CBN and The Nigerian Economy: A Short Story

If you have an M.Sc in Finance or a degree in economics, you can skip this piece. The point of it is to try to explain what the CBN did today at the MPC meeting and how it all relates to the wider Nigerian economy.

The communique they released is here

Larry Summers, I think it was, who once said that it is not so easy to understand how the economy works. And Summers has more than one brain. Everything below is a simplification to get the basic points (as I understand them) across.

Increase the MPR by 100bps from 12% to 13%

First thing to know – 100 basis points equals 1%. It really is as simple as that – the CBN increased the Monetary Policy Rate (MPR) by 1%. But what is MPR anyway?

Every Central Bank in the world has a broad goal that it seeks to achieve. For most central banks, this goal is controlling the rate of inflation usually around a certain target. This is known as – wait for it – inflation targeting.

If there is only one guy in a village with enough money to buy a motorcycle, it’s safe to say the motorcycle seller cannot easily increase the price of his motorcycle. But if a bunch of other rich guys suddenly move to the village and they happen to like motorcycles too, the motorcycle seller now has an opportunity to make more money by increasing his selling price. In other words, there is now more money in the village chasing the same amount of motorcycles. That’s a simple definition of inflation and the downside of it is that it makes people poorer. If the motorcycle seller increases his prices overnight it means you could possibly afford the bike yesterday but not today.

It’s possible that those new rich guys in the village borrowed money from the bank which they are now flashing in front of the bike seller and turning his head (making him increase his prices). This is where the central bank can tackle inflation – by increasing the MPR – which is the interest rate at which the central bank lends to other banks – it can set off a chain reaction that means those new money miss road guys have less money to throw around. CBN lends to the banks, the banks lend it to money miss roads, money miss roads flash it in front of bike seller i.e. CBN is at the top of the food chain, in theory and is throwing meat down at everybody else. The economic principle at work here is the simplest one – if the price of something increases, people will demand less of it (with the exception of a few types of goods). If you think of interest rates as the ‘price’ of money, by increasing the MPR, CBN is trying to reduce the demand for money.

There’s a smaller point as well. If you increase the price of money, obviously it becomes more valuable and anyone who has it suddenly becomes a big(ger) boy. So, if banks were willing to offer you 5% for you to keep your money with them before, they might now be willing to offer you 6% for the same money. All of a sudden, simply keeping your money in the bank has become more attractive than spending it. The new money miss roads in the village won’t be able to buy the bikes anymore and the former local champion will now rather keep his money in the bank given that he will get more for it. And motorcycle seller? With no customer in front of him, he has to drop the price of his bikes.

Inflation down.

Increase the CRR on private sector deposits by 500 basis points from 15 per cent to 20 per cent with immediate effect

Imagine you just opened a bank called Dorobucci Bank. You rent an office, buy a generator and hire a couple of staff to run the place. The cost of the office, diesel and staff salaries on a monthly basis is N1,000. The first customer to come to your bank, Mr Jonathan (Jona for short), deposits N10,000 with you in a savings account. You offer to pay him an interest rate of 5%, say monthly. So at the end of the month, if Jona turns up to demand his money, you need to hand over N10,500 to him. Don’t forget your N1,000 for running the bank i.e. in total, at the end of the month, you have to pay out N11,500. Also you have to make a profit to make it all worthwhile so let’s say N500 is a good profit for you. We are now up to N12,000. Jona is your only savings account customer so somehow you need to turn that N10,000 he gave you to N12,000 before he comes back i.e. a rate of return of 20%. One way of doing this is to buy chemical that turns paper to money but this is very risky and it might not work. Luckily for you, just after Jona gave you the money and left the bank, one guy walked in, Mr Bagajan and says he needs a N10,000 loan.

That’s when you remember that CBN says you can only lend out a maximum of 85% of deposits that customers keep with you. You must keep the rest as cash. So now, out of Jona’s N10,000 you can only lend out N8,500 and he’s coming back to ask for N10,500 in 30 days time. Hmmm.

You already have N1,500 to return to him since you kept it in cash so you need to find another N9,000 for him plus your own N1,500 for running costs and profits. In other words, you need to turn N8,500 to N10,500. You now need a 24% return and not 20% as you earlier thought.

You then tell Bagajan that you can only lend him N8,500 for 30 days at an interest rate of 24%. He’s a bit desperate so he agrees. This is banking simplified. That 15% that the CBN says you must not lend out is what is known as the Cash Reserve Ratio (CRR).

So what happens when CBN hikes the CRR from 15% to 20%? In simple terms, it means you as a banker have to make your money work harder. Now you have only N8,000 to lend out but you still need a total of N12,000 by the end of the month. You now have N2,000 in cash waiting for Jona when he comes to collect his money and you need to find another N8,500 for him plus your own N1,500 to cover profits and running costs. If you lend N8,000 to Bagajan, you now need him to return N10,000 to you – the interest rate you charge him now goes up to 25%.

When you take this hike in CRR together with the increase in MPR discussed earlier you can see what CBN is trying to do – reduce the demand for money.

Why so harsh? Why is the CBN squeezing the money supply from both sides in this manner? Who hurt them? The answer is the banks. They have been naughty and CBN is not happy with them.

By increasing the MPR and CRR, the demand for money will reduce. So Bagajan might get annoyed and walk away when you increase the interest rate from 24% to 25% (and make it worse by telling him you can only lend him N8,000 and not N8,500 as you earlier agreed). As he is walking out, you grab his jacket and rub his head then offer him 22.5% instead. This means he will return N9,800 to you. Now you are short of N200. Where will this N200 come from? Jona will raise hell if you try to give him N10,300 instead of N10,500 as agreed (he knows people in SSS and Police).

Your only option is to reduce your profit from N500 to N300.

Listen to what the CBN is complaining about (Page 14):

However, available data indicates that banking system liquidity has been lavishly deployed in pursuit of speculative foreign exchange trading at the short-end of the market. While the Committee remains fully committed to the goal of promoting inclusive growth through lower interest rates in the medium- to long-term, banks as agents of financial intermediation have a critical role to play in the nation’s development process. A banking system with an overly high profit motive negates the core tenets of banking and purpose of a banking license

In simple English, the banks have refused to fear God and are using all their profits to play lottery. So the CBN has decided that the ‘solution’ to this problem of lottery playing is to punish the banks by squeezing their ability to make profits.

The problem here is that the weapons of CRR and MPR that the CBN is using are not ‘guided missiles’ where you can speak incantations into a ram’s horn and it goes directly to the person you’re targeting. They are grenades, so when you throw it in a room to target one particularly annoying guy, there is no guarantee that you won’t hit an innocent bystander. We see here that the motorcycle seller, the money miss roads and Bagajan have all been affected even though the grenade was aimed at the banks.

Oh well

Move the midpoint of the official window of the foreign exchange market from N155/US$ to N168/US$

The Nigerian naira is not a freely traded currency. If you travel to Australia or Japan or Nauru and you have US dollars with you, you will definitely find someone to change it into the local currency. This means that the US Federal Reserve doesn’t really worry itself about the exchange rate of the dollar. It is traded globally and the price is open. It is hard for one person to control the exchange rate.

On the other hand, if you turn up with Nigerian Naira in Bolivia and demand that they be converted to bolivars for you, depending on the mood of the person you meet, you might either be arrested or slapped. Or both. Outside of Nigeria, you can’t really do anything with the Naira. This gives the CBN great powers to determine the exchange rate of the Naira, afterall it is the one who prints it and controls the supply. The US Fed is also the only one who prints the dollar but the supply is so plentiful across the world that Ecuador and Zimbabwe have adopted it as their currency and they don’t even need the permission of the Americans to do so.

At the beginning we talked about life goals of a CBN. Most of them focus on inflation. But for central banks like Nigeria’s, they have the added work of controlling (or trying to control) the rate at which the local currency trades with foreign currencies. For an import dependent economy like Nigeria’s, this work is quite hard and important. There is no day that people will not want dollars to buy one thing or the other from abroad.

So what the CBN has been doing is to set a ‘band’ at which it will buy or sell dollars to banks and others. For a few years the middle of the band has been N155 to $1 with a 300 basis point ‘slack’ around this. This means that the CBN will allow the Naira move between N150.35 and N159.65 to the dollar i.e. 3% up or down around the midpoint of N155.

How does this work? Quite simply in theory. If people start demanding a lot of dollars and are willing to pay more for it, the price will obviously go up. Once it hits that N159.65 upper limit, the CBN will release more dollars into the system to calm everybody down. If you have been hearing the CBN ‘defending the Naira’ in the papers, this is it. When Nigeria sells oil, we get paid in dollars for it. These dollars flow to CBN. The Nigerian government spends Naira so the CBN gets to keep these dollars and gives naira to everyone instead. When the time to defend the Naira comes, it starts to dip into those dollars until the naira falls below that upper limit of N159.65.

Recently this defence work has been harder than that of a San Marino defender facing Lionel Messi. Our stock exchange is dominated by a lot of foreign investors. Recently they have been selling their stocks and running away because they are worried that you people will break bottles during the elections (and also the US Federal Reserve ending QE…ignore this for now). When they sell their stocks, they need to take their money back to their countries of course. As we have said above, they cannot take the Naira outside Nigeria so they need to change it to dollars in Nigeria before running off with it. More and more people thus need to buy dollars from CBN.

If CBN does not do anything, people will get desperate and will be willing to pay whatever it takes to get the dollars they need. In no time, the upper limit of N159.65 will be broken and the CBN will lose control totally. The investors are attacking, CBN is defending. This thing is tiring and after a while you are bound to concede a goal.

So today, the CBN allowed the attackers to score. At least, in the time it will take to remove the ball from the net, attackers celebrating the goal and getting the ball back to the centre circle, the CBN can rest small before the game starts again.

Now the mid-point is at N168 to $1 and instead of 3% ‘slack’, the CBN will now allow a 5% slack. So the naira will be allowed to move between N159.65 and N176.40. As you can see, the (former) end is now the beginning. In short, the CBN has devalued the Naira by 8.4%.

Going back to the CBN’s complaint quoted earlier, it accused the banks of ‘speculating’ against the naira ‘lavishly’. What it is saying is that banks know that when the pressure gets too much, the CBN will concede a goal. So in simple terms, if you bought dollars last week, you can sell it this week for a sweet 8.4% profit. The banks bet has been proved correct.

Of course, the other action film that is going is that oil prices are falling. Imagine that CBN used to spend $2bn a month on this defence work. Also imagine that when oil was $100 per barrel, $4bn was flowing to CBN monthly. This means that the reserves will still manage to increase by $2bn monthly. But then things have suddenly reversed. All those foreign investors running away (plus the banks speculating ‘lavishly’) have caused the CBN to increase the amount it spends on defence to say, $3bn. Meanwhile oil prices have dropped to $75, meaning that the money flowing to CBN monthly is now $3bn. The reserves are no longer increasing. So imagine what happens if say oil drops to $70 and people are still running away and are now asking for $4bn monthly. The situation will completely reverse – $2.8bn coming in, $4bn going out. The CBN will now need to dip into the reserves to withdraw $1.2bn monthly. If you had only $10bn to begin with, it means you will run out of money in about 8 months if things continue this way.

One is reminded of the ‘Micawber Principle‘ as revealed by Wilkins Micawber in Charles Dickens David Copperfield:

Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness.

Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.

Conclusion

Nigeria has managed to find itself in an almost perfect storm where practically everything that can go wrong is going wrong. These days the world produces roughly 90 million barrels of oil. But of that amount, only about 30 million barrels are produced by OPEC members. So the weapon of cutting supplies that OPEC used to use to raise prices won’t really work anymore. It’s a bit hilarious to hear the CBN accuse someone of spending money ‘lavishly’ given that this is what the Nigerian government has done for the past 4 years when oil prices have been high.

The banks also now know that if you apply pressure, the CBN will concede a goal and devalue again. It is a matter of when, not if. Within a few weeks, the new trading band for the Naira will be blown apart (if it hasn’t already as we speak). Cost of borrowing will also go up for everyone else due to the MPR and CRR squeeze. Things are going to be a bit rough for the next few months and if you have cash or better still, forex, you’re the (wo)man right now.

As bad as things were for Wilkins Micawber, he never stopped living in hopeful expectation. Indeed he lived by the maxim – something will turn up. :)

FF

 

On That Price Crash

Alhaji Putin surprised his friends and haters alike on Sunday with a 40% drop in the price of his flagship Dangote Cement product:

In a move that will raise the stakes in the rapidly evolving Nigerian cement market, leading cement manufacturer, Dangote Cement Plc, has announced huge cuts in the price of the essential product.

In a step that will make cement cheaper than it has ever been since 2005, the new price regime announced by the Group Managing Director of Dangote Cement, Mr. Devakumar Edwin, said the company has pegged the Dangote 32.5 cement grade at N1,000 per 50kg bag, while the higher 42.5 grade is to sell for N1,150 per bag.

The new prices exclusive of the Value Added Tax (VAT) represents about 40 per cent discount on the prevailing market price of the product which is currently sold for N1,700 irrespective of the grade, across the country.

I didn’t see that one coming and annoyingly, I am now at risk of having nothing to complain about on this blog. As you know (or don’t know), I am an Adam Smith Stan and one of my favourite quotes of his was from his Magnum Opus, The Wealth of Nations:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce

Given my almost religious belief in the above statement, it is hard to complain about this price drop – cement is not an accoutrement of garri or rice. It is produced to build houses and infrastructure and the cheaper it is, the more of those things get built.

Given his dominance of the Nigerian cement industry (among others), this move has naturally generated a lot of chatter and analysis online, in what is perhaps somewhat commentary on Nigeria. Almost all the points people have raised as to why he may have made this move have merit – from him wanting to eliminate competition in the market to it being an election gimmick to aid the reelection of Goodluck Jonathan.

So what is it? Why did he do it? I can assure you, I have absolutely no idea why. It could be one thing, it could be a number of things.

But what I would say is that the rules of analysing a ‘normal’ market don’t work in this case. Given that the Nigerian government is a big player in the cement market – by way of banning imports – it is difficult to properly account for that factor, let alone analyse it. The quote below explains why:

ABUJA — PIQUED by the soaring prices of cement in the country, President Goodluck Jonathan, Monday, summoned the Chairman of Dangote Group, and other cement manufacturers with a directive to crash the prices of the product within 30 days period or face the wrath of the government.

Presidential spokesman, Mr Ima Niboro, who announced Jonathan’s decision after a meeting in the President’s office, said the manufacturers had agreed to do all that was necessary to meet the one month time frame.

Remember that? That was in May 2011 (so not exactly an election gimmick) and in the end it turned out to be an elaborate ruse. If prices were indeed ‘crashed’ back then, it must have been a blink-and-you-miss-it type of crash.

The point is that in a market where the President can ‘order’ manufacturers to ‘crash’ prices, you might as well throw away all your analysis textbooks. All we know is that Dangote Cement has said prices are coming down by 40% – it still needs to happen as distributors can claim they are still going through their old stock and thus refuse to lower prices. To further drive home the point that the Nigerian cement market is a market in name only, one of Alhaji Putin’s competitors, Alhaji Rabiu (shall we christen him Alhaji Medvedev going forward?) had this to say yesterday:

What Alhaji Dangote has done today is significant. I am very pleased about it because it would make the cost of the product more easily affordable to Nigerians. With this price reduction, more consumers will be able to buy the product and subsequently drive up demand and in turn increase market share for industry players.

“I hereby urge all cement producers to emulate Dangote and bring down the cost of cement. There is absolutely no reason for a bag of cement to cost so much.

“Despite the infrastructure challenges being faced by the manufacturing sector of the Nigerian economy, it does not justify the high cost of cement.

“On our part, I have already directed all our plants to follow suit and implement the new price regime. We still believe that more can be done to bring down the price even further for the benefit of Nigerians,” Rabiu stated.

This is comedy in its purest form and when supposed competitors are behaving in this manner, you know  FF’s Law of Nigerian Business is in operation. To wit; where 2 or 3 Nigerian businessmen are gathered, a cabal is soon formed. You’re welcome.

All of this means that we can’t really rely on these guys to drop prices when they like or when a game is being played. It is better to have a decent market operating where consumers always have as many choices as is reasonably possible. There is no meaningful reason to continue banning imports anymore – Dangote and co should now be able to stand on their feet, not just in Nigeria, but in Africa and then the world. It is time to take away the feeding bottle of government protection so they can start eating meat.

As for the announced price crash – apply C Caution.

FF

On Cement: ‘Culled’ From The News Magazine

Is it possible to cull one’s self? Well, I don’t know. But I wrote this piece for The News magazine ’bout a month ago (month ago). They are not online as far as I can tell.

I saw this tweet this morning from my friend and I thought to share the article here. The full thing is below. I was constrained by a word limit but maybe that’s not such a bad thing. Enjoy.

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In May this year, at the World Economic Forum in Abuja, I was in the audience at one of the sessions where President Goodluck Jonathan said ‘look at Dangote who is now the richest black man in the world…if not for our policies, he could not have achieved that’.

This was a remarkable statement that might get a leader kicked out of office in some other countries of the world. It is true that Dangote is now the richest black man in the world worth over $20bn. It is also true that much of his wealth is linked to his cement business, which has around a 70% market share in Nigeria and is now trying to expand across Africa. What is also true is that cement prices in Nigeria are around $263/tonne when the same product can be obtained only a few hours away from Nigeria at $67/tonne.

Why is this case? Why is the Nigerian President openly boasting about a policy that is enriching one man by causing Nigerians, the people who elected the president, to pay 3 times what they can pay elsewhere? To answer these questions, it is important to understand the nature of cement as a product and a market.

Cement is a vital input especially in fast growing economies that need a lot of infrastructure; there is almost no way around it. It is also a bulky product, which means that it is almost always produced close to where it is consumed. Indeed, only around 3% of current global cement production is traded across borders. Finally, the hardest part of cement production is starting a new plant – it is expensive. However, once a plant has been built, it is much cheaper to simply continue expanding production to meet demand. What this means is that there is a heavy advantage for those who enter the market first – that is to say, there is a tendency for a few players to dominate the market for a long period of time and you end up with an oligopoly.

Given the above, it is not hard to see how Dangote is able to get away with a 70% gross profit margin. Consider the numbers – the world’s largest cement manufacturer, Anhui Conch of China, produces 217MT of cement annually and generated roughly $8.9bn in revenues in 2013. Dangote Cement produced less than 1/10th of Anhui Conch’s cement output at 20MT but generated $2.4bn in revenues. The end result was that while Anhui Conch ended with 18% margins at the net profit levels, Dangote Cement ended with an astonishing 52% net profit margin – the highest profit margins, by far, of any major cement manufacturer in the world (Anhui Conch is the next closest in terms of profit margins).

A few weeks ago, all the newspapers were awash with stories about how Dangote Cement had ‘slashed’ cement prices by between N100 and N300 per bag. To avoid charges of gross exaggeration, none of the papers who reported the ‘slashing’ mentioned the actual price of the product that was being ‘slashed’. Of course they couldn’t because a headline that read ‘Dangote slashes N100 from N2,600 bag of cement’ would look completely ridiculous. For every $10 Dangote Cement makes, $7 is profit i.e. the limestone, the costs of energy and salaries directly related to the production of the cement only cost $3. It is true that cost of doing business in Nigeria is very high but how does the happily coexist with world record profit margins?

The question to then ask is what effect all of this has on the Nigerian economy. The justification for the policies that have made Dangote Cement possible are usually that it is our own i.e. Nigerian and it creates jobs in Nigeria. These are valid arguments and would justify granting the company some kind of protection given that we desperately need to develop industrial production capacity in the economy. But these benefits do not exist in a vacuum; there are also costs to them and any honest discussion of the matter must weigh the costs against the benefits and determine whether it is worthwhile. After all, the purpose of all production is consumption – we are producing cement so that it can be used to build things that solve problems and not just cement for cement sake.

The most obvious problem that we need cement to solve is the huge housing deficit in the country. By the government’s own estimates, we need 17 million homes to close this gap. Cement is not the only thing required to build a house of course, but you cant build houses without cement in Nigeria, certainly not on the scale we need to. The more expensive cement is, the harder it is to close that gap. By tolerating expensive cement like we do in Nigeria, we are shooting ourselves in the foot because far more jobs will be created in house building than Dangote Cement can ever hope to employ.

But when it comes to house building in Nigeria, there is an often-overlooked cost. There are no reliable estimates for the number of unfinished buildings in Nigeria. But it only takes a drive around any of our towns and cities to get a rough idea of what the situation – unfinished buildings are everywhere from Ikoyi to Alimosho in Lagos as an example. While familiarity has made Nigerians get used to the sight of unfinished buildings across the country, this is something that is very unusual in developed and even middle-income countries. For one, leaving buildings unfinished for long periods tends to quickly turn them into a den for crime and drug use.

The reasons for unfinished buildings are of course varied – lawsuits might be one. But the overwhelming reason is the cost of completing them. Again, this can be evidenced by the fact that low to middle-income Nigerians who manage to build their own homes hardly ever complete it before moving in. Indeed it is not unusual to find people living in homes that have not been plastered on the outside. These homes are usually self-funded and the owners typically squeeze themselves to do as much as possible to make the building livable before moving in. No great leap of logic is required to say that cheaper cement in Nigeria will move possibly millions of buildings from the unfinished to finished category in the Nigeria, creating plenty of jobs in the process.

This part of the story is very important as we attempt to solve the housing deficit in Nigeria. It is not because people are just sitting around waiting for the government to ‘do something’ that has caused the deficit to rise to 17 million. Nigerians have actually tried and continue to try to solve the problem by building their own homes. We cannot help Dangote Cement at the expense of Nigerians. This is what the current policy, which make it possible to charge very high prices for cement in a captive market are doing. It is helping the producer at the expense of the consumer. And it is causing us to drive the economy with the handbrake on.

The government cannot claim to seriously want to tackle the housing deficit crisis and at the same time the President is openly boasting about a policy that has made a cement manufacturer the richest black man in the world. Dangote Cement is not going to solve the housing deficit problem in Nigeria – it is Nigerians and the government who will solve it. Expensive cement is a needless impediment to getting to where we want to.

We can learn from the Chinese who seem to understand the purpose of producing cement – between 2011 and 2013, China used 6.6 gigatons of cement. In the entire 20th century, 1901 – 2000, the United States used only 4.5 gigatons of cement. And what has this translated to? Today, around 90% of all households in China own at least one home. Further, China’s existing housing stock is enough for every household in the country to own a home but Chinese property developers are still adding around 15 million units of housing every year. This is a country with a population of over 1 billion people. And yet, you will not find a Chinese businessman who made his money from cement on any rich list – indeed, China’s richest man, Jack Ma, is around $7bn ‘poorer’ than our own Aliko Dangote by current estimates.

These things are worth reflecting on if we are really serious about tackling the housing and infrastructure problems we face. The Chinese are producing cement to consume it while we are producing it to make the cement producers rich. Producers have been helped for many years by the government; it’s time for someone to help the consumer.

 

Section 68: How To Eat Your Cake and Have It

My policy on cake is pro-having it and pro-eating it – Boris Johnson, Mayor of London

Another day another constitutional ‘crisis’ brought about by a dubious section of the Nigerian constitution, which itself is a dubious document. Invariably, there are now two ‘strong’ interpretations to the section depending on which side of the political divide you stand on.

This has of course been triggered by the defection of the Speaker of the House of Representatives, Aminu Waziri Tambuwal from the PDP to the APC. The PDP contends that by virtue of the constitution, his seat has become vacant…or something like that. Tambuwal of course timed his defection to coincide with the House going on a 6 week recess, which suggests that perhaps, he knows he is standing on constitutionally shaky ground.

Here’s the offending section of the constitution:

Section 68(1): A member of the Senate or of the House of Representatives shall vacate his seat in the House of which he is a member if –

(g) being a person whose election to the House was sponsored by a political party, he becomes a member of another political party before the expiration of the period for which that House was elected; Provided that his membership of the latter political party is not as a result of a division in the political party of which he was previously a member or of a merger of two or more political parties or factions by one of which he was previously sponsored.

God forbid I pretend to be a lawyer or constitutional expert and then make a fool of myself in trying to interpret the constitution. My concern here is more about how we make laws in Nigeria and how an avoidable mess is created.

Why is that (g) paragraph included in the section at all? Thinking through the matter – if someone is elected on the platform of one party and then defects to another party, we can consider it a joint effort. The person probably campaigned well and the people liked him/her over the alternatives. So it would be unfair to simply say the people should leave the office they have been elected to. I think this much is uncontroversial.

Therefore, the simple solution to the matter would be for that ‘joint effort’ to be renewed. The candidate resigns the office, a by-election is triggered and he/she can return to the office if the voters agree. I think this is fair and honourable. And I am certain that our lawmakers thought about this option when drafting that section of the constitution. The trouble is that Nigeria intervened.

Given that none of the lawmakers drafting that amendment are bound to their political parties by ideology or for that matter, honour, they must have known that in the short, medium or long term, this might come to affect them. Simply not greeting the governor of your state properly at a function might cause him to try to replace you at the party primaries, leaving you with ‘no choice’ but to defect to the nearest party. Or you might even be minding your business in Abuja and your state party will be split in two because of 2 competing egos, forcing you to make a choice. That is to say, to paraphrase the famous danfo dictum – nobody is above defection.

And so, what ought to be a straightforward constitutional clause – defect and trigger a by-election – becomes complicated. Our politicians are risk averse so no one wants to risk going back to the electorate to renew a mandate especially if you are defecting away from the PDP – facing their machinery can be a hopeless task in many states. This then leads to lawmakers adding all sorts of escape valves, hatches, clauses and backdoors in the constitution. This is why the (g) section is in that clause – to allow people eat their cake and have it.

Proving that there is division in a political party in Nigeria can be incredibly easy. Indeed, a politician who is planning to defect can ‘sponsor’ such a division in advance. It is no harder than holding a rival meeting in a different location on the same day that the main party is holding theirs. You will always have followers. Or you can sponsor thugs to ‘storm’ the venue of the main party’s meeting and break a few bottles or throw some charms here and there. The courts will never be able to agree on what ‘division’ is in this context – human behaviour is far more complex than what can be codified in a document in this manner.

And this brings me to the point of this post. This is one of the biggest threats to our democracy and guarantees that as a nation we will continue to jog on the spot for a long time. Eating your cake and having it is not a very useful policy when it comes to nation building. And this behaviour is rampant. Consider how the government passes laws to raise tax revenues and then proceeds to exempt its friends with all sorts of waivers and abuse of the ‘pioneer status’ as an example. In the end, such tax laws make a mockery of the whole enterprise to say nothing of the fact that badly needed revenue goes uncollected.

That our politicians have no moral spine or honourable bone in their body is not news. But there is more to the problem – the inability to suspend, even for five minutes, that selfish behaviour is not just frustrating but incredibly dangerous. You begin to get the picture when you look at all the exemptions in our laws and loopholes either through deliberate dubious wording or outright insidiousness. Political factions are a fact of life in practically any democracy in the world – In the UK, the Labour party still has its Blairites and Brownites while the Conservatives continue to be split into some form of Wets and Dries that has plagued the party since Mrs Thatcher’s days.

But to then start writing factions into the constitution as justification or excuses for one thing or the other…that is unpardonable. And from lawmakers whom we pay a fortune.

Bring back the guillotine.

FF

Man of System

Been a while Aganga was bashed on this blog. Thankfully he has supplied fresh material. Going through the papers today, this caught my eye:

Concerned by the low level export of quality goods and services from Nigeria and in a desperate move to remove all barriers militating against export of goods and services, the Federal Government has inaugurated a National Accreditation Committee.

Minister of Trade&Investment, Olusegun Aganga

The committee was empowered to issue certificates of conformity which verify that management systems, product manufacturers, service providers and personnel have complied with best practice for quality, fitness for use and continued safety in operations.

This further ensures that buyers, users and consumers of products and services can pay for goods and services with confidence in the fact that their wellbeing is protected.

While inaugurating the committee in Abuja, yesterday, the Minister of Industry, Trade and Investment (FMITI), Mr. Olusegun Aganga, regretted: “The level of export from this country has been very low and the level of rejection outside this country has been very high.

“The efforts of the Standard Organisation of Nigeria (SON) to set standards and improve quality of products through mobilisation and education of stakeholders is commendable.  However, the initiative under the National Quality Infrastructure will be more encompassing and address the gaps of the erstwhile arrangement.

“The benefit of an accreditation environment have been well recognised all over the world. Accreditation will among other benefits help to significantly reduce the barriers while facilitating export of high quality goods through product testing and certification. Efficiency levels will increase in organizations that are certified, it will enhance consumer satisfaction and stimulate industrial capacity utilization as goods and services will not be of low quality.”

I continue to be baffled that our friend is in charge of actually making business happen in Nigeria. And it is the main reason why I believe the government is either not serious about the things it says or has no strategy and is just winging it and hoping for the best.

First of all, he wants to remove ‘all barriers militating against exports of goods and services’. This is a noble thing – the government even admits that there are barriers in place which is the first step of solving the problem. So how does it plan to solve the problem? A committee!

Can it be that the current reason why we are not exporting enough goods is that we lack a committee to make this happen? Now, we have created a committee that will determine whether or not your product is good enough for export to a foreign country and then give you a licence. This committee will figure out what people in other countries want by sitting in Nigeria. Before you can send a product to say, Cambodia, a group of Nigerians will say ‘no, you can’t send this to Cambodia because Cambodians will not like it’.

Friends, cast your mind back to the 1980s. What kind of product did ‘Made in Taiwan’? signify? Yep, cheap and low quality. I grew up hearing my parents and Uncles deriding Taiwanese made products. But friends, today, Taiwan makes HTC phones and Asus computers – products which most Nigerians can no longer afford. Indeed, Taiwan is now so rich that its citizens no longer require visas to enter the United States.

So I ask you – how were those obviously cheap and poor quality products escaping from Taiwan and entering into Nigeria? Did they not have a committee to accredit their exports before sending them out so that the ‘wellbeing of Nigerians could be protected’? Or perhaps it was deliberate and Nigerians were used to fine tune these products till they got to the stage where they are now?

How about China? In 2013, it exported $2.21trn worth of goods and services. If there is a committee ‘accrediting’ all these exports, I am sure many Nigerians who have bought Made in China products will query its effectiveness. The Nigerians who acted as the guinea pigs for the first set of Chinese smartphones sold in Nigeria probably might not be able to afford the new ones like OnePlus – a firm which does not volunteer to its buyers that it is even Chinese:

Another local firm on the move is OnePlus. Reviewers in developed markets have been raving about its clever handsets, which offer top-notch performance and features for around $300—less than half the list price of the latest iPhone. Carl Pei of OnePlus argues that unlike its rivals, his firm was “born a global company”. Since its founding late last year, it has targeted 16 countries—including such challenging markets as America and Britain. “It helps that a lot of people don’t know that we are a Chinese firm,” he confides

I have also previously written about how the South Koreans used Nigerians to fine tune their Hyundais in the 1970s by sending us cars where the roofs ‘peeled off’ while washing:

Screen Shot 2014-01-01 at 12.41.07

Did the Koreans not have a committee to test if the roofs of their cars peeled off like a banana before exporting? Or did they deliberately sell them to us – with the bait of making them as cheap as possible – and then waiting for complaints to come in so they could refine the products based on those complaints?

There is a guaranteed system of achieving all those things that Aganga wants to achieve for Nigerian exports. It is called a market. There are various ways of entering and competing in a market – you can use quality or you can use low prices. For a country like Nigeria that does not have advanced skills, the best option is to compete on price and get the market to improve our products for us. There is no need for a committee to accredit any export. Send it out there, when they send it back, you will know what is wrong with it. The priority for any serious government must be to get those products out there as cheaply and quickly as possible. Because even if this so-called committee ‘accredits’ the products for exports, what is the guarantee that anyone will buy them? Will a buyer in Peru look at a product from Nigeria and say ‘Oh it’s got a certificate of conformity from the National Accreditation Committee…must be a lovely product, I must buy it‘. Surely they are not being exported into a vacuum? There is plenty of competition out there already.

The mistake being made here is in thinking that goods of low quality are beneath a country like Nigeria with our shiny new GDP. In fact, that is what we need to be doing and doing lots of it and it is evidenced by the high rejection of our products. If they are being rejected, price it until they accept it! using government subsidies if possible – Chinese manufacturers compete with subsidised electricity (if the Taiwanese had priced their goods at Western prices for us in the 1980s, we too would have rejected them). By setting up a committee, the only possible outcome will be that the volume of exports will reduce – the committee’s work will be to reduce the number of goods that make it out in the first place.

So why does Aganga like to waste his and Nigeria’s time with all these policies? I have only one explanation – he is a man of system as described by Adam Smith. Something must replace something. There must be a plan. Government knows it all. Ergo, when barriers are removed, you have to replace it with a committee. As if a committee is some kind of thoroughfare.

When a cancerous tumour is found in the body, it is removed. It is not replaced with a non-cancerous tumour, if ever there was such a thing.

We are well rid of evil.

FF

 

 

Something Ventured

What makes America so great? There has to be more than one answer to this…assuming it’s even possible to answer the question.

Earlier this year I was in Las Vegas for the first time. Driving down the strip one day, I was amazed at the sheer size of some of the hotels there. From the designs of the buildings and even the decor inside some of them, you could tell many of them were built many many years ago – Caesar’s Palace opened in 1966 with 680 rooms. And the Strip is covered with possibly hundreds of hotels. One question I kept asking myself – where did the people find the nerve to build such things? What if people simply don’t come to Las Vegas? What happens to the hotels?

Whatever the answer to those questions, is the one I tend to prefer as the thing that has made America great.

A random post on Quora led me to a documentary called Something Ventured (It’s on Netflix as well). See trailer below.

It’s the story of the people who started what is today known as ‘venture capital’. For the most part they were a bunch of guys who had a basic to decent understanding of how finance worked and how to raise some money. They certainly didn’t go to University to study ‘venture capital’ – they just had an understanding and appreciation of risk. The one thing they all had in common was that they wanted to make money and plenty of it. Interestingly, these days a number of the guys are now doing all kinds of social and charitable investments which might be an indication of whether or not the chicken should come before the egg in these things.

Usually they backed businesses that banks simply wont fund for being too risky or outright insane. You hear some of the guys in the documentary say things like ‘we decided to raise the $3m and build the business to see if it would make money‘. On the face of it, that sounds truly crazy – why do you have to spend $3m before figuring out if something would make money or not?

And yet, it’s that incredible appetite for risk taking that makes certain things happen. It’s amazing to see how Venture Capital today – certainly in Nigeria – has become something so ‘technical’ that only people who go to expensive schools can do. Having been through a business school myself, I’m certain that the number of investments I would have attempted before my education reduced greatly once I had obtained my degree. You definitely learn a lot about risk and various models and theories that (allegedly) teach you to how not to lose money. Is this a good thing?

The example of how Kleiner Perkins invested $250,000 in Genentech in 1976 is a useful example. At the time, the idea being backed was no more than something that sounded interested. The chances of failure were probably 99.9%. Yet, Genentech was sold to Roche in 2009 for $47bn.

Venture Capital firms regularly lose money of course – some have a success rate of even 1 in 20. Most investments they make are lost completely and returns vary very very wildly. But the interesting thing about the Venture Capital industry is that rarely loses money. That is, more often than not, when you take all the VC firms in the (American) economy, they generally make money. In other words, the industry is good for the economy – value is created more often than it is lost. It’s an industry worth having in an economy.

And it’s just not those who call themselves venture capital firms. The whole VC thing is almost like an attitude. Surely there are fraudsters in the American economy too? Surely there are people who talk a good game and turn out to be a waste of time once they have been given money? Certainly, these are borne out by the fact of the number of investments that go wrong as stated above.

But VC needs doing. The Securities and Exchange Commission of Nigeria’s website lists 6 registered Venture Capital firms in Nigeria. The list hasn’t been updated since 2010 so is definitely out of date. But the fact that the SEC website is happy to leave 4-year-old information on its website tells its own story. Today, most of the VC investment in Nigeria comes from America or Sweden or Germany. It’s definitely better than nothing.

One thing the documentary didn’t really focus on was how the money the VCs deployed was raised. But this happens differently in different economies. Take this example from a story in The Economist about China from 3 years ago (the whole thing is worth reading):

A Wenzhou businessman reckons that there are 100,000 people in his city who could each raise up to 1 billion yuan within 48 hours. So liquid is the system that, unlike private-equity groups in the West, Chinese partnerships often do not raise money before seeking prospective investments; investments are found and then partnerships are formed in short order

As long as the money can be raised like this, stuff will get done.

This post is not about ideas or solutions but just discussing something I always think about. Why do people take such huge risks? How does an investment of $250,000 turn a company into a $47bn one especially when the market for whatever it is you are investing in does not even exist at the time?

Back to Las Vegas and Caesar’s Palace. It’s not hard to notice that the thing that made Las Vegas its name – casinos and gambling – is losing its appeal there. Macau had gambling revenues of $38bn in 2012 compared to around $6bn for Las Vegas. If investors put money in Vegas hotels on the basis of gambling revenues, then those models will need to be torn up and rewritten now. Even American casinos are now investing in Macau.

So what does a hotel do when its casino lunch is being eaten right before its eyes? In 2012, Caesars Palace opened its Bacchanal Buffet. It cost $17m to build and covers 25,000 square feet with 500 dishes on offer starting at $19.99 for breakfast. We can agree that the buffet market is rather different from the casino market – I doubt that gamblers take long breaks from the casino to go and sample dishes at the buffet. In other words, the hotel was betting on families being attracted to the premises to replace the gamblers who had run off to Macau. And it’s a big bet as you will need to sell a lot of $20 plates to recoup $17m before accounting for the cost of the food and chefs.

So you start by attracting gamblers and then move on to attracting families. And then you stay in business. The answer is never one thing.

Watch the documentary if you can. It’s 3 years old but there’s still an education in it.

FF

 

Taxes of Bow-Tie

Special taxes should be introduced on luxury items so that there will be more revenue to provide goods and services for the generality of the people.

And to cater for those who are not gainfully employed in terms of making sure that every child in Nigeria attends schools.

The statement above was credited to Dr. Abraham Nwankwo, Director General of Nigeria’s Debt Management Office (DMO) and the quiet member of the trifecta in the Nigerian government that used to be the Axis of Bow-Tie (SLS has since left government leaving only Akin Adesina and Nwankwo).
Whenever I hear someone is trying to raise taxes, my ears perk up – I’m a low tax kinda guy and I prefer that taxes must be justified and actually bring in revenue. I even proposed a PJ-BAD tax on private jets a couple of years ago, a Pigouvian Tax.
By floating the idea of a tax on luxury items, Dr. Nwankwo guarantees that the tax will be popular among Nigerians, most of whom don’t buy luxury items anyway. The problem comes with the second part of his statement – that the taxes will be used to do all sorts of wonderful things like unemployment benefits and sending kids to school (never mind that we already have an education tax in Nigeria).
I’m afraid I have not so good news for Dr. Nwankwo – if this is how anyone is planning to fund education or a social welfare programme, then it means kids are not going to go to school. The simple reason for this is that a tax on luxury items is a tax on behaviour and if you tax behaviour, behaviour will change. Of course, if the purpose of the tax is to change behaviour, then by all means tax that behaviour until people change. A good example of this is taxing petrol to get people to drive less in order to reduce pollution.
So, you tax luxury items because you think there’s a need to reduce that kind of consumption if it causes negative externalities in society. That is fine. If you set the tax high enough, the offending behaviour will disappear along with the tax revenues.
But people in government never stop getting excited at the prospect of taxing something to raise revenues. Indeed Dr. Nwankwo hints at this as well:
But the emphasis is that we do not have more borrowing space because GDP has increased; we do not service debts with GDP, but with revenue and revenue is suffering some setbacks in terms of its sizeability to the GDP
The government desperately wants to borrow more money to meet revenue shortfalls but to do this it has to find more tax revenues fast to be able to service the debts. Things are starting to get hairy and there’s a limit to borrowing to pay back borrowing. It’s also embarrassing that we call ourselves Africa’s largest economy and we barely raise any taxes.
Back in 1990, America decided to implement a luxury tax to balance the budget under George H.W Bush. Things like jewellery, yachts, fur coats, private jets and fast cars were going to be taxed. So what happened?

In 1990 the Joint Committee on Taxation projected that the 1991 revenue yield from luxury taxes would be $31 million. It was $16.6 million. Why? Because (surprise!) the taxation changed behavior: Fewer people bought the taxed products. Demand went down when prices went up. Washington was amazed. People bought yachts overseas. Who would have thought it?

According to a study done for the Joint Economic Committee, the tax destroyed 330 jobs in jewelry manufacturing, 1,470 in the aircraft industry and 7,600 in the boating industry. The job losses cost the government a total of $24.2 million in unemployment benefits and lost income tax revenues. So the net effect of the taxes was a loss of $7.6 million in fiscal 1991, which means the government projection was off by $38.6 million.

It was such a failure that the tax was repealed in 2 years. America went from a next exporter of yachts to a net importer since the taxes made it cheaper to buy boats abroad and even leave them there.
It’s going to be interesting to see what kind of revenue generating taxes the government will cook up in the coming days, especially after the elections. But if its stuff like this, then it’s a waste of time. Most of the owners of private jets in Nigeria for example, already use all sorts of sophisticated ownership structures to avoid the jets being traced back to them. Beating taxes like this will be a walk in the park for them. Unless the definition of what is classified is ‘luxury’ is constantly changing, there is no way for such a tax to raise money sustainably.
So how should the government raise taxes? The answer is staring them in the face (see here) and the fact that this is not even being talked about suggests to me that the avoidance is deliberate. Almost all the local content companies in Nigeria do not pay any taxes due to them having ‘pioneer status’. The Task Force set up by the President on the petroleum industry (headed by Nuhu Ribadu), specifically flagged this problem (Page 19):
The Task Force was informed that at least five companies:
Allied Energy, Midwestern Oil & Gas, Brittania Oil Nigeria
Limited, Suntrust Oil Company Nigeria Limited; and Niger
Delta Petroleum Resources Limited have been granted
pioneer status by the Nigerian Investment Promotion
Commission (with others pending or undetected) for their
exploration and production activities.
The Task Force finds that the granting of pioneer status to oil
operators for an activity that is well established for over 40
years inappropriate. The loss of revenue from the grant of
pioneer status to oil operators is an avoidable loss and it is
recommended that any such further consideration be stopped
forthwith and the current ones set aside and or revoked.

That report was submitted in 2012 and since then there have been more companies with ‘local content’ assets.

This debate on taxes has only just started and it’s going to be very interesting to see how the government approaches the issue.

We continue to observe

FF

Buhari The Ascetic

General Buhari has unwittingly kickstarted a debate about how to fund campaigns in Nigeria. To pay the N27.5m cost of the APC’s presidential nomination form, he revealed he had reached some kind of overdraft arrangement with his bank:

N27 million is a big sum, thankfully I have personal relationship with the manager of my bank in Kaduna and early this morning, I put an early call (and) I told him that very soon the forms are coming, so, whether I am on red, or green or even black please honour it, otherwise I may lose the nomination

The bigger issue here is not that he’s come to this kind of arrangement but that he seems to have left it till the last minute. He’s always known he was going to run for President so before declaring, he should have tied up this loose end with his bankers. Or perhaps he is only making the story public to let people know how he is funding the form-buying given how there have been so many stories of people offering to pay for him.

But surely Buhari has friends who can come up with N27.5m for him? And clearly, if N27.5m is a struggle, then a campaign that will cost probably N1bn is going to be an impossible task. The reason for this appears to be a simple one as he explained himself:

But I felt heavily sorry for myself because I don’t want to go and ask somebody to pay for my nomination forms, because I always try to pay myself, at least for the nomination

Ok fair enough – maybe he knows he is going to have to rely on people to fund his campaign proper and he’s trying to preserve some pride or honour by paying for the form himself; the very least he can do.

All of this brings us to another ‘What Exactly Do Nigerians Want?’ debate. I suspect that a decent chunk of the criticism of Buhari’s approach to funding his form-buying is coming from people who want to justify why they will vote for the current government to continue in 2015. Such people tend to spend an inordinate amount of time criticising every possible candidate that is lined up against the incumbent. We are approaching the amusing situation where the same people will criticise one candidate for being a thief and another one for not having money. This is all a welcome form of political entertainment.

We can find some interesting lessons from Indonesia where a man, Joko Widodo, from very humble origins has just been elected President, defeating Prabowo Subianto, the establishment candidate whose brother, Hashim Djojohadikusumo, is one of Indonesia’s richest men.

So how did Jokowi manage to raise more money than Prabowo? The chart below helps:

Jokowi

40,000 people is still quite small in a country like Indonesia with a population of over 250 million but clearly it was an achievement both in comparison to Prabowo and the novelty of it. Indeed, Prabowo himself initially mocked the idea of raising money from ordinary people:

Jakarta. After vocally criticizing Indonesian Democratic Party of Struggle (PDI-P) presidential candidate Joko Widodo for accepting campaign donations from the general public, Great Indonesia Movement (Gerindra) Party candidate Prabowo Subianto has begun doing the exact same thing.

“Prabowo and [his running mate] Hatta [Rajasa] harshly criticized the public donation scheme at first, but now, without a clear argument, they are doing the same thing,” Indonesian Civic Network (Lima) head Ray Rangkuti said on Saturday.

Joko and his running mate, Jusuf Kalla, have made Rp 40 billion ($3.38 million) since opening three bank accounts in their own names on May 29 for the purpose of receiving donations, becoming the first candidates in Indonesian history to do so.

Some 30,000 supporters have contributed so far, with the campaign taking in an average of Rp 2 billion per day.

Joko-Kalla campaign official Dolfie OFP said that Prabowo’s about-face indicated lack of a clear vision.

“This is inconsistency, they used to criticize Joko-Kalla when they opened the accounts, and now they did the same thing,” he said.

At the time, the Prabowo campaign maintained that the solicitation of public donations was an undignified approach to politics.

“[Joko-Kalla] claimed they wished to make Indonesia prosperous but instead they make their supporters suffer,” Prabowo-Hatta campaign legal affairs head Ahmad Yani said.

The campaign implied that a viable candidate should be wealthy enough to fund his own bid.

“The presidential candidate should be rich so his constituents won’t have to beg for money on the street, this is a social anomaly that lowers human dignity,” campaign official Suryo Prabowo said. “Why ask people to beg?”

But on Friday, the campaign announced that it would begin taking donations nonetheless.

Typical. People first say something is impossible until they see it is successful and then they start copying it. In the end, Jokowi raised 2.5 times more than Prabowo did (at least officially) to finish at around $3m raised directly from the public. The vast majority of that being small amounts of $100.

Not having money in Nigeria has never been a full barrier to political office in Nigeria. A few days ago, I sat with a friend who narrated to me how Aliyu Mu’azu became Governor of Niger state – a hilarious story of how the power brokers in the state couldn’t decide between themselves on a successor to Abdulkadir Kure and ended up with Mu’azu as the compromise candidate. It is unlikely he had much money at the time as he was apparently a civil servant. Of course today, he can probably afford to sponsor someone for the Presidency.

This is the way it has always been done in Nigeria – the Prabowo way. It is thus hard to understand why anyone will criticise Buhari for at least bucking this trend albeit in an uninspiring way.

And this brings us to the real issue with Buhari himself and his campaign – a lack of inspiration. He is undoubtedly popular and is by all accounts a decent man. But his inability to fully maximise his base and then broaden his coalition is a recurring theme of his campaigns so far. And this is a message for those around him. Even if he doesnt win (as is almost guaranteed), he can change Nigerian politics and campaign finance in a way that leaves a lasting legacy.

People often ask why Buhari has never groomed someone as a leader or successor. That is a somewhat harsh but valid question. But if he manages to run a truly people funded campaign, then he will have groomed thousands of successors all over the country who might be inspired to try the same thing.

FF

Lau Lau Fiscal Policy

The boom, not the slump, is the right time for austerity at the Treasury – John Maynard Keynes, 1937

Money is sweet to spend, especially when it’s other people’s money or it has ‘no owner’. A couple of months ago, I wrote about how Nigeria has been in Boom Time for the last 4 years with oil prices consistently above $100 per barrel since the current government came into office.

Given that Nigeria really has no say in the global oil markets – we cant really deliberately affect prices to our own benefit – the time was bound to come when the party music would stop. It appears that time has now come.

Here’s what the story of oil prices in the last 1 year looks like:

Crude Oil

It’s not yet a disaster of course; in theory it’s still above the price we based our budgets on this year ($79), assuming you believe the difference is being saved somewhere. The reasons for this fall in oil prices are numerous and beyond the pay grade of this blog but we can take one useful one:

(Reuters) – Saudi Arabia is quietly telling oil market participants that Riyadh is comfortable with markedly lower oil prices for an extended period, a sharp shift in policy that may be aimed at slowing the expansion of rival producers including those in the U.S. shale patch.

Some OPEC members including Venezuela are clamoring for urgent production cuts to push global oil prices back up above $100 a barrel. But Saudi officials have telegraphed a different message in private meetings with oil market investors and analysts recently: the kingdom, OPEC’s largest producer, is ready to accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two, according to people who have been briefed on the recent conversations.

The discussions, some of which took place in New York over the past week, offer the clearest sign yet that the kingdom is setting aside its longstanding de facto strategy of holding prices at around $100 a barrel for Brent crude in favor of retaining market share in years to come.

The Saudis now appear to be betting that a period of lower prices – which could strain the finances of some members of the Organization of the Petroleum Exporting Countries – will be necessary to pave the way for higher revenue in the medium term, by curbing new investment and further increases in supply from places like the U.S. shale patch or ultra-deepwater, according to the sources, who declined to be identified due to the private nature of the discussions.

All the Saudis need to do to make that happen is to ignore OPEC and pump more oil until prices drop to the level they want. This is a high stakes game and the Saudis are battling for their own future. Aside from Shale Oil in America which threatens them, there are other long term problems they are trying to avoid as well:

After plunging below $35 during the 2008-09 recession, the price of Brent had recovered to $128 a barrel by spring 2012. The oil firms responded by pouring cash into all sorts of projects, from American shale to deepwater fields in the tropics. Analysts at EY, a consulting firm, estimate that the world’s energy companies are currently bankrolling 163 upstream “megaprojects”—those costing more than $1 billion apiece—worth a combined $1.1 trillion dollars. The majority, EY found, are over budget and behind schedule. Most big projects have been planned around the assumption that oil would stay above $100—a notion that in recent years has become an article of faith in the industry

My favourite economist, Thomas Sowell (as you may have guessed), likes to say that the amount of oil available in the world is determined by the ‘cost of knowing’. If the price of oil is high enough, people will go to the strangest places to look for it – the oil in Kurdistan is obviously a lot easier to pump from the ground than the one in Canada’s Tar Sands. Because prices have been so high for so long, people have been emboldened to go out and spend insane amounts of money looking for oil – the Kashagan oil field in Kazakhstan has so far cost $43bn (original budget was $13bn) and the oil hasn’t started flowing yet. If and when all these investments start to pump oil, then the Saudis would be in big trouble. This is what they are guarding against – they are trying to raise the ‘cost of knowing’ as high as possible so no one is crazy enough to go and start looking for oil in strange places.

This game is not for little children as you’d imagine. But what has Nigeria been doing all this while? Well, we know there’s hardly been any new investment in Nigerian oil for a while now due to uncertainty over non passage of the PIB and general persistent anyhowness.

We have also been spending the money in a Lau Lau manner. None of this is new of course, which is what makes it even more depressing.

Screen Shot 2014-10-14 at 11.06.50

I took the chart above from the excellent book – The Oil Curse by Professor Michael Ross. From 1969 to 1977, the price of oil increased by just under 400% while the amount of crude oil Nigeria produced in that same period increased by 380%. In dollar terms, Nigeria’s revenues went from $4.9bn to $21.5bn, adjusted for inflation. And yet, you can see how the government was growing faster than the economy in that same period from the above chart – government share of the economy more than doubled in the period.

One of the lovely things we did with the money in that period was the Udoji Awards. All that money was coming in and no one knew what to do with it, so we did the tried and tested thing – salary increases for everyone!:

Screen Shot 2014-10-14 at 11.27.47

We have a long history of Lau Lau fiscal policy in Nigeria, so one might expect that any government today would try to avoid toeing the same path. Listen to what Ngozi Okonjo-Iweala said last year in November:

The finance minister noted the factors that contribute to the rise in recurring expenses to include the very high salary increase that was agreed for public servants in 2010.

“A very high salary increase was agreed at 53 percent for public office holders. This singular act raised salary figures from about N800 billion to about N1.7 trillion,” she said

Right at the start of the oil boom, we were already spending the money. Part of the reason for that astronomical increase in recurrent expenditure was the minimum wage increase from N5,500 to N18,000 in early 2011. It’s easy to think that this was just about minimum wage but the clever thing that the NLC did was to get Goodluck Jonathan (who wanted to get elected) to agree to maintain the gap between the bands after the minimum wage increase. Say you were earning N16,500 when the minimum wage was N5,500. After the increase, your salary went up to N54,000. Everybody got a pay rise not just the lowest paid.

And the spending on salaries has not stopped. Everyone demands and gets something. Take this gem from earlier this year as another example:

Pension stipends received by professors and permanent secretaries will be augmented by the Federal Government when the new Pension Reform Act is eventually passed into law, investigation has revealed.

This development will enable them to continue to earn their full salaries in retirement even when they don’t have enough funds in their Retirement Savings Accounts, unlike other retirees under the Contributory Pension Scheme.

To be fair, GEJ will be enjoying his retirement in Otuoke by the time the full bill for this one comes in but it’s the little things that add up.

All of this brings us to where we are today. Heavy domestic borrowing with so much of government spending being financed ‘off balance sheet’ through grants and cheap Chinese loans. Major infrastructure projects are also being financed with private sector borrowing. The government does not seem able to ‘shake body’ and drop $1bn on a project. Jonathanism – the ideology which posits that it is possible to describe a bungalow as a skyscraper – is now going to be seriously tested.

Over the weekend the Finance Minister made the following statement in Washington DC (emphasis mine):

She however said government will definitely not borrow to finance its expenditure. “There are three ways we can manage this; you can either go outside and look for resource, but we are not planning to do that. So I just want to make that clear. That is the pride we have. Ever since we have been managing the economy, we have not done that.
“What else we have to look at is our revenue and expenditure side to see how we are prepared. There are already some good news, because we are already ahead in trying to bring out some extra help from FIRS, we gave a target of half a billion dollars (N750bn).  I’m happy to announce to you that they have already hit N800 billion as at the end of the July.
“So we have to go back and encourage them even more, that is one of the measures to take. The other ways are on the expenditure side and this is where we have to plead; this is not a situation created by any one of us but all Nigerians should see openly, something that the DG Budget and I have been saying for quite some time is we have to be very careful to build up what we call a buffer. All of you know the buffer we have as excess crude account. We have to build it up so that if we experience any shock we can now use it.

I always remember being in church and Dr. Okey Onuzo preaching that anytime you open your mouth to make a strong vow, all the demons that were previously bored and fast asleep suddenly wake up excited at finding someone to test. Saying you ‘definitely’ wont borrow is a strong vow to make indeed. I also like her use of the word ‘encourage’ when what she really means is that we are going to send FIRS after Nigerians and businesses to collect as much tax as possible so we can continue to pay it to civil servants. And is it now that oil prices are crashing that you want to ‘build up’ the reserves?

This is the story of how so many countries become ‘customers’ of the IMF – they ignore Keynes and spend like there’s no tomorrow. Well, tomorrow is almost here.

And I did not mention corruption at all.

FF

Local Government Reform… Or Nothing

Given the recent noise about the #30PercentOrNothing movement, it’s a good time to revive one of the ideas I have been talking about for a number of years now.

Aside from the fact that we know how the 30 Percent movement will end (it will be co-opted by the PDP, money will change hands ending the whole thing in recriminations and name calling), there is a bigger danger in allowing it be the dominant movement for young people. Without mincing words, it’s a pretty stupid idea but if it becomes the youth organising movement du jour then almost automatically, all young people get to be thought of as stupid people unable to articulate anything that requires any kind of complexity.

So just in case the day comes and they say no one else said anything, I want to outline an idea to reform our local government system in a way that benefits, not just young people, but Nigeria as a whole.

Constitutional Amendment

The first thing to note is that Nigeria’s executive system of governance is almost exactly replicated at the LG level per the 1999 Constitution. So each LG has a Chairman, Vice Chairman and Supervisory Council made of elected Councillors. This is the hardest part of the plan I’m proposing as it involves changing the constitution, which is never the easiest thing to do in Nigeria.

There is no particular reason why the LG structure has to mimic the Federal one. We already have a system where our Senators are referred to as ‘Distinguished’ (American) while the Speaker of the House is referred to as ‘Right Honourable’ (British). There’s no better place to experiment with improvements in our democratic structure than at the LG level.

Here’s the big idea – scrap the role of the Chairman and Vice Chairman. That’s at least 1,548 politicians we can get rid of in one fell swoop. If each one currently costs us say, N30m a year in salaries and security votes, we can save N186bn over four years. Add the savings from corruption to that and the number is easily N1trillion (ok, I exaggerate).

System Change

So if we no longer have Chairmen and Vice Chairmen running the councils, how are the councils supposed to function? The answer is to simply move to a parliamentary system at LG level. We simply continue to elect Councilors as we currently do. But this time, once a full complement of Councillors have been elected, they will then elect a Chairman and Deputy among themselves by a simple majority. All spending and revenue raising decisions will be decided this way with the Chairman having the final word as normal in an executive system.

In effect, the Supervisory Council becomes the governing council of each LG and Council Leaders can be changed at any time by the Councillors using a vote of no confidence or anything similar.

Winner Takes Some

Part of the problem today is the binary system we have in place when it comes to elections in Nigeria. It just doesn’t make any sense to support any party other than the 2 main parties if you are serious about getting into power especially at the federal level. This then makes it very difficult to dislodge incumbents given that the winner takes all system increases the incentives to decamp. Our politicians, who were never men and women of principle or conviction to begin with, will happily sign up anywhere that guarantees them some kind of relevance for 4 years not to talk of proximity to the treasury.

Further, our First Past The Post (FPTP) system further entrenches the binary system which makes smaller parties that might be driven by ideology or issues completely unviable. Which means that if we reform the LG system as stated above and continue with FPTP, the benefits will be negligible at best. We need a ‘winner takes some’ kind of system. The issue is how to go about it.

New Zealand uses a system called Mixed-Member Proportional system. The name is complicated enough, to say nothing of the actual voting system. Nevertheless, the sample ballot paper below gives an idea of how it works

NZ MMP

I think we could use something simpler that eliminates the need for 2 votes. The key is that the outcome will be determined by proportionality. Each party will have candidates contesting councillor-ships as normal. But the parties will have a list of candidates maintained internally or however else i.e. the people who actually get to be councillors after the vote will be determined by the party based on the votes they get in the election.

Let’s say in Ondo West LGA there are 100 voters. At the end of the elections, the results were as follows:

Labour Party – 40

PDP – 28

APC – 16

UPN – 12

NPN – 4

Also imagine Ondo West LGA has 10 Councillors and the Labour Party won the vote in every Ward in the LGA. Under the current system, the Labour Party will have all the Councillors even though 60% of the voters in Ondo West LGA technically voted against it. In most other countries, there is a threshold a party must reach before it can win a share of the seats available. In New Zealand you have to get 5% of the vote while in Sweden, you need 4% of the vote to get into the Riksdag. We already have a threshold requirement in Nigeria – a candidate must score 25% of the votes in 2/3rds (24) of the states of the country to be elected as president or 2/3rds of LGAs to be elected as governor.

If we set the bar at 5% of the vote for this system, then every party will get at least a seat except NPN, based on the results above. Thus we simply need to divide 10 seats among the first 4 parties based on their share of the vote. The Supervisory Council of Ondo West LGA will then look like this:

Labour Party – 4 seats (40/96*10)

PDP – 3 seats

APC – 2 seats

UPN – 1 seat

 

The calculations can be done in different ways but the results should be the same as above mainly. The question of which actual Councillor gets to sit on the council will be left to the party to decide but it must be someone whose name was previously submitted to INEC as a candidate. Or it could be decided by INEC based on which wards the candidates scored the highest number of votes from – either way, it’s just details. Voters will continue to vote how they vote now and parties will campaign as they currently do. The Labour Party will also have control of the council and will almost certainly produce the Council Leader from one of its 4 Councillors.

And This Concerns Young People How?

So how does this change in system concern young people? Well, for one it makes it much easier to get into the business of governance – the threshold is only 5%. More importantly, there will be less pressure to join one of the big parties as a matter of course. Parties can be organised around as narrow issues as possible – you can have a party of only young people or whatever. As long as you can sell your organising principles to a threshold of voters, you will get into governance.

For me personally, as someone who is sympathetic to the APC as things stand, I will certainly not bother with them anymore if we had such a system. I will instead be minded to form my own party with people who believe broadly in the things I believe in – Free enterprise (making doing business as simple as possible), simple, clear and low taxes and fiscal conservatism (no borrowing to pay salaries and never running a budget deficit for more than 2 years). You will also not be obliged to have a ‘national presence’ as is currently required. For example, given that I am happily an elitist as defined in Nigeria today (anti-stomach infrastructure), I will start my party in Eti-Osa LG in Lagos specifically in Lekki area where all the people who talk as if they have hot food in their mouth live.

The whole point of this is that it allows young people (who are interested) to take what’s possible without waiting for them to given ‘something’ based on no more than the benevolence of the current politician in office or a viral hashtag.

Taste The Power

An LG isn’t that useless, believe it or not. There are useful constitutional powers that can be used to improve people’s lives as opposed to the current system where the Chairman turns up to share money once every month and then disappears again. Here’s what the 4th Schedule of the 1999 Constitution says:

  1. The main functions of a local government council are as follows:

(a) the consideration and the making of recommendations to a State commission on economic planning or any similar body on -

(i) the economic development of the State, particularly in so far as the areas of authority of the council and of the State are affected, and

(ii) proposals made by the said commission or body;

(b) collection of rates, radio and television licences;

(c) establishment and maintenance of cemeteries, burial grounds and homes for the destitute or infirm;

(d) licensing of bicycles, trucks (other than mechanically propelled trucks), canoes, wheel barrows and carts;

(e) establishment, maintenance and regulation of slaughter houses, slaughter slabs, markets, motor parks and public conveniences;

(f) construction and maintenance of roads, streets, street lightings, drains and other public highways, parks, gardens, open spaces, or such public facilities as may be prescribed from time to time by the House of Assembly of a State;

(g) naming of roads and streets and numbering of houses;

(h) provision and maintenance of public conveniences, sewage and refuse disposal;

(i) registration of all births, deaths and marriages;

(j) assessment of privately owned houses or tenements for the purpose of levying such rates as may be prescribed by the House of Assembly of a State; and

(k) control and regulation of -

(i) out-door advertising and hoarding,

(ii) movement and keeping of pets of all description,

(iii) shops and kiosks,

(iv) restaurants, bakeries and other places for sale of food to the public,

(v) laundries, and

(vi) licensing, regulation and control of the sale of liquor.

  1. The functions of a local government council shall include participation of such council in the Government of a State as respects the following matters -

    1. the provision and maintenance of primary, adult and vocational education;

(b) the development of agriculture and natural resources, other than the exploitation of materials

(c) the provision and maintenance of health services; and

(d) such other functions as may be conferred on a local government council by the House of Assembly of the State.

How una check am? Not too bad I think. Devil is of course always in the implementation but the fact remains that under a current system where LG Chairmen are appointed on the whim of the governor, we will never really know what an LG can do in terms of national development in Nigeria.

If this works, we can even move the voting system upwards to the State Houses of Assembly…but please don’t mention this part yet because you need the HOAs to agree to the constitutional change to make this happen. If they feel this threatens them, they wont pass it.

I don’t think young people are a special class of people who need special treatment like you would disabled people (or maybe they are). What is most important is that whatever changes we make to Nigeria must generally benefit the country as a whole and move us forward.

No one is going to make these changes of course but like I said, I am putting my thoughts out there so that, come the revolution, when they are rounding up people to be shot for starting a silly hashtag, I can honestly say I tried to make them see reason.

 

FF