11th January, 2012
As Nigerians gathered with family and friends to celebrate the New Year, the federal government was baking a national cake wrapped in the scheme that would instantly make the New Year a bitter one. Barely had the public weaned itself from last year when government dropped a historic surprise on an unsuspecting nation. PPPRA issued a statement abolishing the fuel subsidy. By this sly piece of paper, the federal government breached the social contract with the people. This government, which owes its very existence to the people’s desire to be governed by someone more humble than elitist, has turned its back on the collective will.
By bureaucratic fiat, government made the most fateful economic decision any administration has made since the inception of the Fourth Republic and it has done so with an arrogant wave of the hand as if issuing a minor regulation. Because of the terrible substance of the decision and the haughty style of its enactment, the people feel betrayed and angry. At this moment, we know not to where this anger will lead. In good conscience, we pray against violence. Also in good conscience, it is the duty of every citizen to peacefully demonstrate and record their opposition to this draconian measure that is swiftly crippling the economy more than it will ever cure it.
By taking this step, government has tossed the people into the depths of the midnight sea. Government demands the people swim to safety under their own power, claiming the attendant hardship will build character and add efficiency to the national economy. It is easy to make these claims when one is dry and on shore. Government would have us believe that every hardship it manufactures for the people to endure is a good thing. This is a lie. The hardships they thrust upon the poor often bear no other purpose than to keep them poor. This is such a time.
I am not calling President Jonathan an evil man. I do not believe he is perverse. However, the economic ideas controlling him are so misguided that they have a perverse impact. Because he is slave to wrong-headed economics, the people will become enslaved to greater misery. This crisis will bear his name and will be his legacy. The people now pay a steep tax for voting him into office. The removal of the subsidy is the “Jonathan tax.” This situation shows that ideas count more than personalities. People may occupy office but how that person performs depends on the ideas that occupy his mind.
Though someday, Nigeria will have to remove the subsidy, the time to do it is not now. This subsidy removal is ill-timed and violates the condition precedent necessary before such a decision is made. First, government needs to clean up and throw away the salad of corruption in the NNPC. Then, proceed to lay the foundation for a mass transit system in the railways and road network with long term bonds and fully develop the energy sector towards revitalizing Nigeria’s economy and easing the burden any subsidy removal may have on the people.
But we know this is about more than the fuel subsidy. It is about government’s ideas on the role of money in better the lives of people, about the relationship between government and the people and about the primary objective of government’s interaction in the economy. It is about whom, among the Nigeria’s various social classes, does government most value. This is why public reaction has been heated. It is not so much that people have to spend more money. It is because people feel short-changed and sold out.
Government seeks to convince us that the Jonathan tax is an unavoidable decision mandated by immutable economic principles. If you accept their premise, you must agree with their conclusion. However, their argument falters at its inception. There are few immutable economic principles. Economics is not an exact science with unbreakable rules like physics.
Economics is no less subjective than politics. It was born an offshoot of politics and there it remains. What this government claims to be economic decisions are essentially political ones. As there is progressive politics, there is progressive economics. As there is elitist politics, there is elitist economics. It all depends on what and who in society government would rather favor. The Jonathan tax represents a new standard in elitism.
This whole issue boils down to whether government believes the general public is worth a certain level of expenditure. It is like the situation where a man dates more than one woman. To each, he promises love thus nothing can be deduced from his words. However, we know he will spend and dote more on one and she will be the one he loves above the others. When banks were in distress, government produced billions of naira out of thin air and in record time. It was explained the swift expenditure was needed to stop the banking system from imploding. There was no worry that government would be bankrupted. If the banks were to fall twenty times in the future, government would jump twenty times to their rescue. It does so because this government lives a conservative economics placing it in close alliance, if not collusion, with corporate power.
However, because the distance between government and the people is far and genuine level of affection is low, government sees no utility in continuing to spend the current level of money on the people. In their mind, the people are not worth the money. Government sees more value in “saving” money than in saving the hard-pressed masses.
Yet, what does government actually save by this measure? The concept of a government that has the unfettered ability to print its own currency needing to save that currency for fear of insolvency is an anachronism. That his economic advisors would cling to this notion is like a person insisting on taking to the expressway in a horse-drawn carriage. For a government that prints its own currency, attempting to save in that very currency in order to defend against bankruptcy in that currency is a relic of the gold standard abandoned forty years ago. If government thrashed the fuel subsidy based on considerations that it will run out of naira then it based its decision on a factor that have not been relevant since the time of the Biafran war.
In 1971, the world left the gold standard replacing it with “state” or “fiat money.” Under the gold standard, a nation had to save gold to support its currency or risk insolvency. After 1971, bondage to gold was broken. Since then, the worth of a nation’s currency is not tied to gold which means that the ability of a nation to print currency is not determined by its holdings of gold. The worth of the currency is based on the strength of the economy and the amount of money the nation prints is determined by that strength as well as the nation’s future economic objectives. A nation can no longer fall insolvent concerning debts or payments issued in the national currency. As long as the fuel subsidy is paid in naira, then Nigeria cannot go bankrupt paying it any more than the ocean can run out of salt water. In a fiat money system, the problem with the fuel subsidy is not impending insolvency as the government asserts. The serious constraint is inflation. Here we must ask whether the payment is so inflationary as to distort the economy. We have been making the payment for years and inflation has not wrecked the economy. This historic evidence refutes the imminent disaster claimed by government.
In advancing the argument that subsidy would lead to imminent bankruptcy, government reveals its lack of trustworthiness on important matters of fact. Is this the same government that several weeks ago claimed Nigeria was among the world’s best performing economies with a GDP growth rate of 7 percent annually? It seems government has a vast canvas on which it can paint a number of different scenarios of Nigeria depending on the whim of the moment. While government may alter its portrait of the nation, the people are forced to live one reality at a time. Is Nigeria a fast growing economy? If the nation’s GDP is growing so strongly, the subsidy or a similar expenditure on the people cannot be the lethal burden government now maligns it to be.
Nigerians have a collective stake in the ownership of our oil resource held in trust by the government of the day. What we need then is the effective management of this scarce resource that will beget long term prosperity to the suffering people of Nigeria and not the present racket in which those in power abuse access and control of NNPC and oil revenue to warehouse money to fund their election campaigns.
This brings us to another inconsistency. On one hand, government states the expenditure is unsustainable yet on the other it claims the amount now earmarked for the subsidy will be used to fund other people-oriented programs. However, the two assertions cannot exist at the same time . If the subsidy is bankrupting us, then reallocating funds to different programs will be no less harmful. A bankrupting expenditure retains this quality whether used for the subsidy or another purpose. Earmarking the funds to something else will not change the fiscal impact. If government is sincere about using the funds for other programs, then it must be insincere about the threatened insolvency.
The concern about government saving naira is purely superfluous. Officials cry that Nigeria will become like Greece. Those who say this disqualify themselves from high office by their own words. Greece sits in a terrible situation because it forfeited its own currency. Thus, it cannot print itself out of insolvency and it must save or earn euro to pay its bills. Because Nigeria issues its own currency, it does not face the same constraint. Again, Nigeria’s problem with the subsidy is not insolvency. Therefore, to go from subsidy to nothing is not wise economics for it “saves” government nothing. What it does is produce real havoc and misery for the majority of the people while the governing elite worship their mistaken fiscal rectitude. Ironically, by acting like the old gold standard fiscal constraints are real, this government will incur the very thing it seeks to avoid. It will subject Nigeria to a crushing economic contraction. The difference between us and the Greeks will be that their situation is the inevitable result of being a weak member in a monetary union dominated by a strong economy, while our downturn will be a discretionary one artificially induced by the backwardness of our policymakers.
By its action, our government placed itself on the list of conservative governments imposing unwise austerity programs on tired and weak economies. The results have been alarming. Greece, Ireland, Spain, Italy, and the UK have imposed stiff austerity. Each nation that has done so now has an intimate relationship with recession. Must we travel the same path? Why does our government think an independently-minded Nigerian success is inferior to the mimicry of European failure? I don’t understand why we take this road. Our government has allied itself with the goals of the European conservatives and not with the needs of the Nigerian populace. No one plucks a chicken to feed his children feathers. Nor does a man set his house on fire just so people can bring him water. However, this is spirit behind government policy. There has been no nation on the face of the planet that has developed or achieved long-term prosperity by devotion to conservative, ultra-free market economic ideas that dominate this government. America, the United Kingdom, and now China all based their initial thrust toward national economic development on significant government interplay in the economy and on sustained government fiscal deficits. If no nation has grown using these conservative ideas when growth was constrained by the gold standard, why would we shackle ourselves to these ideas when we operate under a monetary system that provides the federal government greater policy latitude to achieve economic development objectives.
Again, we must rid ourselves of the old notion that government saving and budgetary surpluses are inherently good and that deficits are always bad. For government to save naira, that means it brings in more than it pays out. Where does this influx come from? It comes from you and me, the private sector. If the federal government saves more, it means the private sector will have less. Government surplus means private sector contraction. This shows that the administration has its priorities confused. It acts as if the people are there to help government run itself. The more beneficial relationship is that government should be giving people the help needed to better live their lives. The government’s position is akin to a wealthy parent demanding his young children bring home more food for him to consume than the parent gives them to eat. We would deride any parent for such meanness. Yet, this government believes this conduct is wise and prudent.
Another argument government has presented is that removal of the subsidy will stabilize the exchange rate. This makes no sense. True, since marketers convert much of the naira from selling petrol gained into dollars, there is downward pressure on the exchange rate and foreign reserves. However, this pressure is not a byproduct of the subsidy. It is a byproduct of importation. With the subsidy lifted, the marketers will earn the same or more from the sale of petrol. For there to be less pressure on the exchange rate would mean the marketers would seek to exchange significantly less of the same amount of naira into dollars simply because the subsidy was removed. There is no logical basis to assume the new Jonathan tax will have the behavioral impact of causing importers to want to hold more naira. The downward pressure on our currency and reserves will not change simply because the imported items are no longer subsidized. In fact, the higher rate of inflation caused by the removal may make importers keener to change naira into dollars. Thus, the real challenge in this regard is for government to pave the way to increased domestic production.
There is another “philosophical mystery” in the government’s position. They state the subsidy must be removed to end the unjust enrichment of the importing cabal. There is a major problem with this assertion. If this is truly a subsidy, there should be no unjust enrichment. A subsidy is created to allow the general public to pay a lesser price while sellers earn the prevailing market price. Subsidy removal should not increase or decrease the amount earned per litre by the suppliers. If the amount earned by the suppliers will diminish materially, what government had been operating was in part a pro-importer price support mechanism on top of the consumer-friendly subsidy. If this is the case, government could have abolished the unneeded price support while retaining the consumer subsidy.
More to the point, government has failed to show how the system it plans to use will be protected from the undue influence and unfair dealings of those who benefited from the discarded subsidy regime. Because it is capital intensive by its very nature, this sector of the economy is susceptible to control by a few powerful companies. Most of the players will remain the same except that a few cronies of the administration will be allowed entrance into the lucrative game. Sending the economy into the gutter is a steep cost to pay just so a few friends can reap a new windfall.
