Broke States

Osun State is in big trouble. If you’ve been paying attention to the news, you would have seen stories of how the state is owing its workers anywhere from 3 to 7 months salaries. So much so that the Ijesha North Diocese of the Methodist Church of Nigeria issued a communique at the end of its recent synod asking Ogbeni to pay up at his earliest convenience:

The synod wished that the state government should look into the payment of her workers’ salaries and retirees’ pensions as at when due in order to save their dependants from untold hardship and untimely death

Safe to say that when the Methodist Church is on your case like this, the garri has been inundated by a surfeit of water. Everyone on social media has a story to tell about someone they know (or perhaps they themselves) being owed their salaries.

The Governor himself has not offered any particularly deep insight beyond the obvious – he doesn’t have as much money as he used to so he can’t pay like he used to. The guys at Budgit have put it in more graphic form:

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Crude oil payments generally come in 3 months after the fact which means that in March, Nigeria started to receive the payments for the oil sold in December which is when oil prices really collapsed below $50. Roughly speaking, payments to states have dropped by around 30% from the average.

In December it was reported that 22 states were owing salaries (if you type ‘states owing’ into Google, it autocompletes it to ‘States owing salaries in Nigeria’ for you) for any given number of months. Some states have taken the ‘novel’ approach of paying what they can – in Kwara I hear 85% is being paid while in Kogi it was reported that only 6 out of 21 local governments could pay 60% of salaries with the rest paying 30% – 40%. I imagine most people will say 30% bread is better than no bread. This is perhaps what makes Osun the worst offender; it is not paying at all from what I have seen and heard.

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When the issue of non-payment of salaries comes up, I find it frustrating how the debate (predictably) goes. People tend to take a fundamentalist view of things – if a state is owing people salaries, it must pay. It is against the Bible and Koran to owe civil servants their salaries and so on and so forth. Even people who don’t usually comment on other matters will typically weigh in with how the offending state should pay the salaries it owes with immediate effect.

Well, it is indeed unconscionable for a state to employ workers and not pay them. People build their lives around being paid their wages and denying them their salaries can be a massively disruptive event. Further, after the salaries have been paid, it is unlikely that the workers will become productive and happy, compounding the problem.

What is annoying, though, is that the debate stops once the salaries have been paid. If oil prices go back up to $80/barrel, the evil day gets postponed till further notice. This raises the status of the act of paying salaries to the level of a glorious achievement while at the same time encouraging Governors to do whatever they can to patch the situation while waiting for the bad wind to blow over.

The hard questions as to how states got themselves into this kind of mess in the first place always come second to ‘just pay the salaries’. By what standard of fairness is it ok for a state to spend 80% of its income on less than 5% of the population? I saw someone on twitter say that after Mr Lagbaja got sacked from the civil service some years ago, he had to suffer the ‘indignity’ of going to learn how to ride an Okada as a new source of income. This is fascinating to me because of what it suggests, perhaps unwittingly – that someone good enough to be a civil servant is only good enough to be an Okada rider in the real world? If, as some like to say, there is a ‘hidden benefit’ of paying people to not produce much in the civil service (the money takes care of their dependants), what is the cost? Benefits surely cannot be considered in isolation. It is telling that when the Osun Governor asked labour leaders to come up with ideas to resolve the salary problem, the people who don’t mind eating their seed corn suggested scrapping the free school meals for children. If the Governor ends up scrapping this programme to ensure payment of salaries, do we take this as an acceptable cost?

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The Federal Government never owes salaries. Whenever there are such stories in the papers and you dig further, you will always find it has to do with a delay or glitch somewhere. But you will never hear the Federal Government is owing workers 3 months salaries or anything of the sort. And there is a good reason for this.

Here’s what Part X of the Fiscal Responsibility Act of 2007 says:

44.-(1) Any Government in the Federation or its agencies and corporations desirous of borrowing shall, specify the purpose for which the borrowing is intended and present a cost-benefit analysis, detailing the economic and social benefits of the purpose to which the intended borrowing is to be applied.

(2) Without prejudice to subsection (1) of this section, each borrowing shall comply with the following conditions-

(a) the existence of prior authorization in the Appropriation or other Act or Law for the purpose for which the borrowing is to be utilized; and

(b) the proceeds of such borrowing shall solely be applied towards long-term capital expenditures.

 We can all agree that the Federal Government breaks the (b) section of that law every 2 or 3 days. Officially the government’s domestic debt is somewhere around  the N10trn mark (my usually reliable sauces tell me the real figure is around the N20trn mark). Well, look around you -do you see N10trn worth of infrastructure anywhere? Exactly. Most of the FG’s borrowing, especially recently, has been to fund things like payment of salaries and paying interest on older debt (what Yorubas might call fikan rankan). By next year, the amount spent on servicing the national debt will almost certainly cross the N1trn mark.

The Federal Government can defy gravity in this way – if it needs to pay salaries, it can simply print the money to pay (this is the long and short of what happens). It is afterall a sovereign with its own fiat currency. States have no control over the currency so they have to stay within some financial limits. When a state goes to borrow money from the markets for example, most sensible lenders will only lend on the condition of a Sovereign Guarantee. In other words, the repayments are deducted at source before the money gets to the state at all. The pain of such an arrangement becomes really acute when allocations are reduced.

So what to do? I am not convinced that the structural problems that cause states to get themselves into a mess like Osun has can be solved by democracy as we know it. Politicians will always have an eye on the next election so taking a knife to a bloated civil service is a mug’s game. Campaigning against a Governor who has sacked workers is the easiest thing in the world. You can pretty much call him the love child of Hitler and Pol Pot and you will find an audience in the electorate – the former Governor of Osun State from 1999 – 2003, Bisi Akande, had the nerve to reduce the state civil service and was promptly defeated at the polls by Olagunsoye Oyinlola who then went on to reinstate most of the sacked workers.

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Today ‘IGR’ has become like a magic or even fetish word. Everyone believes in it and wants more of it. This in turn means that you hardly ever see any analysis of what exactly it is makes up IGR from any state – everyone just runs with the headline figure and use it to compare how one state is doing against another. The reality is that most states are not actually generating any revenue. What they report as IGR is mostly PAYE that they deduct from workers salaries paid from federal allocations. Remove this PAYE ‘IGR’ and most states are generating absolutely nothing. If this sounds like an accounting ruse….well, me I didn’t go to school.

I can think of 3 possible solutions to this problem.

1. At the moment, the FG collects all corporation taxes while the states collect employee taxes (PAYE). What if we were to reverse this? As is painfully clear, states can only really generate revenues from where wealth is being created. This is why you see states behaving like parasites and gangsters shaking down any business for whatever they can extort from them.

Last year, it was reported how Osun State (inspired by Lagos State) was threatening to shut down MTN’s operations over non-payment of ‘right of way’ fees. This happens in almost every state where governments do everything they can to frustrate business until they can extract something from them.

Under this arrangement, states are not obliged to do much to establish the environment that makes it easier to do business. Indeed, they can be as hostile to business as they want. The job of attracting business to Nigeria mostly belongs to the FG. Meanwhile, the person who gets the blame for lack of jobs is the FG while the states collect the taxes on jobs.

Maybe if we let states collect company taxes while the FG collects employment taxes, incentives might be better aligned? It might also force states to think about the things to do to actually attract businesses or maybe even lead to competition on taxes between states. There are problems with this idea of course, but the current situation is hardly working.

2. Since the government is immune to this problem the states face, it might as well help out the states. That’s what friends do.

Let’s create a fund and call it the Pretend As You Were On Condition of Fiscal Rectitude Fund (PAYWOCFR). This fund will be like a smoothing fund for the bad days when oil prices drop off a cliff, as they have now.

So imagine State A – in a normal month it receives N5bn per month in federal allocations. Oil prices crash and its monthly allocation reduces to N3.5bn. It can then tap into the PAYWOCFOR for an extra N1.5bn to meet the shortfall. There will be a maximum a state can draw down based on say, the average it has received in the last 12 months. If oil prices bounce back up and the state’s allocation goes up to say, N7bn, the extra ontop can be deducted to repay into the fund.

The point of this PAYWOCFR is to allow states some stability so they can say with a measure of certainty, how much they will be getting each month, high or low oil prices.

The key with this is the pound of flesh that will be extracted from the states in exchange for allowing them tap into the fund. There are a whole bunch of conditions that can be attached to  allowing access to the money.

Feel free to think of all the things that could go wrong with this e.g when things go back to ‘normal’, will states be obliged to keep whatever commitments they agreed to when they were desperate?

3. You can read about the bankruptcy of the City of Detroit on the Wikipedia page. After years of mismanagement, bad luck and population decline, the city had had enough with debts of up to $20bn. Today, 2 years after, it has started the very long process of healing which includes things like the Blight Removal Task Force kicking down 200 abandoned properties every week.

But Detroit is merely the largest city to go bankrupt in America. It is not the first and certainly won’t be the last – about 13 municipalities have filed for bankruptcy since 2008. It’s a complicated process that is usually triggered by states owing salaries, pensions and everything else.

Here in the UK, it is very unlikely that councils would go bankrupt but councils that run into trouble (not just financial) can be placed in special measures which allows the central government to take over the running of all or parts of the council’s operations for a period of time.

Think of either option as a State of Emergency but triggered by an economic crisis as opposed to a breakdown of law and order as we are used to. And why not? It will be an opportunity to force through strong medicine to get a state back in financial shape.

There are no easy answers anywhere as far as I can see. Which means its more likely that things will continue as they are.

FF

Water and Economic Development

I don’t mean to flog a dead horse but I think there might be an economic lesson in the recent furore over the Oba of Lagos’ comments. In particular, I’d like to zero in on a rather popular view about Lagos that has been echoed by no less a person than Chimamanda Ngozi-Adichie in her recent piece on the matter:

But it is odd to pretend that Lagos is like any other city in Nigeria. It is not. The political history of Lagos and its development as the first national capital set it apart. Lagos is Nigeria’s metropolis

As the gist goes, Lagos is what it is today because it benefitted from being the Colonial and Federal capital. This is why it is more ‘developed’ than anywhere else in Nigeria. Indeed, that is what Ms Adichie is saying above – that it is the political history of Lagos that sets it apart and why it is like no other city in Nigeria.

Well, Lagos is certainly like no other city in Nigeria for sure. But is this because of its ‘political history’? That is, if Lagos was never the capital of Nigeria, would it still be Lagos as we know it? Would another city have developed further than Lagos if it had been chosen as the capital?

The best way to answer a question like this is to try to figure out why Lagos was chosen by the British as a capital in the first place. And the answer to that lies with geography. I try to avoid economic theories linked to geography as much as I can because it is too deterministic and people then focus on the problem and not the solution. But this is important.

Here’s a random Daily Mail story from 2008:

Hooked up to four powerful tugboats, the World War II aircraft carrier Intrepid began what could be its final cruise on Thursday – a return to the Manhattan pier where it has served for 24 years as a military and space museum.

Lines were cast off at a Staten Island naval pier, freeing the ship for the five-mile trek up New York Harbor and the Hudson River.

You can click on the link above to see some photos of the ship being tugged to the museum. The ship itself, USS Intrepid, has a Wikipedia page which tells us that it had the capability of carrying up to 100 aircraft and weighed almost 37,000 tonnes with a full load. It was also 266 metres in length and about 45 metres high. I think we can conclude it’s a pretty big ship.

Yet that giant of a ship was being towed into close to midtown Manhattan in New York. Can such a ship dock anywhere inside Africa? The answer is no. And it is not for lack of facilities or ports to handle its size.

In some ways Africa has been dealt a tragic hand by geography – more than half of the continent is at least 2,000 feet above sea level. Indeed, most of the continent is at least 1,000 feet above sea level. Of course, the higher above sea levels you are, the higher your waterfalls and cascades where rivers meet or drop into the seas and the oceans. This helps to explain why many of the rivers in Africa are not really navigable and the general scarcity of harbours. That is why you cant really get a ship the size of USS Intrepid to dock inside any harbour in Africa. Consider the River Niger – the longest river in Sub-Saharan Africa at 4,200km long – It starts in the Highlands of Guinea which is a dizzying 5,800 feet above sea level before entering the Atlantic Ocean, obviously at sea level. This is not an easy river to navigate and it confused the Oyinbo explorers for a long time.

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All of this matters economically. Before humans came up with trains and aeroplanes, the only way to get around was by sea. It was what made a lot of trade possible as well as migration. Where rivers were treacherous and impossible to navigate, it meant that a lot of places were culturally isolated for a long time and were at great risk of coming under attacks as a result. It might also explain why a continent with around 15% of the world’s population has over 30% of the world’s languages.

You can still see examples of how difficult it is to navigate Africa’s geography for business till today. Take the Simandou Iron Ore deposit in Guinea – it is the richest quality iron ore in the world. But have a look at the map below (from The Economist) which shows the plan of how the ore is to be transported from mine to port:

Simandou

Obviously the most efficient route to the coast for the ore has to be through Liberia. But if you were a Guinean, would you agree to building a port in another country to transport your ore? Exactly. So this route through Guinea will cover 650km of railway lines with 35 bridges and 24km of tunnels at a total cost of $13bn (just for the infrastructure alone). When Guinea will start making money from that ore is anyone’s guess but it won’t be anytime soon.

Now, you are free to assume that the British were stupid for choosing Lagos or perhaps they drew lots and decided on which part of Nigeria to land in – no one will stop you from thinking that way. But these are the facts – the highest point in Nigeria is Chappal Waddi in Taraba State which stands at almost 8,000 feet above sea level. And the lowest point? Lagos Island at almost 1 foot below sea level (click-through the wiki link and have a look at the African countries on the list). Compared to today, there was no sophisticated shipping technology back then so the British naturally used the best access point from the river as their base. Lagos had a natural geographical advantage. Lokoja was a capital before Lagos but the difference in both cities today, tells us that economics trumps politics over the long term.

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So where does this leave us? Is a natural geographical advantage the be all and end all of economic development? Absolutely not. Our purpose on earth is to defeat brute nature. Central heating has made it possible to live productively in certain countries in the world such as those in Scandinavia. Without air conditioning, the US South would seriously lag behind the rest of America today economically. In the time of the Tang Dynasty, China was so hot that an inventor named Ding Hua came up with an air conditioning system and an Emperor later had a ‘cool hall’ built in the imperial palace. Go to Miami today and you will lose count of the number of man-made islands there. Humans have learnt how to create lakes too and build whole cities out of the ground. In 1965, Singapore’s land size was 58,000 hectares. Today it is 71,000 hectares and it plans to add another 6,000 hectares by 2030. Much of this has been achieved by importing sand from other countries. The invention of the elevator made it possible to pack human beings more densely in cities which are much easier to administer and build infrastructure for. The list of places and situations where humans have beat brute nature is endless.

But is it to strange for a country to have a dominant city? Does this always happen at the expense of other parts of the country as is the narrative these days that Lagos was developed at the expense of other parts of Nigeria because it was the capital? The UK’s GDP is around $2.5trn. London alone accounts for close to $800bn of that. The biggest infrastructure project in Europe right now – Crossrail – is happening in London and the High Speed 2 train planned will link the rest of the country to London. It is not because Bristol or Manchester do not need new train networks but because building a country does not have to be zero sum and strong economic centres are not so easy to replicate. And often, the answer lies in history and economics and not politics.

Believing that a thriving economic centre can be created by politics is a journey that leads down the garden path. Reducing the importance of Lagos to a political creation is an economically illiterate and depressing argument to be having. Lagos does not exist at the expense of anywhere else. People make money in Lagos and go and spend it elsewhere in the country. People come to Lagos for opportunities daily – it’s a big market and its density means that infrastructural challenges are not a barrier to getting goods and services to people as they might be in other parts of the country where people are widely dispersed. Lagos is an advantage and benefit to Nigeria and it should be maximised as much as is humanly possible.

Oba Akiolu’s comments were deeply irresponsible and offensive. But Lagos is far better than his comments and it should not be reduced to his level. And certainly it should not be an excuse for people on both sides to bring out their prejudices in the sunshine.

There’s a country to be built and it certainly wont happen by half-baked theories used as a wrapper for people’s prejudices.

FF

 

P.S – I’m from Ondo. Last time I went there, it looked so depressing and hopeless to me. If you ask me the best way to develop the place, my answer will be to find a way to connect it to Lagos as quickly and efficiently as possible. Enough said.

 

 

 

 

‘On such a full sea are we now afloat…’ – A Letter to the President-Elect

Mr President,

I really don’t understand what it means to ‘stand on existing protocol’. Nevertheless, I will go ahead and stand on existing protocol.

1. On the day that Deng Xiaoping became leader of China in 1978, he was just under 75 years old. Between 1980 and 2010, China lifted 680 million people out of poverty. There can be no doubt about it — Deng Xiaoping’s reforms which opened up China’s economy played the biggest part in the stunning transformation of that country.

At a mere 72 years old; age cannot be an excuse for you. You’ve wanted this job for so long anyway. Now, it’s showtime

2. Between 1870 and 1910, over a million Swedes (around 20% of the country’s population at the time) abandoned Sweden for a new life in America. They left a country that was a pretty poor and dark place and suffering repeated crop failures, for the chance of a better life in America.

In 1870, Sweden had a GDP Per Capita of less than $1,500 — not far from where Nigeria was before our GDP rebasing. Today, their GDP per Capita is over $60,000. By the numbers, it has gone from a poor country to a very rich country in just over 100 years.

All of that transformation — from a country people were fleeing to a magnet for immigrants today — happened while Sweden has been a democracy. It is fashionable for people to yearn longingly for an authoritarian ruler in the fashion of Lee Kwan Yew who will drag his country to prosperity. But just as it is never reported on the news when aeroplanes land safely, no one really talks about countries that have gone from poverty to wealth while being democracies.

The excuse that being a democracy makes it hard or impossible for economic reform and development cannot be valid. It can be done. And you must stay within the powers granted you by the constitution – they are there for a reason, mainly to protect the people from the raw naked power of your office.

Nigeria has chosen the path of democracy. There is no longer room for any type other of government. This is what we have and it is what we will develop with, come hell or high water.

3. A few days after General Park Chung-hee took power in South Korea in 1961, he began to arrest a number of businessmen and crony capitalists under a law known as ‘Special Measure for the Control of Illicit Profiteering’. An old prison in Seodaemun which had been used by the Japanese during their occupation of South Korea, was converted to a special prison for crony capitalists and businessmen who had benefitted immensely from the previous government.

To all intents and purposes, it was an anti-corruption crackdown by General Park. But that was only half the story.

A few months after taking power, General Park published a book titled ‘Our Nation’s Path: Ideology of Social Reconstruction’. The book promised a ‘miracle on the Han River’ and building up South Korea into a ‘mammoth economic strength’.

Taken together, General Park did not launch an anti-corruption just for the sake of it. He did it to bully those who might otherwise have been enemies of progress, into supporting his vision of turning South Korea into a ‘mammoth economic power’. The threat of prison was enough to turn rent seekers into manufacturers and exporters in short order.

Yes, a big part of why you have been elected is to get a handle on the corruption which has decayed our country and now threatens to bring the whole structure down. But simply waging war against corruption without a vision of where the country should be going will become no more than a moral crusade. Being tough on corruption will give you a massive chance of pushing through the reforms needed to unleash the animal spirits of the Nigerian economy and put the country on the path to economic development.

General Park’s grand vision was to turn South Korea into an exporting economy. By the time he had finished dealing with the crony capitalists under the guise of anti-corruption, the results were good enough for him to declare, in 1964, every November 30th as ‘Korea National Export Day’. Today, there are few countries on earth you will visit where you won’t find Korean phones, electronics, cars or even ships. And General Park has been dead since 1979.

Chart a new course for this country so that the crooks you want to set straight (most of whom are much younger than you), simply don’t go and hide somewhere waiting for you to leave the scene so they can return the country to ‘business as usual’. If you punish a particular type of behaviour, you must promote an alternative that will be there long after you have left office.

4. The fact that an idea has been tried several times and failed woefully each time does not mean that someone will not attempt it again. Failure, after all, is relative – that something has failed millions of Nigerians does not mean that it has not been an unqualified success for the select few benefitting from that failure.

Between 1958 and 1961, around 36 million people died of hunger and physical abuse in China as a result of the Great Famine brought about by Chairman Mao’s ‘Great Leap Forward’. Partly to cover up the failure of the policies that led to that famine, Mao doubled down and launched the Cultural Revolution which ran from 1966 to 1976 and persecuted millions of real and perceived enemies.

Yet, after Mao died and Deng Xiaoping took over, there were still many many people who wanted to continue his failed policies perhaps because changing course would mean an admission that they had failed. It fell upon Deng to find reformers and back them with all his political will. Some felt the economic reforms were too radical, others felt they were too timid. Chen Yun was a respected economist that Deng could not afford to alienate – he fell into the former camp of those who were skeptical about reforms. But there was also Zhao Ziyang who was very critical of Mao’s policies and was a proponent of bold agricultural reforms. He received the backing of Deng and his agricultural reforms were so successful that Chinese people came up with a saying ‘yao chi liang, zhao Ziyang‘ translated as ‘If you want to eat, look for Ziyang’. The people who had previously starved to death under Mao, knew exactly what they were talking about.

In the end, the anti-reform crew got to Ziyang but by then it was too late to reverse his reforms.

Mr President, you must never run out of political will with which to back the Ziyangs in your government. The change we need in Nigeria goes beyond simply changing the government or ruling party. We desperately need reforms of our laws and how our government sets about tackling the issues plaguing the country. Reform will never be easy (an outgoing minister even reckons some things are unreformable in Nigeria), but you must try. And you must never stop. You must find and protect your Ziyangs before the enemies of progress get to them.

We must acknowledge that we are backward, that many of our ways of doing things are inappropriate and that we need to change

Those were the words of Deng on the day he took office. The result is there for all to see.

5.  You have wanted to be President since 2003. The problem is that, depending on how one looks at it, the problems you wanted to solve in 2003 are now bigger and more complex. It is now when the problems – of insecurity and corruption and economic mismanagement – have gotten out of hand, that Nigerians have, perhaps in desperation, called you.

There are several things this tells us. One is that as long as the problems were ‘manageable’, Nigerians did not need your services. People who behave in this way are likely to get impatient very quickly. It has only been about 2 weeks since Fulani herdsmen attacked a community in Benue State, killing 80 people. It is this same state that you, a Fulani man, just won in the election. Our country is desperate to do better and it has called on you to do the job.

The job is going to be incredibly difficult bordering on the impossible and frankly, it would have been better for you to have been elected in 2003 when some of these issues hadn’t compounded to where they are now.

And yet, as of today, there is nothing stopping you from ending your time in office as Nigeria’s greatest ever leader. The slate is currently blank.

Draw inspiration from another man who, by the time he had finished his 8 years in office as his country’s President, was freely being referred to as ‘the best President ever’ by his countrymen. He increased the average number of years each child spent in school from 5 to 8 years. The number of homes with a functioning and proper connection to the sewage system increased from 37% to 51% under his watch and the number of homes with washing machines went from 24% to 44% of the country’s total. The percentage of the population living in poverty dropped from 32% to 15% in his 8 years in office. That percentage drop translated to 20 million people who were able to move up out of the indignity of poverty and participate in the country’s economy.

Like you, he only won the presidential election at the 4th attempt in 2002 after trying and failing in 1989, 1994 and 1998.

His name of course is Luiz Inácio Lula da Silva.

There is a tide in the affairs of men. Which, taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures.

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Abū Ḥāmid Muḥammad ibn Muḥammad al-Ghazālī has been called the greatest Muslim scholar in history by very serious people. One of his most celebrated works was his ‘Book of Counsel for Kings‘ in the classic Arabian tradition of ‘mirrors for Princes’. Here’s a quote:

nothing is more damaging to the subjects and prejudicial and sinister to the King than royal inaccessibility and seclusion; and nothing impresses the hearts of the subjects and functionaries more than ease of access to the King. For when the subjects know the King is easily approachable, it will be impossible for the officials to oppress the subjects and for the subjects to oppress one another

In the same tradition, another Muslim scholar, Nizam al-Mulk wrote to the Sultan of Shah in 1091 describing how Persian monarchs ensured they did not deviate from the work of serving their people:

According to the books of our ancestors, Kings would hold court out of doors, seated on horseback atop a tall platform so as to distinguish from among all the people gathered in the plain those who were suffering oppression and to give them justice. The reason for this custom was that once a King retires to a residence where doors abound, and barriers and vestibules and hallways and gates, men of ill-will and perversity can bar people’s entrance and keep them from lodging complaints with him.

How you choose to govern such that you are not captured behind doors and vesitbules and hallways and gates, will require plenty of wisdom. But it must be done. Some say this is one of the main reasons you have just kicked Goodluck Jonathan out of office. It will be utterly depressing if you fall victim to the same disease.

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I am not aware that it is possible to campaign in back to back elections on the theme of change. That is, though you have won the elections by campaigning for change, in 4 years time, you will be on the receiving end of the change message while you convince Nigerians of the need for continuity. ‘Twas ever thus, Mr President.

My friend Osita Nwoye – a believer long before I was one – and one of the most committed people to your cause I have ever met put it best a few days ago:

I got some ‘congratulatory’ messages too and all I did was tweet and make a few phone calls on your behalf.

Now that we have seen that it is possible to unseat a President from office for non-performance, I am afraid that this has put a limit on the amount of intellectual dishonesty that is possible in your defence even by your die-hard fans.

I wish you all the very best. ‘Life is to be entered upon with courage’ as Alexis de Tocqueville once said.

FF

Guest Post: Economic Management in Nigeria Post May 2015

 

The outcome of Nigeria’s March 28 2015 polls has significant consequences for Africa’s largest economy. The pace and quality of economic reforms, never sterling, have become patently mediocre under President Goodluck Jonathan. Pervasive perception of the Government’s incompetence and corruption has fed widespread disaffection. With the fall in international oil prices through which the country earns 95% of its foreign exchange and 70% of its revenues, the state’s capability to support consumption and growth is severely curtailed. More than ever, Nigeria needs to initiate and credibly implement economic and institutional reforms that will attract a scale of investment and unlock the quantum of growth sufficient to establish it as a diversified middle-income economy. This will have salubrious political effect as Nigeria’s economic policy weaknesses are closely related to the incapacities that threaten the Nigerian state.

Bye Bye to Goodluck?

The most credible opinion polls have either projected an election too close to call (e.g. ANAP Foundation’s) or clear victory for General Muhammad Buhari, candidate of the opposition All Progressive Congress (Eurasia’s). A Buhari win is potentially better for reforms and growth in Nigeria. The Jonathan administration will be unable to muster the institutional energy, discipline and coherence required to implement critical but controversial reforms (such as trimming and paying the civil service better). Intensified political opposition to a re-elected President Jonathan administration will transform the credibility gap it suffers to near illegitimacy, further rendering it unable to overcome the social opposition to reforms (which it has often managed in a shambolic manner).

Nonetheless, it cannot be taken for granted that a General Buhari Government automatically will launch Nigeria on the path of economic, institutional and political reform. The All Progress Congress (APC) has not shared any coherent economic policy plan that would enable Nigerians and investors predict the direction of economic policy after a likely APC victory on March 28. Predictions have to be based on an analysis of Nigeria’s political economy, especially historic and recent patterns of interactions between ethnic identity politics and economic policy.

Nigeria’s politics have bred poverty, waste and corruption principally because of poor policy choices that have favoured consumption over investment and ineffective state interventions over market provision. Nigerian political elites have been able to continue with these ruinous policy choices because of the absence of strong pro-reform domestic constituencies and modes of political mobilization centered on ethnic and religious identities rather than economic interests. The politics of the 2015 elections have not been different. Supporters’ (as well as some analysts’) expectations of improved governance and economic performance under Buhari rest exclusively on his (personal) probity. This emphasis on personal character is superficial given the fact the most consequential forms of corruption and Nigeria’s persistent failure to fulfill its economic potential have been rooted in poor policy and institutional choices.   General Buhari’s ability to turn Nigeria around should be judged more on the possibility of decisively altering the course of policy.

Awoism Federalised

The Eurasia Group Nigerian elections forecast notes a “vast policy gap” between the “pro-business” and “pro-liberalisation” southwestern wing of the APC and the more “statist and nationalist orientation” of the northern politicians around General Buhari and predicts that “the ascendant” southwesterners will dominate economic policy in an APC Federal Government. The Eurasia forecast underestimates the significance of the fact that social policies such as conditional cash transfers, rooted in Awoist “progressive” Yoruba politics, constitute the central economic platform of the APC manifesto. The lack of attention to urgent investment-stimulating and jobs-creating reforms is as worrying as the macroeconomic threat social welfarism pose in a world of half-price oil. The welfarist policies are likely to be partly pursued despite their onerous costs. They are partly principled beliefs and partly an electoral policy (rather than a coherent or sustainable development strategy) for Awoist political parties. The Princeton economic historian Atul Kohli wrote of the Action Group’s universal education policies of the post independence period “scarce resources were thus utilized ineffectively, mainly to satisfy the short-term political needs of the emerging leadership” (emphasis added). (Action Group’s welfarism was much more affordable as the cocoa export earnings of the Western Region, was four and seven times the earnings of the Eastern and Northern regions respectively). The utter silence over the frittering of about $ 5 billion of Nigeria’s foreign exchange reserves in futile defense of the Naira seems another evidence of the APC’s lack of policy capacity and/or the distance between its economic advisers and the more influential politicians.

The “pro-business” orientation of the dominant southwestern wing of the APC appears completely virtuous only when compared to the party’s Northern wing. The Peoples’ Democratic Party also isn’t anti-business but has been far from been a consistent promoter of free or transparent markets. The “pro-business” orientation is most clearly expressed as a procurement system which has also been a means to finance the party and for its leaders to dominate regional politics. This is also much in keeping with the Awoist tradition. This system somewhat benefits from more effective central control in APC Lagos than PDP Abuja. The way it is adapted to function at the federal level has substantial implications for infrastructure procurement, including through public-private partnerships and strategies to expand or create key industries. Will APC economic strategy aim to attract investments from international capital or will it favour indigenous crony capitalists? What will happen to policies such as the nepotism-riddled “land allocation” system and import waivers which largely have bled the treasury and failed to expand industries and create jobs?

There will be actors on both wings of the APC who will promote corruption-prone industrial policy and subsidies, falsely arguing that under General Buhari, the Government will have the discipline to implement them productively. As a military ruler, General Buhari’s instincts were clearly statist; his total lack of interest in and understanding of the economy has shone through four presidential campaigns. He will be far from being a competent umpire of squabbles over economic policy in the cabinet. Advocates of statist interventions and subsidies are likely to be more successful in getting General Buhari to back them.  The position of would-be reformers already is weakened, but not fatally or conclusively, because the party has not committed itself to or stated its positions on crucial economic policy issues during the campaign. One of the early signs of whether Buhari Government will represent inter-elite distributional politics as usual would be if it appoints the “constitutional” 36-person Federal Cabinet.

A New Kind of Coalition

The rollback of reforms by former President Yaradua’s government was presaged by an extraordinary declaration by its powerful secretary Baba-Gana Kingibe that “reforms are dead”. This was widely interpreted as an ethnic reaction against reforms under former President Obasanjo that had seen Northerners excluded in the acquisition of valuable state assets and licenses. But it seems more plausible that Yaradua’s advisers merely aligned to his ideological proclivities. He had been an avid Marxist in his lecturing days and later member of the socialist Peoples’ Redemption Party. (Aliyu Dangote, a Northerner whose business had been boosted by the Obasanjo Government’s patronage, was one of the major beneficiaries of the oil refineries sale that became the first targets of Yaradua’s strike against reforms).

While Buhari certainly isn’t an advocate of the free-market, he is unlikely to burden his Government with Marxist baggage like Yaradua. He will lack the political capacity to carve out a Northern anti-reform “kitchen cabinet”. A Buhari-led APC Government will have unique features for a Nigerian Federal Government which will confer more advantages than liabilities. Historically, successful Federal parties have been founded, crafted or controlled by politically dominant conservative Northerners who coopted bigwigs from other regions to help them secure enough votes to win federal elections. The only common purpose of these coalitions was to win power and keep it by sharing government positions and associated material resources as fairly as possible. Ruling party coalitions were not only unable to develop an economic strategy or development vision, they also lacked the capacity to execute policy no matter how poorly defined.

No doubt, power rather than policy solutions to Nigeria’s myriad economic and social problems have also been the primary preoccupation of APC coalition building. And the pursuit of wealth will continue to be a significant part of Nigeria’s political culture under an APC Government (General Buhari’s aides accused accomplished policy wonks who joined his 2011 campaign of wanting to hijack the Buhari brand they had been nurturing after “chopping” in the PDP). But an APC Federal Government will be politically resilient and have the confidence and capacity to implement those reforms it choses to initiate. It will enjoy the support of the politically powerful North, opposition from whom diminished considerably the political capital President Jonathan (would have) required to pursue reforms consistently. The APC’s southwestern bulwark and the region’s vigorous media will complement the Government’s northern support. Key political appointees will be less of overly independent ethnic power brokers or nominees of regional godfathers rewarded for participating in a successful electoral coalition and more of party people anchored in defined authority structures and hence more easily marshaled to execute policy.

General Buhari will not be an all-powerful president (like President Obasanjo) or be compelled to disruptively subdue opposition within the party (like President Jonathan). The influence the leaders of the southwestern wing of the APC will seek to exert on the Buhari Government will be overt, legitimate and institutional as opposed to the hold President Obasanjo unrealistically sought singly to exercise on successive regimes from his Otta farm. Policy decisions under an APC Federal Government is thus unlikely to be subjected to the whims of the President (or that of individual free-agent Ministers) and will thus be more sustainable. Squabbles within the ruling party, often ethnic-centered, though highly detrimental to the definition and implementation of economic policy, have been over power rather than policy itself. Nigeria is likely to get a breather from power squabbles at least for four years should the APC win the elections. The personal relationships forged as well as the understandings reached during four years of negotiating a (failed and then  successful) merger will be useful in averting disagreements (over the gains of power) strong enough to fracture the APC into its ethnic constituents. It would greatly help to formulate a semi-formal system of procurement, especially of private investment in and operation of public infrastructure, which meets the expectations of both APC wings and deepens Nigerian capitalism while not overburdening the populace.  Such must also be clean enough to attract international capital. President Jonathan’s power sector privatization has fallen short of many of these criteria.

There will also be the question of what a Buhari government has to deliver for the Northern talakawa that constitute his core political base and also Nigeria’s poorest citizens.  Any sustainable improvement to their plight will come through leaps in the quality of basic education, healthcare and agricultural extension services and security, stuff that can only be delivered through steady improvement in state capacities rather than a splurge on infrastructure or cash transfers.

The APC has touted General Buhari’s incorruptibility rather than advance a clear economic strategy and agenda for institutional reform. If it wins the March 28 elections, it will enjoy a short honeymoon within which it quickly needs to establish its reform credentials before investors and a reputation for competence and trustworthiness before Nigerians. This has to substantially supplant its welfarist plans. It could succeed if it exploits its political heft in appointing competent professionals (who can be found amongst people close to both the Buhari and the southwestern wings of the party) rather than reward regional political bigwigs with ministerial and other important appointments. This will be the decisive test of General Buhari’s incorruptibility. His Government needs to quickly package key reforms and clearly explain to Nigerians why they are critical to the goal of changing Nigeria from a corrupt and poverty-ridden country into a fairer and progressively richer society with a more competent and honest government. To have any chance of fulfilling even some of the aspirations of its teeming supporters, he must first and quickly let down the party men of various ranks who will be angling for gains of Nigerian politics as usual.

 

Dr. Agboluaje is a Lagos-based strategic communications and policy consultant

 

Did Dahiru Mangal Kill The Nigerian Textile Industry?

In the mid-1980s Nigeria had 175 textile mills. Over the quarter-century that followed, all but 25 shut down. Many of those that have struggled on do so only at a fraction of their capacity. Of the 350,000 people the industry employed in its heyday, making it comfortably Nigeria’s most important manufacturing sector, all but 25,000 have lost their jobs. Imports comprise 85 per cent of the market, despite the fact that importing textiles is illegal. The World Bank has estimated that textiles smuggled into Nigeria through Benin are worth $2.2bn a year, compared with local Nigerian production that has shrivelled to $40m annually. A team of experts working for the United Nations concluded in 2009, “The Nigerian textile industry is on the verge of a total collapse.” Given the power crisis, the near-impassable state of Nigeria’s roads and the deluge of counterfeit clothes, it is a wonder that the industry kept going as long as it did.

The knock-on effects of this collapse are hard to quantify but they ripple far into the Nigerian economy, especially in the north. About half of the million farmers who used to grow cotton to supply textile mills no longer do so, although some have switched to other crops. Formal jobs in Nigeria are scarce and precious. Each textile employee supports maybe half-a-dozen relatives. It is safe to say that the destruction of the Nigerian textile industry has blighted millions of lives.

I am currently reading Tom Burgis’ The Looting Machine from where I have taken the quote above. (Actually, the quote above is from an excerpt of the book published recently in the FT. Find it here). The author spent 9 years across Africa as a reporter and this book is the result of the things he learnt. So far, it’s quite a remarkable, if terribly depressing, read.

It is one thing for a country to lose an industry making say, compact disc players – at least you can say that technology rendered that product almost completely obsolete and killed demand for it along with the industry. But why lose a textile industry? It’s not as if clothes have gone out of fashion – the market is worth $2.2bn of illegal imports yearly!

Even more annoyingly, the textile industry remains one of the most labour intensive in the world today. It is also not very capital-intensive compared to other industries – an American study from some years ago estimated that oil and gas companies spend $3.2m per employee in terms of investments. In comparison, the textile industry spends around $13,000 per employee.

Markets are not easy to form. Jobs are not easy to create (they are costs). Who lets such an industry go to waste? There’s more:

And there was something that had accelerated the mill hands’ consignment to the trash can of globalisation. Shuffling their feet and looking warily around for anyone who might be eavesdropping, the men murmured a single word: “Mangal.”

I used to hear the name Dahiru Mangal especially during the Yar’Adua administration but the full-scale of his economic destruction only came to me while reading this book. To put it in Nigerian parlance – he is into smuggling. He denies this of course, saying he merely provides a logistics services.

In the shadier corners of the workshop of the world Mangal found the perfect business partners. “The Chinese attacked at the heart of the industry: the wax-print and African-print segment,” a consultant who has spent years investigating — and trying to reverse — the slow death of Nigerian textiles explained to me. During the 1990s Chinese factories began copying west African designs and opening their own distribution branches in the region. “This is 100 per cent illicit — but the locals do the smuggling,” the consultant went on. There are, he said, 16 factories in China dedicated to churning out textiles with a “Made in Nigeria” badge sewn into them. For a time the Chinese material was of a much lower quality than Nigerian originals, but that gap narrowed as Chinese standards rose. The Chinese began to take control of the market, in league with Nigerian vendors. Mangal acts as the facilitator, the conduit between manufacturer and distributor, managing a shadow economy that includes the border authorities and his political allies. Like many others who profit from the “resource curse”, he plies the hidden byways of the globalised economy.

From his base in Katsina, Mangal arranges the import of food, fuel and anything his wealthy Nigerian clients might desire. But the staple of his operation is the textiles that have helped kill off the local industry. The details of the alleged smuggling operation are drawn from interviews with northern Nigeria politicians, officials, businessmen and textiles consultants in Abuja, Katsina, Kano and Kaduna between 2009 and 2013. Mangal is said to charge a flat fee of N2m (about $13,000) per cargo, plus the cost of goods. In 2008 Mangal was estimated to be bringing about 100 40ft shipping containers across the frontier each month.

Mangal goes to China to buy materials, pays workers, produces clothes, puts them in a container, ships them to a neighbouring country, bribes customs officials, smuggles them across the Nigerian border and still gets it to the Nigerian customer at much cheaper prices than something produced on their doorstep. It’s a different thing when someone brings in something not produced in the country like iPhones. But to be so comprehensively attacked and destroyed at your own game in this way is quite sad and worth reflecting on.

***

The story of why this happened is fairly simple to understand. The knee jerk answer is always to blame epileptic power supply. It definitely does not help to have rubbish electricity but it cannot be the only reason. The author goes on to explain:

Dutch Disease is a pandemic whose symptoms, in many cases, include poverty and oppression. The disease enters a country through its currency. The dollars that pay for exported hydrocarbons, minerals, ores and gems push up the value of the local currency. Imports become cheaper relative to locally made products, undercutting homegrown enterprises. Arable land lies fallow as local farmers find that imported fare has displaced their produce. For countries that have started to industrialise, the process goes into reverse; those that aspire to industrialise are stymied. Processing natural commodities can multiply their value four hundredfold but, lacking industrial capacity, Africa’s resource states watch their oil and minerals sail away in raw form for that value to accrue elsewhere.

Once the oil money starts to enter a country, the local currency comes under pressure and starts to appreciate. Note, this does not mean that currency’s value visibly rises from say N2 to $1 to N1.50 to $1. Instead, the currency is always trading above its real value. So even if the exchange rate is N150 to $1, it might be the that the real value is actually N200 to $1.

Using those numbers, imagine that it costs $5 to make a t-shirt in China. It can sell for N750 in Nigeria at the overvalued exchange rate. But in reality, if the exchange rate was at its real level, it should sell for N1,000 which will obviously make it less competitive in the local market. Naturally, the Naira should be at its real level to at least make it harder for cheap imports to gain a foothold in the market. It also means that if Nigerian textile makers decide to export their products, they will get more Naira for it. This is obviously good as the local market is protected against cheap imports while making exports attractive at the same time.

But those dollars flowing into the economy from oil sales make it very hard to keep the currency at its real level or even undervalued. When the dollars come in, they need to be turned into Naira to be useful. Fighting this pressure on the Naira is by no means easy but neither is it impossible.

***

Everyone has heard of the famous Norwegian Sovereign Wealth Fund now worth almost $900bn. Here’s how the fund describes its life’s ambition:

The ministry regularly transfers petroleum revenue to the fund. The capital is invested abroad, to avoid overheating the Norwegian economy and to shield it from the effects of oil price fluctuations

Yorubas says that if you are not going to eat something, you shouldn’t bring it near your nose. If you don’t want the disease that this kind of money brings into an economy, best thing is to park it abroad.

You will agree that this is completely out of the question for Nigeria right now. We are so addicted to oil that grown men will burst into tears if their monthly allocation from the Federal Government is reduced. Worse, few states have any clue what to do to develop an economy that can pay its way via taxes as a recent CBN report showed – in aggregate, internally generated revenue across the states did not increase between 2013 and 2014.

But there is another way perhaps.

At any point during the last decade or so, it would have been impossible to go a few months without hearing the United States complain about China deliberately keeping its currency undervalued. Here’s a random Bloomberg story from 2010 as an example:

The U.S. pledged to monitor China’s “undervalued” yuan in the next three months for signs that Asia’s fastest-growing market is living up to its commitments to help rebalance the global economy.

China took a “significant step” last month when it ended its peg to the dollar and allowed markets to drive the currency higher, the Treasury Department said yesterday. The report, initially due April 15, concluded that no major U.S. trading partner manipulated its currency and said it’s not yet clear whether China’s policy shift will correct the yuan’s undervaluation. The Treasury promised another review in October.

“What matters is how far and how fast the renminbi appreciates,” Treasury Secretary Timothy F. Geithner said, using another name for China’s currency. “We will closely and regularly monitor the appreciation of the renminbi and will continue to work towards expanded U.S. export opportunities in China that support employment in the United States, in close consultation with Congress.”

 China sells a lot of stuff around the world and in America especially. They earn a lot of dollars from doing this. In theory, the effect should be the same i.e. as those dollars make their way back into the Chinese economy, the Yuan will start to rise which then reduces the competitiveness of their products against American producers. So how does China stop this from happening? From the same article:

China’s reserves rose to a record $2.447 trillion in the first quarter of 2010, according to the People’s Bank of China. Holdings jumped $22.5 billion in March, after gaining $9.4 billion in February and $16 billion in January, data posted on the central bank’s website in April showed.

They are doing pretty much the same thing the Norwegians are doing – re-routing the dollars into their reserves instead of the local economy and thereby keeping manufacturers and exporters competitive.

***

To paraphrase Winston Churchill – You can always count on Nigerians to do the right thing – after they have tried everything else. According to the book, Obasanjo dispatched Nasir El-Rufai  to try to stop Mangal’s smuggling. Mangal claimed he was merely providing a logistics service for people (illegally) importing clothes. Nothing came of it.

The next thing to do of course was to provide ‘intervention funds’ for the industry. Just before leaving office in 2007, Obasanjo ‘launched’ a N70bn Textile Development Fund. This was meant to revive the industry and create the usual 1 billion jobs bla bla. President Yar’Adua didn’t scrap or probe the fund (perhaps because it was merely launched under Obasanjo) but went ahead with it. He ‘appealed’ to Nigerians to be ‘patriotic’ and buy local textile as those industries were suffering due to ‘lack of demand’. He then went on to increase the size of the fund by an extra N30bn to N100bn.

In 2002, Obasanjo banned the import of textiles. By 2010, Goodluck Jonathan’s government decided it had had enough and lifted the ban. Clearly it hadn’t worked (except you were Mangal of course) and Aganga announced at the time that it was only encouraging corruption so the ban was to be replaced by tariffs.

Goodluck Jonathan continued with the Textile Development Fund and as at February 2013, 38 companies had benefited from the fund saving a massive 8,000 jobs and creating 5,000 new ones as a result. By the end of last year, the fund had disbursed N60bn in total and had even been renamed National Cotton Textile and Garment Policy (Aganga likes calling things ‘policy’). Of course, the military and government agencies were ‘directed’ to purchase made in Nigeria fabric as usual. Naturally, those who managed to benefit from the loan hailed the policy as the best thing to happen to textile in Nigeria, ever.

[As an aside, I often wonder how come an industry that has collapsed and isn’t producing anything still manages to have an association or something. What do they do in the meantime while waiting for government to bail them out?]

***

This is all very sad indeed. The funds have apparently been converted into equity by the government which means the industry does not have to worry too much about crippling interest rates. Yet, N60bn has been thrown at the problem to save 8,000 jobs.

The first and obvious lesson here is that prevention is better than cure – one shouldn’t really wait for an industry to die before then attempting to ‘revive’ it. Once those jobs go, bringing them back is very hard even when you have the sharpest policy makers running things (we don’t). No serious country should allow a guy like Mangal lay waste to a whole industry and livelihoods without so much as a response. Of all the things that damaged the textile industry, Mangal was almost certainly the easiest to deal with – just make it uneconomical for him to ship stuff halfway around the world and still make a profit.

Everything has now been tried – banning, unbanning, intervention funds, tariffs, mandating government purchase – without much success.

If the aim of what China and Norway have been doing is to stop their currencies from appreciating, then it becomes fairly obvious that keeping manufacturing competitive in Nigeria is as much a monetary policy issue as it is a fiscal policy one. What to do becomes fairly obvious.

But me I don’t want you people’s wahala so it is not from my mouth you will hear that the Naira needs to be deva…oh look at this big red elephant!

FF

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When CBN Closes A Window….

There’s no punchline. Sorry.

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

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

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

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

So we go to the press release from today.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FF

 

Stealing And Corruption (Book Recommendation)

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

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

 

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

Or is it stealing?

FF