Can a new Buharinomics save Nigeria?

The timing of this lecture is auspicious—coming in the 6th month after the inauguration of a new administration, and also with a new federal cabinet now in place. Before the government rolls out its full agenda, this is a good time to begin our citizen duty of joining the ever continuous discourse on the economy. […]

The timing of this lecture is auspicious—coming in the 6th month after the inauguration of a new administration, and also with a new federal cabinet now in place. Before the government rolls out its full agenda, this is a good time to begin our citizen duty of joining the ever continuous discourse on the economy. Our focus for now shall be pre-emptive and provocative— to challenge the Buhari/APC regime not only to demonstrate that it can manage the economy better than the PDP but also that it can lay the foundation for sustainably shared prosperity in a post-oil economy.
Every team serious about ‘change’ starts with a clear identification of the baseline from which it measures deviations/progress. Nigeria has had 16 uninterrupted years of democracy with the PDP controlling the federal government as well as majority of the states. APC is now in charge at both the centre and majority of the states. A minimum standard for measuring ‘change’ is the extent to which APC government beats the record of the PDP in measurable terms. As the saying goes, if you can’t measure it, you can’t improve/change it! Government must strengthen the National Bureau of Statistics (NBS) and preserve its independence to produce and publish credible national statistics. It needs serious funding.
Since it is the practice to blame PDP for every ill that befell our country in the last 16 years (and there are many of them) it is also fair to credit them with the positive ones. According to data from NBS, one outstanding legacy of the PDP is that in 16 years it held sway, it more than doubled the GDP of Nigeria (indeed with average year-on-year GDP growth rate in excess of 6% over the past 12 years, the GDP actually doubled within the last 12 years. It met average annual growth rate of about 2% and raised it to 6-7%, led by the non-oil sector. Yes, non-oil sector, and the “diversification” reported in the recently re-based GDP happened within the last 16 years. Will the economy more than double in the next 12 years under the APC? For me, if only the APC can double the size of GDP from about $550 billion to $1.1 trillion in 12 -16 years, and further half the poverty index, Nigeria will indeed be on course to be one of the largest 10 economies in the world by the end of this century.
Nigeria desperately needs the moral force/Spartan discipline and leadership of PMB at this time to fight corruption, terrorism, and hopefully begin to reconstruct the values of a people gone astray. On the economy, it is not going to be an easy transition for PMB. Igbos have a proverb that one does not learn to use the left hand at old age, but my prayer is that for the sake of Nigeria, he would have to do so and quickly too. Many great world leaders have had to undergo this personal transformation to adapt and exploit the levers provided by how the real world economy actually works in order to prosper their people. The former socialist/communist regimes of China and Russia are making tremendous progress on the move to competitive market economies.
When PMB first came to power in 1984-85, the nation was as well in crisis. He did so much within the short time especially on anti-corruption and restoration of national discipline. He inherited a command and control economic policy regime and deepened it (capital, exchange, and price controls; import licensing; indiscriminate ban on imports, rationing of essential commodities; government ownership and control of so-called ‘commanding heights of the economy’—banks and insurance, telecommunications, airline, refineries, roads and transport, even manufacturing companies, etc). I recall that it was something like a criminal offence then to be in possession of foreign currency. Exchange rate, interest rate, petrol price and several other prices were largely fixed.
Since 1986, Nigerian economy has changed a lot and my reading is that there is a broad consensus on continuing progress towards a competitive (probably also compassionate) market economy framework.  From the snippets of policy since the new government came, there is a growing perception of nostalgia, reminiscing of the ‘old good days’ pre-1986.  There seems to be a growing tension between a tendency to return to the past versus a progressive match to the future. I am not sure how the new wine will fit into the old bottle.
The treasury single account (TSA) is a great initiative, and I congratulate PMB for that. However, we don’t have to return to the past of having every penny of government largely redundant in the central bank. For an economy desperately in need of stimulation, piling up idle cash at the CBN is not sound economics. We should deploy technology and transparent rules to implement a hub and spoke model of TSA whereby CBN is the hub while the commercial banks remain the spoke.
For the better part of this year, the external shocks to the economy have been complicated or accentuated by a gamut of the “tried and failed” command and control policy regime: de facto fixed exchange rate, largely fixed CBN monetary policy rate, crude capital controls, veiled form of import bans through a long list of ‘ineligible for foreign exchange’, de facto scrapping of domiciliary account established by law, etc.
The issue basically is how a small, open economy such as ours responds to (ever continuous) shocks in today’s world. In the specific case of Nigeria currently buffeted by a terms of trade shock, with macro imbalances (especially fiscal and current account deficits) as well as supply side constraints, and with the economy skidding to a halt with rising inflation and unemployment, how should relative prices or asset prices (including exchange rate and interest rate) adjust to reflect as well as shape the economic fundamentals? External shocks do not kill an economy: the choice of specific policy regime is what can lessen or worsen the effects of the shock. How policymakers respond depends on the source of the shock (nominal/monetary vs. terms of trade/real sector shock). If you do not allow relative prices to adjust when faced by a terms of trade/real sector shocks, then you put the full burden of adjustment on real variables or quantities (especially output and employment)— and they will adjust with vengeance because you cannot fix price and quantity.
Policy choices entail costs and benefits, but the preference of one to another should be based on the “net positive effects”, depending on the stated objectives. To sustain the current arbitrarily pegged exchange rate will require a steep rise in interest rate and squeezing of bank credit to the private sector. Alternatively, intensifying the ever opaque and distorting controls and ‘bans’ will also severely harm the private sector. Every economy is ‘controlled’ in one way or the other. The question is what kind of controls or regulations can be implemented to address observed market failures that will be credible, transparent, and without distorting or perverting the incentive structure so that we can have sustainably shared prosperity. Uncertainties about what will be in the ‘black-list’ tomorrow or next hurt capital flows, while the retroactive ‘bans’ on pre-existing commitments by banks and producers damage the economy. I support sensible regulations on cash transactions that prevent money laundering but not ones that obstruct the payment system.
A worrying aspect of the public discourse on exchange rate is the obsession with the level of nominal exchange rate rather than the real effective exchange rate (REER) or volatility of exchange rate. The question that matters most is whether the currency is overvalued or undervalued in real terms. Government has not shown that N196 per dollar as fixed for months now is the rate that maintains a target competitive real exchange rate.  Let me make another strong statement: no developing country has diversified its economy in the last 40 years or so, especially into competitive manufacturing with an overvalued REER over an extended period of time.
When it suits us, we cite examples of the East Asian countries and the newly industrializing economies, but conveniently ignore their real exchange rate strategy. Even the Communist Party in China knows better. Indeed, China and several Asian countries deliberately keep a weak currency (in real terms) as instrument to protect their economies from cheap imports, thereby creating a productive base for the exports in the future. In Nigeria, the logic is going in the reverse. Oil has indeed been a curse!
Going by the logic of the ‘bans’, why should Nigeria allocate forex for school fees, medicals and mortgage abroad when we have thousands of schools and hundreds of universities; hospitals etc?  So, why not ‘ban’ school fees and medical fees as a way of forcing the elite to patronize our local schools and hospitals? What about mortgages abroad? These three items also cost billions of dollars per annum. We won’t ‘ban’ them because they are goods consumed by the powerful elite and policymakers. That is the problem with this kind of opaque policy regime. So, where do we stop, and who determines the list? This policy is creating instant briefcase millionaires while businesses especially SMEs are dying!
Government needs to clarify the confusion on its policy regime: is exchange rate an objective, or an instrument or simply a price? Sometimes, you hear officials explaining the ‘agenda to strengthen the Naira’— does this mean we are going into exchange rate targeting? Are we going to target the level of the nominal rate (and what is the target rate? how do we pick the rate to target)? More specifically, how did we determine that N196 is the ‘appropriate’ level?  Why not: N1 or N50 or N140 or N200 or N230, etc?
IV:  Towards a “New” Buharinomics
At the end of this century, Nigeria is projected to be the country with the highest gain in its population (close to one billion and third most populous country) and has the potentials to become one of the largest 10 economies in the world. But it could also unravel. The time is now, and the choice is ours. Again, history beckons on PMB— as the president who came “at the wrong time” according to him but one who seized the opportunity to make history. This year, 2015, is the first year of our second 100 years as a country, and fortuitously Nigerians chose a new leadership this same year – APC/PMB– to lead the charge. The challenge is whether the ‘change’ will be fundamental and as the title of a book suggests, ‘built to last’ or will be merely tinkering at the margins.  
Nigerians and the world are waiting for the big ideas (Agenda) that will drive this change. The APC/PMB leadership comes with two unique opportunities or challenges depending on how one sees them: first, from all prognosis of the future of oil, this government has the chance to lay the foundation for a post-oil economy. This won’t be a coffee party, and requires bold (out of the box) ideas with execution precision. Second, it will be the first government challenged to embark upon disruptive economic change but without the external agencies of coercion and reward.
For me, the ‘mistake’ to correct is to abandon or reform the ‘old Buharinomics’ of command and control economic system. Times have changed, and Nigerian economy is different. Every leader in the world is also adapting to the changing world. Countries such as India, China, Russia, etc are fast learners and trying to beat everyone to the ‘game’. We must pragmatically play this ‘game’.
The castle of the new Buharinomics cannot be built in the air. There is a proverb that one must first secure the ground before struggling for the mat. Unfortunately, the ground on which we hope to construct our 100 storey building of hope is shaky and shifting. Nigeria is at war with itself, and is currently on the ‘High Alert’ list of Failed/Fragile States.
Nigeria has come a long way in developing a market economy and still has a long way to go. If it is not broken, don’t mend it! The ‘new’ Buharinomics must resist the temptation of most new governments to think that their mandate is to discredit and replace everything they met. Reducing uncertainties and cost of doing business as well as maintaining macroeconomic stability remain critical first steps. We must avoid ‘state overload’. In a regime of weak institutions, entrusting the bureaucracy with excessive discretion to pick winners is a breeding ground for corruption and crony capitalism.
The new Buharinomics must articulate the five big ideas/programmes to drive the vehicle of change. Where are the iroko trees of the change mantra? Let me suggest that one of them should be a national emergency action on industrialization. Nigeria’s urbanization rate at 5.2% per annum is one of the highest in the world, and with a rapidly growing population and millions entering the labour market every year, creating value-adding jobs for these clustering urbanites will be a fundamental challenge. We must maximize the potentials of every sector in job creation including the hitherto dormant solid minerals sector and then accelerate the transformation of agriculture. But the overarching emphasis of the APC manifesto on solid minerals and agriculture as its own ‘new economy’ is misplaced. An Igbo proverb says that a person who sells a dog and buys a cat still has a squatting animal in his house. Oil, agriculture, and solid minerals are all primary commodities subject to extreme volatility. If job creation is the central objective, both sectors won’t deliver much over the medium term. Indeed, as we modernize agriculture and its productivity rises, total employment in the sector declines. Manufacturing and services remain the key for the future.
At the heart of the new Buharinomics should be an exchange rate strategy that avoids the great mistake of the past. The market for nominal exchange rate in Nigeria is an imperfect market given the position of government as dominant supplier of forex in most cases. Thus, a ‘market determined exchange rate’ in the circumstance is both an art and a science. It requires a great deal of skill to get it right.  The objective however is to have a stable (not fixed) nominal exchange rate that avoids an overvalued real exchange rate. We must have a path of REER to target, and skilfully manage the evolution of the nominal exchange rate to maintain a competitive real exchange rate.
It is in the light of the above that I believe that the current debate on exchange rate is the wrong debate. The de facto fixture of the exchange rate at N196 is a great mistake.
Let us conclude. A fundamental challenge to the APC/PMB team is that their’s is an agenda with a deadline. It has basically three annual budgets and no more than 7,000 hours (if it works 8 hours a day) for Nigerians to SEE the change. As the saying goes, you don’t have a second chance to create a first impression. It is going to be a thankless job as no one gets applause for managing an economy in a crisis. But that is what Nigerians employed them to do. Some elected officials make the mistake of postponing fundamental changes until their second term. It backfires often. My advice is to install all the pillars of the disruptive change in the first year and do all the battles and bargaining with relevant interest groups. If the change is a credible one, by the third year, the pain might have turned into gain. With the full team in place now, we must now turn the page from the Book of Lamentations, and give the people hope that soon, they will start singing from the Psalms of David. For the rest of us, we can only work, watch, and pray that the new Buharinomics can indeed usher the change that Nigeria needs.
Soludo, former Governor of the Central Bank of Nigeria, is of African Heritage Institution (AfriHeritage), Enugu. He spoke at the 3rd Anniversary lecture of the RealNews magazine in Lagos. 19th November, 2015. See complete presentation on www.dailytrust.com.ng