Governance is over, it's officially campaign season

A plan to extend fuel subsidies may put Nigeria on the brink

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The CBN returns with an old trick 

“(People) are perfectly convinced that the rise (in prices) with which they have to contend for the moment is unnatural, artificial, and wholly unjustifiable, being merely the wicked work of people who want to enrich themselves, and who are given the power to do so not by the economic conditions… This has been so since the dawn of history… but no amount of historical retrospect seems to be of much use. The same absurdity crops up generation after generation.”

It’s hard to be Nigerian without believing some bad economic ideas. Countless Nigerian leaders have pushed the idea that Nigeria is a wealthy country, others have demonised imports. And under the Emefiele-led CBN, we’ve spent six years obsessed with not “wasting our precious dollars on things we can produce locally.” 

The last six years have truly been special; we’ve had a government appointee argue that a rise in VAT will not affect the poor. Another argued that only Nigeria’s middle-class felt the pinch of the border closure because they miss imported “seedless grapes.” But ordinary citizens also have these arguments, albeit in different forms. I’ve followed several conversations where people questioned why inter-state travel becomes expensive at festive periods when demand is high. This refusal to understand demand and supply may be linked to Nigeria’s 15.63% inflation.

Terms like headline inflation, runaway inflation and food inflation do very little to help people understand why they can no longer afford the basics. But blaming it on the wickedness of businessmen and middlemen, as Buhari has done repeatedly, is an easier story. It’s an especially effective excuse since Godwin Emefiele seems to have forgotten his remit as CBN governor. In two terms, Emefiele has focused on everything except managing inflation. 

Two weeks ago, the CBN built a rice pyramid in Abuja to celebrate its success in funding the local production of rice. It helps to remember that the price of rice has tripled since 2015. And that with unemployment biting, households are spending over 60% of their income on food. But the Central Bank is not done; convinced that importers and exporters are “wasting FX”, it is now implementing a “price verification mechanism.” 

Here’s an excerpt from the CBN: “Imports and exports with unit prices that are more than 2.5 per cent of the verified global checkmate prices would be queried and will not be allowed for successful completion of either form M or Form NXP as the case may be.” Despite what the CBN is calling this policy, it looks and sounds like a price control measure, setting upper limits on prices for importers and exporters. 

Here’s a breakdown of what this new policy means:

• The CBN will set benchmark prices and Imports and exports with unit prices that are more than 2.5 per cent above those benchmarks will not be allowed to access FX. 

• All importers and exporters have to pay $350 yearly for “authentication of suppliers”

• Essentially, the CBN is setting up a mechanism to control prices

Where have we seen this before?: The CBN first announced the price verification policy in August 2020 and justified it at the time with a claim that “Over-invoicing of imports with $35.597 billion as of August 20 has been attributed to as a major drain on the nation’s external reserves.” At the time, it generated very little press, but last week’s announcement did, given the fact that everything the CBN has thrown at the FX crisis since 2016 has been a resounding failure. 

It once again reinforces this assessment of Emefiele’s performance by Global Finance: “In recent years, Nigeria’s central bank has engaged in deliberate measures to ensure the stability of the Naira. The measures have included a tight grip on the local currency and even halting the sale of forex to bureau de changes…. In many aspects, the volatility of the Naira is synonymous with the reign of Emefiele, which since 2014 has been characterized by rising inflation and tremors in the banking industry.”

But it’s not only Emefiele that is going back to old patterns….

Nigeria’s fuel subsidies get another lifeline

“In May 2021, data from the NNPC showed that Nigeria’s petrol consumption was 72 million litres daily. That increase suggests mind-boggling corruption around the subsidy process, which means Nigeria now spends N250 billion per month on fuel subsidies. That the payments are unsustainable is obvious for a country where government revenue growth has been sluggish. But putting a stop to them has proved difficult.” - Notadeepdive.

Last week, Nigeria’s Federal Government talked about hitting a pause on the plan to remove the country’s contentious fuel subsidy payments. The proposal to continue fuel subsidy payments for 18 months is subject to the approval of the National Assembly. While that hangs in the balance, one thing is clear: this is an end to governance for the Buhari administration—campaign season is now in full swing. 

With elections a year away, removing fuel subsidies will raise fuel prices to an estimated N302/litre. Considering the current inflation rate, unemployment and general sense of despondency, it would have been unpopular. Yet, it is a failure of the Buhari administration that fuel subsidies, one of the biggest strains on Nigeria’s finances still exist today. 

As global oil prices rise, the cost of subsidising PMS becomes more worrying; this year, the government will spend four times the amount budgeted on public health on fuel subsidies. The politics of fuel subsidies is strange; we’ve seen time and time again that the people who benefit from subsidies are smugglers, contractors and bad actors. And unlike other times, continuing fuel subsidy payments against the backdrop of low government revenue and rising debt amounts to economic sabotage. 

“Faced with a widening budget deficit, policymakers have increasingly turned to costly CBN overdrafts (also known as Ways and Means financing), which are not properly integrated into the fiscal accounts. The high cost of servicing CBN overdrafts is compounded by large off-budget expenditures—especially the PMS subsidy—which crown out much-needed investments in human and physical capital. While Nigeria’s debt burden remains manageable for the time being, maintaining sustainable debt dynamics will require curbing the use of CBN financing for the deficit and addressing fiscal pressures to break the cycle of low growth and rising public debt.” - World Bank (November 2021).

Nigeria, which remains the only country in the world that subsidises only PMS a.k.a petrol, spent more on fuel subsidy than it received in revenue from the NNPC in a 9-month period in 2021. I’m going to resist the temptation to close this with a doomsday prophecy, but pray, tell, where goes Nigeria from here? 

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