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.




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

Screen Shot 2015-01-11 at 16.49.38

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


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


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


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


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


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



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).



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.



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.

Why Buhari?

Opposition parties don’t win general elections, governments lose them – British adage

How does someone go from really disliking Buhari to openly supporting him in 4 years? I doubt I’m alone in this – certainly I know a good number of people who wont have touched him with a long pole a couple of years and are now just waiting for their ballot paper so they can vote for him. I think that Nigeria will have a new President come May 2015 and it will be Muhammadu Buhari.

The first thing to note is that Buhari is actually quite easy to beat in an election. He is a very popular politician and I doubt any other politician in Nigeria today can come close to matching his numbers purely on name recognition and character. The man is not a crook and in Nigeria of today, that counts for a lot with millions of Nigerians. But he has one big strength – anti corruption – which makes it easy to develop a strategy to beat him in an election. To put it another way, when Nuhu Ribadu was in his prime at EFCC, it would have been very difficult for Buhari to defeat Obasanjo in an election. It does not matter whether the anti-corruption drive of Obasanjo’s government was highly selective in picking targets, the main thing is that that Buhari’s strength in an election was blunted Obasanjo having a highly public campaign against corruption.

What has happened over the past 5 years is that Goodluck Jonathan has gone out of his way to make Buhari as attractive as possible to many more people, as if under a spell. That a 72 year retired General who has been in semi-retirement for the better part of the last 30 years now has his best shot at becoming President – at the 4th time of asking – really ought to make pause and reflect.

Let’s be honest with ourselves – Nigeria is one of the best places for a politician to steal public money and get away with it. We do not really punish corruption in the normal way that other countries do – throw offenders in jail. Except you offend someone or fall into the hands of the British courts, you get to steal and keep the loot. Even when you have the misfortune of actually going to prison, it’s usually for a short period and you come back to your life as it was before you left. There is no shame or loss of privilege.

Consider Bode George who actually went to prison for corruption amount to N100bn of split contracts. Here’s what happened while he was in ‘prison‘:

Saturday Vanguard investigations revealed that the Chief  Bode George and his colleagues had  been confined to the V.I.P. section of  the prison since they arrived Monday evening and have  started eating meals prepared by their families.

It was gathered that there were no signs of molestation by other inmates of the dreaded prison yard as the new very important inmates were being  accorded special treatment because of their former positions in the country.

As I recall it at the time, he was later moved to a ‘flat’ inside the prison with air conditioning. He came out of prison to a lavish reception that was shown live on TV and within a few months was nominating ministers that remain in government today. There is no evidence that he has suffered any loss of wealth on account of him going to prison and the current PDP gubernatorial candidate for Lagos, Jimi Agbaje, got the ticket because of him.

Why then did President Jonathan pardon Diepriye Alamieyeseigha last year? The point of the Bode George example above is to show that there really is no punishment for corruption even when you are convicted. Alams had served his time and had become influential again. There was nothing a pardon was going to do for him other than soothe his ego and perhaps allow him to convince himself that he was innocent afterall. Why did the President of the Federal Republic of Nigeria use the powers of his office to grant such a pardon? Why?

After 4 years in office, this government cannot honestly point to anything it has done to at least stop corruption from over running the state. What we now have is a free for all. We have become numb to stories about Malabu or N123bn disappearing from the civil service or $6.8bn fuel subsidy scam or N28bn in pension funds going walkabouts. One time we even had receipts! The list is endless. Everyday there is one new theft or the other and some don’t even make the headlines. Even when there is a crisis or major incident that does not look like a corruption case on the surface, once the story starts to unravel, we see that it is actually corruption. A clear example of this is was the NIS tragedy that led to the loss of 17 lives because people were so blinded by greed. The Minister responsible still attends Federal Executive Council meetings in Aso Rock every Wednesday. And then there are the things we hear about the military about how our soldiers are sent into battle ill-equipped to face a deadly enemy because money continues to disappear before it gets to them. When he has managed to show some decisiveness, it is in sacking the Central Bank Governor for blowing the whistle on the cesspool of graft that is the NNPC. But he openly complains that his petroleum minister is summoned too often by the National Assembly at a time she was being probed (even if half heartedly) for corruption.

Goodluck Jonathan did not invent corruption in Nigeria – we have been at it since forever. What he has however done is take it to unseen levels that are difficult to explain. It is one thing to allow corruption to fester under your watch, what is perplexing is watching the President actively try to downplay by splitting hairs between ‘mere stealing’ and corruption. By arguing that corruption only exists as rhetoric, he seeks to convince Nigerians that what they see and hear everyday is some kind of an illusion. He does not believe that it is something that can totally corrode decision-making in a nation. He has no will to fight it.

The American Professor, Andrew Wedeman who has studied China for decades wrote a book called ‘Double Paradox:Rapid Growth and Rising Corruption in China‘. An excerpt from it:

Corruption in China more closely resembled corruption in Zaire […] But unlike Zaire, China punished around 668,000 members of the ruling party for corruption over a 5 year period and sentenced 350 to death.

We know what happened to Zaire. As countries go, it cannot really be called a going concern anymore. There is a real risk of state collapse in a country where corruption is allowed to roam free as has been the case in Nigeria in the last 4 years. Nothing useful can get done – indeed, if this government gets re-elected next year, it plans a budget where 91% of all spending will go towards recurrent items. Corruption helps to promote incompetence such that what is not stolen is wasted.


There is a whole Wikipedia page dedicated to George W. Bush’s ‘Bushisms‘. His grammatical challenges, combined with his Iraq misadventures helped to raise the status of eloquence in politicians aspiring for President in America to the point where they voted a former Law Professor with a silver smooth tongue to succeed him. Francois Hollande called himself ‘Mr Normal’ when he was campaigning for the French Presidency in 2012. He won. Why? Because Nicolas Sarkozy spent 5 years in office acting abnormally. He raised the status of normality to the point where French voters were happy to settle for a man who they pejoratively referred to as ‘Flanby’ – a kind of wobbly caramel pudding with a soft centre.

Were the Americans and French voters right to do a 180 turn from leaders who had turned them off? Well, we know the Americans had a chance to correct their decision in 2012 (if they felt they had been wrong in 2008) but instead stuck with it for another 4 years. The French will get their chance to make amends in 2017. As at today, it looks like they cant wait to kick him out of office but a week is a long time in politics, never mind 2 years.

Buhari has not much changed as a person over the years. It is Goodluck Jonathan who has raised his status. It is Goodluck Jonathan who has raised the status of a leader who can tackle corruption. And he has lowered the bar so much that if a President Buhari sacks just one Minister for corruption, he would have out performed Goodluck Jonathan. If he manages to supply the political will to send a couple of people to jail for stealing, Nigerians will feel like they did the right thing by voting him into office.

Nobody is going to vote for Buhari to come and put an end to corruption. Even in China where people are executed for stealing public funds, corruption has not stopped. It is to at least turn us in a different direction that makes people feel at least that we are not being completely overrun by rampant graft.  think Buhari did a decent job with the economy when he took over power in 1983 but even he will be blown away by the scale of the challenges today. With the various economic headwinds facing Nigeria, one can only wish the next President the best of luck.

Will Buhari turn out to be the best President Nigeria has ever had or be so bad that Nigerians will be itching for 2019 when they can correct their mistake? It is impossible to tell. But it is – at this time – definitely a risk worth taking. This is why those who are trying to accuse people of inconsistency for changing their minds on Buhari are running a fool’s errand. The times have changed and this will be reflected in the votes in February.


There are countries that have done well in terms of development under a monarchy – Nigerians who like to visit Dubai can attest to this. Some dictators have also done well for their countries – Thomas Sankara comes to mind. And of course, much of the Western world continues to develop while being democracies – Sweden being one of the best examples.

You can get a good leader under any system. The trouble starts when you get a bad leader and you then want to change them. You discover that under a monarchy you have to wait for the King or Queen to die or in a dictatorship you wait for another dictator to come and kick them out of office.

But democracy – ah – is the only one that guarantees you can change leaders you don’t like at regular intervals.

It is for this reason that I am now firmly a Buhari supporter. He is not going to win the election. Goodluck Jonathan is going to lose it.



Lunatic Liu And The Quality of Corruption

To achieve a great leap, a generation must be sacrificed – Liu Zhijun

I’m continuing my education on China and I recently came across a story that I thought worth sharing. It’s about a chap called Liu Zhijun aka Great Leap Liu aka Lunatic Liu aka Minister Liu.


For this post, I have borrowed heavily from Evan Osnos’ Age of Ambition‘  – one of the most enjoyable books I have read recently.

In 2003, Liu was made China’s Railways Minister. To give an idea of how big this job is/was, China’s railways alone employs around the same number of people as the entire US government does (over 2 million people). The Railways Ministry has its own police and courts amongst other things. It is the very definition of a fiefdom.

Great Leap Liu had very humble origins and he started his career inspecting rail tracks with a torch in the middle of the night. From there he rose to Minister through a combination of a frightening level of hard work (how he got the Lunatic Liu nickname) and unlimited ambition (also marrying a woman from a well-connected political family). When he was made Minister in 2003, he set a target to build 7,500 miles of high-speed rail by 2008. At that time, all the high-speed lines in the whole world were less than 7,500 miles.

So how did Lunatic Liu do?

The Work

1. Before his tenure came to an end in 2011, the annual budget controlled by Lunatic Liu’s ministry was well over $100bn. He managed to lay over 6,200 miles of high-speed track (more than the whole of Europe combined) while accumulating debt of almost $500bn. These are large numbers but the thing to note about high-speed rail is that, due to the speed of the trains, the lines have to be constructed practically in a straight line unlike normal rail. So if there’s a rock or mountain in the path of the line, it has to be blasted and tunnelled through. If there’s a valley, you have to build a bridge over it. And so on. These things significantly add to the costs.

2. I was in China last year and had the privilege of using the high-speed trains. It’s the real deal, no doubt about it. (See my notes here). The 5 hour plus journey from Beijing to Shanghai (and back) is the best train journey I’ve ever taken in my life. Vastly superior to anything here in the UK. And much cheaper too – the return ticket cost me around £50 at the time.

The scale of what has been achieved needs to be seen to be understood. Much of the credit for this has to go to Lunatic Liu who relentlessly drove the programme of construction forward by sheer force of will.

The photo below is one of the favourites I took – Shanghai Hongqiao Rail Station


3. The CRH-380A model is the crowning glory of China’s high-speed rail system. It is manufactured from start to finish inside China. In 2010, under the watchful eyes of Lunatic Liu, the train set a world record of 486km/hr in a test run. You can watch the video here.

4. The high-speed rail network now carries more than 2 million people everyday and connects over 100 cities in China. It is on course to lay 10,000 miles of track by 2020 based on current plans. The line from Beijing to Shenzhen is 2,400 kilometres in length – the longest in the world and cost about $70bn. It is due to extend into Hong Kong by next year.

There s much to talk about China’s high-speed rail system that one blog post cannot do it justice. But I hope you get the gist – every record possible has been broken by the Chinese in this project and Lunatic Liu played a huge role in making it happen.

The Corruption

In 2011, Lunatic Liu was sentenced to death after a trial for corruption. The sentence was later commuted to life imprisonment so he will likely die in prison. The thing about China is that once you have been expelled from the party for wrongdoing, the party scrubs all your achievements from the public records. Given that most media is controlled by the government, it is now almost impossible to find articles where Lunatic Liu was being praised.

So what did he do?

1. Last week a woman named Ding Shumiao aka Ding Yuxin was sentenced to 20 years in prison for corruption relating to contracts in the Railway Ministry under Lunatic Liu.


Chinese people derisively referred to her as Daft Mrs Ding. She changed her name to Yuxin apparently because Shumiao was a ‘village name’ that gave away her very very humble origins. She began her ‘career’ by selling eggs by the roadside and somehow built a multi-million dollar empire (worth $700m in 2010) spanning railway carriages and transportation after she had a buka that became popular with railway executives.

Because the Railways Ministry was so huge and dispensed billions of dollars in contracts, there was a feeding frenzy to get in on the action. Mrs Ding thus became a sort of middle woman who could arrange contracts for you for a fee. It was during a routine audit that someone spotted a payment of $16m to her company as a sort of ‘commission’ by another government-owned company that was trying to get contracts from the Rail ministry.

How did she get so influential with Lunatic Liu? She supplied him with women. In the corruption report against him, he was accused of having 18 mistresses across the country including TV stars and actresses. Mrs Ding appeared to be the one who made the hookups for him.

2. According to gist, depending on the kind of position you wanted, you could pay anywhere from $4,000 to $15,000 for a job with the Railways ministry (the $15k would get you a Supervisor position apparently). The whole ministry was so corrupt that people who had been no more than cooks in their lives were ‘engineers’ in the Ministry.

One promotional video for the ministry that was 5 minutes long ‘cost’ $3m to produce. When investigators went to the house of the person in charge of producing the video, they found $1.5m in cash and papers to 9 different houses.

3. Lunatic Liu had a younger brother called Liu Zhixiang who joined the Ministry under him and became the head of the ministry in a town called Wuhan. The younger Mr Liu was also deeply corrupt and took bribes for everything. In 2006 he was given a death sentence (also commuted later) for hiring people to kill a contractor who had threatened to expose him.

Unfortunately for him, the contractor wrote a will before he was killed which included the line ‘If I am killed, it will have been at the hand of corrupt official Liu Zhixiang’. The contractor was killed in front of his wife with a knife.

When Liu Zhixiang was arrested, he had so much cash n his house that some of it was starting to turn mouldy. In all, about $50m in cash and assets was seized from him – he was taking a cut of every railway ticket sold in his area apparently.

4. 5 months after Lunatic Liu was arrested, there was a devastating crash in a town called Wenzhou. The wiki page of the crash is here. The gist of what happened was that there was a storm and lightning struck a signal box while it was on green. Somehow, this then froze the light on green while disabling one of the trains that was in service in a tunnel at the time. Another train was coming behind it and of course was working on the green signal. Before it could be stopped, it rammed into the stationary train from behind and knocked it off the bridge where it was.

In all, 40 people died and almost 200 were injured. It emerged that the company that built the signalling system had done a rushed job and probably got the contract by paying Mrs Ding as you would imagine. Lots of people were fired after the investigation and the incident sort of confirmed what many people had feared with the pace of work under Lunatic Liu – things had been done too fast. There was a lot of soul-searching in China afterwards with people wondering if statistics were everything and how much human life mattered to corrupt government officials.

After the crash, speeds were reduced across the entire high-speed network

5. Lunatic Liu understood the art of sycophancy very well. He knew that as long as he was delivering targets, his bosses would be happy. When the first line to Beijing opened in 2008, it was almost 100% over budget. The Guanghzhou Station was supposed to cost $360m to build. In the end it cost 7 times that amount. But it remains a magnificent thing to behold with 15 platforms and used up around 3.7 million metric tonnes of cement (more than 30% of what Dangote cement produces in a year).

One time President Hu Jintao was passing through a station where Lunatic Liu was and it is said that he ran so fast across the station to meet him that his shoes came off but he continued running anyway.

Kawasaki Heavy Industries which developed the technology for Japan’s Shinkansen bullet trains complained bitterly that Lunatic Liu stole their technology and passed it off as Chinese made. They threatened to sue and it became a diplomatic incident before they backed down.



So there you have it. Feel free to search the internet for more of the gist as I have left out some things for word count reasons.

Note that in the year of the crash that killed 40 people, Chinese rails carried 400 million people. 40 people easily die on Chinese roads daily as the World Bank noted at the time. And as much as Kawasaki complained about technology theft, the Americans complained about the same thing many years ago when the Japanese began building their own train system.

Having read all that, I now invite you to take the poll below.

Merry Christmas and see you in 2015, God keep us.




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.


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. :)