For years, the IMF has maintained that Nigeria must remove fuel subsidies and also float its Naira currency, for it to advance economically. Some have gone back to some of those statements as Nigeria has implemented the policies, with some challenging short-term results (could still work in the long-term). I will quote some previous press releases:
Case 1: “The IMF urged the Nigerian authorities to remove fuel subsidies by mid-2023, and to increase well-targeted social spending. The International Monetary Fund (IMF) has urged the Nigerian government to deliver on its commitment to remove fuel subsidies by mid-2023”.
Case 2: “IMF recommends establishing a market-clearing unified exchange rate with the near-term focus on allowing greater flexibility and removing the backlog of requests for foreign exchange.”
But what if I tell you that the IMF is not actually wrong even in the short-term. If you read their reports, they always put something like this: The IMF recommends a “multi-step approach to exchange rate unification and flexibility.” In other words, both the fuel subsidies and exchange rate removals cannot be one-time events, rather, extended and cascaded series of events, before they’re removed. Nigeria’s playbook was different.
This is important because everyone, in the long-term, expects fuel subsidies to go and the Naira floated, as the economy matures. What that long-term means varies; it could be 2 years, 5 years or 10 years!
But right now, Ndubuisi Ekekwe maintains that fuel subsidy in Nigeria is not a wrong policy; what is wrong is the corruption in Nigeria’s fuel subsidy management. In my position, Nigeria has to reform that process and remove that corruption, and if it does, it can advance economically. In the United States, the US postal service has not made a profit in the last 20 years because it subsidizes the US supply chain to drive productivity in the economy. If you check the top 10 largest economies in the world, more than 80% subsidize energy.
And on floating Naira, it makes no sense since basic economics will always work. Nigeria does not “produce” enough US dollars even as it needs tons of it. So, if you float it, without fixing that lack of parity, the equilibrium point will shift, and Naira will lose value.
In AO Lawal’s Economics textbook for secondary schools, he postulated “floating” companies and industries as means towards economic development, as he discussed location and localization of industries, and their associated benefits. Nigeria must focus on floating companies over just Naira, as floating firms provide paths to a sustainable economic future, by improving US dollar supply via exports, and reducing demand for it via local substitution of import.
The IMF recommended a multi-step approach to exchange rate unification and flexibility. While such an approach carries some implementation and credibility risks, it seems appropriate given the need for monetary policy to support the economy and steps needed to move from the current system to a well-functioning exchange rate system. At the same time, it will be crucial to follow through with reforms without delays and not to backtrack, to ensure maximum effect. Likewise, clear and timely communications of the FX strategy to the private sector are also important to instill confidence.
Comment on Feed
Comment 1: Ndubuisi Ekekwe with the recent result posted by CBN, how long can Nigeria subsidize forex?
I read a write-up today that states that about 90% of stock fish produced in Norway is exported to Nigeria market. When we aren’t producing enough, should we spend the little we have on such imports?
We abandoned the important things like Education, Healthcare, etc. to attend to less important things. We don’t even acknowledge that government is subsidizing many of these things. It is their responsibility.
Nigeria economy is very dominant in the west African sub-region. Our subsidy on fuel is a blessing to many of our neigbouring countries. To me it’s a major indicator that as much as we are protecting our economy, we also influence many other countries’ economy. Like you said, how do we remove the corruption of subsidy? I am sure Nigerians will gladly endure a N500 per litre PMS price till the government can sort itself out but unfortunately, nobody can vouch for NNPlc’s calculation of what the landing cost is and thus it has created trust issues.
I hope the forensic auditor to CBN, NNPlc, etc. will conclude its job on time and the ministers will be given portfolio as soon as possible. We need all hands on deck to drive this economy.
My Response: “Ndubuisi Ekekwe with the recent result posted by CBN, how long can Nigeria subsidize forex?” – Nigeria generates close to $100 billion yearly from crude oil, agro, etc yearly. And we import about the same with refined fuel taking $77 billion. Largely, we should not have a real issue. The problem is “corruption”. Some of these subsidies are not bad if you eliminate corruption. But if you think you do not want to face it, you will bring the house down (the masses) when fighting the issues. If you think any manufacturer will absorb a 4X increase in the cost of energy, I will respectfully argue that you are wrong!
My Response 1: “Nigeria economy is very dominant in the west African sub-region. Our subsidy on fuel is a blessing to many of our neigbouring countries. ” – you made the case. Why not fix your border?
Comment 2: Ndubuisi Ekekwe , floating the naira is a bad for the Nigerian economy. The IMF should back off IMF policies are evil to our economy. They don’t mean well for us at all. Floating naira when our useless politicians don’t even buy made in Nigeria cars etc. If it continues like this the Naira will be dead. I see the naira going down as low as 1,500 to 2,000 naira to a US dollar before the end of 2023. Mark my words
