Break up Nigeria into how many pieces?

In response to calls by some to break up Nigeria I thought to share this map. It shows the geographical location of ethnic groups in Nigeria. I could not label all of them but I think the few labelled help emphasize some points. The North is not just Hausa, the west is not just “Yoruba” and the east is not just Ibo. Exactly how many pieces will we need to break into to achieve ethnic homogeneity? I can count about 30.

Religious statistics are a bit harder to find but I’ll share those once I find them. You can download the entire ethnographic map here. (Warning: You need geographic information software to open it).

Filed under: Random Thoughts , Boko Haram, Ethnic Groups, Nigeria

A Plan

I have been one of those in favour of the removal of fuel subsidies. However for most Nigerians the problem is not that they don’t understand the logic of spending wisely. The problem is they don’t trust the government to do so. The government has used these tricks in the past and there really is no reason to believe they are serious about investing now. As popular as the protests are, and I support them, the only tangible plan I’ve seen involves returning to N65 per liter, reducing the  cost of governance, plugging holes in oil sector and provide power. The N65 is popular however the rest are all pretty vague. Almost as vague as the government SURE plan.

I have therefore decided to try to contribute by coming up with a plan that doesn’t require people trusting the government. This is a plan to replace the governments proposed subsidy reinvestment and empowerment program. It is based on three principles: ringfencing the savings from the subsidy removal; enforcing pre agreed conditions on projects with the federal, state and local government; and providing a tool for ordinary Nigerians to monitors projects. This plan is not supposed to replace other demands by protesters. Demands such as reducing the allowances of members of the national assembly.

This plan is still in the early stages of development and all suggestions are welcome. Please email suggestions to me at thesubsidyplan@gmail.com.

ThePlan(Download)

Filed under: Uncategorized , fuel subsidy, Nigeria, protests, Transparency

Now that the subsidies are gone….

The subsidies are gone. The subsidies on PMS at least. Cue the expected panic and protests. What exactly should we fight for during these protests? Or what exactly should YOU fight for since I won’t physically be on the streets.

Should we fight for a return to N65 per litre? No. The simple option facing the government is to spend N1.x tn on the fuel subsidies or on infrastructure. The answer is really simple. Spending on infrastructure has a multiplicative effect on the economy. The effect of a new three lane highway between Abuja and Lagos, for example, outweigh any possible benefits of the fuel subsidy. Yes there is a direct immediate effect on income which is felt most by the poor and figuring how to alleviate that is important. A return to N65 won’t achieve that.

What should we fight for? For starters we need to fight to ensure that the saving actually goes to infrastructure and not salaries or some other meaningless government program. The SURE document outlines a couple of these plans but strict timelines need to be stated. Secondly we need to force the government to cut some of its own trivial spending. A certain food budget perhaps. Finally we need to make it clear that if these infrastructure projects do not materialize the current administration will be voted out come 2015.

These are the things that I believe we should fight for. The opportunity is there to change things. We can change for the better or worse. Returning to the status quo should not be an option

Filed under: Random Thoughts , fuel subsidy, Nigeria, Protest

Fuel Subsidy: The real PRICE of petrol

I woke up this morning to an article on the “real cost of Nigerian petrol“.  The article goes through a series of calculations, mostly on various costs, on the refining and transporting of crude oil. The article comes to the conclusion that because, based on their calculations, the cost of refining PMS is N34.45 there really is no subsidy. They rather argue that the government is already taxing the public up to 91.2% and wants to increase the “tax”  A travesty.

They however forget the simple truth about prices. Prices are not really determined by the cost of producing things. The cost matters in the sense that the price will probably never go below whatever it costs to produce. Volatile costs would probably also lead to volatile prices. Beyond that the cost really has no say. The price is determined by demand and supply. The amount people who want to buy the product and how much they are willing to pay for it and quantity of the product available for sale.

It is common knowledge that we do not refine enough petroleum products locally to meet local demand. The bulk of our petrol, kerosene and so on is imported from international markets. The same markets we sell our crude oil. The price of a gallon of refined gasoline (what we call PMS) as at the time of writing this is $2.70 per gallon. This equates to about N100 per litre. Over the past six months it has fluctuated between $2.45 and $2.90 per gallon. This is the price of refined gasoline. This price does not include the cost of transportation from the actual refineries to Nigeria. It does not include the famous demurrage charges. These will probably push the landing price of petrol in Nigeria higher.

Is the landing cost of petrol N138 per litre? Probably close to it. Is there already a subsidy? definitely.

The positive side to the calculations by Prof. Agbon, if they are correct, is that we should definitely be able to refine PMS for much cheaper than the price at international markets. If we can refine PMS at close to N35 per litre and the rest of the world is willing to pay up to N100 per litre then there is a lot of potential growth in domestic refining. Of course we need to swallow the bitter pill of deregulation first.

Filed under: Random Thoughts , Crude Oil, fuel subsidy, international markets, Nigeria

Convincing the public

The subsidy is inefficient. We know.

The subsidy may bankrupt the government. We know.

We could better allocate the gains from removing the subsidy to finance critical infrastructure. Again, we know.

The economics of removing the subsidy makes a lot of sense. Unfortunately we also know that we do not have a very serious government. There are no guarantees that this government will do any of the things it says it will do after the subsidy has been removed. The success of the plan depends a lot on the public believing that the government will do what they say they will. Things like this; Jonathan, Sambo To Spend N1b On Food In 2012, and this; KPMG Report On The Monumental Fraud And Corruption At The NNPC do not help the cause at all.

The government needs to realize that although this policy is a good one it can fail. Lots of countries have tried to remove subsidies and some have had governments collapse as a result or have been forced to back pedal. The government needs to show that it is ready to bite the same pill it is asking the public to.

Filed under: Random Thoughts , fuel subsidy, Nigeria, Policy

Who actually benefits from fuel subsidies?

My article in yesterday’s business day newspaper

http://businessdayonline.com/NG/index.php/analysis/commentary/30447-who-really-benefits-from-fuel-subsidies

 

Filed under: News Stories , Crude Oil, Economics, Nigeria, Petroleum, Subsidies

Ban the Rice. Smugglers need love too

I hear GEJ is about to ban rice again. Something about boosting local production. The graph below says it all. It show exports of Thai rice to Nigeria and Benin. Interesting what happened after Rice was banned in January 2006. We never learn do we?

source: http://www.fas.usda.gov/gainfiles/200711/146292904.pdf

Filed under: Random Thoughts , Nigeria, Rice ban, Trade Policy

CBN Naira struggles and market gimmicks

The CBN acted during the week to shore up the Naira and probably tackle rising inflation which has risen to above the single digit target. One thing is clear: things are not looking good. The naira is desperately trying to shed some weight and inflation seems to be back to the fore. The CBN is doing all it can to keep things together and rightly so but we know it cannot do that for much longer. Something needs to change and soon. A certain subsidy perhaps.
They need to stop with the gimmicks though. Excluding participants from its WDAS only widens the gap between the CBN’s official rate and the true rate in the market, the one the one that really counts. Yes there is all the talk about round-tripping but that only exists because some participants who are willing and able to pay more are excluded from the auction. Thy cannot reduce round tripping by creating more incentives for round tripping. They are really just reducing their ability to influence the true exchange market.

Filed under: Random Thoughts , CBN, devaluation, exchange rate, foreign exchange market, naira, Nigeria

Microfinance in Nigeria: Can it work?

Microfinance has been touted as the saviour of the poor and with success in some parts of south Asia is being exported to various poverty-stricken parts of the globe with modifications done by most countries to fit their system. Nigeria too has jumped on the microfinance bandwagon but has so far not been able achieve the expected targets. In order to understand the problem with microfinance in Nigeria it is useful to first of all understand why microfinance works in south asia.

I should point out the primary problems with lending to the poor which microfinance attempts to solve. Firstly the costs associated with lending to the poor are usually higher than lending to regular businesses. This is because of the small amounts of loans involved. Transaction costs and follow-up costs are a lot larger because they apply for almost every single small loan as opposed to transaction costs for larger regular loans. Secondly there is a degree of risk involved in lending in general. Collateral is usually used to protect the lender from defaults for regular loans but poor people usually do not have collateral. Microfinance deals with the problem of higher transaction costs by charging higher than market interest rates. Nothing irregular about that. However the key ingredient for succesful microfinance in asia however is how they deal with the risk.

One thing that is unique to south Asia is the caste system or in more general terms the kinship network. A system which is still practiced in most of their rural communities. Basically each individual belongs to a caste which is also associated with various jobs. The farmers, the manure collectors, the sweepers and so on. Loans are indirectly guaranteed by the caste with threat of withholding future loans to the caste if any of its members defaults. This creates a situation whereby each individual borrower has a big incentive to pay back loans or risk being outcasted which in most cases also results in being out of work. The lender also has the indirect guarantee that even in the event of a default by the borrower the caste would rather pay up on his or her behalf than risk being quarantined from future loans. This caste system therefore creates some kind of trust between the lender and borrower which reduces the risk of default even without collateral.

Indeed microfinance institutions are not the first to take advantage of this feature of asian society. Colonial money lenders also worked in a similar way to modern microfinance banks by charging higher interest rates and leveraging the caste system to reduce the risk associated with lending although they were not as loved as modern microfinance banks.

Back in Nigeria however the microfinance banks do tackle the higher transaction costs by charging higher than market interest rates however the second problem is still unsolved. There is no system, either natural or artificial that deals with the risk associated with lending without collateral. The caste system in south asia is not present in Nigeria. Indeed the closest thing I can think of  is the Esusu and even that does not provide enough incentives for individual borrowers to ensure they pay back loans or for the group to bail them out.

In trying to figure out how to make Microfinance work in Nigeria dealing with the issue of risk and incentives not to default are critical. A direct copy of microfinance programs from asia will not necessarily work here

Filed under: Random Thoughts , CBN, Kinship Network, Microfinance, Nigeria

Investors are not charities

$90bn. That is apparently what it would cost to increase our electricity generating capacity to 40000mw by 2020. Not nearly enough electricity for a country our size but certainly more than the 4000MW capacity we are currently struggling to maintian. One thing is clear, the government does not have a $90bn to invest in electricity. Private sector investment is desperately needed but these private investors don’t seem to be interested. Why?
At this point we should take a detour to understand what really drives investment. Investment is driven not just by the desire to turn a profit but by the potential to make more profits than could be made elsewhere. This potential for profits is driven by the price of the commodity in question which in turn is driven by the demand and supply dynamics. Hence if there is too little supply of a product the price should be higher than the standard price ( the price at which the cost of producing that commodity is just covered) which should give investors the opportunity to make more than normal profits and should drive investors into production of that commodity hence increasing supply and reducing prices eventually. The key point is that price fluctuations below and above the “standard price” act as a kind of referee guiding investors and ensuring that supply always keeps up with demand. Of course this all assumes that the markets are working and there are enough participants etc etc. In the event that the markets do not work and the price needs to be set by a third-party this rule must still be followed if private investors are expected to continue their investments and ensure adequate supply.
Back to our need for electricity. We are at a point where demand has outrun supply to such an extent where PHCN is now seen as a ‘back up’ supplier. Not to be relied upon for anything remotely important. We have got to this point mostly because the ‘rule’ for pricing electricity has not been followed and the government has not made up the required investment to at least maintain the status quo. It cannot afford to. It has come up with all sorts of fancy agencies to try to convince private investors that it will follow the rule with the latest contraption led by NOI. Unfortunately the private sector knows the truth. The govt cannot be trusted to follow the rule. The govt will cave in every time to the pleas of the populace for electricity costing too much which in turn means losses for investors. That is all fine and good if the government can back up its actions with its own investments. But it can’t. The price of electricity in Nigeria now should be sky-high seeing as electricity is nowhere to be found but it is not. It is still lower than the prices in Ghana and South Africa, two countries that are in much better shape than we are. It may even be lower that the “standard price”. Investors are not in the business of throwing away money, they are not charities. If we want to make any progress in our struggle for stable electricity it is time we start to think of pricing solutions that do not involve a government agency somewhere setting prices.

Filed under: Random Thoughts , Electricity, investment, NEPA, NERC, Nigeria, PHCN, pricing