A first class graduate of economics from the University of Port Harcourt, Otti is an alumnus of Harvard Business School, Wharton Business School and Stanford Business School. He was a Bank MD until 2014 when he voluntarily retired.
“If anything can go wrong, it will go wrong”
– Edward A. Murphy
It is exactly one year today that President Muhammadu Buhari came to office. To say that it was a landmark event in Africa where an incumbent President lost election and conceded defeat is to state the obvious. The whole world cheered and celebrated our country for having advanced in the democratic process. On the part of Nigerians, the expectations were very high. And there were genuine reasons for this.
The new President had contested on three previous occasions and failed. It was therefore expected that this President who had been a military Head of State in the 80s must have something to offer Nigerians. Secondly, President Buhari is generally accepted as an honest and incorruptible leader who would fight corruption to a standstill. Again, the campaign promises were quite attractive and people really needed a change from the old order. One year after, however, the pertinent question is: how has the President and his party fared?
Most people believe that the President has done well with fighting corruption, though there remains a loud noise about the fight being one sided as most of the people being investigated are from the defeated Peoples Democratic Party (PDP). The President’s men had responded by arguing that it is natural that the people who would be investigated were people in government and not those that are just coming into government. The outcry can be likened to someone who was caught stealing, alleging that because someone else also stole and had not been caught, he should be left off the hook!
One other reality that must have dawned on the President is that quite unlike his first coming in 1983, this one is a democratic setting where he must comply with the rule of law. So, for you to successfully put someone in prison, even when he is caught red handed, you must prosecute him and the accused remains innocent until he is proved guilty. Even when that happens, he still has his right of appeal up to the Supreme Court level. Given that we just learnt that it takes over 20 years to conclude a case to the supreme court, your guess should be as good as mine as to how many successful prosecutions that would be concluded by this administration.
On the fight against Boko Haram, most people agree that the government has done well, though there is still a long way to go. Our armed forces have dislodged the terrorists and reclaimed all the territories in the North east where they captured and hoisted their flags. Most of the attacks from Boko Haram are no longer as brazen, but pockets of suicide bombings and hits at soft targets. The enlisting of our neighbors in the Chad basin has engendered regional cooperation in routing out the insurgents. Unfortunately, we have made very little progress with rescuing the over 200 girls of Chibok Secondary School who have been in captivity for over two years.
Many Nigerians are unimpressed with the President’s reaction time. Some have wondered if the President realizes that he has only 48 months out of which one quarter is gone. It took over six months for the President to set up his cabinet. Someone cracked a joke that when the President was taking his time to announce his cabinet, he thought he was trying to import people from China or India, but was disappointed when the announcement was made and they were all people who had been here with us. After one year, boards of parastatals have not been reconstituted throughout the country. Our diplomatic missions have remained without ambassadors and high commissioners. Governing Councils of Federal educational institutions have also not been reconstituted and the necessary oversight has been left in the hands of people who require to be supervised and guided.
An area that had received the greatest attention is the economy. Most people are in agreement that the President should have done a whole lot better with the economy which is almost prostate. Oil prices dropped from around $115 per barrel mid 2014 to less than $30 per barrel early in the year, though it has gradually increased to around $50 per barrel at the moment. Given this ugly scenario, foreign exchange rate came under severe pressure. As Central Bank refused to adjust the exchange rate in line with the President’s position of not devaluing the Naira, the free funds market moved from around N170 per dollar to over N400 per dollar, coming down subsequently to N325 per dollar and going up again to around N350 per dollar after the Minister of State for Petroleum announced price increase for PMS.
Meanwhile, given the rapid run down of our foreign reserve, CBN introduced controls and rationing. It has got so bad that a lot of businesses including airlines are complaining very vehemently about their inability to procure foreign exchange from the CBN. Some of them have stockpiled so much Naira in the last couple of months that if something is not done, such businesses may begin to head south. Then, enter the fuel crisis that almost brought the economy down on its knees. We are going to spend sometime looking at the foreign exchange policy and Petroleum policy of the Buhari government. These two interrelated issues are major areas that if the government does not address robustly may affect most other policies of the government and prevent it from delivering on its promises to the people.
On Foreign exchange, we had articulated arguments in the past on how we got here and what we think we should do (refer to “The Foreign Exchange Monster” THISDAY, March 13, 2016, Backpage). We believe that we cannot continue to encourage rationing of foreign exchange in this day and age. Rationing is like import licensing of yesteryears which we all know was riddled with corruption. And it is not about who you put in charge. Even if you succeed in identifying saints to handle the rationing, because it is open to abuse, it will sooner or later be abused. That is the essence of the quote with which I started this piece which is referred to as Murphy’s Quantum law.
Perhaps, a little modification of this law into “everything that can possibly go wrong will go wrong” by Colonel John Stapp elucidates the law further. It simply warns us that if there is a chance that something will go wrong, we should assume that it will go wrong and put adequate mitigants in place. So the question remains, why set up a system that we all know is not only subject to abuse, but is also not transparent?
Given everything we know, we call on the government to start the process of deregulating the foreign exchange market as soon as possible. We must realise that we may get to a point where we will not have any more dollars to sell at a subsidized rate. What do we do if we get there? How do countries that have no oil fund their foreign exchange market?
We are of the strong conviction that deregulation would lead to an initial rise in the rates and stabilize at the real market rate. It will also lead to some shock therapy which will eventually settle. Central Bank may choose to intervene from time to time to regulate the market and move rates in directions that would achieve the monetary policies of the government.Imports of frivolous items will go down, exports will be encouraged, consumption of locally made goods will be encouraged, foreign investment will go up and the government will earn more Naira for every dollar that it sells. Of course, arbitrage and round tripping income which distorts the economy will disappear and corruption will be arrested at that end.
On Petroleum, the government had recently increased the price of PMS to N145 per litre. This action generated a lot of debate and protest which have eventually subsided. One initially thought the government was removing subsidy and deregulating the market. However, the fact that the government retained a cap left an impression that the product remains regulated. We had expected that the authorities would have used this opportunity to bite the bullet once and for all.
The danger in government’s action is that sooner or later, there may be a need for further upward adjustment with all the social tension that it generates. This is certain to happen because crude prices and exchange rates are sure to continue to go up and these are major components in the price template used by PPPRA. In fact, the mere fact that the PPPRA is retained suggests that the government has not removed subsidy, even though we are aware that it was not provided for in the 2016 budget. We believe that if we deregulate this market, we will see prices that may be lower than the N145 per litre and the reason is simple. Initially following the deregulation, prices will spike. But as more importers enter the market, and supply improves, prices will slump and normalize at an efficient market rate.
Government had since deregulated the diesel (AGO) market and prices seem to have stabilized at between N125 and N130 per litre for a long while now? The question to ask is why didn’t the prices hit the roof? The answer is simply that given the number of traders selling the product, no one can successfully increase the price to unreasonable levels, otherwise, he would not sell. Competition drives prices down. So what is different between PMS and AGO?
Another area we believe the government needs to take a position on is our four local refineries in PH, Warri and Kaduna. The Minister of State for Petroleum and GMD of NNPC, Dr. Ibe Kachikwu was quoted to have said that it would cost up to $700million to bring our refineries to full refining capacity. Some people had continued to argue that the refineries are too old and should be scrapped and sold. I find this argument preposterous. Port Harcourt Refinery 1 was built in 1965, Warri, 1978, Kaduna 1980 and Port Harcourt 2, 1989.
Now compare these to the six operating refineries in Britain. Fawley, (owned by Exxon Mobil) started operations in 1921, Grangemouth (owned by PetroChina and Ineos) 1924,Pembroke (owned by Valero) 1964, Stanlow, (owned by Essar Oil) 1964, Lindsey, (owned by Total) 1968 and Humber, (owned by Phillips)1969. I have deliberately highlighted the ownership of the refineries to make the point that we seem not to have planned very well in the past, otherwise we would have got our major exploration and production companies to invest in refining crude in country.
The refining business is not necessarily attractive on a stand-alone basis because it is a thin margin business. Most times, major companies are made to offer it as a value added service. Be that as it may, we still believe that we should rehabilitate our refineries and thereafter decide whether we have capacity to run it as a public enterprise or want to sell it to the private sector. It is only when we are able to refine locally that we will be able to benefit from the upsides of a low crude oil price regime. This is because locally refined petroleum products are not exposed to the foreign exchange rate as we wouldn’t be importing. We also benefit from cutting out the logistic costs of shipping crude and importing finished products in terms of dual loading, offloading, tariff, freight and all such costs, including demurrage.
It is our contention that the government should deregulate both the foreign exchange market and the PMS market and take away all the subsidies, both overtly and covertly embedded in these products. The government is not only losing revenue that could be channeled to development of infrastructure, but also wittingly or unwittingly encouraging abuse and illicit profiteering by those who were not supposed to be beneficiaries of the subsidies in the first place. The government may choose to subsidize productive activities that would create jobs in the economy.