Policies to leave behind in 2016
2016 was a rough year for Nigeria’s economy. The first official recession in over two decades was confirmed with no end in sight. Inflation continued it relentless march rising from under 10 percent year on year in January 2016 to over 18 percent as at November. The story there was inflation was driven by the one-time increases to fuel and electricity prices, although the increases do not appear to be over. Unemployment also continued trending upwards with youth unemployment hitting almost 50 percent in the third quarter. All the statistics translated into a very tough year for Nigerians. As we settle into a new year, it is time to reflect on policy mistakes that were made and those that should be left in the dustbins of 2016. The essence of the piece is not to point fingers but to strategize for a better policy environment in 2017.
The foreign exchange program.
If you had to pick one policy mistake made in 2016, it was the foreign exchange program. I call it a program because it really could not be called a market. The first part of the year started with the decision to peg the exchange rate at N199 per dollar. A decision that most economists, both locally and internationally, argued was unwise. Faced with a collapse of the price of its major export, crude oil, the worst thing to do was to try to fix the exchange rate. Yet that was what we did, and by the end of June we were officially in recession.
In July, we thought the Central Bank (backed by the Presidency) had learned the folly of the policy. We all hailed the introduction of what was supposed to be the new “floating” foreign exchange policy. A policy that was supposed to finally free the foreign exchange market from the choke hold of government. Unfortunately, that turned out to be a pipe dream. The foreign exchange market turned into a currency peg on steroids. Gestapo tactics were used to manipulate prices with the DSS even sent to force dealers to sell at approved rates. The result was a foreign exchange program with multiple rates in multiple markets and confusion across the board, and unexpectedly the currency slide continued.
At black market rates the naira is the worst performing currency in the world in 2016, after Venezuela.
As we are set to learn the hard way, the economy cannot recover to its prior heights without freedom in the foreign exchange market. Money and foreign exchange is the engine oil of the economy and without it the engine knocks. The rate itself is secondary to the market itself. If there is one policy that should be thrown in the dustbins of 2016 it is the policy to destroy the market. No market no economy.
Self-sufficiency and hostility to trade.
If the foreign exchange market is the engine oil of the economy, then trade is the engine. Trade underpins much of any economy activity and subsequent improvements in standards of living. Individuals exchanging stuff they have for stuff they want. Businesses exchanging stuff they have for stuff they want. Countries exchanging stuff they have for stuff they want. This exchange of goods and services is the economy.
Unfortunately, this government appears to be opposed to trade, at least internationally. If you had to pick one policy slogan for 2016 self-sufficiency would be it. “We are aiming for self-sufficiency in rice by 2017.” “We are aiming for self-sufficiency in tomato paste by 2016.” “We are aiming for self-sufficiency in toothpicks.” The reality is that self-sufficiency in anything is almost impossible unless you are planning to be poor. This is true for individuals, companies, and countries. It is also true for rich countries, poor countries, Asian countries, and African countries.
The self-sufficiency policy has led the government to create all sorts of hostile environments around import of everything from rice to palm oil. Not fuel though, despite it being the single largest imported item. Ironic eh. The policy is one that also needs to be left in the dustbins of 2016 as it does nothing but keep Nigerians in poverty.
Price fixing and the fuel subsidy, again.
The final policy that needs to be left in 2016 is the fuel subsidy. I know. You thought we had learned out lessons and had scrapped the policy. Unfortunately, the truth is not that simple. We did in fact scrap the fuel subsidy but retained the price fixing policy. The realities in the crude oil and foreign exchange market have made the N145 per litre price unsustainable and the fuel subsidy has been tactically reintroduced, except in a less transparent manner. The problems with the fuel subsidy need no explanation as we all know how that story typically ends. The price fixing policy is one that also needs to left in the dustbins of 2016.As the saying goes, “those that do not learn from their history are doomed to repeat it”. Hopefully we learn from the policy mistakes of 2016 and do not repeat them in 2017.
Nonso Obikili is an economist currently roaming somewhere between Nigeria and South Africa and tweets @nonso2. The opinions expressed in this article are the author’s and do not reflect the views of his employers.