Saturday, 4 March 2017

Fundamentals of Nigerian Economy and the Political Economy of Foreign Currency Manipulation

One of the prominent political scientists in Nigeria, Dr. Olugbemiga Afolabi has penned down an interesting piece on the unstable value of the naira in the parallel market.
 
Dr. Olugbemiga Afolabi
 
Looking at the above title tells us that there are several connections between an economy or economic life of a country and foreign currency, especially the dollar in an increasing globalized world.
 
A country’s economy at its base represent the total package of day to day life (daily living) and how income and expenditure of individuals and groups are structured. It is a system and processes that defines the wealth and poverty of individuals and nations. Without being too simplistic, a country economic structures and processes captures the essence and existence of any given people of a particular country.
 
That explains why some countries would, ceteris paribus, remain backroom players and some would remain the front runner, given the competitive edge inbuilt in economic processes and systems, intra and inter states. That explains the wealth and poverty of nations, apologies to Adam Smith, Acemoglu and Robinson.
 
The above preamble would readily suggest to the reader that economic issues are better not to be left to the whims and caprices of the novice, nor should they be left to those who are faint-hearted to take important and hard decisions to better the lot of the generality of the people. Directly important to an economic systems and processes are institutions and structures as well the quality of individuals who are charged with managing these processes and systems.
 
A cursory look at those charged with managing the Nigerian economy inspires no confidence. They themselves radiates little or no confidence. At the risk of sounding unmerciful, when you have HND and BSC holders managing the size of the Nigerian economy with potential for growth, then what you are likely to have is a stunted growth and uninspiring performance, both of the managers and the economy. The institutions they head are often like them, uninspiring and under-performing. This is aside the systemic corruption that permeates individual, private and public life, including institutions, especially those charged with the economic management.
 
However, the problem goes beyond the managers at different levels. The fundamentals of the Nigerian economy shows it to be a buying and selling economy, or what the average trader calls buy and sell. In other words, Nigeria operates a buy and sell economy. That forms the basis of Nigerian economic life, structure and process wise.
 
Let me quickly explain that by structure, Nigerian economic institutions are built to buy and sell and this, successive governments and economic managers have continued to maintain and redefined to suit each successive government without fundamentally altering its nature, features and character. We have argued elsewhere and severally too, that, even though this buy and sell economic structure was instigated and built by colonial interlopers, Nigerian rulers and economic managers have not only perpetuated this structure, they have manage to even bastardized the structures to abysmal levels, especially during Jonathan era.
 
In concrete terms, Nigeria had always been relying on commodity products like Cocoa, Groundnut, Coal and now, crude Oil to sell at cheap prices and buy technological products at very exorbitant prices, creating a permanent unequal and unfavourable terms and balance of trade, to the near fixed disadvantage to Nigeria. These structures in clear terms are Ministry of Finance, Central Bank of Nigeria and other government created financial institutions. These is not to exempt individual, group and quasi government institutions outside the government. They fall into the same category of institutions that buy and sell.
 
By process, we mean the orientation, attitude and manifest consciousness that permeates and pervades the individual, social and state towards the Nigerian economy. Everyone has been conditioned to think in terms of buy and sell, not to create and manufacture. This explains why everyone is selling maize, food and ‘pure water’ at the lowest economic level; establishing schools and churches/mosques, etc at the middle level; and, joining politics/selling votes, currency traders and influence peddling. Almost everyone is now a currency dealer and speculator as well MMM participant/dealer.
 
Thus, the buy and sell process shows why everyone sell the same goods and services on every street corner; proliferation of schools and churches/mosques; wants to join politics and crudely accumulate wealth, explains do or die politics, and every Yinka, Nnamdi and Dogo now trade in foreign currencies, otherwise known as forex (fx). 
 
When Buhari government came to power, fx was much lower and was trading around 205 naira to a dollar. What sustained the naira then was the high price of crude oil at the international market, excessive looting resulting in excess liquidity in the system (unhinged corruption) and proliferate spending, especially on elections and vote buying.
 
Dollar became the medium of exchange. It was a case of postponing the evil day and/or waiting for the economic bubble to burst. However, the rental or buy and sell economic structures and process predates Jonathan administration. It has continued apace since Buhari’s government came to power, made worse by his government try and error economic policy, low crude oil price and low quality of personnel managing the economy. More alarmingly is the failure of successive government, including Buhari’s to attempt a restructuring of the Nigerian economy away from buy and sell economy to a manufacturing industrial economy. Such restructuring of the economy would involve economic and political economy thinkers and not just run of the mill NHD and BSC that currently pervades the corridors of economic decision making. Nigeria have a long way to go.
 
In light of the above, we argue that the recent intervention of the Central Bank of Nigeria (CBN) in the forex market is not sustainable on many fronts and indications are already pointing to that. As of today (03-03-2017) the naira has started falling again (450-8 to a dollar) reversing its recent short-lived gains (see abokifx.com). Due to a combination of individual, systemic and governmental structures and process, we ask, how long will CBN continue to supply dollars to the forex market in view of volatility of oil price, foreign reserve and structure of international economic system?
 
At whose cost is the intervention and manipulation? What are the opportunity cost in terms of infrastructures and peoples welfare? What about inside trading and round tripping? While economic purists and Utopian academic idealists would argue that currency (fx) intervention by governmental agencies like CBN is positive as a regulator, we posit that such interventions are part of currency manipulations that we only serve as a stop gap and generally fall into same category of currency manipulations that often occurs in a buy and sell economy with no longer term benefits, except the fundamentals of the economy are changed.
 
Afolabi, Olugbemiga Samuel PhD
 
Political Science lecturer, Obafemi Awolowo University, Ile-Ife, Osun State.

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