Monthly Archives:

Budgets have never been so crucial for South Africa and Nigeria

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 23 Feb 2016. See link viz.

South Africa’s finance minister Pravin Gordhan is scheduled to present his country’s budget for the 2016/17 fiscal year on 24 February, one month before the beginning of the fiscal year on 1 April; a tradition the country has rarely trifled with. Its continental rival, Nigeria, does not have a coherent budget two months into the country’s 2016 fiscal year. So, even as markets decry the current state of South Africa, Nigeria is doing so much worse. South Africa’s central bank is also doing an excellent job with the country’s monetary policy. The same cannot be said of the Nigerian central bank. Still the two countries’ budgets would be a major determinant of how much progress their economies make this year. In the South African case, a conservative budget is what is needed to placate key stakeholders, especially ratings agencies. Nigeria needs to be prudent as well. However, Nigerian authorities have opted for the type of fiscal expansion unprecedented in the country’s history. Even then, Nigerian authorities have not been able to produce a workable document. That job has now been unwittingly delegated to the Nigerian legislature, which instead of debating the substance of the budget is now overwhelmed with the task of reconciling the figures and producing a coherent document in the first instance. It is pertinent to note at this stage, that the economic headwinds facing both countries are similar. One country has been forced to follow the path of relative prudence because it is more integrated into the global economy. Incidentally, Nigerian authorities are also learning that it would not be enough to simply talk of wanting foreign direct investments without providing the type of certainty that investors need to make capital allocations to their country. It is now abundantly clear that short of painful and palpable economic consequences from the authorities’ dated policies, Nigeria’s President Muhammadu Buhari may not see the missteps he has made adopting some of them; his naira policy in particular. He may not have to wait too long. Economic growth for the first quarter of 2016 would likely be poor. Much of the momentum economic agents were banking on to power the economy this year was the budget. And now even that does not inspire confidence. By the time it is finally passed by the country’s legislature in March – hopefully and that is if things run smoothly – most private capital allocation decisions dependent on the fiscal outlook would probably only begin to bear fruit in the third quarter of 2016 and even then perhaps only marginally. Nigeria should probably brace up for growth of about 3 percent or less this year. In the South African case, growth would likely be zero or near zero percent in 2016. Drought effects, likely tighter than planned monetary policy, and a likely ratings downgrade to junk status are some of the reasons why. Likely continuing student protests and probable labour unrest during the course of the year are also weighing factors.

After the relatively cool reception to the State of the Nation address (SONA) by South Africa’s President Jacob Zuma on 11 February, there are still great expectations about finance minister Gordhan’s proposals. Keen watchers would be ratings agencies that are all but decided on a likely downgrade of the country’s credit ratings. There is a high probability Standard and Poors (S&P) would downgrade South Africa’s rating to junk status in June. Having been behind the curve relative to its rivals, Moody’s would almost certainly downgrade South Africa to one notch above junk status at some point this year. Actually, Moody’s dilemma is likely whether a two-notch downgrade straight to junk might not be more appropriate; in part to correct the image it has been lenient hitherto. There is some resignation to the junk scenario among officials, albeit they have been putting on a brave face, fervently making the case that the country could avoid a downgrade. It is expected that finance minister Gordhan would make some major cuts in expenditure and probably raise taxes. Judging from President Zuma’s speech, it may not be far-reaching enough. There is not yet the political will to make the kind of aggressive, unpopular moves that are needed to turn the country around. There might actually not be the political space for them. For instance, authorities need to sell some state-owned enterprises that continue to weigh on the country’s finances. Instead, authorities are actually setting up new ones. In his SONA speech, President Zuma announced the setting up of a state-owned pharmaceutical company to supply vital drugs to public hospitals that are currently procured at exorbitant prices from the markets. This is likely popular with the masses but sub-optimal for the fiscus. South Africa should actually be letting go state-owned enterprises, not setting up new ones. Another much more effective cost-cutting measure that would resonate with ratings agencies would be to cut the size of government. The announcement by President Zuma that the number of capitals should be reduced to one from the current two – Pretoria and Cape Town – is not far-reaching enough. The number of government ministries needs to be reduced as well and the consequent redundancies dispensed with.

Even when such far-reaching measures are taken, there is the issue of growth. Forecasts for 2016 are already tending towards zero. Moody’s ratings recently announced it expects the 2016 headline to be 0.5 percent this year. As the South African Reserve Bank (SARB) may need to be much more aggressive to curb inflation – higher than expected in January at 6.2 percent year-on-year, it would likely revise downwards its 2016 growth forecast of 0.9 percent at its next monetary policy committee (MPC) meeting in March. Markets expected the inflation headline to be a little below 6 percent in January. On 19 February, SARB deputy governor Kuben Naidoo signaled – rather directly and probably aimed at testing market reaction – that the central bank may need to implement much more aggressive monetary policy in ‘a short space of time’ if it is to bring inflation back within target. This is being interpreted to mean it could hike rates further in March – after only just hiking its benchmark rate by 50 basis points to 6.75 percent in January – and perhaps at each of the remaining MPC meetings in 2016. The downside to this appropriate stance would be growth. With drought effects worsening, zero growth in 2016 is becoming increasingly likely. A ratings downgrade amid tighter monetary policy makes negative growth in two consecutive quarters – a recession – this year highly likely. Analysts have already begun echoing this possibility. So, it may matter little in the short-term what measures Mr Gordhan announces this week. Still, were they to be far-reaching enough, it may improve the country’s ratings later in the year.

Political risk is also a major drag. Apart from the diminishing power of the incumbent president, an increasingly aggressive opposition is gaining ground. Student protests on fees, free education, and racism are symptomatic of much more entrenched problems. Increasingly effective, opposition parties like the ultra-leftist Economic Freedom Fighters (EFF) are leaping on the opportunity. The ruling African National Congress (ANC) would be forced to respond. For instance, ‘FeesMustFall’ protests in 2015, resulted in upward adjustments to the budget allocation of the government’s financial aid scheme for students. Above-wage labour settlements are also inevitable compromises the ruling party may be forced to accommodate as it tries to hold together its tripartite alliance with the Congress of South African Trade Unions (COSATU) and South African Communist Party (SACP). These potential settlements are a great source of concern for the SARB. The aggregation of these risks – drought effects, exchange rate pressures, political upheaval, above-inflation wage settlements, higher interest rates, slowing Chinese economy, and dull global economic growth – is overwhelmingly credit negative. Having downgraded countries like Brazil, Saudi Arabia, Bahrain, Oman for less, S&P cannot afford to ignore these risks based on positive signaling from authorities alone. There is a credibility issue for all parties. On the one hand, South African authorities are faced with the task of rebuilding their lost credibility – and it would be foolhardy to think four months to June would be adequate to restore it. Ratings agencies face their own credibility issues as well. Of the three major ones, S&P has proved prescient and much more diligent. Going from its no-nonsense drift thus far this year, it is highly unlikely it would not downgrade South Africa in June. Moody’s faces a bigger credibility problem. In light of what is now known, its current rating for South Africa is not an accurate reflection of the country’s credit-worthiness. It needs to restore that credibility. This is likely what has motivated its aggressive turnaround to the downside on the country. Recent warnings by Moody’s in so short a space of time are ominous. One expects it would downgrade South Africa by at least one notch soon. What South African authorities should probably focus on is a subsequent recovery. The advice to authorities would be that they embark on much more comprehensive structural reforms now. One is not sure if the resignation or removal of President Zuma would help douse some of the negative sentiments. Irrespective of who is president however, if he or she does not implement the type of painful, unpopular and aggressive structural reforms needed to return South Africa back to a sustainable growth path, then the current headwinds may herald the beginning of a heartbreaking and downhill journey towards stagnation.

In the Nigerian case, there is a clear need for President Buhari to get his house in order. He is failing on the economy. Year-on-year economic growth in the first quarter of 2016 would likely be lacklustre – could be negative even – due to constrained economic activity in the quarter thus far. There is an urgent need for President Buhari to constitute a strong economic management team. It is also abundantly clear that there needs to be a change in leadership at the Central Bank of Nigeria (CBN). There are sufficient grounds for asking Governor Godwin Emefiele to resign. Although his current term would not expire for another two years at least, the malfeasance under his watch during the Jonathan administration is solid ground for him to be excused. Considered objectively, his probable culpability in the whole affair potentially taints the advice he offers the president. Two of the most recent CBN governors have come out publicly to criticize this current CBN leadership. If former governor Chukwuma Soludo is not considered apolitical, could this also be said of erstwhile top banker, Emir Muhammadu Sanusi? It is highly unlikely that Emir Sanusi’s relationship with an international financier would prevent him from airing objective views. The Nigerian president seems ideologically entrenched to the argument that since the country does not export much, a cheaper naira has limited advantages. However, the need to devalue the naira in the Nigerian case is largely based on an anti-corruption and economic diversification argument. How the president does not get this is mind-boggling. This column highlighted previously the political challenge the president potentially faces were he to devalue the naira. Going from commentary among humble people in the country, there is now an awareness that the naira’s value is higher than the official rate. Even sachet water vendors are now conversant with the exchange rate. It therefore borders on arrogance if the president continues to insist on his really stale argument. Frankly, one gets the sense the Nigerian president does not like being ‘guided’ on what to do.

On the 2016 Nigerian budget, it is hugely embarrassing that such monumental errors and numbers manipulation should be associated with the Buhari administration. Although, this is not by the president’s design, as leader he is responsible. More importantly, it is now abundantly clear there need not be as much spending as earlier planned. Various estimates making the rounds suggest 600 billion to 1 trillion naira in budgeted spending could be done away with. There need not be as much borrowing therefore. And the budget deficit needs not be higher than 2 percent of GDP, 1 percent is actually much more apropos. The excuse that the reduced number of ministries and new zero-cost budgeting approach are responsible for the shoddiness is simply disingenuous. Nigeria’s Auditor-General has already come out publicly to say the envelope-system was used in preparing the 2016 budget now being corrected by the Nigerian legislature. And by the way, why did the reduced number of ministries not create redundancies? Reducing the number of ministries without dispensing of the staff seems counter-productive. What benefit then? Cost efficiencies from cutting the number of ministries can only be garnered if it helps reduce the public wage bill significantly. These efficiencies are not discernible from the budget precisely because the gains from the cuts have been limited. With monetary and fiscal policies in such shoddy form amid a continuing oil price slump and strained finances, S&P would likely put Nigeria on a negative outlook or even a downgrade in March. As Nigeria plans to tap the Eurobond market, what was already an unfavourable market would be even harsher on the country for reasons of the authorities’ own doing. As things are at the moment, the cost advantage of borrowing internationally is increasingly diminishing. There seems to be recognition of this by authorities as earlier in the month, Reuters news agency reported plans by authorities to postpone its planned Eurobond non-deal roadshow in March. Although Nigeria’s finance minister Kemi Adeosun debunked this claim to a rival news service, Bloomberg, it is highly likely Nigerian authorities now recognize – as they should – that a Eurobond issue might not be optimal at this time. In sum, the lesson in one’s view for the current Nigerian government is one of caution. The Nigerian president needs to up his game on the economy. He is running out of time. He has to ensure that these avoidable mistakes do not occur again. To this end, the necessity of establishing a highly powered economic management team cannot be over-emphasized. One would advise that the team be dominated by independent members who should not enjoy any form of remuneration from government. And there are highly capable and experienced people who would gladly take up these roles should they be invited. President Buhari should also probably stay at home more. Else, he may wake up one day frustrated at his little progress and with no time left.

Africa should renegotiate EPAs for manufactures’ trade parity (2)

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 16 Feb 2016. See link viz.

Foremost Oxford economists, Paul Collier and Anthony Venables, argue – in their 2007 paper, “Rethinking trade preferences: how Africa can diversify its exports” – that protectionism by African countries has thus far failed to boost manufacturing exports. They also show how trade preference schemes – if properly designed and under the right conditions – could aid industrialization. Their main idea revolves around the need for a change from the finished goods mindset that currently underpins most African industrial policies to that of being part of global value chains. Even then, they argue such schemes only accelerate growth when relevant skills and infrastructure are available. They probably have a point. One wonders though if protectionism would not have worked if the dearth of needed skills and infrastructure was not a constraint. It seems to me that it may be better for African countries to protect their markets pending when they do acquire these requisite complements for industrialization. In any case, one is generally weary of western economists; albeit this pair is quite respectable. Some of that distrust is due to Africa’s history with westerners, mostly dreadful – currently reading Martin Meredith’s recent book: “The Fortunes of Africa.” To be fair, Africans have also been complicit in what is still a lagging continent. Still, my personal experience makes me convinced only Africans can lift their continent from its perennial inertia. If you have worked or lived in London, New York, or any of the other major financial centres, you know ‘Africa’ is an exclusive, niche club. Outsiders – mostly Africans – face high barriers to entry. Africans who try to be ‘AfricaN’ in these places are reminded they could simply board a plane back home. So, worried I might be biased on the revised Economic Partnership Agreements (EPAs) not being in the long-term industrial development interests of African – or African, Caribbean and Pacific (ACP) – countries, I aimed to seek the views of ‘AfricaN’ economists. I got the opportunity on 24 September 2014 at Chatham House in London. Dr. Adam Elhiraika of the United Nations Economic Commission for Africa (UNECA) had come for the launch of UNECA’s 2014 Economic Report on Africa aptly titled: “Dynamic Industrial Policy in Africa.” During the Q&A session after his presentation, I put the question on my concerns (or biases) about the EPA. I got the sense he believed the EPAs in their current form may weigh on Africa’s industrial progress and should be re-negotiated. Some African authorities probably think re-negotiating these revised EPAs would be a daunting task. I beg to differ. Europe needs new markets. With low population growth, it could not possibly sell all the goods it could manufacture in its own market. Europe needs the raw materials that Africa has in abundance – always has. Europe needs the EPA.

Africa’s wealth can only be an advantage if the raw materials it possesses in abundance are available primarily for its own industries and only sold to foreign partners after local industrial requirements have been fulfilled. And even then, only as finished products and at such prices that the destined country’s manufactured goods would never be as competitive. This is the ideal but unrealistic scenario. Were Africa to industrialize and produce goods with the same efficiency and of similar quality as its European counterparts, free movement of goods may not be so attractive – it probably motivates the advocacy for the global value-chain plug-in concept. There would simply be no space for African goods in that saturated market. Incremental demand for European goods is to be found in the still relatively virgin markets of Africa. Simply put, Africa needs to manufacture goods for Africa. However, it could not possibly compete with other countries’ manufactured goods in its own backyard if it gives up its coercive power to impose punitive import bans and tariffs. In my view, this revised EPA – albeit better than past ones – would serve to ensure a constant lag in relative competitiveness for African goods. One of the most effective ways of gauging trade between countries is to visit the local supermarket. In South Africa, most of the consumables on the shelves are made locally. Even when there are foreign brands, they would typically be produced locally. In Nigeria, supermarkets stock mostly foreign brands. The data supports these observations. Whereas manufactures accounted for just 3.3 percent of EU imports from the Economic Community of West African States (ECOWAS) region in 2014, they constituted 28 percent of total exports of the Southern African Development Community (SADC) to the EU in the same year. The SADC region has always had – and still has – a relatively stronger industrial base. Outside of commodities, most of the goods – semi-processed or processed – that Africa sells to Europe are bought by Africans in the diaspora or adventurous Europeans nostalgic about their experiences on the continent. As I recall – when seeking the ‘African’ food products on those shelves – during my weekly grocery shopping trips to a major UK supermarket chain, it was usually sobering upon reflection that they were ‘African’ only to the extent that they were popular European-owned brands one was used to back home.

Should Africa opt out of the EPA? No. If well negotiated, it could be a catalyst for Africa’s industrial development. Ideally, duty-free access for Africa’s exports to the European Union via the EPA should supposedly make its goods cost competitive relative to say, Asian ones who pay duty. Tariffs and duties that would have been paid by African exporters had there been no trade preferences also add to capital for incremental investment. With predictable demand for its exports consequently, these schemes are expected to help generate employment and contribute to growth. Ironically, the component of the EPA – quality specifications – that may really aid Africa’s industrial development has hitherto been a major constraint. African exports to Europe cannot be of lesser quality. Quality specifications in earlier versions of the EPA were beyond the technological reach of most African countries. The still contentious but revised EPA is more flexible in this regard. Subject countries would now be allowed to import intermediate inputs without losing their preferential market access. For instance, the EU-West Africa EPA will allow subject countries “produce goods for exports to Europe using materials sourced from other countries without losing the benefit of the free access to the EU market.” In the long run, this flexibility may allow for some technology and skills transfer. So even if Africans would ultimately be the dominant consumers of relatively cheaper goods manufactured on the continent, they would be assured the quality would be no different from the European ones they are used to. Thus, there is a delicate balance that African authorities need to strike with their European counterparts.

Also published on my company’s website on 17 Feb 2016. See link viz.

Africa should renegotiate EPAs for manufactures’ trade parity (1)

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 09 Feb 2016. See link viz.

African countries should only allow duty-free manufactured goods’ imports for the same amount of manufactured goods that they export. Customs duties should apply to trade in excess of this threshold. Reciprocity by Africa’s trading partners would be just as well. Ultimately, this would incentivize local production as Africa’s more industrialized trading partners realize the exports market for their manufactured goods would be dependent on the destined African country’s industrial progress. In tandem, African authorities would also need to ensure that local alternatives are cheaper and readily available. In my view, this is the simple but necessary change that African, Caribbean and Pacific (ACP) countries must insist be made to the Economic Partnership Agreements (EPAs) between them and the European Union (EU). My focus would be on the EPA between the EU and the West African regional bloc. Nigeria is yet to sign the most recently revised EPA. So, it still has a chance to secure concessions from the EU. In his speech to the EU parliament on 3 February 2016, Nigeria’s President Muhammadu Buhari highlighted concerns of local manufacturers about the agreement. These concerns were initially raised during the administration of President Goodluck Jonathan. On 23 June 2014, I attended an event in London hosted by the Financial Times and the Nigerian Customs Service themed “Business in Nigeria: Trade facilitation for Africa’s business hub.” When asked about the status of the EPA negotiations at the event, the then Nigerian trade and industry minister, Mr Olusegun Aganga, said Nigeria would not sign an EPA that potentially harms its industrial development. More than two weeks after, Heads of State of member countries of the Economic Community of West African States (ECOWAS) endorsed the revised EPA that – in the words of the communiqué issued – “has taken due account of the technical concerns raised.” Although the language of the communiqué was somewhat vague, I assumed that perhaps ECOWAS had succeeded in securing concessions on the concerns of its member countries. Not until the Nigerian legislature brought the matter to fore in January 2016 did I realize Nigeria’s concerns had not been addressed. At this time, a committee of Nigeria’s lower house of parliament is reviewing the EPA and should present its findings before the end of February. There is tremendous pressure on Nigerian authorities to sign the EPA. They should not. Not yet.

The Cotonou Agreement reached in February 2000 is actually a marked improvement from the earlier Lome and Yaounde Conventions. The EPA in question is the third revision of the Cotonou Agreement. Earlier revisions were in 2005 and 2010. There is a consensus about the failure of these agreements to achieve their development objectives. The European Commission admitted as much, saying EPAs “failed to boost local economies and stimulate growth in African, Caribbean and Pacific (ACP) countries.” During the period of the four Lome Conventions – which subsisted between 1975 and 2000, exports to the EU from ACP countries actually declined. Between 1978-2002, ACP exports to the EU declined from 7 percent to 3 percent. There has not been much improvement since the Cotonou Agreement either, as trade in manufactures remains significantly tilted in favour of the EU. Not that this is entirely surprising. Fifteen years after the Cotonou Agreement, only 15.5 percent of total ACP exports to the EU were manufactured goods. In the same year, 69 percent of total EU exports to ACP countries were manufactures. The manufactures’ trade deficit is much more staggering for the ECOWAS region. In 2014, manufactures accounted for 3.3 percent of total exports to the EU by the ECOWAS region. Goods manufactured in the EU were almost 50% of its total exports to West Africa in the same year. The revised EPAs – that would subsist for at least another 5 years (2015-19) before they can be revised again – are supposedly aimed at reversing this trend. Still, reservations that these new EPAs would achieve their stated goals of trade development, sustainable growth and poverty reduction remain. This is because the revised EPAs still have provisions that are potentially harmful to local industries in ACP countries. A major issue is the very short transitional period – five years in the West African case – before European goods would enjoy free movement in subject countries. It does not require a stroke of genius to know that these arrangements would be detrimental to Africa’s industrialization.

Why did Nigerian authorities wait till after the negotiations to raise their concerns about the revised EPA? Negotiations between the EU and the West African regional bloc were closed on 6 February 2014 and ECOWAS Heads of State endorsed it on 10 July 2014. I have always wondered about the recurring incidence of sub-optimal negotiation outcomes by African countries. At the Financial Times Africa Summit in October 2014, I put these concerns to Dr. Donald Kabureka – who was then the President of the African Development Bank (AfDB) and keynote speaker at the event – wondering if he thought for instance that Ghana’s petroleum fiscal regime was optimal. My question was more pointed. Did it make sense that Ghana was borrowing money abroad at about the same time that it was already producing crude oil? Ghana’s Jubilee oil field started production in late 2010. Unlike most crude oil producers who have Production Sharing Agreements (PSAs) with their partners, Ghana opted for the less lucrative Royalty Tax System (RTS) for its Jubilee oil field. Much more worrying is the fact that the Ghana National Petroleum Corporation has only 13.64 percent equity in the Jubilee oil field – the Nigerian National Petroleum Corporation has a 60 percent ownership in five of its six joint ventures with foreign oil companies. After much criticism, however, Ghanaian authorities sought better terms in subsequent contracts. A paper published in the Ghana Policy Journal in December 2010 – “An evaluation of Ghana’s petroleum fiscal regime” – authored by Joe Amoako-Tuffour and Joyce Owusu-Ayim, shows only 38-50 percent of crude oil revenue accrued to the Ghanaian government, calculated based on $65 per barrel of oil – the average brent crude oil price in 2011-14 was $108. When compared with Nigeria’s 64-70 percent, Angola’s 64 percent and Cameroon’s 74-78 percent, it is sub-optimal. Not surprisingly, Dr. Kabureka tactfully avoided taking on Ghana specifically but highlighted how through the African Legal Support Facility (ALSF), the AfDB assists African governments to secure optimal outcomes from negotiations with partners. I do not know if the ALSF was involved in the Ghanaian oil negotiations. However, trade negotiations do not seem to be a priority area for the ALSF, based on its literature. As most trade-related technical assistance (TRTA) is sponsored by developed countries whose interests it serve that such capacity remain limited in the subject countries, the ALSF should probably prioritize trade-related capacity building (TRCB) and TRTA as well. The concerns raised by the Nigerian government on the EPA – and some ACP countries hitherto – is evidence of limited negotiating capacity. Still, even when a government fails to negotiate properly, it should not sign a document if it later realizes its error. It would be most unfortunate if the Nigerian government signs the EPA in its current form.

Also published on my company’s website on 10 Feb 2016. See link viz. 

Divergent strokes to central banking in Africa’s largest economies

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 02 Feb 2016. See link viz.

Just days after the 25-26 January monetary policy committee (MPC) meeting of the Central Bank of Nigeria (CBN), President Muhammadu Buhari declared publicly he was not going to “kill the naira” by devaluing it, confirming views that the CBN is probably now no more than any other government agency under his direction. Last week, this column highlighted how much of the CBN’s decisions are probably ‘directed’ from the State House. The president’s comments on the naira, just after the CBN kept mum on a widely expected policy move on the currency, vindicates this view; albeit he is clearly unapologetic about this. The argument for devaluing the naira at this time is a strong one. A situation where a central bank gets to determine who gets foreign exchange is prone to corruption. Naira devaluation would also support the economic diversification objective of the government. When imported goods become expensive, people tend to look for cheaper and often domestic alternatives. The consequent increased demand eventually boosts local manufacturing. President Buhari is an intelligent and experienced man. It is not likely that this understanding eludes him. His concern about how a weaker currency would affect Nigeria’s majority poor is genuine, however. Some of that concern is also political; and this aspect should not be underestimated.

President Buhari’s power derives from an almost fanatical followership amongst the country’s majority poor, many of whom cannot afford the imported goods that a strong naira helps keep cheap. However, short of subsidies, naira devaluation would automatically lead to an increase in the regulated prices of petroleum products. This is because the pricing template used by the regulator is calculated in US dollars. The price of a litre of kerosene – fuel used for cooking by the poor – was increased in January by 66 percent to 83 naira from 50 naira – effective on 1 January but based on data as at 29 January. Still, that increase is based on a US dollar exchange rate of 197 naira. Were the naira to be devalued so soon afterwards, Nigerian authorities would have had little choice but to increase the prices of petroleum products by at least the same rate. Thus, had the CBN gone ahead at the January MPC meeting to devalue the naira by 27 percent to 250 naira say, Nigeria’s poor would have had to pay 105 naira for a litre of kerosene, a more than 100 percent price increase from 50 naira just a month ago. As the regulated price of petrol would have been hiked as well, transportation costs would have risen in tandem. Potential labour action subsequently, would have created the first scalable void in the support base of the president that the opposition could exploit. This scenario would likely still play out when the needed weakening of the currency is eventually done.

The optimal ‘political’ choices before the Nigerian president therefore are whether to continue subsidizing the costs of petroleum products and thus increase an already expansionary budget or keep the naira strong and avoid the incremental foreign exchange costs. President Buhari has clearly decided keeping the naira strong – albeit artificially – would be less expensive. Simply put, naira devaluation would be politically difficult for President Buhari at this time. Were the CBN independent, however, these considerations would be inconsequential. Nonetheless, the CBN has signaled a new foreign exchange framework would be announced soon. There are varied opinions on what it would look like. It would probably include measures to stem disruptions from hot money. For instance, the CBN could say it would only provide foreign exchange to investors who hold on to their investments for a minimum period else they should procure it from autonomous sources. A wider exchange rate band could also be introduced. Some of the hitherto adhoc foreign exchange measures would likely also be formalised; specifying for instance, industries and segments of the economy that would get preferential access to foreign exchange from the central bank. While much bolder actions are required, a framework would at least provide some predictability.

The South African Reserve Bank (SARB) is determined to maintain its independence, however. The Bank raised its benchmark rate by 50 basis points to 6.75 percent at its MPC meeting in January. Although the inflation outlook has deteriorated significantly, it is clear the SARB also needed to make clear to South Africa’s National Treasury, President Jacob Zuma and markets that though it worries about weak growth and the costs of a potential ratings downgrade to junk status, its credibility and independence matter more to it. A central bank’s credibility is crucial to its effectiveness. Investors and analysts are better influenced in times of crisis when they know the central bank is credible, the comments of its officials are honest and the information they provide is accurate. The consequent trust often pays off when the central bank needs key stakeholders to help prevent or manage a systemic crisis. It must be pointed out though that the vote was close. 2 members of the MPC preferred a more moderate increase of 25 basis points, 3 members wanted a 50 basis points hike and a member preferred no change at all. Finance minister Pravin Gordhan probably preferred a moderate rate hike to guard growth. In any case, markets were pleased by the move with the rand strengthening below the 16.0 psychological level afterwards.

With the benefit of hindsight, the upside risks to inflation in South Africa are probably more heightened than earlier thought. Whereas at the November 2015 MPC meeting, the SARB expected inflation to be higher than its target – 3 to 6 percent – only in the first and fourth quarters of 2016, the Bank now forecasts inflation would remain outside of the target throughout the year. Worse still, the SARB sees inflation averaging at 7 percent – 5.8 percent previously – in 2017, in part due to base effects. The marked deterioration in the inflation outlook is primarily due to expectations of further rand depreciation and likely higher drought-induced food price inflation. Electricity tariffs may also be increased during the course of the year. The SARB also acknowledged that negative domestic events turned out to be more significant for the rand than the rate hike by the US Fed in December. Expectations of further rand weakening are still driven by domestic factors. So, even as the growth outlook is bleak somewhat – the Bank sees downside risks to its 0.9 percent growth forecast for 2016, the SARB may need to quicken the pace of its current tightening cycle if it is to bring inflation back within target at the earliest possible time.

The dilemma faced by the Nigerian and South African central banks are similar. In both countries, inflation is rising in tandem with dampening growth. Structural reforms – most of which are unpopular – are needed to reverse the weak growth trend. And the political environment in both countries is very challenging. Still, the independence of the respective central banks is dependent on how much they need global capital and how determined their governors are. In the South African case, the SARB governor can always rely on markets to fend off any attempts by the central government to curtail its powers. Nonetheless, a popular – or populist – South African president could succeed in clipping its wings. To be fair, attempts at reining in the CBN started during the administration of former President Goodluck Jonathan. Widely perceived as meek, even he succeeded in bending the central bank to his will; no small feat considering how formidable the then CBN governor Sanusi Lamido Sanusi was. Under a powerful President Buhari, the CBN would still have had little chance of remaining independent under a strong leadership. However, as a central bank is also the government’s banker, its leadership needs to be strong enough to be able to overrule the country’s president when needed; never mind that the current one is believed to be incorruptible. Recent revelations that foreign exchange in billions of US dollars were removed from the CBN in cash and shared amongst the country’s political elite during the Jonathan administration points to why. There is probably a need to further empower the central bank governor in order to ensure that he or she is able to prevent such pillage in the future. In any case, the South African experience shows a central bank’s independence is more assured when its economy matters to global market participants. It also helps if a country’s fiscal authorities depend on global capital for financing. As Nigeria now finds itself with probably a prolonged need for that kind of capital, there is an opportunity for its central bank to break the stranglehold the central government seems to always have on it.

Also published on my company’s website on 03 Feb 2016. See link viz.