The 2017 Budget speech: Why Buhari’s economic ideas are wrong
President Buhari’s speech to the National Assembly last December on the 2017 budget was, for all intents and purposes, a lecture on his economic philosophy. The parts of the speech in which the president set out his economic ideas are far more significant than those that dealt with the brass tacks of the 2017 budget. Those philosophical biases will have far-reaching implications for the competitiveness and health of the economy than a budget that is likely to be more honoured in the breach than in the observance. For instance, if the economy starts to recover this year, as some analysts are forecasting, it will not be because of the 2017 budget or of any structural adjustment, but because of oil price that is currently running at nearly $60 per barrel, well above the budget’s benchmarked price of $42.5. But no economy should depend solely on such exogenous factors. This is why, for me, it’s more useful to discuss the president’s economic philosophy than details of the 2017 budget.
Now, let’s start with the first ideational theme in the president’s speech: patriotism. President Buhari talked about “those patriotic Nigerians who believe in Nigeria”. But who are in this category? Well, according to the president, they include “manufacturers who substituted imported goods for local materials”. So, by inference, any manufacturer in Nigeria who uses or wants to use imported raw materials is unpatriotic! What a strange thing for a president to say! All over the world, manufacturers are expected to procure cheap and quality inputs from whatever source(s) globally in order to produce quality goods that can compete internationally. Of course, if cheap and quality inputs are available locally, economic rationality demands that manufacturers should use them. But it defies economic logic for any government to insist that manufacturers should, willy-nilly, use local inputs.
Yet, this was the warped philosophy that informed the central bank’s misguided exclusion of 41 items from access to foreign exchange. Last year, the minister of industry, trade and investment, Okechukwu Enelamah, admitted in a BBC interview that the discredited CBN forex ban has had “unintended consequences” because the 41 items include essential raw material inputs. As a result, manufacturers have suffered gravely because they can’t obtain foreign exchange to import these raw materials. No government would deliberately harm industries in this way, except in Nigeria, where the president believes that manufacturers who use imported inputs are unpatriotic!
But why, you may ask, does the Buhari government pursue such an ideologically-backward, economically-illiterate and industry-destroying policy? Well, the president said in his speech that, “We wasted our large foreign exchange reserves to import nearly everything we consume” and, as a result, “we saw our reserves eroded”. But how true are these claims? First, is Nigeria really an unusually import-dependent country? And, second, are imports to blame for the erosion of Nigeria’s foreign reserves? Let’s consider the two claims in turn.
A country’s openness to trade is measured by the sum of its trade (exports and imports) as a share of its GDP. For the sake of this discussion, let’s look only at the import component. According to World Bank figures, Nigeria’s import of goods and services as a percentage of its GDP in 2012 was just 12.9%, and this dropped to 10.8% in 2015. Compare this with South Africa’s, which was 33% in 2013 and 32% in 2015. Given that Nigeria has a population of about 175 million, while South Africa has 52 million, you would think that Nigeria should be importing more goods and services than South Africa, but it is not. In fact, according to the World Bank, Nigeria ranks only 34 out of 137 major importing nations. This doesn’t suggest a country that is heavily import-dependent.
Of course, the government will point to the shortage of foreign exchange. But are imports the primary reason for Nigeria’s foreign exchange problem? The answer is no! The country is in a forex pickle because it depends on one export, oil, which accounts for about 95% of its foreign exchange earnings. Nigeria is not generating enough foreign exchange from non-oil exports and foreign investment. Inevitably, when the price of oil collapsed, the country’s foreign exchange earnings dipped significantly. But a foreign exchange shortage is not a problem, even with imports, unless it is accompanied by a fixed exchange rate. It’s only when an exchange rate is pegged that imports pose a serious risk to a country’s foreign exchange reserves.
When a country’s currency is too strong or overvalued, it makes imports cheaper, and, of course, when most things become cheaper, people tend to buy more of them. Over the years, a strong naira encouraged cheap imports, which were paid for with scarce foreign exchange. Now, let’s be clear, imports themselves are not the problem, but a pegged naira. And the solution is not to ban or restrict imports, which is counterproductive, but to float your currency so that its value can adjust and regulate imports accordingly. For instance, since the government partially floated the naira, imports have reduced, because the weak naira has made imports more expensive. Yet, the government has refused to allow the full flotation of the naira. Indeed, recently, Buhari said: “I will resist the devaluation of the naira”. But the president can’t command the markets as he can order the military. Markets react to incentives, and one of them is a flexible, market-determined, exchange rate.
Let’s face it, President Buhari has some strange ideas about imports. For instance, he said in his speech: “By importing nearly everything, we provide jobs for young men and women in the countries that produce what we import, while our young people wander around jobless”. First, this is cheap populism, because, as the Nigeria Industrial Revolution Plan makes clear, even the public sector doesn’t patronise Made-in-Nigeria products! Ignore the hypocritical publicity gimmicks by key public officers who are sudden converts to Aba-made goods. The president’s statement is also self-contradictory. The same Buhari who so hates imports also said in his speech that “We must take advantage of current opportunities to export processed agricultural products and manufactured goods”. So, if imports destroy jobs in Nigeria, won’t Nigeria’s exports cause job losses in other countries? How disingenuous!
Of course, in truth, President Buhari is instinctively mercantilist. He believes that export is good, import is bad! “Under my watch”, the president said, “we will grow what we eat and consume what we make”. Really? Which country ever does that? This is mercantilist populism at its worst. But, forget about the fallacy of self-sufficiency, the idea that Nigeria can ban or put prohibitive tariffs on imports, while also promoting its own exports, is like living in cloud cuckoo land. It has no place in today’s globalised and interconnected world!
What’s more, protectionism will also harm exports. According to the Lerner symmetry theorem, imports and exports are the flip side of same coin; and restrictions on imports act as restrictions on exports. When you restrict imports, particularly of raw materials, you raise production costs in the industries that use them, and hamper their productivity and ability to compete and export. Furthermore, protectionism creates anti-export bias. Few firms would have the incentive to produce quality goods for export markets when they can easily take advantage of a protected market at home? It is often said that “industries than can compete globally will thrive locally”. But companies than cannot compete internationally can only survive at home if propped up by government protection. They are zombie firms!
But when a government protects domestic industries from international competition, it harms consumers and the economy. This is because protectionism transfers income from consumers to producers and distorts economic incentives. For example, in a recent article in The Washington Post, an economist argued that when the US imposed restrictions on Japanese cars in the 1980s, the policy created 44,100 US jobs. But the cost to consumers was $8.5 billion in higher prices. Furthermore, as this cost reduced what consumers spent on other goods, there were more job losses in other sectors of the economy than the additional jobs created in the protected industries. So, here is the read-across. While the Buhari government’s social intervention programme is intended to reduce poverty in Nigeria, its protectionist policies will actually make more Nigerians poorer! This is why Adam Smith said that trade restrictions cannot serve the public interest.
Yet, President Buhari said that the “underlying philosophy” of his government’s economic recovery and growth plan is to use monetary, fiscal and trade policy instruments “to promote import substitution”. Essentially, this means exchange controls, import bans and prohibitive tariffs; it means a closed economy! These, you will remember, dear readers, were the same policies Buhari pursued as military head of state in 1984/85. They failed woefully then; they are unlikely to succeed now! Worryingly, President Buhari said in his speech: “I will stand my ground and maintain my position”. Clearly, the president doesn’t understand the power of economic incentives and the danger of economic distortions.
To be clear, there’s nothing wrong with encouraging the use of Made-in-Nigeria goods, but this must be achieved through exhortation and market-based incentives and not trade restrictions. Truth is, only openness and competition can help Nigeria’s economy adjust, recover and grow. And the key tools are flexible exchange rate and trade liberalisation. President Buhari must learn the lessons of economic history, including from his own past!
Olu Fasan