VICTOR OGIEMWONYI
Victor Ogiemwonyi, a retired investment banker, is a former Governing Council member of the Nigerian Stock Exchange (NSE), now Nigerian Exchange Group (NGX Group). He sent this contribution from Ikoyi, Lagos. He can be reached via comment@businessamlive.com
Following the current Administration’s two “must do” policies — fuel subsidy removal and naira currency realignment — a lot of unintended consequences have followed, not because they were the wrong policies, but because they were rushed. If the intention to carry out these policies was announced by the President to signal the direction of policy reforms ahead, and a time frame of “soon” given to it, to allow government put in place necessary support to ensure that the most vulnerable citizens were less affected, the chaotic situation we found ourselves could have been avoided.
For instance, the Foreign Exchange Support loans we are now seeking in bits and pieces could have come in a more solid form, with better terms, because we were in a better position to negotiate with the World Bank, International Monetary Fund (IMF) and other multilateral institutions by putting the burden on them, to provide the support we need, before implementing.
Our announcing this intention was enough to show our plans for reforms, we will then insist on getting their pledge for support, if we are to go ahead. We would have been able to “blackmail” them into giving us the FX support that would have given the naira depreciation a slower trajectory and avoid the speculative spike that pushed the naira to limits, which has caused the currency crisis we have now.
The pressure that followed the rushed policy, resulted in a rushed response of the disastrous palliative policies that harmed the economy, more than it has helped.
Our usual penchant of throwing money after every problem, without any attempt to do the serious thinking of the consequences, before trying to implement, was at play again. We rushed to budget billions of naira for palliatives, without a proper plan to implement, or even properly identify beneficiaries to target, to ensure those who need it, really get it. In the end the results have been dismal at best.
The first unintended consequence of this palliative policy was the government and its agencies going into the market to directly buy commodities, like rice, that was already in short supply and pushing up the prices, disrupting the natural supply chain, and stoking inflation that was already high, exasperating the situation and making these food commodities, also scares, for even the rest of the population.
So, instead of the government expanding supply sources, it created false demand for these food items and consequently created more problems. The government and its agencies buying from the little that was available, supposedly to go and distribute to the “venerable” population, actually created scarcity and pushed prices even further up. The Central Bank of Nigeria (CBN) saw this in its data, in the review of food inflation spike, in the first quarter of 2024. The proper thing to do was for the federal government to have looked for ways to increase supply sources and not become a competing buyer of food items in the market.
A good example of a palliative policy that worked, and was effective, was what the Lagos State government did. It created new special markets in several neighbourhoods, around Lagos, subsidised prices directly to suppliers, giving them the incentive to sell at lower prices.
By creating those special markets, where people can buy and sell, they also achieved a good objective of aggregating the buyers and sellers into those special markets, allowing for prices to be monitored, and giving sellers a large market and buyers, choices.
It was a good example of bringing good thinking to policy making.
They also did the meaningful thing, of flooding the public transport routes with buses and temporarily subsidising fares for the immediate effect of attacking the transport fare hikes, that resulted from the fuel subsidy removal.
The currently announced policy to import food, would have worked better at the beginning, if it was targeted at the last quarter of 2023 and the first quarter of 2024. And all such imports were targeted to end by March 31st 2024. The impact of the food imports would have been effective and quick. The first benefit would have been that the imports of food will cost less, because it would have come at the lower FX rate in the first six months of the currency alignment policy, as well as the inflation lowering effect of the food imports. Doing it later has priced in all the inflation that the policies have enabled. This is now a case of too little too late.
What we are doing now, with the new food import policy, is again causing another unintended consequence, pushing FX prices up and putting further pressure on the naira. We have seen increases in FX rates since the policy was announced. Asking importers to go and import food, when they will have to compete for the little FX liquidity available to the market, means that many will turn to the black market to quickly take advantage of this food import policy window that the government has now opened for six months.
This will continue to push up FX prices as we have observed, and will now upset the relative stability in the FX markets, achieved these last few months, and will also now trigger other economic implications, and upend the monetary policies put in place to ensure stability in the economy.
Our policymaking needs to be better evaluated before implementing, to avoid this chaotic situation that we always seem to create.
So far, our policy making has been one foot forward, and two steps backward.
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