Economic reforms, who wins and who loses?, By Uddin Ifeanyi

However one defines politics or government, as an art or science, it is nearly always a question of which winners policymakers prefer over which losers. Nowhere is this trade-off more obvious than in the foreign exchange markets, where successive governments have plumped for those who need access to cheap exchange rates over the goal of boosting the economy’s long-term productivity. Driven by its choice of winners and losers, what we are seeing is that despite there being no change in the economy’s fundamentals, the naira continues to strengthen markedly against most traded currencies.

Whatever its implications are in the end for global politics and economics, and irrespective of how the many questions emerging around its probity are posed (and hopefully resolved), the ongoing war in the Middle East leaves our domestic politics with two lessons. Thus far, the war’s most conspicuous effect here has been to push retail petrol and diesel prices up. Its bearing on government finances, on the other hand, is likely to be muted by the oleaginous accounting practices of the national oil behemoth. Supply constraints across global oil and gas value chains have been one unpleasant (albeit foreseeable) consequence of the United States of America and Israel’s airborne invasion of Iran.

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Prior to the Tinubu government’s reform to pricing in the downstream oil and gas sector, price increases in global oil and gas markets would have leached directly into the Federal Government’s profit and loss account. This, nonetheless, was but a rounding item in the government’s former practice of accounting for fuel prices by subduing adverse price pass-throughs to the domestic economy from global markets and equalising pump-station fuel prices across the country.

Expectedly, there have been calls for the Federal Government to return some of the weight of the fuel price increases on to its budget and off the average Nigerian’s pocket. According to this reading of the problem, lousy unemployment rates, and poor inflation numbers have strained the country’s consumers so much that this additional price increase could presage the collapse of domestic final demand. However, the difficulty with asking for government subsidies to help cushion the impact on retail petrol prices of the war in the Middle East is the precedent that it sets up. Someday when prices fall below our refineries’ cost of production, an industry lobby will then be justified in asking for price harness arrangements.

This brings us to the first lesson from the war: that economic reform programmes create winners and losers. In the case of the Federal Government’s price reforms in the oil and gas sector, the immediate losers were the fuel subsidy-wallahs. Government benefited, both in the long term and short, as a massive strain on the spending leg of its budget was eliminated. The economy, through a more efficient allocation of a wasting, scarce, and crucial resource is likewise on course to be a long-term beneficiary. Eventually, the people ought to gain from the workings of a more efficient economy. But in the short term, they are losing – to the ravages of higher prices on disposable incomes.

Obviously, this latter lesson is the more consequential for our economy’s long-term outlook. This perhaps explains the Tinubu administration’s de-prioritisation of the follow-up reforms that would have built on the stabilising effects on the economy of its initial reform initiative. It explains the administration’s reluctance to pursue further reforms that may improve the economy’s long-term prospects, including through optimising the Federal Government’s spending.

The second lesson follows from this latter loss: the domestic political market for votes is far from efficient. The first evidence for this is the fact that the failing economic conditions of Nigerians’ is not transmitted perfectly, completely, and instantly to the political market, and much of what is transmitted is at considerable cost to most (if not the more important segment of) market participants. Otherwise, how do you explain the ease with which the All Progressives Congress (APC) won the last general elections on the back of the heartbreak that was the Muhammadu Buhari government? The second evidence for this second lesson is that voting outcomes here do not fully reflect all available information. This shortcoming, in turn, allows political jobbers, through a lucrative trade in political patronage, to consistently outperform the market for votes.

Obviously, this latter lesson is the more consequential for our economy’s long-term outlook. This perhaps explains the Tinubu administration’s de-prioritisation of the follow-up reforms that would have built on the stabilising effects on the economy of its initial reform initiative. It explains the administration’s reluctance to pursue further reforms that may improve the economy’s long-term prospects, including through optimising the Federal Government’s spending. It also explains why the government’s solution to food inflation was to pursue policies that pushed domestic prices below farmers’ post-harvest costs last planting season. Inevitably, therefore, even if we back out our farmers’ struggle with unseasonable weather conditions, post-farm gate prices this year will be heaven-bound. Government may plug this hole through aggressive food imports, but that will be at the expense of wiping out the domestic agriculture industry – the winners and losers thing, all over again.

However one defines politics or government, as an art or science, it is nearly always a question of which winners policymakers prefer over which losers. Nowhere is this trade-off more obvious than in the foreign exchange markets, where successive governments have plumped for those who need access to cheap exchange rates over the goal of boosting the economy’s long-term productivity. Driven by its choice of winners and losers, what we are seeing is that despite there being no change in the economy’s fundamentals, the naira continues to strengthen markedly against most traded currencies.