The twin policies of fuel subsidy removal and the floating of the Naira’s exchange rate, to allow market forces determine it, have remained, perhaps, the most misunderstood issues in the governance of the Nigerian nation for about three and a half decades now. The misunderstanding, however, stems from the policies’ unavoidable character of impacting short term pains and sufferings on the populace – giving the policies themselves the unfitting stigma of being the devil’s alternative.
Consequently, each time we make a move to implement these policies and experience a little of the initial heat and pains, we quickly run back and declare them the worst economic policies on Earth. Proper understanding is, therefore, vital and this contribution is to delete the error in understanding by exploring the full character of the two policies, so that maximum clarity could be brought to bear on the issues and whatever is truly wrong, identified and corrected.
The beauty of the economic policies of subsidy removal and exchange rate floatation, for us as a developing nation, lies in the role of price as an economic indicator that allocates resources in an economy.
First, subsidy elimination has the immediate impact of raising prices. Second, the floatation of the Naira’s exchange rate also has the impact of raising domestic prices, too, though not immediately, but by first devaluing the Naira vis-a-vis the currencies of Nigeria’s major trading partners, because of the country’s poor production and export index relative to that of her trading partners.
As holders of a devalued currency, therefore, we pay more in Naira for the stronger currencies; consequently, the goods and services we buy from the economically stronger nations assume higher prices for us in naira. So, for both policies, the result is higher prices domestically. As the Naira gets more devalued, domestic prices rise even higher. The above scenario is not a comfortable situation at all.
However, it is important to note that what a currency gets from the market forces (devaluation or appreciation) is exactly its worth – no favouritism. Market forces are blind and just dealers. They tell nations and their economies their true worth – that is, the level of their economic power, and it is important that they know, so that if what is evident is unsatisfactory to any, the country does something about it in good time.
Now, what do we do to stop the devaluation of our currency, make it appreciate in value and be able to command greater quantity of foreign goods and services, so that such goods and services would become cheaper for us?
To find the answer to this question, we must first know what gives national currencies their power and value, which the forex market forces merely reveal. A currency is empowered by the production and export capacity of the economy that owns it. The power is high or low if the production and export is great or small. Therefore, the only way to make our currency stronger and to command greater foreign goods and services, and make their domestic prices drop is to produce and export more.
The same goes for goods and services the prices of which have been increased by subsidy removal. Increased production of such will bring down their prices, because the higher the supply, the lower the price.
The implication of the above is that high prices are actually telling us a story and advising us. They are saying: “You have not been producing but consuming only.” They are advising us: “Produce! Produce and live; fail to produce and perish.” So, the bottom line is production. Production is everything in the economy. Nations win or lose in the field of production; economies rise and fall in the field of production.
As economic indicators, high prices signal to our entrepreneurs what to invest their capital in and produce more of, in order to take advantage of the higher prices and make more profits, because those higher prices actually mean profit areas. As our entrepreneurs do this, they produce more and drive down prices unwittingly. Thus, economic theory is of the view that when the two major policies of the Tinubu administration are in place in an economy, entrepreneurs will respond by investing and producing more. Supply will then increase and, in the presence of a constant demand, prices will drop. Then, demand will subsequently increase at a point, leading to new cycles of economic expansion and boom, all things being equal. This is why the two policies are just right for us, inspite of the short term pains that follow.
What then is the problem with our own implementation of the two policies? Why are our own higher prices not yielding the expected results of increased production as to bring down prices, and produce cycles of economic expansion and boom?
Well, we have, however, said that such can happen only if all things were equal. Could there be somethings that are unequal? Certainly, there are issues in the nature of our system, which make somethings associated with these policies to be unequal. Those things, however, present as problems in the system, and prevent our expectations from coming through.
So, it is important that the problems be pin-pointedly identified, and subsidiary policies packaged to assault and decimate the problems, and thereby open up the way for the main policies to produce their much expected impact. At this point, therefore, it is our advice that His Excellency, the President of the Federal Republic of Nigeria should, as a matter of urgency, seek the needed assistant policies to aid the two major policies fulfill their purposes.
The ongoing penury, misery and sufferings of the mass of Nigerians will continue to endure and even worsen unabatedly, should this recommendation be ignored, compelling us to, once again, consider withdrawal.
This must not be allowed to happen, for we have no viable alternative outside of the two main policies. Government must do the needful to have the twin policies serve us as they should. The subsidiary policies are key.
Echeghe is a Public Policy Commentator from Abia State University.
