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.

The injustice of state-funded elite prosperity

 Government policies that favour the middle-class and elites, worsen inequality

By Tunde Obadina

In a 1955 report on the Nigerian economy, a World Bank mission to Britain’s west African colony noted that the attitude of the local population to the state could impede the country’ progress. They observed that while Nigerians desired material progress, many did not realise that wealth creation is only achievable through the efforts of the people.

“No progress can be made unless the people themselves are willing to assume the main burden of the development effort. The mission found this not fully appreciated in Nigeria. Nigerians in all walks of life tend to look too much to the government, more specifically to the British colonial officials, for the fulfilment of their aspirations. The heavy reliance on government is frequently coupled with a strong distrust of its actions and motives…”

“The need for self-help is not understood by the African businessman who looks to the government, and the government alone, for financial assistance in the expansion of his business instead of joining with others in a partnership or other form of common enterprise. It is not understood by rural communities and their leaders who demand school and hospital facilities but are not ready to pay for them by increased tax assessments. It is not understood by those who deplore graft and corruption in the hospitals, in the produce inspection service, in the railway and in private business, yet are unwilling to take effective action against these abuses.”

At the time the World Bank made these observations, Nigerians could dismiss them as bigoted rantings of agents of imperialism. Over sixty years later, we know differently. The belief that it is the responsibility of government to provide citizens with the conveniences of modern civilisation remains strong, especially among the elite. The expectation is that the state will deliver free or subsidised education, healthcare, electricity, transport infrastructure, water and sewage system and other items and services that come with economic development. Yet there is aversion to taxation.

Oxfam's absurd poverty reduction claim

By Tunde Obadina

In a recent report on inequality in Nigeria the UK-based charity Oxfam made the incredible claim that the combined wealth of the five richest Nigerians could end extreme poverty in the country. The organisation explained that the wealth owned by the five totalled $29.9 billion in 2016 whereas only $24 billion was required to lift the 112 million Nigerians living on less than $1.90 a day from severe poverty for one year. This presentation makes eradicating poverty seem easy. All the government has to do is confiscate the wealth of five individuals and spread it among the poor masses. 

Of course this is fantasy thinking. Oxfam, which earlier made another headline-grabbing claim that in 2015 just 62 people had as much wealth as the poorest half of humanity, has a faulty understanding of wealth and poverty. For a start the $30 billion worth of assets owned by five tycoons, led by Africa’s richest man, Aliko Dangote, is unlikely to exchange into any amount near $30 billion in cash that can be given to the poor. Most of the wealth Oxfam is eying is in the form of equity holdings. Once the government or any other enforcer puts the confiscated shares on the market their value will most likely fall. This is what tends to happen when large quantities of shares are dumped on markets.

The fact is that equity wealth is volatile. At the point Oxfam made its calculations Mr Dangote was reckoned by Forbes to be worth $14.4 billion, but his net worth has since dropped to $11.9 billion as at May 2017. According to Bloomberg Billionaire Index Dangote’s net worth has plummeted from a high of $25.7bn in July 2014 to $9.89 billion in May 2017.

The myth of Nigeria’s import-dependency

By Tunde Obadina

There are many myths in circulation concerning the nature Nigeria’s economy. One is these is that it is highly import-dependent. The common assumption is that Nigerians are more reliant than other nationalities on the consumption of imported goods. The truth of this may seem obvious to nationalists who believe that it is unhealthy for people to prefer exotic products over local products. But the assumption is simply not true. Merchandise imports as a percentage of Nigeria’s Gross Domestic Product (GDP) in 2015 was only 7%, according to the National Bureau of Statistics latest trade data. This rate indicates a nation that has far lower usage of foreign goods than most comparable economies in the world.

The reality is that Nigeria is one of the least import-dependent nations in the world and its low level of international trade is probably a major factor in its economic under-development. According to World Bank’s data imports of goods and services as a percentage of GDP in Nigeria was 12.5% in 2014. This was the lowest of all countries recorded in the table and compared with a ratio of 30.3% for Britain, 33.1% for South Africa, 18.9% for China and 25.5% for India. With imports equivalent to only an eighth of domestic output it is absurd to describe Nigerians reliant on imported goods. Countries like Singapore, Hong Kong and Togo, where the value of imports is greater than GDP, may be categorised as highly import dependent, but not a nation where imports is a fraction of GDP. Of course, it may be argued that World Bank data do not fully capture high levels of smuggling into Nigeria. But even if the 12.5% import-to-GDP estimate was doubled to account for smuggling the result would still not make the country is extraordinarily import-dependent.

The fallacy of high unemployment in Nigeria

By Tunde Obadina

It is often said that Nigeria is impaired by a major unemployment problem, especially affecting its youths. But this common belief that the level of joblessness in the country is high by international standards is simply not true. Using internationally comparable method of calculation, unemployment in Africa’s most populous nation is not high. It is low to moderate.

The idea that a large proportion of the Nigerian labour force is without gainful employment stems partly from job data published by the country’s National Bureau of Statistics (NBS) up until mid-2015. Before revising the premises on which it calculated unemployment rates, the bureau told that the world that around a quarter of Nigeria’s workforce was out of work. The problem with this assessment is that it is derived a definition of unemployment that is quite different from that used by most national statistical agencies in the world and the International Labour Organisation (ILO). Nigerian statisticians counted members of the labour force who did not work for at least 40 hours in a week as jobless, while the ILO defines unemployed as those in the workforce who have not worked for at least one hour in a week.

Whereas people who worked only one hour in a week are regarded by the ILO as employed, those who toil for 39 hours were counted as unemployed by the NBS. Given this very different understanding of joblessness it made no sense using official Nigerian data to compare unemployment in the country relative to elsewhere.

In May 2015 the NBS launched a new method of computing unemployment rates. This is a compromise between the old formula and the ILO way. Official unemployment figures now comprise people who have not worked for at least 20 hours in a week. This still exaggerates the extent of joblessness in the country, but to a less degree. Fortunately, the NBS now also publishes alongside the official rates, estimates based on the ILO definition. In its first post-revision dataset the bureau put Nigeria’s official unemployment rate in the last quarter of 2014 at 7.8%, but only 2.1% when calculated according to the ILO formula. Nigeria’s internationally comparable unemployment rate was shown to be significantly below the 5.3% average for developing countries and 7.8% for the world, as reported by the ILO.

Unemployment in Nigeria has since risen, reaching 5% in the fourth quarter of 2015. The upward trend is worrying but the current levels are still below the global average. It is not surprising that joblessness in Nigeria is relatively low. Economic inactivity is not an option available to poor people in countries that lack state welfare safety nets for the out of work. Individuals without savings or benefactors simply cannot survive without engaging in some form economic activity. The prospects of destitution forces men and women to be imaginative in creating work for themselves.

Unemployment statistics indicate the quantity of available work in an economy. The issue in Nigeria and other developing economies is not the quantity of jobs available but their low quality. Widespread poverty does not stem largely from unemployment but prevalence of low-paid and low yielding economic activities. Poor people are not idle – most toil for many hours, but for little gain. Subsistence farmers who produce insufficient value of crops to support themselves and their families are not poor because they are unemployed or underemployed – they have little money because of the low value of their output. What they need is not necessarily new jobs but the wherewithal to boost their productivity, and perhaps access wealthier markets.

The challenge facing governments is to foster an environment in which individuals and firms are unhindered in their ability to grow through attaining higher productivity and expansion into new markets. Those who look to the state and large corporations to generate millions of new jobs to cater for low earning masses are liable to be disappointed. Governments already struggle to maintain their current workforce let fund substantial expansion of the public sector. Also the era of mass job creation in the private sector is probably over in most parts of the world. We are unlikely to replicate the conditions that triggered the mass movement of labour from farming into urban factories as occurred during the industrial revolution in the West and the more recently in parts of East Asia.

Manufacturing, traditionally the big provider of full-time, salaried employment opportunities, is worldwide struggling to retain its existing workforces. The nature of work in the 21st century is evolving into something quite different from what pertained in the past two centuries. Globalisation and advances in technology have made manufacturing less centralised and labour intensive. Furthermore, many labour intensive industries, such as textiles, that have moved from the old industrialised centres to newly industrialising economies have also in the process shifted from the formal to informal sector.

Governments in low-income economies should endeavour to remove restrictions on the ability of citizens to grow their wealth by exploiting their skills and innovating for greater profit. The state should get out of the way of enterprise and concentrate its attention on protecting life and property, rendering other services if they are essential and only it can provide.