If
there is any lesson the federal government must learn from the lingering petrol
crises, in the unabated long queues at our petrol stations, it is that that a
government cannot substitute itself for the market no matter the depth of its
patriotic intentions. From the
management of the foreign exchange to petrol markets, we see an economic management
paradigm that markets do not matter, that a government can take over the
fundamental functions of markets from the supply of goods, to the determination
of demand and the ultimate fixing of prices. Nothing illustrates the fallacy of
this economic paradigm more than the current petrol crisis. When economic goods
are mechanically and artificially priced below their true economic value, the
effective and efficient functioning of markets are distorted, supply dries up
and demand becomes over-bloated. This leads to secondary and parallel markets
where economic goods will ultimately find prices closer to its true value. The few
privileged elites who control supply benefit from unjustifiable rent, the
market becomes inefficient and productivity and economic output ultimately decline.
It will be useful to estimate the productivity loss and output decline
occasioned by the current petrol crisis in all sectors of the economy including
small business and the impact on the quality of life of Nigerian households.
If
the economic and output implications issues of a fixed pricing of foreign
exchange are not as clear, it should be clearer with the petrol product crisis. Essentially, the fixed price of petrol below its
economic value created little incentive for the private sector to participate
in the petrol market leaving virtually the NNPC as the sole supplier. Despite all
patriotic intentions and the best of logistic management, the NNPC alone has
been unable to cope and meet national demand. If any government must be open to
market logic, it should be the one operating in a time of heavy fiscal
constrains like the current administration. In the period of fiscal abundance,
a government might have the resources to call the bluff of markets, even
controversially so but certainly not in the period of fiscal constrains where
private sector resources need to be deliberately courted and mobilized to
complement constrained fiscal supplies. From Venezuela to Nigeria, we see the
same challenge of the anti-market economic policy and its negative effect on
output and employment. A genuinely patriotic Hugo Chavez could call the bluff
of markets when oil prices were high in his days in Venezuela but not the
current Maduro government operating in period of low oil prices and heavily
constrained fiscal state resources. Outputs have shrunk; inflation and unemployment
have skyrocketed in Maduro’s Venezuela.
Shops are empty and there are typical long queues for basic essential
groceries. Like Zimbabwe with the same unorthodox economic policies, we in
Nigeria are now beginning to queue perpetually for fuel, queue for forex and
queue for electricity.
As
it affects petrol and forex markets, the same issues affect the infrastructure
and power markets. The Works and Power Minister has lamented that while his ministry needs two trillion
naira to complete just the road projects inherited from the previous
administration, his ministry will at best have just about N400billion from the
budget, which is expected to finance road construction, including investments
required to radically upgrade our power infrastructure. It should be obvious
that if we do not get our power markets to work with the right pricing of
economic goods that provide sufficient incentives for private investments from
home and abroad, we should say good-bye to serious improvement in our
electricity situation. Babatunde Fashola despite his good track record may be
potentially demystified by the current government economic policy.
It is not that markets are always perfect and
cannot fail. There are in fact critical instances where markets fail and their
dysfunction necessitates the intervention of the state to protect the poor and the
socially vulnerable. In the case of public goods like education and health,
where the social benefits of investments are far bigger than private returns to
capital, when private capital will not sufficiently invest in public goods, the
state must intervene to correct market failure to ensure the protection of the
socially vulnerable, the poor and the larger society. The state will achieve this by driving public
investments in social services including the provision of subsidies targeting the
socially vulnerable. Such public
investments and social subsidies especially in a fiscally constrained state must
be appropriately targeted to ensure that they are going to only those who
deserve such subsidies, those who cannot afford to pay commercial prices. Designing such social subsidy program can be
very challenging as we see in the petrol subsidy program as well as in the
current forex allocation program, which is effectively a social subsidy program
to buy the dollar at prices below its true economic value. The true economic
value or price of the dollar is the equilibrium price that balances demand and
supply in the forex market. This price given parallel market rate today is
clearly above the official fixed exchange rate.
The
distortion in the current forex subsidy program is obvious. The subsidy program
is benefiting the rich and narrow elites more than the poor. The poor do not
buy dollars. They do not process letter of credit nor buy dollars for capital
investments in their companies and their subsidiaries abroad. They do not pay
overseas school fees neither do they pay mortgages abroad using our dollar
commonwealth. They do not travel overseas and certainly do not buy Personal Travel
Allowances at official rates. And, there is certainly very little trickle-down
effect of this heavy subsidizing of the dollar consumption of narrow elites as
production inputs are priced at near parallel market rates, in the
determination of market prices, even among businesses that are privileged to
get the dollar at official rate. The
evidence of rising inflation confirms that the current non- market, fixed forex
pricing policy, despite its good intentions has not delivered low prices of
goods for the poor.
The same distortion also happens in
the petrol subsidy program. The wealthy consumes more petrol with several fuel
guzzling cars per household compared to the low income that uses mass-shared
public transportation. The wealthy benefit from petroleum product subsidy more
than the poor. The petrol product market
will be more efficient if prices reflect their true economic value at
equilibrium prices that balance demand and supply. At true economic prices, demand
will reduce to match available supply. This will solve the lamentation of the
State Petroleum minister that thirty percent of our fuel imports are ferried
across the border to Cameroun and Chad where petroleum product prices are
closer to their economic value. In a
market driven pricing regime, the arbitrage margin between local price and
cross-border price of petroleum product shrinks eliminating incentives to
smuggle petrol across the border. Fuel imports and demand for dollar for fuel
import will crash; the naira will appreciate with positive spiral effect on
social welfare. Private sector supply of petroleum products will also increase
at market prices, reducing the pressure on NNPC to supply and fulfil virtually most
of national demand. We can then save resources from NNPC and plough them to
fund social investments in infrastructure, public transportation, health and
education.
Our argument in essence is that a fiscally
constrained government such as we have, cannot afford to distort markets in
area where they are potentially efficient and create inefficiencies by its
commission or omission. The social cost of such market distortions is high on
society, the economy and general public welfare. While the anti-corruption
stance of the Buhari government is commendable, it must embrace real economic
pragmatism and allow markets to function if it will make a difference in
reversing the economic downturn. There is very little evidence, even if
nascent, that the anti-market economic policy orientation of the government is
working. Growth rate is at its lowest in decades, unemployment and inflation
are rising. It is now time for change. It is time for the government to let the
markets work.
Olu Akanmu publishes a blog on Strategy and Public
Policy on http://olusfile.blogspot.com
