Exploring Buharinomics

When Muhammadu Buhari was elected Nigerian president last year there were questions about what his economic plan was going to be. When he was head of state from 1983-1985 he had a vision of reducing public expenditure, reducing imports and increasing exports.

Assuming power in 2015 in the midst of economic crisis just like in 1983, President Buhari’s economic policies had to be clear and effective. Oil prices, which constitutes 70% of government revenue, had dropped dramatically and the country was feeling the squeeze.

crude
Brent crude prices over five years. Source: nasdaq

Buhari announced what was a standard Keynesian policy of increasing expenditure on infrastructure in order to get the economy going again. And so after a prolonged delay, a record budget of 6.06tn naira ($30bn) was approved. Facing severe domestic fuel shortages, he increased the cap on fuel prices by 67% to ease pressure on demand and improve supply.

These two policy moves are not exactly remarkable and they are what I would expect of any president no matter what his/her long-term vision for the economy is. But in seeking extra powers to fast-track the procurement process and reduce the bureaucracy involved in getting infrastructure projects underway, Buhari has shown that he is unafraid to be seen as reverting to dictatorial rule if that is what it takes to achieve his economic goals. However, it is when it comes to control over monetary policy and central planning that we begin to see the defining qualities of Buharinomics.

In the immediate post-colonial period many West African leaders, most exemplified by Kwame Nkrumah, pursued rapid industrialization and a policy of import substitution to break their countries from their dependence on selling primary commodities and the boom-bust cycles that that reliance brought upon their economies.

If successful, these policies would have made the countries exporters of processed commodities who relied on domestic industries for goods and services. Due to several factors including the collapse of commodity prices, cold war inspired political interference and domestic political instability, these objectives were not achieved. The countries have as a result had to rely on aid and several programmes with the IMF and other developmental agencies. Buharinomics can be viewed as the most prominent example of the return to the policy goals of the post-colonial period.

There is a widely held view that developing nations cannot rely on liberalized markets and simple macroeconomic and political stability to develop. They have to introduce some protectionism and commit to develop domestic industries even if they are initially inefficient. Despite the fact that many governments in sub-Saharan Africa have been liberalizing markets, the goal of domestic industries still makes its way to political speeches and manifestos. There is a feeling that such a development will allow countries to break free from the influence of western and Asian countries and multilateral organizations.

The thing about developing domestic industries though is that there is a need for some form of central planning. Government intervention has been crucial in developing domestic industries in many countries including the USA, Japan and South Korea. Without a direct policy to protect domestic industries private business people may look at the costs of production and decide that it will be cheaper, even with import tariffs, to import goods to sell instead of manufacturing in Nigeria. Consumers may also believe that imported products are of a higher quality or more affordable than domestically-produced goods and may therefore choose those ones over the local ones. In order for Buharinomics to reach its goal therefore, some direct government intervention must be exercised to reduce imports and increase exports. The opportunity for this came in the way of the dwindling foreign exchange reserves of the nation due to the collapse of oil prices.

ngr fx res

With rapidly dwindling reserves, one would expect a currency peg to be removed for the market to determine the value of a currency. However, a peg of 199 naira to $1 was maintained even as the divergence between official and black market rates widened to ridiculous levels.

When a country pegs its currency at a particular exchange rate then it must sell more of its currency when it is strengthening and buy more of its currency with foreign exchange when it is weakening in order to maintain the desired rate. The former is easy because a country can always print currency, the latter is more difficult unless a country has a high level of reserves of other currencies – something Nigeria did not have. The only ways to maintain the exchange rate at this desired level with low foreign exchange reserves is to control the money moving out of the country or offer ridiculously high interest rates on bonds issued in your currency so that the demand for your currency will be high. Nigeria could not do the former and the latter is not even an option so it chose to pretend that the naira was 199 to the dollar while it was trading at about 320 naira to $1 in the black market. Pressure finally caused the peg to be lowered after 16 months.

In the meantime however, the Central Bank of Nigeria (CBN) had issued a list of products for which importers will not be given foreign exchange therefore forcing importers to the black market and increasing the price of the imports.The statement which announced this list was explicit about the fact that promoting domestic production was the goal for this exclusion. The maintenance of the currency peg allowed Buhari to use the allocation of foreign exchange as a way to promote manufacturing industries and reduce imports. With the country being short on foreign exchange he could make the case that he had to keep foreign exchange for what he considered to be the most essential services.

Further evidence for this is seen in the recent announcement by the central bank for banks to ensure that 60% of all their foreign exchange transactions be made with manufacturing companies for the purpose of importing raw materials, plant and machinery. Even more evidence is in the surprise reduction in interest rates in November 2015 with the CBN Governer, Godwin Emefiele, saying the “fresh liquidity from the cash reserve rate cut would only go to banks that were ready to channel it into employment generating activities such as infrastructure projects, the agricultural and minerals sectors.”

It will be more difficult for President Muhammadu Buhari to direct resources to his favoured industries and harm imports in the absence of a scramble for foreign exchange. In a case where there’s no shortage or no wide divergence between official and black market rates, importers of the kinds of goods that the president wants to be produced in Nigeria will not have any significant disadvantages compared to those importing raw materials unless Buhari wants to impose large import tariffs.

So although Nigeria has been affected by the currency peg with airlines moving out of the country and JPMorgan and then Barclays dropping Nigeria from their respective emerging market indices, the president has also got a chance to put Buharinomics into action.

If oil prices should recover while Buhari is still president, it would be interesting to note how he will push through his agenda.

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Jerome Kuseh

Accountant | Economist-in-Training | Private Investor
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