IDEAs 23rd June 2023
Bismarck Rewane on IDEAs issues in Subsidy Removal and Naira Convergence
Sandra introduced Ayo who intimated her that today’s was the penultimate broadcast of IDEAs Radio.
The guest, Bismarck Rewane, was greeted by Ayo who went on to say that the new administration of President Bola Tinubu had been getting praised for its policies such as floating the Naira and removing the fuel subsidy, but that most of that praise was coming from outside the country. Even though most people inside Nigeria agreed that these policies needed to be implemented, there was real concern about the impact on people. She wanted to talk about what those policies mean in IDEAs terms, explaining that Bismarck is not only the Managing Director and Chief Executive Officer of Financial Derivatives, he is also an economist and a banker who was a member of President Buhari’s Economic Advisory Council from 2019, and therefore had an idea of the policies in question, their impact, and why Nigeria had not been able to deal with that impact as regards people who were trying to do the honest thing, because it now seemed as though by increasing these prices, the Government had surrendered to those who could not behave with Integrity.
Bismarck said that it was important to know that economic policy is designed not only to alter people’s behaviour, but also to influence economic outcomes and the general performance of the economy. There would be short- and medium-term outcomes, and long-term performance issues. The announcement of the scrapping of multiple exchange rates coupled with a sharp reduction in the subsidies had a direct impact on Nigerians as the beneficiaries or targets of those policies. The international community is observing these changes because they have a stake in the Nigerian economy. As a result of the convergence of exchange rates, the naira that had been trading at N467 now traded as high as N730 and up to N775. The question is what is the fair value …
Ayo interjected that the issue was less what the right value of the Naira was, and more why we had those multiple exchange rates in the first place, because although Bismarck had said that the naira had gone from N467 to over N700, in reality, only a few people were able to get their naira at the N467 rate, and everybody else had to pay that rate of over N700. She asked why everybody had not been able to get their naira at the N467 rate?
Bismarck explained that that was due to a Price Discriminatory Monopoly where the one who has the supply determines to whom he will sell at the favourable rate, while everybody else would have to get their naira at market rate. He agreed that most Nigerians were getting their foreign exchange at the parallel market rate, while a few in an exclusive club were getting their naira at the ‘discounted rate’. Those few people were the Federal Government of Nigeria, people who went on hajj or pilgrimage, and a few people who were able to get the personal travel allowance. The bulk of those who got at the favourable rate sold it back into the market and made a spread for themselves. But that foreign exchange regime was not sustainable, and it was only a matter of time before we ran into a crisis.
In response to Ayo’s question of whether it wasn’t sustainable because those who got the naira at the favourable rate did not behave with Integrity, Bismarck said that that was a given, because if they got the naira at N460 and sold it into the market at N700, they made a spread and got a commission. It was not sustainable because it meant that the people who got the naira at N460 had an interest in making sure that the naira depreciated as much as possible so that they could get more from their arbitrage activities. Listeners should understand that everybody knew that.
So the question is: What next? Because the issue is why there was a difference in the rate, and why are we now getting accolades from those who are outside Nigeria, but not from those who are inside the country? Bismarck said that the market structure now allows many more participants, and with all the domiciliary account rationing and restrictions removed, generally speaking there should be an increase in supply. Thirdly, the actual supply of dollars into the market has not been increased, so what we have been doing is tinkering at the edges. He noted that the current situation was that when the official rate was pegged at N815 to a dollar, the parallel market rate was N775, so it made more sense to buy in the parallel market and sell to the Federal Government! That forced the Central Bank to bring its official rate down towards N775. He said that that is how markets operate, and that in economics, it is known as the cobweb theorem – you fix a price, overshoot, and then the price comes down, in a zig-zag movement.
Foreigners are happy because we know that Nigeria has to go and negotiate a rescheduling of its international debt, and one of the conditions for that will be taking measures like removing the subsidies, allowing the exchange rates to unify, and increasing interest rates, as Turkey has just done. When that happens, things will begin to improve, and the inflation rate will start to come down from 24/25% to 21, 20%, 18%.
Ayo said that that was what Nigerians hoped for, and Bismarck said that that was what going to happen. However, Ayo continued, we have also seen the same thing in relation to our petrol prices. The Government was subsidizing petrol, and it now seems as though a third of what we were producing or selling in Nigeria at the subsidized rate was being smuggled out of the country. So it looks as though because the Government could not control the behaviour of those who were ‘smuggling’ (if that word which suggested clandestine activity could properly describe a situation where several huge tankers full of petrol openly crossed the borders into neighbouring countries), because Government could not control that, the ordinary people are being made to pay for its default in enforcing standards of Integrity.
Bismarck said that this was saying the obvious, but the question had to be asked why those who were smuggling could not be brought to book? Ironically, the reality was that those who were benefiting from the situation were the same people who had the wherewithal to ensure that they got into government. Ayo said that this raised the question of why we should have such policies if we knew that people were not going to behave in an Ethical manner, and that it also raised the question of whether anybody was going to be held Accountable for the failure of those policies.
Bismarck said that that that structure had now been dismantled, and that removed the incentive to move money from one market to another. Thus, things would start to get better, because the deviation was no longer there for people to make N300 on every dollar they got at official rates. Gradually and slowly, we will begin to see an improvement, but in the meantime, there would be a lot of economic pain for the ordinary man.
Ayo said that that was the point: the ordinary man would want to know that if he was going through this pain with regard to the price of petrol and so on, and the reason why government hasn’t been able to maintain the price because a third of it is being openly taken into our neighbouring countries (where the price of petrol has gone up because they no longer have recourse to cheap smuggled Nigerian petrol) that somebody was being be held accountable for these failures of government.
Bismarck said once you have a policy change, it must be backed up by institutional reform. The institutions that must implement the policy changes cannot be reformed without holding people Accountable for what they did in the past, and it must be obvious to the public that this is what has happened. Nigeria is at that point now where we have announced the policy change; at that point where we have to reform the institutions responsible for implementing it; and at that point where we have to hold people Accountable for the misdeeds of the past. You either do that, or you say: “All of you go and sin no more: we are starting on a new slate.” But, he continued, these are very trying times for the people, ordinary Nigerians are bearing the brunt of the change, for example, in Lagos where the price of petrol just today has increased to N497 per litre.
Ayo said that it was indeed very trying for most people, and that even though seeing wrongdoers held Accountable might not in itself bring immediate relief, it would perhaps serve as a warning to those who might want to game any future system, especially in regard to the promised palliatives, because in the past for example, in measures to reduce unemployment, we had seen cases of people getting the jobs and then splitting the payment with another person who would actually do the work. Recalling Bismarck’s statement that economic policies were designed to change human behaviour, Ayo asked whether he thought we were getting there?
Bismark’s reply was an emphatic No! He said that we are not getting to that kind of change any time soon, and that at times we get counterproductive outcomes. Therefore, for now, the effectiveness of the policies depends on the resoluteness of the powers-that-be to stop this bad behaviour. But they could not do that effectively if they themselves were condoning or practising it.
Bismarck ended by saying that Nigeria is now at a point of inflection where everybody must have to observe very closely the total impact of the policies and the genuineness of those who are talking about change.
What do you think about these measures: is government punishing everybody with high prices because it cannot or will not punish those who are actually at fault? Is the demand to hold people Accountable merely wanting to see wrongdoers suffer as well, or will it have an effect on future would-be wrongdoers? Why not post your views, or join the discussion below?