Currency controls lifted
NIGERIAN PETROL SUBSIDIES
Petrol prices are now a bit more realistic. Will the naira be next?
May 21st 2016 Economist
Nigeria’s previous attempt to reduce the vast sums it squanders on fuel subsidies did not go well: protesters poured onto the streets after the price of fuel doubled in 2012. Shops, schools and petrol stations shut and the government was forced into an embarrassing U-turn. Now a new administration led by Muhammadu Buhari, a former military ruler, is taking another shot at reform. Last week the official price of petrol was jacked up 67%, to 145 naira per litre ($0.43 at black-market rates). Restrictions on who can import the stuff were also lifted.
The new petrol price is still well below a true market price, but it is a start. Price controls fuel a huge racket: importers are paid the difference between the market rate and the Nigerian one. The government argues that the subsidy helps the poor. In fact the scheme is a cash machine that spews public money into the hands of fuel importers, employees of the state-owned oil company and government officials who collude to pocket cash paid to subsidise fictitious imports. In 2011 (the peak year), some $14 billion in hard currency was squandered on petrol subsidies. Truckloads of Nigerian petrol are smuggled abroad and sold at market prices, leaving Nigerian pumps dry.
Since 2014 the government’s finances have been thrown into disarray, thanks to a collapse in the price of oil, which accounted for 90% of federal revenues, and disruptions to production by militants who blow up pipes and kidnap oil workers. The fiscal deficit almost doubled to 4% of GDP in 2015 and economic growth slumped to 2.7%, the slowest since 1995.
Because oil is cheap, the subsidy payments have fallen too, easing pressure for reform. But there are still good reasons to end subsidies and free prices completely. That should end petrol shortages at a stroke. It would also give investors an incentive to build oil refineries in Nigeria, which would be lunacy now.
Another pressing reason to deregulate is that Nigeria faces a chronic shortage of dollars. Since oil prices slumped, the trade deficit has ballooned. An open economy would adjust to such a shock by allowing its currency to devalue, making imports costlier and locally produced goods more attractive (although higher inflation would be a nasty side-effect). Instead Nigeria has insisted on defending its currency, the naira, keeping the official exchange rate pegged at 197 to the dollar. (On the black market it trades for 340.)
The country needs about $18m-worth of fuel imports each day (and tens of millions of dollars more to feed and clothe its people and buy spare parts for factories). Reserves have fallen to $27 billion—the equivalent of about seven months’ supply. The central bank cannot provide enough dollars at the official rate to pay for all these imports and it releases only about $200m a week. This has opened new avenues for graft: people with access to cheap dollars can nearly double their money in minutes by selling them on the black market.
Businesses without connections typically have to buy dollars there. That has translated into higher prices for almost everything, including petrol, which was supposed to sell at an official rate of 87 naira per litre for the past year but in fact sold last month at an average of almost 163 naira (see chart).
The only way to match the supply of and demand for fuel and dollars is to let the market determine the price of both. Some analysts think that the government’s raising of fuel prices is a prelude to letting the currency slide. The central bank denies it.
One lonely union has organised a strike against pricey petrol, but it lacks support. Protesters were reportedly stoned in Jos, a city in the centre of the country, when they encouraged traders to close their shops. A reversal seems unlikely. “I protested in 2012 but I wouldn’t do it again,” one civil servant says as his car snakes through a queue in the capital. “Nigerians have been ripped off. Something had to change.”
NIGERIA FLOATS ITS CURRENCY
A slumping economy and high inflation prompt a much-needed reform
Jun 18th 2016 Economist
Bare shelves in supermarkets and soaring inflation would worry any central-bank governor. For Godwin Emefiele in Nigeria, the added twist is that both problems are partly his fault. The central bank’s policy of trying to maintain the value of the naira, Nigeria’s currency, in the face of a slump in the price of oil, which used to account for about 90% of the country’s export earnings, has failed miserably. Now it is being scrapped.
Mr Emefiele tried heroically to conserve the country’s dwindling reserves of foreign exchange. In effect, he banned the import of a huge range of goods, from tinned fish to toothpicks; arbitrarily rationed the supply of dollars from the central bank to importers; and threatened to clamp down on people trading dollars on the black market. Mr Emefiele maintained this policy even as other oil exporters such as Russia, Angola and Kazakhstan allowed their currencies to slide to make exports more competitive and to dampen demand for imports.
Despite the central bank’s best efforts to defend the peg of 197 naira to the dollar, it continued its slide on the black market, where a dollar costs more than 360 naira. Since most importers have to get their dollars on the black market, rather than through the tiny allocations released by the central bank, the price of almost everything in Nigeria has soared. In May annual inflation jumped to almost 16%.
Foreign investors have pulled back, and reserves have slumped. Factories have closed their rusty doors, shedding tens of thousands of jobs. In recent weeks airlines including United, an American carrier, and Iberia, a Spanish one, have stopped flying to Nigeria because they cannot take money from ticket sales out of the country. Ramming home the foolishness of the policy was the revelation that the economy shrank in the 12 months to March, its first contraction in over a decade.
On June 15th Mr Emefiele finally relented. After patting itself on the back for “eliminating speculators” (in reality only those with pals in the central bank had access to cheap dollars they could sell for a quick profit on the black market) and stoking domestic production (manufacturing contracted by 7% in the 12 months to March), the central bank explained that it would introduce a “flexible interbank exchange-rate market” starting on June 20th. If the currency is allowed to find its natural home, it may settle somewhere between 280 and 350 naira to the dollar, traders reckon.
Many people were surprised by the extent of the currency’s liberalisation after so much talk of the central bank introducing some sort of two-tiered exchange rate. Some see the hand of the president, Muhammadu Buhari, in the new policy. Mr Buhari had previously blocked proposals to devalue the currency, saying it would “kill” the naira and hurt the poor. Yet in recent weeks he has softened his stance, and is thought to have insisted that the central bank should go for a fully-floating exchange rate rather than some sort of dual rate, which would only have fuelled yet more corruption.
Even so, private-sector bankers are wary. They fret about lingering controls. The central bank says it will intervene in the market “as the need arises”. The new policy “sounds almost too good to be true,” says Alan Cameron, an economist at Exotix, a bond-trading firm in London. “Having seen so many false dawns in the past six months, I think many will need to see the new system operating before they believe it.”
But if Nigeria does what it says it will, it can expect a surge of investment. Some big private-equity firms say they have been eyeing up deals, but waiting for news on the currency. Nigeria will have an easier time borrowing $1 billion abroad to help meet a budget deficit of about 2% of GDP. A second quarter of negative growth looks inevitable, and with it a recession. But the worst may soon be over.
SMUGGLING in NIGERIA
The government’s protectionist policies are keeping the bootleggers in business
Apr 30th 2016 Economist
There is a clamour down the tiny alleyways of Kano’s central market, in northern Nigeria, as vendors thrust fabrics at passers-by, promising the best colour, quality and price. Amid the racket, Alhaji Zakari sits cross-legged on his countertop, surrounded by materials marked “Made in Côte d’Ivoire”. “They’re not”, he says with a degree of honesty which can do little good for sales. “It’s imitation from China.”
Nigeria is awash with contraband. Chatham House, a British think-tank, reckons that at least 70% of trade between Africa’s biggest economy and its neighbours goes unrecorded. In 2010, the World Bank estimated that $2 billion worth of textiles like Mr Zakari’s are squirrelled into Nigeria every year.
One bootlegger supplying the latter is Adamu Muhammad, or so he gives his name. Like many others in the north, his syndicate brings goods in through Cotonou, Benin’s main port and commercial capital, then through Niger, and across Nigeria’s border. For a decade, convoys of up to 50 of the syndicate’s vehicles have rattled into Kano without obstruction, because bigwigs in the capital were paid to let them pass. A lucrative lorry-load may command a fee of up to 1m naira ($5,000 at official rates), Mr Muhammad says. In return, “Everyone is settled—from Niger to Kano.”
Sadly for his crew, that party is now over. Almost a year ago Nigeria acquired a stringent new president, Muhammadu Buhari, who has vowed to crack down on corruption. He put trusted counterparts at the top of misbehaving agencies such as the customs department, so it is now harder to get the sign-off for illegal deliveries. It seems to be working: Mr Muhammad says his friends must wait until the process can be “facilitated” again.
Mr Buhari has affected cross-border business in other ways, too. Nigeria’s economy, dependent on oil (the price of which has slumped since 2014) is in dire straits. In a bid to conserve foreign exchange, Mr Buhari has imposed harsh restrictions on imports of goods that he reckons could be made at home. As a result, the value of the dollar has soared on the black market, making it increasingly expensive to buy from abroad. In Benin, huge car dealerships used to do a roaring trade with Nigerians who smuggled vehicles through the bush. They are now eerily quiet. A peeved merchant of second-hand tyres says he is doing “zero business”.
Another part of the reason that goods are secreted into Nigeria is that shipping to Lagos is slow and bureaucratic. Customs officials ask businesses to produce 13 documents when they bring a shipment in, and nine on the way out. Corruption is rampant, and tariffs are high. Import bans on items including rice and carpets are supposed to protect local businesses, but instead push trade underground and make rich the cronies who win waivers. It is no coincidence that women cross into Nigeria carrying rice on their heads, or that Mr Muhammad also specialised in deliveries of cooking oil and pasta, the import of which is supposedly banned.
This hurts Nigeria’s economy (in 2010 the World Bank estimated annual revenue losses from smuggling of $200m). Despite the efforts to protect them only a handful of the 175 companies producing local fabric in the mid-1980s survive today.
The World Bank says that removing import bans would lift 4m Nigerians out of poverty. Unfortunately, Mr Buhari thinks that barriers will help shore up the currency and stimulate domestic production. Under his watch, foreign exchange has been banned for imports of 41 items, including glass and wheelbarrows.
History shows this will not work. At Benin’s Seme border post, an immigration official watches a motorbike laden with rice whizz past and declares, with a smile: “Smuggling is easy.”
ELECTRICITY in NIGERIA
Powerless. Nigeria has about as much electricity as Edinburgh. That is a problem
Mar 5th 2016 Economist
Out in the farthest reaches of Lagos, a bumpy boat ride across the city’s dividing lagoon, Egbin power plant is trying to light up one of the world’s darkest nations. Six turbines growl in its huge belly, watched over by mechanics in a futuristic control room. They say the place is barely recognisable since privatisation in 2013. Output has rocketed since Sahara Group, a Nigerian energy conglomerate, took over. When running at full steam, Egbin generates almost a quarter of the whole country’s electricity.
That is not a particularly stretching target. Of Nigeria’s many daily headaches, power is perhaps the worst. After years in which state-owned power plants decayed, the government changed course by selling power stations and the distribution grids that carry power to homes and businesses. This bold stroke was meant to turn the lights on, and indeed it has encouraged investors to put millions of dollars into upgrading the battered system. Yet the supply of power has failed to respond as hoped in the two years since privatisation. At the moment the country’s big stations produce a pitiful 2,800MW, which is about as much as is used by Edinburgh. Only just over half of Nigerians have access to electricity, and it is still harder for businesses to hook up to the grid than almost anywhere else.
One reason why privatisation has failed to improve Nigeria’s power supply is that the process itself was flawed from the start. Even as companies were bidding to buy power stations or distribution companies, striking staff prevented them from looking at what they were buying. Once the deals were done they found they had bought rundown equipment and companies whose books had been systematically cooked. More important, though, was that many could not get the gas they needed to power their plants. Government meddling held down gas prices, which meant that many producers would simply flare it off (while extracting oil) instead of bothering to sell it at a deep loss. Moreover, the pipes meant to carry the flammable stuff are rusting and regularly vandalised by thugs demanding money to protect them.
The privatisation process was also incomplete and left the transmission grid (which carries electricity from power stations to the local distribution grids) in the hands of the state. It has not invested much, so huge amounts of power fizzle out on its dilapidated lines. Even if power plants could generate more electricity, the grid would not be able to handle it. At Egbin a handful of people employed by the state-owned transmission network sit watching YouTube clips as their private-sector colleagues beaver away.
Power plants are also owed colossal sums by the agencies that act as middlemen between generation companies and the distributors. Egbin alone is some $225m out of pocket. The intermediaries, in turn, blame distributors, saying they have not been collecting cash from their customers. As for the distributors, they say that the tariffs they are allowed to charge are too low to cover their costs and that, in any case, Nigerians do not pay their bills. Depressingly, the biggest offender is the government, whose various departments and agencies owe almost $300m. “It’s difficult for anyone to go to a military barracks and order them to pay—except if you’ve written your will,” says one insider.
More than a year ago the Central Bank of Nigeria organised a $1 billion loan to plug the gap and avoid a wave of insolvencies among power generators, but only a fraction has been disbursed. Since then a falling currency and shortages of foreign exchange have made it harder for private power producers to service debts denominated in dollars, a currency many chose because it offered lower interest rates than borrowing in naira. Finding cash (and hard currency in particular) to buy gas, maintain machinery and pay technical partners is a growing strain. Dallas Peavey, Egbin’s chief executive, reckons that without repayment or preferential access to foreign currency he can keep the country’s biggest power station running for just another four weeks.
Still, there are glimmers of hope. In recent years the government has raised the price of gas, and supplies are growing more reliable. Distribution companies are installing new meters, which are harder to fiddle. Unpaid public electricity bills are being chased up. Most crucially, tariffs were increased in February by as much as 45%. It did not go down at all well with locals. But if Nigerians can be convinced to pay their bills, it ought to get some cash flowing through the system. That would be a start.
The end of state-sponsored marriages is just the funny bit
Jul 30th 2016 Economist
Weddings do not come cheap, as Kano’s state government has found out. Over the past four years its Islamic morality police, the Hisbah, has arranged, and helped pay for, marriages for more than 4,000 lonely ladies. Yet even the most pious can put a price on love. As Nigeria’s economy heads into recession, the state now says that it cannot afford to pay bride prices or to fill marital homes with furniture and cooking kit. Ten thousand disappointed daters have been left to find love and marriage the normal way.
They can hardly be so aggrieved as Nigeria’s 36 state governors. Most of them have little in the way of either local industry or foreign investment, meaning that they are incapable of providing for themselves. They borrowed heavily when oil prices were high, and also rely on monthly allocations from the federal government to keep afloat. But two years of low oil revenues have eaten nastily into those disbursements leaving them unable to service their debts or pay their inflated workforces.
Out of the window have gone more pricey programmes, such as pilgrimages sponsored by Niger. This state (not to be confused with the country) generated monthly revenues of 500m naira ($2.5m) in 2015, while running up a wage bill over four times that. “Other equally people-oriented demands” must now take precedence over journeys to Jerusalem and Mecca, Governor Abubakar Bello said recently. Politicians in Bayelsa, a southern state that has a reputation for oil and alarming kidnap rates, waved goodbye to a five-star hotel which has been over a decade in the making. Good riddance, many said. The 18-storey monstrosity cost the governor 6 billion naira before he shelved it.
More important investments in roads and schools have long since dried up, according to BudgIT, a fiscal analysis group in Lagos. Civil servants no longer hope to get their salaries on time, and in some places their already meagre pay has been slashed by half. Osun state, which previously splurged on six stadiums, is now surviving without a cabinet. Governors best known for fast cars and love nests are suddenly professing restraint. In Niger state, Mr Bello has said he will cut spending on housing for officials by at least 80%; an easy promise to make, given that his books are not made public.
This points to a general problem within federal Nigeria. With a couple of exceptions, its local and state governments do not publish budgets, so they can spend at will. It is no surprise therefore that they failed to cut spiralling costs as oil prices fell. Or that the governors squandered the 660 billion naira federal bail-out package intended to pay salaries last year. In just one mysterious transaction, Imo decided that 2 billion naira might be put to best use on the government accommodation account.
Having frittered away this lifeline, they are now asking for a new one. Last month Nigeria’s finance minister agreed to lend the states 90 billion naira, provided they start publishing audited accounts. That is a start. Meanwhile, the governors will take hope from a resurgence in their gross June and July allocations (thanks to higher federal tax collections). But in Kano, the Hisbah is looking for a quicker solution: private sponsors for mass weddings. “Stopping it altogether [is] unthinkable,” its director-general said. Recession be damned.