Devaluation alone will not unify Nigeria’s forex system

The massive devaluation of the naira in June 2023 is a positive move, but it won’t be enough to fulfil the new administration’s goal of unifying Nigeria’s foreign exchange system.

The devaluation was substantial, yet it may not produce a fundamental reform of the system. The current Investors & Exporters window was initially proposed to operate based on market-determined exchange rates. This is what the CBN asserted when it introduced the system in April 2017.

What changed this week was that the CBN allowed market forces to prevail, instead of its prior practice of controlling exchange rates, even though the system was meant to be based on willing buyer, willing seller principle.

The I&E window was not the first time the CBN attempted to liberalise the system. In June 2016 the bank supposedly floated the Naira when it launched what was said to be a market-determined interbank foreign exchange market. The naira was devalued to match the parallel market. For a while, the currency was even weaker in the official market than in the black market.

Both times the CBN devalued the naira and promised free market rates, it soon reverted to pegging the currency.

To achieve a unified and stable exchange rates regime the government and CBN must abandon the long-held myth of a strong naira and the belief that the state should channel subsidised forex to certain economic sectors. They should also scrap capital controls, including bans on certain imports, that restrict entry into the official market and drive individuals and organisations to the black market.

It is also crucial that policymakers understand why under market forces the Naira constantly depreciates. The most important factor has been the excessive growth in the money supply in the economy, largely driven by money printing to finance government deficit spending.

Forget oil. Forget taxation. Debt pays Nigeria's bills

 By Tunde Obadina

An enduring myth concerning public finances in Nigeria is that government operations are paid for by the nation's citizens, chiefly the wealthy. Flowing from this is the belief that some social and economic groups sustain the federation.  For instance, many people assume that the government needs oil income to pay its bills and that without the lucrative liquid gold, the public sector would be in deep trouble.

The reality is quite different. Government revenue only partially covers public expenditure. The contribution of taxpayers to the national coffers is minor and dispensable. Data recently published by the finance ministry show that 61% of the federal government's expenditure in 2020 was financed by borrowing from the capital markets and money created by the Central Bank of Nigeria (CBN). Abuja spent N10.1trn, more than double its N3.9trn revenue.

The idea that petroleum lubricates the state machinery is increasingly a fallacy. Oil-related revenue made up only 42.3% of the federal government's income and accounted for a mere 16.5% of spending. Nonetheless, oil's role did loom large compared to the contribution of the rest of the economy. Non-oil revenue accounted for a paltry 12.7% of federal spending in 2020.

The reality is that the Nigerian state's survival, both federal and sub-national, is increasingly dependent on creditors and central bank financing rather than taxpayers or oil revenue. Consider that the share of debt service payments of the federal government's income last year was a staggering 83%. Revenue remaining after interest payments covered only a quarter of the bureaucracy's personnel costs or a little more than a third of capital expenditure. Put another way, after satisfying creditors, which is necessary to keep on borrowing, what revenue remained was insufficient to implement just the defence budget.

Abuja is not alone in relying on debt. State and local administrations also generate little of what they spend. The combined expenditures of all three tiers of government were twice their aggregate income in 2020. When politicians promise or citizens demand more public goods, such as schools, hospitals and roads, and security, they seek to grow the national debt. The same goes for labour unions demanding public sector pay rises.

Proponents of Modern Monetary Theory (MMT) argue that fiat currency-issuing governments need not worry about running large deficits. Fiat money is a currency issued by a government that is not backed by any commodity and has no intrinsic value other than being supported by the state. Debt is not a problem for currency issuers as they can create as much money as needed to repay their obligations. There is no risk of default.

Indeed, MMT advocates believe such governments need not borrow as they can print all the money they want, that is, as long as it doesn't fuel inflation. In recent months, western governments have created colossal sums of money to support their Covid-19 devastated economies that make Abuja's debt financing seem trifling. Technically, as the naira currency issuer, Abuja could obtain enough money from the local capital market and the CBN to not tax any citizen.

Before asking the CBN to rev up its money-making machine, consider two differences between Nigeria and financially sovereign nations in Europe and the United States. Firstly, these highly indebted rich-nation governments borrow only in their currencies, whereas about 40% of Nigeria's debt is foreign. Unlike its naira loans, Abuja cannot settle foreign debts by the central bank digitally adjusting its balance sheet. Secondly, growth in money creation in the west has not triggered inflation. Consumer demand has not risen much, and their economies are sufficiently robust to absorb new spending.

In contrast, deficit spending in Nigeria has helped fuel inflation and weakened the naira. Its low productivity economy cannot supply goods and services to soak up new spending. Furthermore, government policies that restrict imports of goods and drive up local production costs limit supplies, driving up prices.  

Inflation, especially foodstuffs, harms low-income households. It traps them in poverty. By eroding their meagre incomes and other assets' purchasing power, inflation prevents poor people accumulating capital to improve their economic opportunities. They are unable to grow into prosperity, only struggle to survive on an inflation propelled treadmill.

While the poor suffer, the political elites feast on debt. Politicians and highly placed bureaucrats enjoy first-world lifestyles financed by public debt and central bank money printing. Meanwhile, middle and upper-income households consume cheap energy and other facilities subsidised by the government with borrowed money.

MMT assertion that currency-issuing governments do not need tax revenue to spend applies to the Nigerian state, even though it is not fully financially sovereign. With little prospect of substantial increases in tax collection in Nigeria's recession-crippled economy, Abuja will likely resort more and more to debt and money creation to pay its bills.

Deficits are not necessarily bad. The problem in Nigeria and many other indebted underdeveloped countries is that the borrowed and created money are used to fund a bureaucracy that hampers real economic growth. The evitable outcome is worsening inflation and impoverishment of the low-income earners.

The folly of Critical Race Theory

Wealth, not race is the prime determinant of inequality in the West

By Tunde Obadina

Much has been said and written in recent months about racial inequality. The loudest voices have been those who say western societies are endemically racist. They contend that centuries of white privilege and institutional racism have solidified race inequality, maintaining the structural subordination of black people to whites. This controversial view implies that blacks are socially and economically inferior to whites.

For centuries proponents of racial ideology can be divided into two schools. Firstly, those who argue that Africans and their descendants are naturally inferior because of biology or the curse of God. And secondly, those who maintain that black inferiority is the consequence of material conditions — though born equal blacks have been rendered lesser beings by their environment and upbring.

Whiteness is a dangerous fallacy

 Anti-racists who define the values of hard work and productivity as exclusively “white” are doing us no favours.

By Tunde Obadina

The Smithsonian National Museum for African American History and Culture in the United State created a stir after it published in March 2020 a chart depicting the features and assumptions of whiteness. The diagram displayed the museum’s rendering of the attributes of “white dominate culture, or whiteness.” It included “hard work is key to success”, “cause and effect relationships”, “self-reliance”, “heavy value on ownership of goods”, “work before play,” and “objective, rational linear thinking”.

The chart was supposed to be an anti-racism guideline for talking about race. But in declaring hard work, delayed gratification, rugged individualism, and emphasis on the scientific method as white values the museum displayed racism that is as obnoxious and damaging as anything professed by white supremacists. In July 2020, after criticism, the mainly black run and partly public-funded museum removed the chart from its website and apologised for publishing it.

The museum’s depiction of whiteness implied that black people are lacking the characteristics needed for wealth creation and material prosperity. Teaching black children that hard work, delayed gratification, self-reliance, and reason are white qualities is to seek to condemn them to failure in a capitalist society. Such sentiments may be applauded by opponents of economic development but do nothing to advance the cause of black people.

The myth of human capital shortage in Africa

 People with knowledge and skills are being wasted

By Tunde Obadina

It is a common belief that the prevalence of extreme poverty in Africa stems from shortages in skilled manpower needed to spearhead rapid economic growth. This notion has led international development institutions to advise African governments to invest more in human capital development. But are African nations impeded by lack of qualified manpower? The answer is no.

Take Nigeria as an example. University educated Nigerians are more likely to be unemployed than the average citizen in the country. According to the Nigerian government employment data, 28% of workers with university first-degree qualifications were unemployed in the second quarter of 2020, compared 15% with only secondary school education and 5% who never attended school. Nearly a fifth of master’s degree holders was jobless, while a quarter of those with a doctorate was underemployed. Overall, more than half of workers with higher education qualifications were jobless or underemployed.

This employment situation suggests Nigeria’s economic underdevelopment does not stem from a deficiency in knowledge and skills in the workforce. What we see is an over-supply of college-educated people, including doctors, engineers, and teachers.

Who’s afraid of China’s loans to Africa?

 By Tunde Obadina

China’s growing economic relationship with African countries has received much negative media coverage in recent years. Critics of the fast-rising Asian economic superpower present the Chinese state as the new imperialist threat to Africa. As did yesterday’s European colonisers, China is today seeking to capture Africa’s vast natural resources and exploit its labour-force for the aggrandisement of the world’s most populous nation, so say the critics.

A strategy purportedly being deviously used by Beijing to capture African resources is debt. Critics see China as offering cheap loans to African governments, hoping they will default on repayment, enabling the Asian giant to gobble up assets used as collateral. China’s Belt and Road Initiative, a global infrastructure development strategy, is described by the critics as a debt-trap diplomacy, part of a campaign for global hegemony.

Concerns over the safety of Nigeria’s struggling economy in the face of the envisaged encroaching dragon led the country’s House of Representatives in May to launch an investigation into all China-Nigeria loan agreements since 2000. The lawmakers want the contracts reviewed and where necessary, cancelled. The legislator who spearheaded the action said there is widespread global concern about the alleged fraudulent, irregular, and underhand characteristics of Chinese loan contracts with African nations, which have resulted in a new form of economic colonialism foisted by China.

Racism, a vile form of collectivism

 What unifies black people is a racial ideology that denies their individuality

By Tunde Obadina

Racism is grouping people according to their genetic origin or physical appearance and assuming that members of each group share common traits, such as behaviour, intelligence, and capacity. Stemming from this is the notion that one group is inferior or superior to other groups. Racism is a way of viewing the world.

Racists are not only individuals who view members of other groups contemptuously, but also those who view them favourably. Declaring that black people are angels is as racist as castigating them as evil. Racism is a variant of collectivism–it is a denial of individuality. As the novelist Ayn Rand observed, “Racism is the lowest, most crudely primitive form of collectivism.”

The only two traits blacks have in common are, firstly, the skin complexion that defines blackness and secondly, being subjected to racial ideologies and the actions of others that stem from such beliefs. Racial ideologies are ideas that attribute certain innate characteristic to being a black person. But black people do not share common history, psychology, culture, language, intelligence, behaviour, and any other characteristics associated with individuals. By the same token, there is no such thing as white history, psychology, culture, language, intelligence, behaviour, etc. We are all individuals, each with unique sets of characteristics.