When CBN Closes A Window….

There’s no punchline. Sorry.

CBN actually just closed the rDAS/wDAS window via a press release today. But what is rDAS/wDAS anyway?

Retail Dutch Auction System is the method by which CBN sells foreign exchange to those who need it. The rDAS system is the main system the CBN has been using for a while now so perhaps that’s what needs a definition.

If you need US Dollars as an end-user, you go to your bank and ask for it. You tell the bank what you want to use it for and the bank then takes that request to the CBN asking to buy on your behalf. The bank then collates all the requests from its various clients and takes it to CBN. From  the point of view of the CBN, this system allows it know who is demanding for foreign exchange and what they are using it for. In theory, it can then refuse to sell to certain people if it feels their demand is not ‘legitimate’. Of course there is an advantage to buying from the CBN – the rate at which they sell dollars – the official rate – is always much better than what you find on the streets or Bureau de Change.

The more requests submitted by banks, the more pressure on the Naira naturally – people will be willing to pay more Naira to get the dollars they want given that the dollar is the scarcer item in that equation. And given that CBN wants to keep the Naira from devaluing, it has to supply more and more dollars to meet requests – It has been supplying over $100m/day in recent times.

So we go to the press release from today.

The managed float exchange rate regime, which the Bank had adopted following the liberalization of the foreign exchange market, has for the most part been successful in ensuring exchange rate stability in line with its mandate.

Think of this as one of those obituary statements in the newspapers where they say ‘it is with a heavy heart that we announce the demise of Chief so and so’. The managed float exchange rate regime that the CBN is talking about is all the ways it has been supplying dollars to the market over the years.

It is saying it has been mostly successful in keeping the Naira successful. But when a statement opens like this, you know something else is coming…

In recent times, however, with the sharp decline in global oil prices and the resultant fall in the country’s foreign exchange earnings, the Bank has observed a widening margin between the rates in the interbank and the rDAS window, thus engendering undesirable practices including round-tripping, speculative demand, rent-seeking, spurious demand, and inefficient use of scarce foreign exchange resources by economic agents. This has continued to put pressure on the nation’s foreign exchange reserves with no visible economic benefits to the productive sector of the economy and the general public.

Ah, here we are. Given all the challenges that the Nigerian economy is going through, the CBN has decided to vote for change.

There is rDAS – which I described above as the rate that CBN sells to the banks, presumably on behalf of its customers. There is Interbank – which is the rate at which the banks sell to themselves. This Interbank rate is of course higher than the rDAS as you can imagine. Why buy from CBN and then sell to another bank at the same rate? even Mother Theresa would not approve of such charity.

CBN is thus saying that the difference between the rDAS and the Interbank (which is closest to what you get from your Mallams) is widening. Given that the CBN is the number one source of dollars in the economy it’s not hard to understand what they are saying – people are buying from CBN and going to sell at Interbank for a profit.

There are two issues here. The first is that CBN is saying some of the requests being submitted on behalf of customers are clearly fake (“spurious demand”). Otherwise why would banks buy from CBN and go and sell to other banks if they were buying strictly for their clients? But you didn’t hear that from my mouth. The second issue here is that dollars are obviously getting scarcer relative to demand. If CBN supplies $100m this week out of say, $150m demanded but then the next week it supplies $120m out of $200m demanded, the dollar is getting scarcer even though CBN has increased the amount it sold (“scarce foreign exchange”).

As the final evidence that this is the work of “economic agents” (a nice name to call people you don’t like), the CBN is saying it cannot see any evidence that the dollars it is selling is being used to import things like agricultural equipment or industrial machines etc (“productive sector of the economy”). In short what is going on is arbitrage by “economic agents” – when you see something available to buy at one price in one location and also see people paying a higher price for it at another location. It will be rude for you to pass up such a profit-making opportunity by connecting price A with demand B. The wider the gap between rDAS and Interbank, the more money people are making obviously. Not nice says CBN.

In view of the foregoing, it has become imperative that appropriate actions be taken to avert the emergence of a multiple exchange rate regime and preserve the country’s foreign exchange reserves. Consequently, we wish to inform all authorized dealers and the general public that, with effect from the date of this press release, the rDAS/wDAS foreign exchange window at the CBN is hereby closed. Henceforth, all demand for foreign exchange should be channeled to the INTERBANK FOREIGN EXCHANGE MARKET.

Is this starting to sound like a coup plotter’s speech or is it just me?

The CBN is now saying it has had enough of your bad behaviour. It no longer wants to be the guy you have put in your friendzone who is funding your other boyfriend…the guy you truly love. You are taking CBN for a fool and it will no longer stand for it.

It has now cancelled the rDAS window. Slammed shut. Banks can no longer come to the CBN every week saying ‘my client asked me to buy $100,000 dollars for them to buy tractors from China for their farm’. CBN is no longer that guy – go and meet the guy you obviously truly love.

Now, if you need dollars, go to the Interbank. Well, as an end-user you really can’t go to Interbank per se. This is simply the market where the bank that has dollars sells to the bank that needs dollars. Because the banks know whats up, it is hard to see how “economic agents” will come and play the same games they have been playing here. We can conclude that the demand at the Interbank will be pretty close to reality.

What does this then mean? Well, we can imagine that even if the bulk of the demand under rDAS was “spurious” as CBN claimed, surely it could not have been all of it? The people who were genuinely demanding dollars through their banks will suffer. They are now as good buying from the black market. If you were going to import machines worth say $10m, the difference you will have to pay now will probably be up to N10/dollar. That’s an extra N100m you have to find.

But the move will strike a blow against speculation – this is like abruptly ending a party and telling everybody to go home.

Most Nigerians have been buying dollars at Interbank rates anyway so on the surface it should not affect them. But it will. Because the Interbank rate is likely to increase given that banks don’t have as much dollars as the CBN has and are likely to sell for as high as they can to each other. This higher rate will probably feed into the economy. But again, the effect might be counteracted by eliminating all those “economic agents” which means demand will not be as high as before, in which case the Naira might not lose value as expected.

We will soon find out either way. If the Naira gains value as a result of this rDAS closure, then we will be able to conclude that the whole thing was to the benefit of “economic agents” in the past and the CBN was right in closing it. If the Naira loses some value against the dollar, then we might also say that genuine people who need dollars are suffering as they have to pay more for what they need.

So what if dollars are so scarce in the market that banks now start selling it for N300/$1 to each other?

For the avoidance of doubt, all authorized dealers and the general public should note that the CBN will continue to intervene in the interbank foreign exchange market to meet genuine/legitimate demands

CBN says calm down. It will still enter into the Interbank market and put dollars up for sale if and when things start to get out of hand i.e. if dollars start to become scarce. If Bank A wants to buy $1m from bank B and bank B says it wants N250/$1, the CBN can get in touch with bank A and offer to sell to it for N225/$1 or something. That will stop bank B from being able to sell for N250 and thus devaluing the Naira further.

What’s the moral of this story? There is none. Let us wait and see.

FF

 

Stealing And Corruption (Book Recommendation)

I am not going to waste my hard-earned education on a useless debate about the differences between stealing and corruption. Much of a muchness.

Between the media chat in May 2014 and the one yesterday where he tried to ‘explain’ what he meant, the difference between stealing and corruption is now as clear as mud to me. Here’s the one from last year (start around 1:05:00):

 

To be fair, he says he was quoting someone else even though he agreed with the quote. He went on to say a ‘common thief, they say he is corrupt’. He also used ‘just’ to refer to stealing a couple of times…’clear cases of where people just stole money’. You can see a thoroughly bamboozled Cyril Stober struggling to hold his laughter.

From this interview, one is tempted to conclude that he was trying to say stealing is perhaps something lesser than corruption. Or maybe not. I honestly don’t know. So let’s move on to yesterday’s chat:

 

This is the long-awaited ‘clarification’ as prompted by one of the journalists. He does not disappoint – he went full ham and by the end was merely one sandwich short of a picnic.

This time it appears he’s saying stealing is actually worse than corruption in our culture.

As an example, if you kill someone, you can go to court and try to hide under Grievous Bodily Harm (GBH) to get a lesser sentence, if you can get away with it. But surely the reverse cannot be the case? You won’t punch someone, land in court and then try to hide under second degree murder. I think this is what he was trying to say – that people hide under corruption to get away with stealing. He didn’t use ‘just’ or ‘mere’ to qualify it this time, so we can conclude he has upgraded the crime from a year ago.

Further, he went on to finally give an example of corruption – ‘two unmarried men sleeping together’. I am not sure but perhaps the President was channeling the words of Peter in 2 Peter 2:7-10 in coming to this definition:

7 and if he rescued Lot, a righteous man, who was distressed by the depraved conduct of the lawless 8 (for that righteous man, living among them day after day, was tormented in his righteous soul by the lawless deeds he saw and heard)— 9 if this is so, then the Lord knows how to rescue the godly from trials and to hold the unrighteous for punishment on the day of judgment. 10 This is especially true of those who follow the corrupt desire of the flesh[a] and despise authority.

That verse is referring to the things that brought God’s judgement on Sodom and Gomorrah – another version refers to men going after ‘strange flesh’. This definition of corruption makes me wonder about the sexuality of some of the people who have been found guilty of corruption in Nigeria. But let us not speculate wildly.

Finally, the President is clear that we should stop calling people corrupt when they have stolen money, maybe. So next time you see a corrupt government official in the streets, you know what to do.

Be that as it may, weapon is not groundnut. So let’s get serious.

I’ve been reading Sarah Chayes’ book – Thieves of State. Nothing has ever made me think deeply about corruption as this book has. The way she uses history to trace the structure of modern-day corruption and more importantly, the effects on the lives of people who are on the receiving end of it, is very skilful indeed.

You can start off by reading this piece in the New Yorker magazine that interviews her and talks about some of the points she makes in the book.

Corruption is no joke and regardless of how the President tries to confuse by clarification, it is something that should be as clear as possible in our minds precisely because of the lasting, and possibly, irreparable damage it can do.

Please get a copy of the book as soon as you can. If you read it and don’t like it, come for a refund from me. But if you do that just to get money from me, that is corruption.

Or is it stealing?

FF

Broom Business: The Supply Curve of Jabez

“Oh that you would bless me indeed and enlarge my territory” – From The Prayer of Jabez, 1 Chronicles 4:10

The Tribune carried a report today about how the broom business is booming on account of being the symbol of the APC. Several other papers have reported variants of this effect and we can at least agree that there isn’t much of a surprise here. However, there is something it can tell us about the kind of economy we are and the kind of economy we want to become.

Let’s start with some basic economics. Please don’t be put off by the graphs.

That’s a fairly simple supply curve (actually it’s a line in this case but let’s play along). The graph illustrates one of the simplest points in economics – the higher the price of a product, the more suppliers will supply. Using the figures above, if the product in question sells for N70, only 70 units will be available for sale in the market. Why? Well, there’s obviously less profit to be made at a lower price so suppliers won’t be motivated to produce more for sale.

But if the demand is actually more than 70 units, then you have more people demanding more than the amount of the product available. This will push up the prices and in turn, encourage suppliers to supply more of the product. Ergo, using the example above, the price goes back up to N100 and 100 units are once again available.

It’s tempting to take this supply curve as a full and simple explanation of what goes on in a market place. Indeed, it’s pretty much correct except that it is somewhat limiting as an explanation. One can conclude that an economy or a market just continues to dance along that supply curve – up and down – ad infinitum. Prices go up, suppliers are happy and supply more which means people can buy less thus reducing demand. So, prices go down, suppliers are unhappy and ‘go on strike’.

But there is something else which happens that helps to explain how an economy grows and enriches those who take part in it. Another graph (last one, I promise. Also, apologies for the dodgy drawing)

This is what makes life better in an economy. More of the product is being supplied at a reduced price. Why? Because the supply curve has shifted, wholesale, outwards. In economic terms, this is the answer to the prayer of Jabez if you like – the area to the left of the supply curve is the coast of Jabez. His coast has been enlarged.

When we were dancing up and down along the old supply curve, perhaps it would have been hard to believe that the market could clear 120 units of the product at N80. Looking at the old graph, to get to 120 units, we would have needed a price of N120. What gives?

Profit has a smell and producers/entrepreneurs/suppliers have a nose for smelling it. The thing that causes that supply curve to shift outwards is the entry of new suppliers into the market. It’s not the old guys from the old curve who were leading us on the up and down dance. New hustlers have smelt profits and have entered. They are happy to sell for a lower price to win market share and as a result, they make the market bigger by drawing in people who would never have been able to afford the product or bothered to buy it (innovation or marketing).

The world is full of practical examples of this. In 2011 in the UK, around 150billion text messages were sent. By last year, the number had dropped to an estimated 140billion text messages. If an alien were to land on Earth and the first thing he saw were those numbers, he might be tempted to conclude that humans are reducing the amount of time spent talking to each other. In reality, the supply curve for messaging has shifted outwards and new people who were not there even 5 years ago have entered the market. In this case, they haven’t even reduced the price; they have crashed it to zero. So today, the number of messages being sent via BBM, Whatsapp, Snapchat and the likes reached 300billion last year.

People are still sending text messages. People are also sending instant messages. The sum total is that far more messages are being sent today than 3 or 4 years. The visiting alien would be spectacularly wrong in his conclusions.

So what does this all have to do with brooms? Some quotes from the article:

Mrs Hadija Ayeola a broom seller at Ojodu Local Government Area, told Inside Lagos that brooms within the period were sold between N150 and N250 each, depending on the size.

“Right now, the price has turned back to the previous price of N80 and N100, but I must say that APC as a party has turned around broom business, not only in Lagos but also in other parts of the country. The business was good within the period of rally, I sold all my brooms and I thank God for the opportunity.

We did not hike the price to the detriment of APC presidential rally in the state but we did it for us to have a livelihood.

I travelled as far as Osun State to purchase the brooms and I have to think on what price to sell, so that I can make a little gain,’’ she said.

Another seller, Mercy Odesola, explained that the business boomed at the period of rallies and also the commended APC rally in the state.

“The price was not high; selling broom between N150 and N200 is not too much and you know that broom is the symbol of the party,’’ she said.

Mrs Ayeola is not telling the whole story. Could she really have hiked the price of her brooms? It is doubtful. Mercy Odesola also makes reference to the prices in a way that tries to give herself the credit. Bless her.

Definitely, more brooms are being sold. And people who were not broom buyers 6 months ago are now buying brooms. Knowing what Nigeria is like and how people don’t waste time in taking advantage of an opportunity, it is not hard to imagine that some of the people selling brooms today were doing something else a few months ago. We have new broom suppliers in the market.

Yet more evidence of the pricing system at play in the article:

Another seller, Evelyn Njoku, also admitted the upsurge in demand for the brooms but regretted that the price had not changed.

“Although the demand for the broom rose so high, the price still remained the same, a medium size broom still sells for N50.00 while the big one still goes for N100,” Ms. Njoku said.

Amen somebody?

If you are looking for evidence that the supply curve has shifted out, this is it. Evelyn Njoku is saying that despite the increase in demand, she is unable to take advantage of the market by increasing her prices. Producers/Suppliers/Entrepreneurs have smelt the profits to be had from selling brooms and have entered the market.

These days capitalism is like a dirty word. This is a tragedy because capitalism has done far more than anything else to better the lives of people around the world. Indeed, as one of my favourite Professors, Deirdre McCloskey, says, we should no longer call it capitalism (which gives the impression that capital is simply being accumulated) but ‘trade tested betterment’.

These principles have implications for the way we like to make policies in Nigeria. And they are worth thinking through

1. Imagine that the Nigerian government wanted to ‘support’ the ‘nascent’ broom industry. Since the government hardly has a direct relationship with many of its citizens, the first thing that will need to happen is for a cabal to be formed – Association of Nigerian Broom Makers and Distributors (ANBMD). The chairman of this cabal probably won’t know the difference between a broom and a rake, but what does that matter? The talent required to head this broom cabal is not knowledge of broom making but rent seeking.

The cabal will pay courtesy calls to the President in Aso Rock where he will be handed a special broom and he will make a show of sweeping with it, live on television. The cabal will also present him with an award as Chief Sweeper of the Federation for his dedication to the local broom industry (which no other president before has shown).

In the end, the government will come up with a grant of N5bn to support the broom industry or something of the sort. To crown it all, a massive tariff of 1,000% will be placed on imported brooms or, depending on how righteously indignant the Minister in charge is, an outright ban on broom importation.

5 years later, it will emerge that no actual brooms were produced but there was an uptick in the number of Range Rovers imported into the country around the time the grant was released. Meanwhile, brooms will continue to be smuggled in via Benin Republic to the shock, shock I tell you, of the Minister in charge.

And yet, this example of brooms tells us a very simple point – the best way to help poor people is to buy things from them. It’s as simple as that. Mrs Ayeola, Mercy Odesola and Evelyn Njoku would probably never benefit from the N5bn ‘intervention fund’ for the broom industry. But the increased number of brooms they can sell is far better than any government fund.

2. When a policy is about to be announced, usually the target is something that Nigerians are currently importing from abroad. This thing will then be relentlessly attacked in the media with stories like

S-C-A-N-D-A-L: Nigeria spends N472.9 Quintillion Every Year Importing Slippers from Abroad! W-A-W-U! OMG!

Slippers are of course something we can produce in Nigeria so by importing so many, we are keeping people abroad employed when we should be ‘self-sufficient’ in slippers. It’s a seductive argument and anyone who argues against it risks being labelled an economic saboteur or an agent of Western Economic Imperialists and racist marauders.

But again, what does the broom example tell us? There are things which are already being produced in Nigeria that can be boosted. Look around you; they are all over the place. Of course it is sad that it has taken politics for us to discover that the broom industry not only has capacity to expand to meet rising demand but it can also do it very quickly and without fuss or government intervention.

Nevertheless, the lesson remains useful – the economy has many more cylinders to fire on if the conditions are right.

3. Where you have a ‘nascent’ industry, well, it’s only natural that some ‘protection’ will be offered by policy makers. This is another ‘policy’ that is hard to argue against and some version of it is guaranteed no matter who is in government.

But it’s worth thinking about a bit more. Of course, it always starts with protecting an industry against foreign competition but does it ever end there? From the point of view of those benefitting from the protection, foreign competition does just as much damage as local competition hence why cabals are needed to keep outsiders at bay.

This kind of protection is what keeps a market dancing up and down on the same supply curve and makes it impossible for the supply curve to shift outwards.

Imagine requiring a licence or approval to become a broom producer or seller? For sure, Evelyn Njoku wont be complaining about an inability to raise prices like she did above (assuming she’s inside the cabal). The increased demand would have been met by much higher prices and you get a scenario where people who need brooms to do their normal sweeping are priced out of the market and start resenting politics or anyone they feel is to blame.

People talk a lot about money grabbing greedy capitalists yet in this instance, Evelyn Njoku’s ‘greed’ has been curtailed by the market – if she raises her prices, the new entrants will take her market share by under-pricing her. Once protection against foreign entrants starts, it is only a matter of time before Nigerians become the actual victims. No market better illustrates this than the cement market in Nigeria.

4. Final point – where can broom making elevate a nation to anyway? It’s hard to tell. But in the first half of 2012 alone, Mexico exported 3.1million brooms (broom corn) to the United States (see chart below). The Mexican broom industry got a big lift when the North American Free Trade Act (NAFTA) was passed in 1994. The American broom industry couldn’t compete and most producers left the market for the Mexicans.

The point here is that brooms are hardly the first thing you will think about when trying to figure out what a country can export. But homes and public places will always need to be cleaned and presumably, witches will always need to fly. That the demand or exportability of something is not immediately obvious doesn’t mean it does not exist.

All of this leaves us with one final question – how can we boost demand in a way that is not artificial or overly cyclical like what we have in the ongoing political economy? How can we get Mrs Ayeola to sell more brooms, whether or not the APC have it as their party symbol? We know that she will put the money back in the economy by using it to send her kids to school and buying better quality food etc.

That one is a topic for another day

FF