Nigeria is currently paying the price of a reform paralysis that came upon the country. We failed to take certain actions when they were due, and in some cases, the wrong actions were taken. That is why the economy is now in a state of turmoil. Prices have risen across the board and continue to gyrate in the wake of deregulatory measures taken by the government. Their impacts would have been more subdued had the actions been taken long before now.
Economic reforms are like medical treatments for ailments. The longer a treatment is delayed, the longer it may take to achieve results when eventually started, and obviously, the more costly it will be to the patient. It is even worse if a country embarks on the wrong reforms, due perhaps to wrong diagnosis and prescriptions.
Reforms are constant in economic management, as they offer us the opportunity to expand our production possibilities curve and review the thoughts that have determined the subsisting management style. This means that every economic reform must be evaluated on the basis of its ultimate impact on the effectiveness and efficiency of an economy.
Thus, the welfare of the average consumer is at the heart of reforms. We improve system efficiencies through changes in production and resource and product allocation. Done well, this has the potential to benefit the consumers who, over time, will pay less or gain more value in return for their money.
This aspect of reforms is often lost on the different parties who negotiate whether there should be reforms or how far a particular reform should be carried out. This is so because there are always losers and gainers as a result of the change. Those who stand to lose as a result of a particular reform are bound to oppose it. In the process, the essence of a contemplated reform is sometimes lost.
This explains why, currently, Nigerians are suffering or paying the price of wrong or delayed reforms in pricing in some critical sectors of the economy. Changes in pricing are a common form of reforms that are carried out in economies, and quite understandably, they are resisted the most.
We price our currency through the exchange rate system that we have adopted. In part, analysts have blamed our recurring foreign currency crisis on Nigeria’s foreign exchange management system. Many such people believe the naira has been deliberately overvalued over time. They believe that our foreign exchange sector is in confusion because of wrong policies that delayed the correction in the pricing of the naira in terms of other currencies.
Some economists, including Prof. Bongo Adi of Lagos Business School, believe that the correction of the naira should have taken place when Nigeria had two recent opportunities to do so. One such golden moment to do that was in 2016, when Nigeria was in a recession, as the price of oil tanked. That was an opportunity for the government to define what it wanted to do.
At such a time, floating the naira would have been more effective because, with limited money flowing into the country, there would have been fewer foreign reserves to support the naira.
Even at that, the best exchange rate system would have been a managed float. That would mean allowing the naira to fluctuate within a band. I believe, as do a number of Nigerians, that a fully liberalised foreign exchange market is not the best for us now.
That didn’t happen. Instead, as soon as the money started flowing again in 2017 as oil prices recovered, we went back, pumping so much into the forex market to support the naira.
Another opportunity came after the COVID-19 meltdown, when the oil price came down again, as the global economy shrank. That would have been an opportune moment to liberalise the foreign exchange market, but again, we could not latch onto that.
It is clear that supporting the naira beyond the productive capacity of the local economy does not help much; it will rather hurt our competitiveness. It is already known to the authorities, including the central bank, that the strength of the naira is a function of the demand-supply interplay. We do not have enough foreign exchange earnings to support the demand for foreign goods and services. No doubt, as Nigeria expands its foreign exchange earning capacity, which will reflect on our reserves’ balances, and the naira will strengthen against other currencies. Until we get there, efforts will be focused on demand management. This is the role that price (the exchange rate) is playing now in both the I&E window, as well as the parallel market.
Nigeria is also paying higher prices now for petrol because of the delay in effecting a gradual or incremental price change for the commodity.The eventual removal of the petrol subsidy on May 29 this year has exposed whatever lies held sway about the pricing of petrol in Nigeria. It has exposed the fundamental truth that the commodity was mis-priced all along. With what has happened now, many folks have parked their vehicles and opted for public transport. We had been told all along that there was a subsidy on petrol, but given the way the world has gone, it is not likely that the subsidy will be sustainable. Besides, there had always been a question mark over the extent of the subsidy, really.
The argument on this, which actually makes sense, is that if the midstream and downstream segments of the oil sector had been deregulated much earlier, the sector would have been able to attract investments enough to boost the local capacity. We heard and wrote stories about investors not rushing into the sector unless they were sure of charging cost-effective prices for their products. Had that been done, Nigeria would by now have had functional refineries and with that, the domestic price of petrol would have been de-linked from the international oil market price.
Unfortunately, this is not the case now. We are already hearing from petrol marketers of the imminent price hike, on top of the current price of about N617 per litre. They say this is linked to the recent rise in the price of crude oil on the international market to about $95 per barrel.
This is quite understandable since the rise in the price of crude oil means that refiners would also top up their prices. It is part of the price we have to pay.