We are in something of an economic crisis with three of the largest states partially locked down and the crude oil price collapse wreaking havoc to foreign exchange inflows and government revenues. As with most other crises there is suddenly a change in the political dynamic and the consensus to make tough decisions has suddenly appeared.
Take the fuel subsidy for instance. It has been a hot topic at least since the 1980s. Every few years we have the same set of debates asking if we should remove fuel subsidies or not. Or if we should increase fuel prices and by how much. Organised labour lines up on one side and some policy makers line up on the other. If you look at the periods when we actually removed subsidies, which by the way we have done more than half a dozen times in the past, it almost always occurs when there is some crisis. Either a revenue crisis, or an oil price crisis, or a corruption crisis. Once the crisis comes, all of a sudden, the decision makers can agree that fuel subsidies need to go. Once the crisis goes away though, the bad behaviour returns.
In the case of fuel subsidies, the bad behaviour is refusing to allow prices go up when they should go up. If you are looking for a period in history when the government introduced a fuel subsidy you will not find it. Instead what typically happens is that prices should go up based on the changing price of crude oil or the exchange rate, but the politicians say: “No we cannot allow prices go up right now. Keep prices fixed for now”. And so, a subsidy returns. The argument over whether or not to remove subsidies is not the problem, but a symptom of the problem. The real problem is the penchant for price fixing. Once the crisis is over the tendency to return to the price fixing ways becomes politically convenient again.
I know some will say this time is different. Indeed, the NNPC chairman has been in the news recently talking about how there is no more subsidy, and how they will use a new “price modulation” mechanism to ensure that they do not have any under-recovery. But the NNPC is not really the culprit in the price fixing behaviour. The PPPRA and the politicians are the real culprits. And they are curiously silent. The NNPC chairman may make his opinions on the matter heard but let us not forget that the person who actually first proposed this price-modulation mechanism was removed rather unceremoniously. Institutionally, there is no reason to believe the politicians will not revert to their price fixing status quo once we get through this crisis and prices need to go up.
The fuel subsidy is not the only issue on the table. The question of the exchange rate typically follows the same pattern. Every few years we face the “should we or should we not devalue” question. Again, that is just a symptom of the disease of trying to fix the exchange rate against the dollar. Again, due to the crisis, we have suddenly built a consensus to make some changes. The old official rate of 306 has been scrapped, some windows have been merged, and some other windows have been allowed to move a bit further. Still, are there any institutional changes to guarantee that when this crisis is over, we do not revert to the same old bad behaviour? In fact, the case can be made that the institutional environment has gotten worse with the CBN now mandating that the NNPC and international oil companies sell their foreign exchange to it. Essentially increasing its power to try to arbitrarily decide what the exchange rate should be. And increasing the likelihood that it will try to use that power again in the future.
If the current set of policy makers really want to get this disease of price fixing, and the associated symptoms, dealt with for good then they must think about institutional protections for when there is no crisis, and when the current crisis-induced political consensus goes away. If the price of crude oil goes up and the oil marketers need to raise prices, what protects them from a PPPRA or a presidency who may want to prevent that for political reasons? If the fundamentals of the economy change and the exchange rate should be weaker, what protects Nigerians and exporters from a CBN who, for political reasons, may want to keep the exchange rate fixed via “administrative measures”? Political consensus for anything is a constantly revolving door and as the popular saying goes, “Never waste a crisis”.
NONSO OBIKILI
Dr. Obikili is chief economist at BusinessDay.
