Taming Unemployment – The Abba Moro Edition

It is the very nature of the capitalist mode of production to overwork some workers while keeping the rest as a reserve army of unemployed paupers.” – Karl Marx, Theory of Surplus Value.

According to the Nigerian Bureau of Statistics, Nigeria’s unemployment rate is 23.9%, while the 2012 Baseline Youth Survey Report suggests 54% of Nigerian youths are unemployed. The bad news is the situation shows no sign of getting better. If you believe the numbers thrown around, 1.6 million jobs were created in Nigeria last year. The numbers look good until you realize that over 2 million Nigerians enrol with the National Youth Service Corps (NYSC) annually. This means Nigeria is adding at least 500,000 graduates to the labout market (if we assume that all the jobs created are taken by unemployed graduates), . 

How bad is this? During the Great Depression, unemployment in England peaked at 22%, while the United States of America and Germany saw unemployment rise to 25%. This tells us two things: (1) The future of our youth is bleak and (2) Current government interventions are not working. One of my biggest challenges with our government is the one track solution for unemployment – direct job creation. While direct job creation is perhaps the fastest way to reduce unemployment, in most cases it creates a fiscal strain on government revenues, and does not provide a sustainable solution to a structural problem. According to Professor Subramanian Rangan at INSEAD, the expense of public employment programs may undermine a government’s fiscal position, while the actual labor market impact may be to simply divert job creation to favored areas rather than increasing overall employment for young people.

This is why young people must start paying attention to the electoral process. The solutions to unemplyment will not come from exploitative government officials like Abba Moro, the Interior Minister who supervised that tragic recruitment exercise to hire 4,500 people for the Nigerian Immigration Service (NIS). Let us consider this again -a federal minister charged 530,000 applicants N1,000 each to apply for less than 5,000 jobs. The exploitative and poor planned exercise led to the deaths of Nigerians. The same minister comes on national television and says “we will not be distracted by what has happened and we will setup a high powered panel to ascertain what happened in these centres.” He is still a federal minister, paid from the taxes of those lucky enough to be employed. Nobody has apologised or been sacked for the deaths caused. If this is not a classic example of killing a man and dancing on his grave, I dont know what is. The solution to such blatant idiocy is not violence, or the type of “revolution” many have asked for. The solution lies in a silent revolution, one effected through the ballot box on Election Day.

It is our collective duty to remember the bitterness, helplessness and anger; and channel these emotions into selecting candidates that will improve the level of governance at all levels. For the millions of young people without jobs, we must listen to political parties and candidates that show a clear sense of how to stimulate job creation. From simple solutions like job search assistance programs, to more difficult ones like fiscal rebates, or specific policies that remove the barriers to doing business, our votes should go to candidates that demonstrate a clear ability to solve our problems. For example, according to Roland Michelitsch, Chief Evaluation Officer and Manager at the International Finance Corporation (IFC), Mexico has experienced a 2.8% increase in employment from measures that reduced red tape and taxes for businesses. In many other countries, employment has grown by 5% or more on the back of an improvement in grid sourced power supply. The problem is not without solutions, contrary to what the responses of our governments suggest.

Yesterday was a reminder that we surrendered our collective power to an inept political class. It is also a call to action – we must register and vote to prevent people like Abba Moro from getting into elective office or appointed into senior government positions. Until that happens, we must brace ourselves more for painful tales like this one: https://m.soundcloud.com/onyinye-ough/eyewitness-account-nis?utm_source=soundcloud&utm_campaign=wtshare&utm_medium=Twitter&utm_content=https://soundcloud.com/onyinye-ough/eyewitness-account-nis

Buy Sheep, Sell Deer, Make Profit.

For this post, let us assume you own Iya Eba, the popular food joint in Lagos Island. You love your customers, and to satisfy them, you devised a wonderful promotion called Amala and Coke. Here’s how it works: Coke is normally sold for N35 at your canteen, but you think customers should enjoy a discount. So you announce to all your customers that Coke (I mean Coca-Cola, not the other one NDLEA can lock you up for selling) now sells for N10 per bottle. How do you pay for this? You tell your shop manager to take money from the daily sales to buy 100 bottles of Coke (the number of bottles your customers normally drink). At the end of each day, you do some Arithmetic.

You ask: “Mary, how much did we make today?” She responds: “Madam, we sold 100 plates of Amala at N100 each, so we made N10,000.” You start counting the money, and notice there is only N8,000 in the tin of Milo. So you ask Mary, “how come there is only N8,000 here?” Mary reminds you she bought 100 bottles of coke at N30 each, which means she spent N3,000 from the money collected. Since you instructed her to sell the drinks at N10 each, she only made N1,000 back. You are satisfied and everyone goes home.

This continues till the day you get complaints from customers that despite your advert, a bottle of Coke still sells for N35 at the canteen. So you visit the canteen wearing a wig and big glasses, pretending to be a customer. To your dismay, a cold bottle of Coke is sold to you for N35 instead of the N10 advertised. At the end of the day, you return to the shop and order Mary not to sell Coke at N10 per bottle anymore. She asks why, and you say nobody pays N10 for the bottle so there is no need deceiving yourselves; Coke should now be sold at N35 per bottle. There are witnesses when you gave Mary this instruction, including your cousin who is being groomed to run the shop when you retire at the end of the year.

Fast forward this story by four years; you are now retired, living in a different country and your cousin is in charge. Mary is still delivering N8,000 per day, insisting she buys Coke at N30 to sell at N10. A waiter tells Mary he remembers your instruction to stop the discount, but Mary says she never heard you give the instruction. She asks him to show her a letter you signed, which formally instructed to her to stop. Let us pause here and wonder why Mary continues to buy Coke at N30 and report that she sells at N10.

This is what actually happens. Mary takes N3,000 from the money jar to buy 100 bottles of Coke. She sells each bottle at N35, so makes N3,5000. Instead of putting N3,500 in the money jar, she puts N1,000 and claims this is the amount she made (remember she pretends to sell each bottle at N10). She then goes home with N2,500 per day. In the last four years, Mary has made N3 million (N2,500 x 300 days x 4 years) from this scam, and established a canteen on the next street. Before you know it, she will steal all your customers.

This is what Sanusi Lamido Sanusi is accusing the Nigerian National Petroleum Corporation (NNPC) of doing. Despite a Presidential order in 2009 to stop the subsidy on Dual Purpose Kerosene (which we all know as Kerosene), the NNPC continues to deduct this subsidy from the Federation Account without approval. To worsen matters, nobody can remember buying kerosene at anything close to N50 per litre; everyone I asked buys it between N150 and N170 per litre.

This is what “they” say happens:
•NNPC imports a 30,000 MT vessel of kerosene at $30 million
•NNPC sells the kerosene on the vessel for $10 million to a middle man, charging a “subsidy” of $20 million to the Federal Government.
•The middle man sells the product at $37 million (full market price) and does not transfer the “subsidy” to the end user (you and I).
•The middle man makes a cool $27 million from the sales (buy at $10 million, sell at $37 million).
•This is shared by some people we don’t know at this time.

Now, NNPC imports an average of 9 vessels per month. At $20 million profit per vessel, that’s $180 million being stolen every month. We hear this has been happening for the last 20 months, so my arithmetic says Nigeria has lost $3.6 billion to this simple trick. For those wondering how $20 billion was allegedly stolen from the Federation Account, you now have $16.4 billion to account for.

As Nathan Rothschild once said, his secret of making money was to buy sheep (low) and sell deer (high).

Need more insight? This diagramKerosene_Subsidy[1] might help you

The Devaluation of the Naira and Other Stories

It was Claude Ake who described Nigeria as a disarticulated economy, that produces what it does not consume, and consumes what it does not produce. This description summarizes the dilemma that faces Sanusi Lamido Sanusi and his team at the Central Bank of Nigeria (CBN).

It is no news that what we suspected is eventually happening. The Naira is under significant pressure, and the CBN has emptied its artillery to protect our beloved currency. In various official publications on the exchange rate, the CBN has indicated target exchange rate corridor of NGN150: US$1 ± 3% corridor (i.e. NGN 145.5 – NGN154.4). At the close of business yesterday, depending on who you talked to, the Naira closed at NGN165 – NGN168. At best this is 11 Naira above the CBN’s target.

At an “expected” emergency meeting of the CBN’s Monetary Policy Committee (MPC), three drastic measures were announced. The most celebrated was the 275 basis point increase in the Monetary Policy Rate (MPR) from 9.25% to 12%. This is the rate at which the CBN gives loans to banks, and is the nominal interest rate anchor. This means interest rates will go up in a bid to encourage savings in the Naira, as interest rates, for once, will provide real returns (after adjustment for inflation). This will reduce the supply of Naira in the market, thereby reducing demand for the US Dollar. The downside of this is a resulting increase in lending rates, and a re-pricing of existing loans, priced using a floating rate (usually the prime lending rate of the lender).

But this does not tell the full story. The apex bank also increased the Cash Reserve Ratio (CRR) from 4% to 8%. This is the proportion of bank deposits held in cash by the CBN; therefore this huge increase in CRR means a sharp reduction on the amount banks are able to lend to the real sector. If we assume an industry balance sheet size of N9 trillion, that is N360 billion that could have gone to private sector loans, taken out of the industry.

By reducing the Net Open Position (NOP) of banks from 5% to 1%, the CBN has effectively reduced the amount of foreign exchange a bank can hold at any time. The Net Open Position is simply the difference between assets and liabilities of a bank held in a foreign currency, usually measured as a percentage of the shareholder’s funds of a bank. This reduction will significantly reduce the volume of foreign exchange deals on the inter-bank market and autonomous purchase of foreign exchange, because of this reduction of the amount of foreign exchange banks can hold for mainly speculative reasons. This might mean a reduction in the short term profits of banks, as the treasury function, impaired by this rule, is usually one of the most profitable businesses of Nigerian banks.

The MPC is a team of nine, and the vote to increase the NOP was unanimous. The vote on increasing the MPR was 8-1, while that for the CRR increase was 7-2 (2 members voted for 200bp increase). The unity in the voting patterns suggests a room of worried policy makers. The CBN has blinked, and the result could be harsh.

We know lending rates will go up significantly, and supply of credit will reduce. If you are an existing or intending borrower, this is the time to say a prayer. It will be harder and more expensive to get a loan now, like it wasn’t already very difficult. Government is the biggest borrower in the economy, therefore its borrowing costs will increase, as government securities will be priced higher to accommodate for this MPR increase. The effect on the bond market could be interesting. An increase in the risk-free rate (the rate at which the FGN borrows) will mean states yet to issue sub-sovereign bonds might be forced into offering a higher coupon rate. The same will apply to corporate debt.

As always, unpredictability is an investor’s worst nightmare. This sharp depreciation will affect investor confidence, at least in the short term. So, it is safe to assume a few wrinkles were added to the face of a certain Mr. Aganga at the Ministry of Trade and Investment last night.

How does this affect us, the ordinary Nigerians? Our taste for imported goods from Brazilian weaves to Rich Tea Biscuits will come at a higher cost. . That is the price we pay for being so dependent on imported goods. The road ahead is cloudy; we have not been in a similar position since the rocky days of 2008/9. It is never good to be a harbinger of bad news, but it is time to tighten our belts and build up healthy cash reserves. One principle that never changes in difficult times is the well known mantra “CASH IS KING.”

Is This the End of the Greenback?

Since its emergence as the global reserve currency after the Second World War, the United States (“US”) Dollar’s role as world’s currency has not faced the level of scrutiny it currently faces. Following the demystification of the US economy by the Financial Crisis of 2007-2009, and resulting fiscal deficit, there have been calls to review the role of the US Dollar as the global reserve currency.

America enjoys several benefits from this role. Seigniorage, the income a country generates by issuing its currency, appears to be one. The profit derived from the issuance of additional currency to non US residents who hold US notes and coins is estimated to be about $10 billion annually. Also, the high demand for the Dollar ensures its protection from fluctuation. The global demand for the Dollar has in effect, insulated it from volatility. There are also socio-political benefits. America is the world’s largest economy and considered to be the bankers to the world, allowing it wield enormous political influence. As Henry Kissinger said, “he, who controls money, controls the world.”

The US also bears the burdens attached to such responsibility. The high global demand for the Dollar, and the need to maintain liquidity, makes it difficult for the US government to run a surplus budget. The exposure of the US economy to creditors such as China has significant disadvantages to America. The prophecy that the Chinese government will take a swipe at the US in order to overtake it as the world’s leading power is not improbable. The effect of China dumping the over 11 million US treasury securities it currently holds will collapse the US economy. China has in recent times, had the ability to artificially manipulate the value of the Dollar by intervening in its own currency by largely underpricing its Renminbi when compared to the Dollar, thereby leaving it undervalued.

The global economy has benefited from the US Dollar being the global reserve currency. Its use as a global medium of exchange cannot be overstated; largely reducing the cost of international transaction and greatly reducing currency risk that may arise in transacting with more than two currencies. The value of international trade that is invoiced in Dollars is much larger than the total trade conducted by the US and countries with currencies linked to the greenback. Also most countries can protect the value of their currencies by intervening with their Dollar dominated foreign reserves. Where the market forces are not favorable to a country’s currency (the supply of the currency outweighs the demand, which will lead to drop in value of the currency), the country can purchase the excess supply of its currency using its Dollar reserves. This stabilizes the value of its currency. Though this act of intervention divides economists, it is still common practice among numerous countries, notably Nigeria.

However, these benefits also come with drawbacks. One of such is that the US can take certain monetary steps without considering the global economy. The Stiglitz Report claimed that “US monetary policies were implemented with little consideration of their impact on global aggregate demand or demands for global liquidity and were thus a cause of instability in exchange rates and global activity” in reference to America’s response to the excess Dollar liquidity in the 1970s. There is the increased risk of doomsday if the Dollar fails. The “Triffin Dilemma” propounded by renowned economist Robert Triffin, asserts that where a single currency (such as the Dollar) acts as the global reserve currency, the increased need to fuel global liquidity will lead to an increase in the supply of that currency. This will result in an increased budget deficit of that country supplying the currency which will one day erode the value of that currency.

The world has put its eggs in one basket. Will the global economy survive the failure of the Dollar? Is the US really too big to fail? Using the Dollar as the global currency reserve creates a systemic risk to the world that is too large to overlook. The question on everyone’s lips is, “to be or not to be”? Has the Dollar outspent its usefulness as the global reserve currency? Is it time for the Dollar to vacate this position for another currency or group of currencies?

March 23, 2009 is a day of significant importance. On this day, Zhou Xiaochuan the Governor of Central Bank of US’ largest creditor, China, called for a replacement of the Dollar as the dominant world currency. He suggested the creation of an international reserve currency issued to a stable benchmark, disconnected from individual nations. Should China’s Renminbi replace the Dollars as the world’s global reserve currency? China has relaxed restrictions on its currency allowing foreign holders trade its currency to some extent. This has encouraged numerous trade partners like Nigeria to adopt the Renminbi as a tradeable currency. However, China’s currency regulation is far from perfect. There are allegations that China is intervening in its currency, as the rate its currency currently exchanges, does not reflect the growth in its economy. There is no guaranteed independence of the Chinese Central Bank from the political leadership of the country, a major flaw in its system. The alteration of the Renminbi for the US Dollar does not remove the systemic risk of the use of one currency as global reserve currency.

Will a dual or multiple global reserve currency system solve this problem? This system will solve the primary problem of over reliance on only one currency as the global reserve currency. However, this system also brings along its own complexities. First, it is more complex to transact in more than one currency. Secondly, where the dual currency system applies, holders automatically double the currency risk they face.

The ‘savior’ appears to have arrived or so it seems. The proposed system is an improvement on Keynesian idea of an international reserve currency issued by a supranational bank. The Stigitz Report suggests the Special Deposit Receipts (“SDR”) issued by the IMF be utilized as the global reserve currency. The report further proposes that a Global Reserve Bank should be set-up by the IMF to run this. Global currencies will be issued to the IMF in exchange for SDRs in similar quotas with the IMF quota creating a global security backed by a number of currencies. The exchange rate of the SDR will be an average of all the currencies held.

In conclusion, it is clear that though the Dollar is not dead, it is terminally ill. However, the world should not be quick to jettison the US Dollar until a well-structured alternative is available. The proposed SDR appears to be a good alternative; the intricacies have to be properly worked on and all nations be carried along in the process of establishing the new global reserve currency.