Introduction
In the last week, there was a big match between the World Bank team captained by the President, Mr. David Malpass and Nigeria captained by the Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed ably assisted by the Central Bank of Nigeria (CBN) Governor Godwin Emiefele. Venue was the Bank’s headquarters in Washington DC during the World Bank/International Monetary Fund (WB/IMF) Spring Meetings. This column reviews the match and gives its verdict.
FIRST HALF
The World Bank fired the first shot by urging Nigeria’s federal government to reconsider its policy on fuel subsidy, saying that the huge amount being expended on the policy could be channelled to other critical sectors. The Bank described fuel subsidy as a major drain and waste on the economy and sounded the alarm bells that the federal and state governments may be unable to pay salaries from 2022. The Bank concluded that petrol subsidies as currently operated are benefiting the rich more than the poor therefore subsidies either for food or for fuel if it must exist should be carefully targeted at those most in need of it.
Nigeria’s Minister for Finance, Budget and National Planning moved to defend the shot fired by the WB/IMF by excusing the rise in prices of oil due to the war in Ukraine as the catalyst that has pushed up the expenditure on fuel subsidies and thrown the country’s budget deficit into crisis levels. But the Minister was insistent that despite the huge spiralling budget deficit, Nigeria does not have a debt crisis but only a revenue issue.
VERDICT
Nigeria is going about subsidies on petrol, foreign exchange and electricity the wrong way. Subsidies are more effective when they are applied to production, but Nigeria is applying subsidies to consumption which is further worsening the economic crisis instead of solving it. That the Federal Government (FG) plans to spend N4trn on petrol subsidies in a single year which is half of the cost of Dangote’s refinery is clear evidence of disarray in government policy on subsidies. That FG’s revenue for 2021 was N5.5trn and government plans to spend over 80% of that on petrol subsidies alone is insane! The budget deficit in 2022 of 7.35trn has subsidy taking more than 50%. In the few months that there was petrol scarcity, most retail outlets dispensed petrol at prices ranging from N200-400 but the Armageddon the FG says will take place if subsidies are removed did not happen! The economy held on with full resilience. Removal of subsidies will sure result in short term pains but the long-term benefits will far outweigh the pains. The FG has shown a total lack of courage to confront the criminal enterprise arising from petrol subsidies where the quantities of petrol imported upon which subsidies are paid are shrouded in secrecy and the security establishment feigns inability to police the borders to stop subsidised petrol from being smuggled across the borders to fuel the economies of the entire west African subregion. Given that the APC government promised a removal of subsidy which they described as non-existent during the electioneering campaigns leading to the 2015 elections, the government has broken the social contract entered into with Nigerians upon which the APC was voted into office!
SCORE: WB/IMF 1 – Nigeria 0
SECOND HALF
The World Bank fired the second shot by calling on Nigeria to do away with multiple exchange rate system, which the Bank said are complicated and not as effective as it would be if there were a single exchange rate. The Bank further said that the most useful thing for developing countries is to have a single exchange rate that is market-based, that is stable over long periods of time as that attracts investments.
Nigeria through the CBN attempted to defend and deflect the shot fired by the WB/IMF. He foreclosed the possibility of adopting a clean float foreign exchange management system as long as the supply shock remains. The CBN further maintained it would continue with a managed float approach, as Nigeria cannot afford to abandon the local currency to the vagaries of market forces because doing that will result in uncontrollable spiral on the naira which they currently control with managed float.
VERDICT
If the CBN is holding firm to the managed foreign exchange market to support the productive sector of the economy, it will have positive impact on the economy. But the CBN Governor is subsidising consumption by dolling out foreign exchange for payment of foreign school fees, holidays, mortgages, medical tourism etc and these services have very high-quality local alternatives of comparable international standards. It therefore amounts to doublespeak for the CBN Governor to be defending a managed float when it is not being used to boost productive economic activities in Nigeria but rather used to fund foreign schools, tourist sites, housing industry and medical sectors. On the other hand, the CBN is setting Monetary Policy Rate (MPR) at double digits thereby making credit unaffordable to local businesses. Cheap credit will boost local production of goods and services which the CBN is currently issuing foreign exchange to import. The CBN has therefore created a dual market with no control over the racketeering, rent seeking and arbitrage that is resultant. At this point the CBN needed to consider what is more painful, float the rate or lose billions through the sharp practices of rent seekers taking advantage of the dual market and common-sense would dictate that the former is less painful!
SCORE: WB/IMF 1 – Nigeria 0
Conclusion
The Match ended WB/IMF 2 – Nigeria 0.
The government of President Muhammadu Buhari have no economic policy to deal with the twin devils of petrol subsidy and exchange rate. There is no use advising the government which for 7 years have played deaf ears to all advice. The focus therefore is for the incoming government in 2023 to fundamentally deal with the twin evils once and for all.
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