“Indeed, a major source of objection to a free economy is precisely that it… gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.” Milton Friedman(1912-2006).
“Famine emerges from a lack of interlocal trade; when one locality’s food crop fails, since there is virtually no trade with other localities, the bulk of the people starve. It is precisely the permeation of the free market throughout the world that has virtually ended this scourge of famine by permitting trade between areas.” Murray Rothbard (1926-1995)
Economics is a (social) science that deals with the allocation of scarce resources. Nevertheless, people have called it all sorts of names. Some say it is not a science at all because it has to do with human behaviour. Some more complimentary ones have conceded that though it may be deemed some sort of science it is most appropriate to address it as a ‘dismal’ science. Wherever you come out in the debate, the truth is that it is settled that economics is a social science. This is more because of its capacity to predict human behaviour. Another settled fact is that Demand and Supply respond differently to price, while Price itself responds to Demand and Supply. This is one fundamental truism in the discipline of Economics. If you want prices to go up, the easiest way to achieve it is by bringing supply down. The converse is also correct if you want prices to go down. Those who are familiar with behaviour agree that human beings are inherently rational and therefore selfish, they respond in a way that serves primarily their self-interest. It is for this reason that modern day administrators of the economy know what factors to manipulate to achieve a desired outcome. Done any other way, it will invariably bring distortion to the economy.
As Nigeria was celebrating the Sallah holidays last week, news came from the Special Assistant to the President on Media and Publicity that the President had directed the Central Bank of Nigeria not to allocate any cent to food importation any more. Going by statistics, the Central Bank has done very well in reigning in frivolous importation of items that could be produced in Nigeria. The jury, though, is still out as to the effect of the ban of the 41 items from enjoying foreign exchange in the official foreign exchange market and the recent addition of Milk to that list. It is assumed that the ban is effective and will as such result in the development of local substitutes. If, on the other hand, the ban is not as effective, (a Nigerian common experience), it would mean that the order would merely raise the price of such commodities in the market. This is because the ban leaves importers with the option of funding at the black market at rates much higher than the official window. At the end of the day, this cost will have to be transferred to the final consumer, with its inflationary effects and probably the impact on the poverty index. The simple truth here is that it is the ultimate consumer that pays the price of all commodities.
At a Bankers’ Dinner held in Lagos late last year, the Central Bank Governor, Godwin Emefiele, was reported to have said that the nation’s monthly food import bill fell from $665.4m in January 2015 to $160.4m as at October 2018. The reductions in food import were recorded mainly on rice, fish, milk, sugar and wheat. This represents a cumulative fall of 75.9% and implied savings of over $21b on food imports alone over that period. “Most evident were the 97.3% cumulative reduction in monthly rice import bills, 99.6% in fish, 81.3% in milk, 63.7% in sugar, and 60.5% in wheat” the governor had concluded. Without prejudice to the other points made above, these are significant numbers which indicate that the policy had been effective over the period under review.
Mr. Emefiele also pointed out that to achieve the success so far recorded, the CBN introduced the Anchor Borrowers Programme, which had ensured that Nigeria moved from being a net importer of rice to becoming a major producer, supplying key markets in neighbouring countries. The Anchor Borrowers Programme had been supported by other CBN interventions like the Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) and the National Collateral Registry. The Governor revealed that as of October 2018, a total number of 862,069 farmers cultivating about 835,239 hectares, across 16 different commodities, had so far benefited from the Anchor Borrowers programme, which had in the process, generated 2,502,675 jobs across the country.
There is no doubt that these are good stories coming out of the Central Bank of Nigeria. It is not unlikely that these may be one of the major reasons the President considered an outright ban on allocation of official foreign exchange for importation of food items in the country. While agreeing that in the long run, this would help the country conserve scarce foreign exchange, build our external reserves and ensure sustainable self-sufficiency in food production, there are inherent dangers in that directive which the President may not have taken into consideration. The first of these is statutory and should be of concern to all who appreciate the concept of rule of law and separation of powers. All over the world, the monetary authorities of all democratic nations are, by law meant to be independent and autonomous of both executive and legislative direct influence. This is to ensure that monetary policy decisions are not used to achieve short term political advantages that would have long term adverse impact on the overall economy. In order to enforce this, the Central Bank has its Monetary Policy Committee and Board of Governors. Statutorily, the President has his nominees sitting in both bodies and can influence the decisions of those bodies through these nominees. Theoretically, the President has no power to make the pronouncement he made, except if it was an opinion which he is free to hold. Even as an opinion, he could be seen as interfering with the autonomy of the monetary authority. We are all familiar with the implications of the executive crossing the Central Bank independence line. Those in doubt should read about the Late Idi Amin’s Uganda. The same uproar greeted Trump a few days ago when he voiced his frustration at the exchange rate of the dollar in the wake of the lowering of the value of the Chinese Yuan.
Having dwelt extensively on the statutory aspects of the pronouncement, let us now turn to the economics of it. Like we had earlier stated, the undue penchant of Nigerian consumers for imported items has a direct adverse effect on the value of the Naira, the stock of our foreign reserves, the creation of jobs, imported inflation and general phenomenon of self-sufficiency, or lack thereof, in food production in the country. Conventional wisdom suggests that for a country like Nigeria, still struggling with economic growth and development, we shouldn’t import what we can produce. Economists, however, recommend that we should maximize the production of goods over which we have comparative advantage, while we exchange with countries who have comparative advantage over other goods which we cannot efficiently produce. Two major economic theories, Specialisation and International Trade, have their foundation from this thinking. The big issue therefore, is this; how do we ensure that we do not buy from foreign countries, things we can produce in Nigeria? There are two ways: by a directive like the one the President has just given or by using market forces to influence consumer behaviour. Economists would tell you that legislations and directives hardly work in the real world. You will also agree that were it so, with the plethora of policies and legislations, a host of government agencies meant to enforce such policies, the Nigerian consumer would have become the model in the whole world. However, human beings, like we highlighted earlier, are bound to act in their own self-interest. To the extent that there is demand for those goods, people will continue to demand them and the importers will invariably continue to bring them in. The import therefore, is that bans will only drive people away to informal markets; a very dangerous phenomenon. Just like the saying goes, when you drive people away from the arena where opinions are expressed, they only go to converge in the cellar where revolutions are born. Because economists operate at the arena, they will rather deal with those opinions.
The solution therefore is to find sustainable and holistic ways to make it unviable for businessmen to import the items. How then do we do that? Simple; it is by making importation of food unprofitable. For instance, if the same food item, in terms of quantity and quality is available in the country at a lower price than imported ones, no rational consumer will buy them. Once there is no demand for the goods, no one will import them. Therefore, market forces would rather support a programme that makes the locally produced goods more competitive than one that directs that imports are prohibited. In reality, confronted with a directive that prohibits imports, market forces would not be bereft of responses. The first question market forces would ask is, is there a demand for the banned items? Once the answer is yes, then a few other questions would follow. Is the market in such a state that it will pay the price for bringing in the goods “by fire and by force”? The next question would be, where is the best and most cost-effective place from which to bring the goods? How can the goods be brought in without the prying eyes of the government that had restricted the importation? Since government has banned the item, how can it be brought in at the cheapest cost possible in order for profitable sales to be made? In the process of answering these questions, there is a huge question that may not necessarily be asked and it is the most important question. That question about the quality and safety of the food, since it has been taken out of the sight of the regulatory authorities, standards and safety measures may no longer be enforced. Bear in mind that the country is not self sufficient in food production and may never be. Truth be told, we are yet to see a country that is self-sufficient in food production.
It is our considered opinion that it would be very difficult for the CBN, even if it wanted to do so, to successfully implement this latest Presidential directive. The CBN should indeed worry about the implications of the directives on the economy. I am not sure that it has reliable statistics to show that we have attained self-sufficiency in food production. In fact statistics available point to the fact that more Nigerians are falling below poverty line and Nigeria has actually become the poverty capital of the world. One thing you can literally take to the bank is that should the CBN decide to implement the directive, it will not stop the importation of food into the country. The directive is that our subsidised foreign exchange should not be allocated to importers of food. The importers would naturally source their funds from the black market at higher prices. This price will naturally be passed on to consumers which means higher cost of food with its attendant implication on inflation. Again, the level of banditry and kidnapping in the country also points to declining farming activities in the rural areas and this year may witness very poor harvest. It is also a known fact that a lot of banned items find their way into the Nigerian markets at more exorbitant prices. Sadly, the government is wittingly or unwittingly enriching the ports of neighbouring countries anytime we place a ban on the importation of essential items. Despite our celebration of all the feats we have achieved with rice production, our markets are still flooded with imported rice. That shows that there is still a market for it. It is important to state that in the process, we also deny the country of the tariffs on those smuggled goods, were the goods imported directly into, and through, our facilities.
Our position is that we should avoid the temptation of trying to manage the economy by fiat. That approach has not worked in Nigeria, nor has it worked in any economy I know. I make bold to say that it will also not work in this instance, unless we want to hide our heads in the sand like the proverbial ostrich. Every well-functioning economy has in-built mechanisms to correct itself. All we need are effective and knowledgeable managers who know what to do to achieve desired outcomes at both monetary and fiscal levels. Let us leave command economics for the military era, where, by the way, it was also a colossal failure!