market just continues to dance along that supply curve – up and down – ad infinitum. Prices go up, suppliers are happy and supply more which means people can buy less thus reducing demand. So, prices go down, suppliers are unhappy and ‘go on strike’.

But there is something else which happens that helps to explain how an economy grows and enriches those who take part in it. Another graph (last one, I promise. Also, apologies for the dodgy drawing)

Supply Curve 2

This is what makes life better in an economy. More of the product is being supplied at a reduced price. Why? Because the supply curve has shifted, wholesale, outwards. In economic terms, this is the answer to the prayer of Jabez if you like – the area to the left of the supply curve is the coast of Jabez. His coast has been enlarged.

When we were dancing up and down along the old supply curve, perhaps it would have been hard to believe that the market could clear 120 units of the product at N80. Looking at the old graph, to get to 120 units, we would have needed a price of N120. What gives?

Profit has a smell and producers/entrepreneurs/suppliers have a nose for smelling it. The thing that causes that supply curve to shift outwards is the entry of new suppliers into the market. It’s not the old guys from the old curve who were leading us on the up and down dance. New hustlers have smelt profits and have entered. They are happy to sell for a lower price to win market share and as a result, they make the market bigger by drawing in people who would never have been able to afford the product or bothered to buy it (innovation or marketing).

The world is full of practical examples of this. In 2011 in the UK, around 150billion text messages were sent. By last year, the number had dropped to an estimated 140billion text messages. If an alien were to land on Earth and the first thing he saw were those numbers, he might be tempted to conclude that humans are reducing the amount of time spent talking to each other. In reality, the supply curve for messaging has shifted outwards and new people who were not there even 5 years ago have entered the market. In this case, they haven’t even reduced the price; they have crashed it to zero. So today, the number of messages being sent via BBM, Whatsapp, Snapchat and the likes reached 300billion last year.

People are still sending text messages. People are also sending instant messages. The sum total is that far more messages are being sent today than 3 or 4 years. The visiting alien would be spectacularly wrong in his conclusions.

So what does this all have to do with brooms? Some quotes from the article:

Mrs Hadija Ayeola a broom seller at Ojodu Local Government Area, told Inside Lagos that brooms within the period were sold between N150 and N250 each, depending on the size.

“Right now, the price has turned back to the previous price of N80 and N100, but I must say that APC as a party has turned around broom business, not only in Lagos but also in other parts of the country. The business was good within the period of rally, I sold all my brooms and I thank God for the opportunity.

We did not hike the price to the detriment of APC presidential rally in the state but we did it for us to have a livelihood.

I travelled as far as Osun State to purchase the brooms and I have to think on what price to sell, so that I can make a little gain,’’ she said.

Another seller, Mercy Odesola, explained that the business boomed at the period of rallies and also the commended APC rally in the state.

“The price was not high; selling broom between N150 and N200 is not too much and you know that broom is the symbol of the party,’’ she said.

Mrs Ayeola is not telling the whole story. Could she really have hiked the price of her brooms? It is doubtful. Mercy Odesola also makes reference to the prices in a way that tries to give herself the credit. Bless her.

Definitely, more brooms are being sold. And people who were not broom buyers 6 months ago are now buying brooms. Knowing what Nigeria is like and how people don’t waste time in taking advantage of an opportunity, it is not hard to imagine that some of the people selling brooms today were doing something else a few months ago. We have new broom suppliers in the market.

Yet more evidence of the pricing system at play in the article:

Another seller, Evelyn Njoku, also admitted the upsurge in demand for the brooms but regretted that the price had not changed.

“Although the demand for the broom rose so high, the price still remained the same, a medium size broom still sells for N50.00 while the big one still goes for N100,” Ms. Njoku said.

Amen somebody?

If you are looking for evidence that the supply curve has shifted out, this is it. Evelyn Njoku is saying that despite the increase in demand, she is unable to take advantage of the market by increasing her prices. Producers/Suppliers/Entrepreneurs have smelt the profits to be had from selling brooms and have entered the market.

These days capitalism is like a dirty word. This is a tragedy because capitalism has done far more than anything else to better the lives of people around the world. Indeed, as one of my favourite Professors, Deirdre McCloskey, says, we should no longer call it capitalism (which gives the impression that capital is simply being accumulated) but ‘trade tested betterment’.

These principles have implications for the way we like to make policies in Nigeria. And they are worth thinking through

1. Imagine that the Nigerian government wanted to ‘support’ the ‘nascent’ broom industry. Since the government hardly has a direct relationship with many of its citizens, the first thing that will need to happen is for a cabal to be formed – Association of Nigerian Broom Makers and Distributors (ANBMD). The chairman of this cabal probably won’t know the difference between a broom and a rake, but what does that matter? The talent required to head this broom cabal is not knowledge of broom making but rent seeking.

The cabal will pay courtesy calls to the President in Aso Rock where he will be handed a special broom and he will make a show of sweeping with it, live on television. The cabal will also present him with an award as Chief Sweeper of the Federation for his dedication to the local broom industry (which no other president before has shown).

In the end, the government will come up with a grant of N5bn to support the broom industry or something of the sort. To crown it all, a massive tariff of 1,000% will be placed on imported brooms or, depending on how righteously indignant the Minister in charge is, an outright ban on broom importation.

5 years later, it will emerge that no actual brooms were produced but there was an uptick in the number of Range Rovers imported into the country around the time the grant was released. Meanwhile, brooms will continue to be smuggled in via Benin Republic to the shock, shock I tell you, of the Minister in charge.

And yet, this example of brooms tells us a very simple point – the best way to help poor people is to buy things from them. It’s as simple as that. Mrs Ayeola, Mercy Odesola and Evelyn Njoku would probably never benefit from the N5bn ‘intervention fund’ for the broom industry. But the increased number of brooms they can sell is far better than any government fund.

2. When a policy is about to be announced, usually the target is something that Nigerians are currently importing from abroad. This thing will then be relentlessly attacked in the media with stories like

S-C-A-N-D-A-L: Nigeria spends N472.9 Quintillion Every Year Importing Slippers from Abroad! W-A-W-U! OMG!

Slippers are of course something we can produce in Nigeria so by importing so many, we are keeping people abroad employed when we should be ‘self-sufficient’ in slippers. It’s a seductive argument and anyone who argues against it risks being labelled an economic saboteur or an agent of Western Economic Imperialists and racist marauders.

But again, what does the broom example tell us? There are things which are already being produced in Nigeria that can be boosted. Look around you; they are all over the place. Of course it is sad that it has taken politics for us to discover that the broom industry not only has capacity to expand to meet rising demand but it can also do it very quickly and without fuss or government intervention.

Nevertheless, the lesson remains useful – the economy has many more cylinders to fire on if the conditions are right.

3. Where you have a ‘nascent’ industry, well, it’s only natural that some ‘protection’ will be offered by policy makers. This is another ‘policy’ that is hard to argue against and some version of it is guaranteed no matter who is in government.

But it’s worth thinking about a bit more. Of course, it always starts with protecting an industry against foreign competition but does it ever end there? From the point of view of those benefitting from the protection, foreign competition does just as much damage as local competition hence why cabals are needed to keep outsiders at bay.

This kind of protection is what keeps a market dancing up and down on the same supply curve and makes it impossible for the supply curve to shift outwards.

Imagine requiring a licence or approval to become a broom producer or seller? For sure, Evelyn Njoku wont be complaining about an inability to raise prices like she did above (assuming she’s inside the cabal). The increased demand would have been met by much higher prices and you get a scenario where people who need brooms to do their normal sweeping are priced out of the market and start resenting politics or anyone they feel is to blame.

People talk a lot about money grabbing greedy capitalists yet in this instance, Evelyn Njoku’s ‘greed’ has been curtailed by the market – if she raises her prices, the new entrants will take her market share by under-pricing her. Once protection against foreign entrants starts, it is only a matter of time before Nigerians become the actual victims. No market better illustrates this than the cement market in Nigeria.

4. Final point – where can broom making elevate a nation to anyway? It’s hard to tell. But in the first half of 2012 alone, Mexico exported 3.1million brooms (broom corn) to the United States (see chart below). The Mexican broom industry got a big lift when the North American Free Trade Act (NAFTA) was passed in 1994. The American broom industry couldn’t compete and most producers left the market for the Mexicans.

Broom Corn

The point here is that brooms are hardly the first thing you will think about when trying to figure out what a country can export. But homes and public places will always need to be cleaned and presumably, witches will always need to fly. That the demand or exportability of something is not immediately obvious doesn’t mean it does not exist.

All of this leaves us with one final question – how can we boost demand in a way that is not artificial or overly cyclical like what we have in the ongoing political economy? How can we get Mrs Ayeola to sell more brooms, whether or not the APC have it as their party symbol? We know that she will put the money back in the economy by using it to send her kids to school and buying better quality food etc.

That one is a topic for another day

FF

 

 

 

Fooling Around With Petrol Prices

Government will continue to pursue full deregulation of the downstream petroleum sector. However, given the hardships being suffered by Nigerians, and after due consideration and consultations with state governors and the leadership of the National Assembly, government has approved the reduction of the pump price of petrol to N97 per litre. The Petroleum Products Pricing Regulatory Agency (PPPRA) has been directed to ensure compliance with this new pump price

That was President Goodluck Jonathan on January 16th, 2012 backing down from the earlier announced N141/litre that would have all but eliminated the subsidy paid on petrol by the government.

Until yesterday, that price of N97 has remained the same. But what is petrol without crude oil? Here’s what the price of crude has behaved like since January 2012:

Screen Shot 2015-01-18 at 23.45.48Strictly speaking, what the Nigerian government does with petrol prices in Nigeria is not a subsidy per se. Whatever the price of crude oil – no matter how crazy that graph moves – or even the value of the dollar, the Nigerian government guarantees that you will pay a set price for it. To put it in the language of the street, the government undertakes to ‘chest’ the difference between the N97 it says you should pay and whatever the real price is.

On the day that President Jonathan announced the N97 price, the price of Brent Crude was $110 per barrel. On March 8th it was $128 per barrel. Picking another random date – May 1st 2013 – it had dropped to $98 per barrel. By June 18th 2014, it was selling for $115 per barrel.

You get the gist – Brent crude is priced daily and the price is hardly ever the same on 2 consecutive days. It’s a market which responds to demand and supply and the price gives us a rough idea of what the market is like in a given period. These days the price is under $50 per barrel which is partly because there is more oil in the market than is being demanded. And no one knows what the price of oil will be in 6 months or 1 year. Could be lower than $50, could be higher.

So that you don’t buy petrol at N97 today and then N120 tomorrow and then maybe N100 the day after, the government has this ‘chesting’ policy which insulates Nigerians from what is going on in the real world. This kind of thing doesn’t happen elsewhere as you know – if the cost of transport goes up, the person selling tomatoes in the market will increase the price – no ‘chesting’. And when you go to the market, you pay what the price is. There are not many things from which people are shielded from reality in this way but then, the story of fuel subsidies is complicated – Nigerians, with good reason, feel it is the only thing they get from successive feckless thieving governments.

***

The reason why subsidies are a bad idea are pretty simple to understand. Consider Aliko Dangote, a very rich man indeed. He can afford almost anything he wants including lots of cars. Let us say he has 20 cars in his house. Each car has a 100 litre tank. Every week he buys a full tank of petrol in each car to run errands and all sorts. This will cost him N194,000 per week. But what if the actual price of petrol is N127 per litre and the government has chested the N30 difference. This means that the government pays N60,000 every week towards fuelling Dangote’s cars. We can agree that Dangote is not suffering from a lack of N60,000 – last I checked, he was down to his last $24bn.

If you are poorer than Dangote and you have just 15 cars, the government pays N45,000 every week towards fuelling your car. If you are hustling with just one car, all you will get is N3,000 per week from the government. And so on. It is clear to see that the richer you are, the more you benefit from the government’s chesting of the petrol price difference. Now, that N3,000 of course means more to you than the N60,000 does to Dangote – which is exactly the point. Doing subsidies this way is quite wasteful and the richer you are, the more you benefit which is turning things upside down from the stated goal of helping those who need help the most.

This is why now is the best time to remove subsidies. Because the price of crude oil has fallen so low to the point that the government is not paying much subsidy (90k per litre according to the PPPRA website in December), you can end subsidies and get away with it. This is what the new President in Indonesia, Joko Widodo, has done. By some very good timing, he was able to cut subsidies and the prices actually fell from what the government set it at. This will save his government around $16bn per year which he plans to use to build some infrastructure and also roll out the Indonesia Smart Cards for health, education and welfare transfers to the poorest citizens in the country. In theory, now that the cards are in the hands of the poorest people, if and when oil prices go up again, the government can make payments to those poor citizens who will be most affected by petrol price increases while leaving the rich people like Dangote to pay the full price. It is hard to argue that this is not the right way to do things.

India’s new Prime Minister, Narendra Modi also took advantage of falling oil prices to scrap petrol subsidies in October last year, freeing up around $11bn per year. Again, the plan is to better direct the money to those who need it and not the blanket approach of price fixes.

***

I am a firm supporter of the APC. I am hoping and praying (and doing whatever little I can) to make sure they win the Presidential elections next month and oust the PDP. But the nature of politics and politicians is that they are guaranteed to do things that you find annoying or can’t defend. The APC have recently been taunting the government over petrol prices. No less a person than the Lagos State Governor, Babatunde Fashola has been at the forefront of the calls for lower petrol prices. Governor Fashola is a very smart man so a charitable reading of this is that he has been playing politics hoping to put the PDP on the back foot. Fair enough. The problem is that the government has now taken up the offer and actually dropped the price. There is no winner here – if the APC win next month, this is already a trap. They are going to have to either put the price back up or remove the subsidy entirely. Neither will be popular and that would mean a complete turnaround from their previous position in only a matter of weeks. (At least they will have the excuse of finding something ‘unexpected’ when they take over to justify their volte face).

As for the PDP, well they are in a hole already so I won’t advise anyone to enter a digging competition with them. They know how much of a mess the country’s finances are currently. There is no way Nigeria can afford to start paying subsidies again. The markets have given them some serious breathing space by cutting the cost of the subsidy – the amount of chesting they have to do – without any effort from them that would normally require a lot of political capital. Perhaps they reckon they can afford it for 2 months and once they win, they will simply put it back up again.

At a time when the national budget is in tatters with a massive hole in it, where is the sense in this? Already, the government is on course to borrow a record amount of money this year which means that we are guaranteed to start spending more than N1trn a year on debt servicing from next year (currently around N990bn). Not forgetting that this year’s budget has only 9% of capital spending in it and capital budgets are the first thing to cut when things are really tight. There is no country anywhere in the world I am aware of that grew by spending the bulk of its budget on recurrent expenditure – we are jogging on a treadmill as a nation. Going nowhere fast.

 ***

It’s all well and good to ‘enjoy’ the price reduction but let no one be fooled – the bill is coming and it is coming soon. No one should take this is some kind of right because oil prices have fallen. You did not pay more when prices went up so demanding some kind of price reaction based on market forces is a bit ludicrous.

All of a sudden people are saying what if the landing price is below N87? Doesn’t that mean the government is taxing petrol? This is a bizarre argument. The government does not import petrol itself. It asks people to import and then based on what it costs them to import, it pays them the difference between their cost (plus a profit margin) and the N97 it has set. If the landing costs are below N97, then there is simply no subsidy to pay. But because the price is fixed and not market driven, surely marketers cannot be expected to volunteer to reduce prices themselves? There is no tax. The importers simply make a bit more money.

There is also the silliness of assuming that because crude prices are saying one thing today, a price reduction in petrol is justified immediately. It does not work that way. In economic jargon, there is something known as Asymmetric Price Transmission otherwise known as the ‘rocket and feathers effect‘ that is, prices go up like a rocket but come down like a feather. It is a fact of life for which there need not be any collusion at work.

By reducing the price of petrol, the government has now volunteered to pay subsidies where it does not need to. Any right thinking Nigerian ought to be worried about that especially coming from a government that has not been known for sound financial management. Even when Nigeria was earning $110 per barrel, the budget was running a large deficit. Surely now that prices have halved suggest that there is no money to throw around for anything?

I do not like the current government at all but I also do not want them to bankrupt the country before they leave next month in the name of tossing N10 to Nigerians.

 

FF

 

P.S At the time of Occupy Nigeria, I supported the move to keep the subsidy in place for 2 reasons

1. I thought that since it was something the government badly wanted, it was an opportunity to draw some concessions on reforms from them in exchange. The economic argument against subsidies were the same then as now and I believed in them then too.

2. I also did not fully grasp the scale of the corruption around the subsidy programme until after the protests when the investigations and hearings began.

I have since changed my mind and I now think the subsidies should go. It was one thing mainly that caused me to switch my position.

During the hearings, I was reading different things about the whole mess and came across a checklist that was used to approve subsidy payments to importers. It was designed by a leading Nigerian accounting firm and the checklist had 30 different steps i.e. each step needed to be completed and signed off before the payments could be made. Some of the steps were as mundane as asking if the ship bringing in the petrol was sighted at the port and whoever did the sighting signing and dating that part of the checklist.

I am an accountant and building checklists to improve processes is something I have had to do in different jobs. If you hired me to improve the subsidy system, a checklist like that is one of the things I would have done with distributed verification across different parties who could be held responsible in case of something going wrong.

And yet, people were paid subsidies for ships that never came to Nigeria. It is one thing to say get paid for 1,000 litres of petrol when you only brought in 800 litres. That is malaria and it can be cured with chloroquine or something. But when you are getting paid for imaginary ships and passing a 30 step checklist (including someone attesting that they saw the imaginary ship), that is cancer – things need to be cut off.

I believe that there is still a lot of stealing going on. Perhaps we are no longer paying for imaginary ships (or as many as before) but we will only know when the next scandal breaks. Our record of punishing people for stealing is not very good to put it mildly so I doubt the people who were stealing have suddenly become model citizens.

Let the subsidy go. The whole thing. And there is no better time to do it than now.

 

 

 

My Books (and Reads) of 2014

Another poor reading year. Same excuse I gave last year. Nevertheless I did manage to read some really interesting things.

The Internal Enemy: Slavery and War in Virginia, 1772 – 1832 

I am not sure this was the best book I read in 2014. I think it’s the best book I have ever read, period. If everyone writes history like Alan Taylor does, it will be a far more interesting subject than it currently is.

This is the untold story of slaves in America – around 3,400 in all – who escaped from Virginia to side with the British and fight against their former American owners. It is a bit more complicated than that, but you get the gist. In the end, this is a tale about the unlimited capacity that humans have for hypocrisy – just because something is evil (and most people know it’s evil) doesn’t mean it can’t continue for hundreds of years.

This epic bit of trolling by a slave – Bartlet Shanklyn – who escaped and then wrote a letter to his former owner was one of my favourite bits of the book

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I really loved this book and its one I will go back to again.

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Age of Ambition: Chasing Fortune, Truth and Faith In The New China

The thing about China is that the Communist Party really really controls the flow of information in the country. So unless you live in China, it really is impossible to know certain things. Records are erased to the point where you can never find them anywhere anymore.

Evan Osnos spent 8 years living in China and documented a lot of what he saw. The result is an immensely enjoyable book that follows the lives and ambitions of actual ordinary Chinese people living in a time of almost breakneck speed.

You have absolutely nothing to lose by reading this book. Some really excellent writing by a fine journalist

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Preferential Policies

Professor Thomas Sowell remains one of my ideological lodestars so from time to time I go back to read something he wrote a long time. They never disappoint.

This book was written in 1990 and it’s fresh as ever. If you really want to understand how ‘good intentioned’ policies can create the problems they were intended to solve, then you should read this. Using empirical example after empirical example from India, Nigeria, South Africa and the USA among others, he causes you to think hard about so many things that are as sacrosanct as gospel these days

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Zero To One

Bring all your priors, knowledge and beliefs and allow Peter Thiel to challenge them for you. It’s not too difficult to be a contrarian – just oppose whatever the consensus is. What is not so easy is to make a convincing argument for thinking the opposite of what everyone accepts as conventional wisdom.

You won’t agree with everything he says – I am still struggling with his arguments on monopolies – but you will not be able to dismiss the points he makes easily. He is formidable as an intellectual.

And he is interesting

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Everyday Is For The Thief

Teju Cole really knows how to own the English language. Not everyone can think something in their head and then write it down in a way that brings the reader into their head.

This is also a depressing read about how Nigeria doesn’t change much – he wrote the book in 2007 before the critical acclaim that came with Open City. It remains as true then as it was in 2014 when it was published again.

It’s a work of fiction. Or is it?

 

x24171.books.origjpg.jpg.pagespeed.ic.jWSgb2MCwX Catastrophe: Europe Goes To War 1914

Last year was the 100th anniversary of the Great War that killed millions and millions of people in Europe. Yet, a century later, few people are agreed on what exactly it was that caused the war.

Max Hastings does his best though and the result is this magnificent chronicle of the first year of the war and everything that led up to it. Even African conflicts look like child’s play compared to the killing spree that went on in the first 5 months of the war alone – 329,000 French deaths and 800,000 German casualties among many others.

It is amusing then to see Scotland and several other small ‘nations’ agitate for independence in 2014. Europe used to be a place where it was really dangerous to be a small country.

How the times have changed

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Please Stop Helping Us: How Liberals Make It Harder for Blacks to Succeed

It sometimes felt as if 2014 was the most racist year in history, ever. Every week on twitter there was one ‘racist’ event or the other, complete with its own hashtag.

What’s the real story? Is the world evidently more racist than it has ever been? Who knows. But Jason Riley writes from America (where the majority of these arguments emanate) in a way that isn’t very popular outside of Conservative circles.

Staying with the data and avoiding emotional arguments, he makes the case (like Thomas Sowell) that many people who wanted to help blacks in the 60s ended up harming them.

Skip if this something you are not interested in. I am biased and I thought it was a really good and timely book

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Some Reads

I thought to add some articles I read and enjoyed in 2014 as well. I really got into New Yorker magazine and they gave me some really enjoyable reads in the year.

1. What do you know about Angela Merkel, one of the most powerful politicians in the world?  After reading George Packer’s piece on her, you’ll realise the answer to that question is ‘not much’.

The Quiet German

2. There is something about this piece on a (non-existent) Goldman Sachs aluminium that I really liked. When I read it, I tweeted it below

I am glad that I wrote my most popular piece in 2014 and it was an explainer. If you read that piece and shared it, thank you very much.

The Goldman Sachs Aluminium Conspiracy Lawsuit is Over 

3. This 5 part piece on the future of the book by The Economist magazine was excellent.

The Future of The Book

4. I got into some arguments about GMO crops in 2014 (I’m a believer in them) so this piece was of interest to me. I think it perfectly describes the motivations of the people behind a lot of scaremongering about GM foods. Also from the New Yorker

Seeds of Doubt

5. In 2014 I discovered Professor Ricardo Hausmann. He blogs once a month at the Project Syndicate (bookmark him) website and everything he writes is excellent.

It’s hard to pick a favourite but if I must, it will be the one below

In Search of Convergence

6. Professor Deirdre McCloskey is another one of my ideological lodestars. As someone said, she appears to have read everything worth reading and is never ever boring to read.

She did a 55 page review of Thomas Piketty’s ‘Capital’ and it did not disappoint. I haven’t read the book itself but I suspect Professor McCloskey’s review is more interesting than it is.

Review of Piketty

That’s it. Books continue to enrich my life and I hope they do yours too.

See you in a year (no, this blog will still be here. I mean the next review).

FF

 

Guest Post: Does It Matter If A Cat Is Black Or White?

In 1978, Deng Xiaoping became China’s pre-eminent leader at 74. Before leading China, Deng had cut his teeth in the army, helping it grow into a military machine during the Communist Revolution in the 1940’s. Though initially praised for his role by Chairman Mao, he fell out favour during the 1960’s because Mao considered him too self-centred; was stripped of all his posts and exiled to a rural province to be re-educated. Deng eventually made a political comeback after Mao’s death and started downgrading Mao’s legacies and opened China to globalization.

He was not a flawless leader; the Tiananmen Square Massacre happened under his watch and he also instituted the radical policy of limiting families to “one child per couple” to stem the rising population. However, his most important legacy is laying the foundation for China’s economic boom with forward thinking reforms.  He opened China to international trade and introduced reforms in agriculture and industry that improved the overall standard of living and triggered a period of sustained economic growth.

The similarity with the Deng story is a major reason I am supporting Muhammadu Buhari to become Nigeria’s next President despite his history of being a military ruler whose government signalled in the end of democracy in 1983, or a perception of being driven by ethnic sentiments and religious bigotry. I strongly believe he is the leader for the Nigeria of today, and that a government under his leadership will create the foundation for a sustained period of economic growth and development.

The next five points summarize why I’m batting for the Buhari/Osinbajo ticket to win the 2015 presidential election. Here goes…

Much Ado about Corruption

Nigeria has lost between $20 billion and $30 billion in the last two years to oil sector corruption alone, an amount equal to the Federal budget in 2013 ($31.7 billion). With this in mind, anti-corruption is the most important agenda for him during this election season. While it is obvious that one man cannot solve this problem, it is useful studying how Georgia managed to reduce corruption significantly when President Mikheil Saakashvili took over the government in 2004. If you read the comment below, you will understand why Muhammadu Buhari’s credibility is a great asset in the battle to minimize corruption.

This document here is a great read on how Georgia successfully fought corruption. If you can’t read the complete report, the summary is pretty simple – If a country’s leadership shows zero tolerance to corruption, the business community and citizens will fall in line. In Georgia’s example, the radical policies not only reduced corruption, they improved government’s credibility which increased tax collections. This is my biggest reason for asking voters to vote Muhammadu Buhari into office with a majority at the National Assembly.

What can others learn from Georgia’s success? Leadership and political will are all important. So too is establishing early credibility. In early 2004, the government thought it had 8 months to get quick results. Most famously, 16,000 traffic police officers received their waddling orders overnight. In an effort to sustain public support, attention grabbing symbols matter.

 

The APC Ideology

I am a member of the All Progressives Congress because its overall ideology is the right one for today’s Nigeria. A “left of centre” party will ensure social welfare programs which are badly needed in Nigeria today, protect workers and provide equal opportunities in the society. If you don’t belong to a group of Nigerians benefiting from Government patronage, this is the right party for you.

While there are legitimate concerns around the size of such governments and its impact on free markets, an APC government will provide a fine blend of grey matter to balance the impact of its policies on business and the cost of governance. Within the party, there are people like Nasir El-Rufai who led a lot of the privatization of public assets at the BPE; Ben Akabueze who has brought his banking experience to the public sector and ensures Lagos State delivers on an ambitious development plan; Olawale Edun, who led the diversification of Lagos State’s revenues between 1999 and 2007; and of course, Yemi Osinbajo, who is credited for reforming the Lagos State Judiciary during his term as the Attorney-General and Commissioner of Justice.

This is a stellar cast of grey matter that will thrive under a Buhari Presidency.  If there is one thing we have learnt from Buhari’s record of leadership, it is clear the man has no problem delegating responsibility where competent lieutenants are available.

It’s the Economy, Stupid!

James Carville might remain relatively unknown, but the campaign slogan he coined for Bill Clinton’s 1992 presidential campaign is now one of the most iconic campaign slogans of all time. Nigeria is now facing headwinds as oil revenues, our major income earner, might experience a sustained period of suppressed prices. There is absolutely no reason to believe a government that frittered a period of boom away will manage this lean spell properly.

In a period of reduced revenues, exchange rate depreciation and  higher interest rates, voters need to be sure about the decisiveness of its leaders and the ability of government to respond intelligently to the rapid changes in the global economy.

For 16 years, Lagos State has used its share of growing oil revenues to boost non-oil collections by improving tax collections. Today, it is the only state where federal allocations contribute less than 50% of the total revenues recognized by the state.  Today, while the Federal Government and many states struggle to pay salaries, Lagos State is not only meeting its obligations to employees, it is also embarking on a large-scale infrastructure projects.  For those who will ask the inevitable questions on Lagos State’s debt, I already answered that here .

2015 is an opportunity to test if the relative successes seen in Lagos since 1999 can be replicated at a national level.  It is also the right time to test the economic policies of both parties and their presidential candidates. Since 1999, there has never been a period where the economic credentials of our leadership team are more important than now. Will you vote the government that ensured 24% of Nigerians remained unemployed despite record-breaking revenues or the one with a clear agenda to ensure at least 5 million jobs are created per year?

Yemi Osinbajo vs Namadi Sambo

This one is the clearest reasons to bat for the APC ticket. I don’t know Namadi Sambo, but the limited influence of the Vice-President suggests he doesn’t add sufficient value to Nigeria’s leadership. While the Vice-President of Nigeria might be seen as an expensive appendage, it is clear under a Buhari presidency, Prof. Yemi Osinbajo will get a lot of leverage to lead policy implementation. Like thousands, I have been exposed to the “incoming” VP’s clear thoughts on Nigeria and the solution to our underdevelopment. It is therefore exciting to finally see an opportunity for one of the finest thinkers I know to put those theories to test.

I can’t remember any Vice-Presidential candidate being so important in an election, but Prof. Osinbajo brings a lot more than religious and ethnic balance to this ticket. It is an incredible opportunity to get a proper intellectual into office especially one who has spent most of his adult life proffering solutions to his country’s problems. For those in doubt, please wait for a debate between Vice-President Sambo and Professor Osinbajo. Get your white towels ready, it promises to be a remake of that epic battle between Sugar Ray Leonard and Roberto Duran.

Buhari 2.0 > Buhari 1.0

The Buhari running for office in 2013 is very different from the one that ruled Nigeria in 1984 or the one that ran for office in 2003. I will use two quotes from the man himself to explain.  I attended a session where he sounded very sad about the Supreme Court judgement where the result of the 2007 Presidential Elections was upheld by 4 votes to 3 despite an admission of irregularities during the election. Buhari seemed surprised the judges who dissented with the majority were Justices Oguntade, Onnoghen and Aloma Mukhtar (who later became the CJN), and not the ones who came from the same ethnic origin as he did. In that moment, I suspect the strong ethnic connection Buhari had been associated with slowly dissolved, and he realised people are aligned by interests and not where their origins lie.

The second was his admission that he submitted to democracy‘s power over autocratic leadership when the U.S.S.R. dissolved without a bullet. In both admissions, it was clear that both incidents had a huge effect on him and contributed to the renaissance we are now witnessing.

The result is very interesting. For the first time since 2003, GMB has finally built a coalition with a national outlook instead of the Northern based candidacy which was never going to deliver him the Presidency. For me, his conduct during the merger that created the APC showed a man who now understands compromise is an important word in the political landscape.  I don’t regret not voting for the 2003 version but the 2014 version surely has my vote in the bag.

Cats and Mice

Many ask which version of Muhammadu Buhari will show up. Is it the hard-line one that will truncate privatization reforms and increase government’s involvement on business or the one that will provide a platform for technocrats within his government to thrive?  My answer lies in Deng Xiaoping’s most famous quote:

It doesn’t matter if a cat is black or white as long as it kills mice

 

Akin Oyebode

A Rejoinder: Which Buhari?

Someone, whose opinion I respect very much sent me the rejoinder below to my piece yesterday on why I now support Buhari. I don’t know if  agree with the idea that this is a referendum on Buhari – he’s already been rejected three times (or maybe 2 times) by voters so if this is his best chance, perhaps it says more about the incumbent he is trying to unseat.

Nevertheless, winning the election is less than half the job. I want a President Buhari to govern well. And given how fractious our country is, the bigger and deeper the mandate he gets, the better for him and the country. The post makes some very useful points in that regard.

Enjoy

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Given how badly the Goodluck presidency has turned out, the 2015 presidential election is really a referendum about the suitability of the APC candidate; Muhammadu Buhari. It is however not going to be a walk in the park. Not because Goodluck Jonathan hasn’t done enough to allow even an electric pole to win the vote, but because Muhammadu Buhari, his party and teaming supporters are ignoring critical realities that will influence how folks vote come February 14, 2015.

One fundamental error of General Buhari and his campaign is the seeming inability to grasp the various nuances that are shaping the views of voters on his candidacy. This has produced messaging that is half part strident denunciation of folks who think different or are undecided, and the other half; an unfortunate and often all-out threatening of bodily harm.

In a bid to help those who want to sell GMB more effectively, I will attempt to sketch out a few voter profiles to improve understanding and perhaps help re-shape the messaging of the campaign. I will also point out some of the problems with how these folks are currently being approached/engaged.

The Christian Northerner

Many latter-day supporters of General Buhari from southern Nigeria (especially the Twitterati) still live under the illusion of a monolithic north peopled by Hausa-Fulani Muslims all of which are going to troop out in February shouting Sai mai Gaskiya. A useful education offered by @amasonic on the diversity of northern Nigeria can be found here.

While the southerner may have the luxury of viewing this election in terms of corruption and the economy, the reality for the Christian northerner is that, this election is perceived in many quarters as a matter of survival. Real life issues like the historical and well documented persecution of northern Christians, the Sharia movement and more recently the murderous onslaught of Boko Haram which by this account of the UK Telegraph has seen more than 700 churches attacked; makes issues like Malabu pale into relative insignificance.

While the southerner may see the CAN president as some amusing character, the Christian northerner tends to view him as a heroic bulwark against a genocidal onslaught. Not only will disparaging those who hold this view not win GMB any converts, it will actually entrench the view and propel voters to go out and cast a vote for what has been effectively cast (thanks to forced conversions and mass slaughter by Boko Haram in cities like Mubi) as a battle for their survival.

Sadly, instead of trying to convince folks, GMB has been at best ambivalent and on worse days resigned to the fate that these folks will never believe his strenuous denials of bigotry. No doubt his now predictable selection of notable clergy as running mates is aimed at addressing this issue, it does always appear as too little too late.

GMB has had many years of opportunity to work in northern communities to demonstrate ‘his tolerance’ but has refused to use such opportunities. At this stage, what may be helpful for the campaign is for GMB to take very clear and unambiguous positions on issues like: implementation of Sharia; and the widespread policy of refusing approval for Christians to build places of worship in many parts of the north which is essentially a means to Boko Haram’s ends by government policy.

The Southern Reactionary

There are many from the south who still hold to the idea that the north has had more than its fair share of time at the industry of pulling Nigeria back. If Nigeria has not actually had a history in which northerners have held sway at the top for a greater part of the time, it would have been easy to simply describe this group as closet ethnic supremacists. However, history sometimes takes the side of foolish ideas, and so it isn’t always easy to convince the simple-minded majority who have bought into the different shades of the it-is-our-turn argument.

Now some may snort their noses at this obviously sentimental approach to selecting leadership, but often not without their hypocrisy showing through. The truth of the matter is that, a fundamental reason why Buhari is the candidate of the opposition party is to take advantage of the groundswell of agitation for “power to return to the north”. But for this and his ability to win massively in the north, he would hardly feature at all on a merit based list of persons capable of leading a developing nation with aspirations for becoming a modern economy.

The more virulent specie of this voter (and I believe the one least likely to be converted) is the reactionary who is pushing back against the perceived born-to-rule mentality of the northerner. Nevertheless, there are many in this group who just feel that handing power back to the north would slow whatever progress the country may have made. It is to this group that the campaign must look to win converts. To do this, it must pursue an issue based campaign that shows in relatively realistic roadmaps how it would move the economy and society at large into the future.

The Idealist

The idealist is the one who really gets under the skin of the new crop of ‘realists’ who have just seen the Buhari light. The ‘realists’; many of whom in recent times have argued about how unelectable the General was, now consider the idealist to be unnecessarily nit-picking and refusing to see the big picture (of a bill board with a Buhari sporting a 50,000 megawatt smile in a Tux and a Sanusian bow tie).

The idealist is often an intellectual himself; often a liberal left winger who considers things like human rights and democracy to be sacred. The idealist finds it excruciatingly difficult to imagine a former coup plotter as beneficiary of the democratic process. For those of extreme idealist persuasion, that is like appointing a ‘former’ paedophile as a primary school head teacher.

However, there are moderate idealists who just want General Buhari to acknowledge that what he did was wrong and that he sees things differently now. That executing people under retroactive laws was not the best thing to do; that having one set of rules for northern politicians and another for their southern counterparts doesn’t exactly cut the image of a red cap and akpochi wearing nationalist. Moderate idealists want the GMB campaign to realize that there is little to choose between the man who calls Abacha a saint and the one who wants to make Alams a Senator.

Sadly, the campaign and his supporters have largely refused to woo this group of voters by conceding even the obvious. It is as though they fear that once this garb of sacredness they have clothed the man in is removed, all that may remain is an impotent scarecrow.

Losing the Referendum

As far as I can see, this election is shaping out as a referendum on Buhari because I suspect most Nigerians realize that Jonathan has been largely a lame duck president taken hostage by insurgency and corruption.

However, due largely to the less than effective way in which the GMB campaign has been running, he seems to be doing too poorly for an election in which he is essentially the only candidate. There is a huge population of Nigerians who want anyone but Jonathan, but many of them would also rather just stay home than vote the current candidate that the GMB campaign has managed to present to the public.

The GMB campaign has presented a man who only manages to energize his core group of supporters. They in turn are too busy giving notice of the hell they will let loose if he loses in February as to have time to do any real canvassing.

It is barely 6 weeks to the elections that will usher in the change the APC/GMB promised Nigerians. I hope it is enough time for them to demonstrate the ability to deliver by first making the necessary change in direction that their own campaign sorely needs. The electorate needs to be sold a significantly improved version of the candidate.