I believe I grew up at a time that saw the last plenitude of quality products in Nigeria. I remember my brothers would jest: “revere that –Scanfrost– fridge before opening it, it’s older than you.” It was the same for the National TV, the SMC ceiling fan, the Kenwood turntable and other home appliances. These devices lasted over a decade without repairs. These products were from Europe and America. Chinese products were thought of as inferior. Then, few individuals could do importation businesses. Titles like “importer-exporter”, “general merchandise” and “international” connoted status in markets and social unions. All that soon changed.
Today, over 18.7% of imports are from China, and it is no coincident that a significant portion of import-goods are inferior products. In fact, in a regular shop, you are typically first offered a substandard item as nearly all original items have their substandard version in competition. Even pharmaceutical products are not spared. The dealers exploit the information asymmetry to create imminent Lemon problem in the import-goods market: fake products crowd-out original products. It is better to pay the minimum price and get the minimum quality than to pay the maximum price and get the minimum quality instead of the maximum quality. Interestingly, the dealers operate brazenly in most markets across the country, they are not in hiding. The war against piracy and watered quality seem to have eluded the regulatory agencies in their duplicative forms – Standard Organisation of Nigeria (SON), National Agency for Food and Drugs Administration and Control (NAFDAC) etcetera.
How did we get here?
Historicalcoincidences
As population increased, it became insufficient for the few importers to meet the import demands of the entire country. At about the same time, the country was making huge petro-dollars in oil revenues. As these monies began trickling into the society, more individuals found it attractive to venture into import businesses. This time may have also coincided with indigenization decree of 1970s when Nigerians began to take positions in the shipping/cargo trades. By this time, China was building its economy towards industrialization, surplus production and export drive. Today, they are the largest economy in the world!
Chinese producers brought greater flexibility in terms of pricing and quality which made them more attractive to many new importers than their European and American counterparts. This price-quality compromise made Chinese imports to Nigeria cheaper relative to others – exploiting the price sensitivity of consumers. This quality flexibility is most evident when one finds that an item produced in China for European or American markets tend to be more durable than those produced for Nigerian markets.
Regulatorylapses
Another explanation for the proliferation of substandard items is weak import regulation amplified by poor border management – corrupt border agents. In Nigeria today, anyone can import almost any item in commercial quantities so long as it is not in the contraband list or the few special goods that require import license. Times changed, the sector evolved but the regulatory framework has not changed. Just anybody should not be able to import goods in commercial quantities: it does not only make regulatory administration difficult especially for a highly populated country where there is personnel shortfall; it makes import demand for foreign currency becomes uncontrollable with attendant depreciation pressure on the local currency. In 2017 alone, import demand was NGN1.79 trillion, dwarfing the NGN720 set aside for Naira/Yuan swap for three years. On the production side, it cripples domestic ability to produce, leading therefore to output decline and unemployment.
eCommerce
One last factor was the internet and technology revolution. The development of internet technologies sparked irreversible revolution of trade through eCommerce, facilitating cross-border transactions such that everybody can buy virtually from any part of the world. This reduced the transport costs of business and eroded the market powers of the earlier importers. The importers market today, is purely competitive.
A simple way out
Admittedly, there have been major reforms to stem the tide such as anti-piracy technologies, raising penalties from 50,000 naira to 300,000 naira, and seeking collaborations with governments of trading nations. However, the fight must be strongest at home. It is therefore important to restrict commercial importing to registered importers and trading companies who meet certain criteria. These registration criteria need not be monetary payment but would include minimum capital requirements, loan credibility, storage/warehouse facilities, logistics ability and etcetera. The registration system would allow for efficient administration of regulatory checks on product quality and standards. The registered import businesses would be buoyant enough to issue product warranty and return guarantee should the product not satisfy the customer as against the current practice where consumers are ambushed by petty importers unable to give these assurances. So this would go a long way to ensure consumerism and consumer protection.
By way of trade protection, the registered importers would typically organize themselves into unions according to their respective trade lines and help combat substandard imports so as to protect their market profit and avoid regulators knocking their doors. The intuition is that these importers are better positioned to curb the menace of substandard items, and with the right incentives, would develop the internal interest to do so.
Regulatory agencies can then focus on design standards and compliance. Should any substandard product enter the local market, agencies would know where to begin their investigation. Inter-agency collaboration in order to avoid unhealthy rivalry and stakeholder engagement to bring about synergy in product tracking would help solve the lemons problem. As a final caveat, we are about signing the continental free trade agreement which opens our borders to a flood of importers from across Africa, if we cannot manage our own importers, what is to say we would be able to manage the multitude of African importers? Free trade does not mean dumping of substandard goods. We would more now than before, need a registry of importers.
Urban societies are typically a mix of diverse people and interests that are often interdependent. It is therefore pertinent that urban housing strategies account for social integration of these varied interests. But the ‘affordability’ of housing seems to be an ambiguous subject matter. Definitively, affordability should capture the average income of the people, the design and material costs of building, the underlying costs of lands, maintenance costs and other associated costs that determine the price per unit of the housing structure. In Lagos where the prices of lands, materials and designs are comparatively high, the final price per unit of a decent housing development turns out above the average wage of the people and thus a luxury for the low-middle income groups. A realistic price for low-income resident should derive from the prevailing average income, ranging therefore between N18, 000 and N50, 000. The inflated cost of lands is due mainly to a combination of factors including inflexible land tenure system, land speculation, land grabbing and high incidence of fraud. The result is the manifestation of inequality and segregation in settlement pattern – for which mixed income/class policies are possible solution.
Mixed income/class housing is a strategic co-location of both social housing and market housing designs in an area with shared access to infrastructure in order to ensure social inclusiveness. Given the housing situation in the country, market motivated strategies only worsen inequality and social exclusion. The time is now to grease the stiff necks of the government, call the attention of private developers and community stakeholders towards mixed income/class alternatives. We must build political consensus on housing as a necessary human need for the rich and poor alike.
Challenges to mixed income/class housing policies
Market mechanism: where the government has failed to provide the basic infrastructures that ensure social inclusiveness and lacks policies against gentrification of cities, private developers step in to fill the gaps however with a selection strategy that maximizes profits. For instance, if the underlying land is auctioned and developed under market process like in Banana Island, a decent unit in the eventual development becomes too expensive for the common man.
Social costs: mixed strategies imply that low income earners live in the same neighbourhood as the wealthy where infrastructures are available. But these infrastructures and utilities such as energy carry costs that may exceed the income levels of the poor. Also, because prices generally tend upwards, the activities of wealthy may drive up prices – of foods, schools – such that the poor may sort themselves out. Example, Amuwo-odofin, FESTAC town.
Security: the growing disparity between classes has dynamic implication on behavioural patterns and environmental expectations for both classes. This for the wealthy class manifests in perception of insecurity around the poor and class tension. For the poor, it could mean oppression and intimidation.
Policy proposals: case study
Studies show that inclusive, equitable cities are more sustainable. In particular, two international case studies in Vienna, Austria and Maryland, USA show interesting outcome and could serve as guide in the approach to mixed housing strategies. In Vienna, the government drives the construction of most new apartments: land is sold to the winning developer at a subsidized rate, under low interest financing and long-term loan repayment schemes. In conformity with the stipulated design standard, ecological considerations, the developer must then rent half of the new apartments to low-income residents at prices regulated by the government. Today, Vienna is adjudged the world’s most liveable city.
In Maryland, the policy sets aside 15% of housing units over 50 units for affordable housing, of which one third goes to the Public Housing Authority for subsidized low-income housing, while two third goes to the modest income class. Two approaches were compared thereof in this case study: in Mckendree development, the affordable residences were clustered in one area where there are high income residents as well. There were no shared facilities or community spaces, and maintenance was left to the individual residents. In Timberlawn development, the affordable units were dispersed around the city with the market-rate residences. The units also had shared facilities which were centrally maintained. Comparative surveys showed more satisfaction in Timberlawn than in Mckendree.
We can draw lessons from the successes in the international case studies. Policies can be designed to address the challenges that hinder the implementation of social housing programs across Nigeria. In Lagos for instance, a mixed housing policy could stipulate that 20% of estate development greater than 5 hectares have to be allotted for constructing affordable housing. Of the 20%, 15% may be reserved for moderate income class while 5% would be reserved for the low income category such as artisans, housemaids, and petty traders. These affordable units would be sold only to cooperative groups so as to avert the incidence of speculative reselling – at market values. However, members of the cooperative societies may sell or transfer their block or shareholdings to existing or new members. Rental price in the lower income segment may be a fraction, say 20% of their estimated average income. Government involvement is necessary to keep prices stable.
The design guidelines should follow the distributed-type mixed housing, proximity to social infrastructures such as schools, healthcare centres, parks and markets should be considered. Given the electricity situation, buildings should be at most, 5 storeys with navigable stairwell – without elevators. Kitchen, toilets and bathroom may be shared by optimum number of room/occupants. Designs should adopt simple parameters such as cross ventilation, double roofing and roof overhangs in order to boost environmental performance and reduce maintenance costs. However, these policy suggestions are not conclusive. They are simple, practical steps towards inclusive housing policies and are open to debate and further discussions. It attempts to call the attention of private and community developers, governments and other stakeholders to the possibilities in creating social housing.
(This article is based on the report, Achieving Mixed and Integrative Housing in Lagos by Heinrich Böll Stiftung and Arctic Infrastructure)
First published: https://www.businessdayonline.com/exclusives/analysis-sub/article/affordable-housing-strategies-mixed-income-policies-part/
In part I of this two-part series, I argued that the price of land among other factors is a key driver of variation in price of rental units across location. Therefore, policies and strategies to create and finance affordable, low-income housing should begin from stabilizing the price of lands and managing the distortions inherent in the system. For instance, the report by Heinrich Boell Stiftung (HBS) and Arctic Infrastructure (AI) in 2017 reveals that in Ijora-Badia, Lagos, where the government had evicted over 9000 people (according to Amnesty International) in a bid to construct low-income housing in the area, the government offered the land – in equity – without any development or due diligence as to the soil type and whether further subsidies were necessary to keep the final rental price/unit low. The construction of the foundation and other necessary development to enhance the carrying capacity of the land consequently shot up the price of a simple 2 bedroom to 22 million naira. Under a rent-to-own scheme designed by the developers, it is required to make an initial down payment of 1.1 million naira and a subsequent rent of N 175, 000 to be covered by 33% of monthly income. One would have to earn over N500, 000 monthly to be able to fulfil this obligation. This automatically changes the equation of the units from low-income to high income.
Speculation is another aspect. Land Speculation creates the distortions in market process that raise the price of lands beyond normal market level. Even worse, given the high demand for housing and other productive demand for lands, speculation prevents the optimum use of land and halts development. Banana Island which was initially government development has seen huge speculative purchases that have driven the prices of properties to one of the most expensive in the world. Interestingly however, little over 50% of the land has been developed (HBS/AI report 2017). It is therefore pertinent to correct for these distortions that push the prices of rental units above the affordability of the common man.
Landsubsidiesandhousingfunds
Governments interested in providing low-income housing can hold equities by providing land subsidies to the developers that emerged out of a competitive bidding process. The land should be accessible with developed road network and drainage channels to prevent floods. The winning developers should be given access to low interest financing over a long-term repayment scheme. The government can establish social housing funds from which community developers and private developers interested in social housing investments can draw. A number of proposals on social housing investment funds were suggested in the report that followed the Lagos Development Envision Lab 2017 by Heinrich Boell Foundation and Arctic Infrastructure: Habitat Funds – to be disbursed to mortgage banks for onward lending to households earning monthly incomes between N18, 000 – N40, 000, at 5% interest rate over a 20 year period and a monthly repayment plan ranging N5, 000 – N12, 000. A Loan to Value (LTV) ratio of 85% would apply under this fund with a maximum of 5% initial equity contribution from the beneficiaries. The participating mortgage banks (PMB) would obtain the funds at a 3% interest rate from the state funding institution. A Social Housing Guarantee Fund would guarantee any amount in excess of the 85% LTV extended to households. A Construction Fund, through the PMBs would finance developers interested in social housing at interest rates not exceeding 6% over a 20 year repayment period. Whereas the Habitat fund enables households to buy rental units, the Construction fund incentivizes developers to provide low-costs housing. Other funds may be set aside for innovation and technology that reduces the costs of building materials and construction as well as energy innovation related to housing construction.
Unusedlandtaxes
It is not consistent with common sense to have lands fallowing in speculation when there are prevailing demand for housing units. But land speculation happens to be sound business intuition especially in Lagos where alongside inflexible land tenure system, the process of land acquisition defeats transparent market process and is underlined by high incidence of fraud. It is therefore intuitive to suggest that unused lands be subject to taxation, proportionate to the value of the land after two years of purchase. This is likely to cut short the speculative time window, moderate any value accruable from speculative purchases within the two-year period. It may therefore free up idle lands for productive housing construction at least – if not social housing. Additional incentive may be to offer tax abatement to developers providing mixed income and affordable housing. Developers may also be given density bonuses which allow them to build more units per acre than the permissible level thereby increasing profitability per land area.
Summarily, it may be most effective to collaborate with cooperative housing societies in order to avert likely distortions especially in the disbursement of funds and subsidies. These housing societies, if formed within the community by community members with the sole purpose of providing low-costs housing would be more committed to the welfare and development of their communities than external private developers with profit motives. More so, housing societies optimistically, would be easier to regulate on issues of rental pricing and speculative reselling than private actors. It is also possible to work with the community association of land owners who are willing to surrender their land titles in equity towards the construction of low-costs housing units. Example: Amukoko Community Development Association. This way, the developers need not buy the lands, but issue equities or a fair share of the development units to the original landowners.
(This article is based on the report, Achieving Mixed and Integrative Housing in Lagos by Heinrich Boell Stiftung and Arctic Infrastructure)
The Trumpian bias about the US trade deficits and the US-China trade war is beginning to spill over, and we are beginning to see domestic versions of it in Nigeria (and the rest of Africa). The reluctance that trailed the signing and ratification of the African Continental Free Trade Agreement (AfCFTA) was a harbinger; the eventual border closure is exemplary. The argument put forward was that while the nation looks to grow its local industries, entering the agreement would open the economy to presumably uncontrollable volume of imports especially from foreign countries outside the AfCFTA—as Nigeria is thought to be the target market—which could challenge efforts made to develop the cottage industries.
Manufacturing countries in Europe, Asia, and America who have standing arrangements with sovereign states in Africa could exploit the free trade agreement to route their goods to other African countries, enjoying the exemption on tariffs and other benefits of the agreement. This would have a devastating effect on domestic manufacturing: business shutdown, job losses, and the loss of tariff and tax revenues. There would also be some exchange rate effects as the expanding import bill implies depreciation pressure on the naira exchange rate.
Nonetheless, it is also likely that the AfCFTA brings significant welfare benefits that offset the scenario above. For instance, increased imports could lower the prices of goods and services through economies of scale and competitiveness. This could, in turn, imply reduced inflationary pressure. Moreover, there is the “rule of origin” that attempts to checkmate the incidence of foreign goods smuggling.
Yet, faced with a budget deficit of N1.9 trillion in 2019 and planned deficit of N2.18 trillion for 2020, the Nigerian economy is in desperate need of finance and the administration is doing everything it can to increase revenue: we have seen the government raise the VAT from 5 to 7.5 per cent and introduced new tax schemes. The CBN recently enforced the exclusion of 41 import items from accessing foreign exchange (forex) via the official exchange window in a bid to reduce the pressure of import demand on forex. Only three months after signing the AfCFTA in June 2019, the government shuts down all land borders with Niger, Benin and Cameroon in jittery reaction to the likelihood of import binge, and the other consequential issues that may follow the implementation of the AfCFTA in 2020. This, however, is not peculiar to Nigeria alone: in Equatorial Guinea, the government talks about building a wall to prevent illegal immigration from other West African countries. Xenophobia in South Africa is another overt resistance towards factor mobility.
The Nigerian government is under pressure to protect its economy and win in the AfCFTA but its approaches are anti-free trade, protectionist and nearly indigenization of the economy, very similar to the trade ideology of President Trump in the US.
As the government aggressively extracts revenue in tax from the society and prevents cross-border trade transactions, it directly stifles the economy, meting out hardship and misery on its citizens. By these actions, the government overtly reveals its preference for revenues over societal welfare, grossly undermining the continental trade agreement and the essence of regional integration; and by so doing, transmitting negative signals to other countries within the AfCFTA. Since the closure of the border, the consumer price index has gone up; small businesses struggle, hunger and poverty trend upward. Investors have also adopted a wait-and-see approach to the one step forward ten steps backwards pace of the economy.
The economy admits its weak manufacturing and infrastructure base; it would not stand the competition that would come. Uncontrolled import would challenge local manufacturing and ridicule industrial development especially the target on food self-sufficiency in the Economic Recovery and Growth Plan (ERGP).
One way out of the woods
A World Bank data shows that as of 2017, total imports to Nigeria amounted to 13.18 per cent of GDP and trade growth of 11.56 per cent. Even though participation in intra-African trade is relatively low at 4.4 per cent, the AfCTA holds the potential for increased trade. It is therefore important to establish a system of importers registry based on certain stipulated criteria in readiness for the deluge of importation. These registration criteria need not be monetary payment but would include minimum capital requirements, loans credibility, tax returns, storage/warehouse facilities, logistics ability and etcetera. This approach would eliminate the myriads of micro importers—as is the statusquo—that contribute to the pressure on forex while broadening the import business by giving a formal structure.
The importers’ registry would complement the implementation of the rule of origin clause to eliminate round-tripping. It would allow for the efficient administration of regulatory checks on product destination, quality standards, and tracking. Other importers from across Africa interested in the Nigerian economy need only comply.
It would engender cooperation among the indigenous importers, the CBN and the Nigerian Customs Service.
The other benefit of the importers’ registry is that the registered import businesses would be buoyant enough to issue product warranty and return guarantee to dealers/retailer should the product not satisfy the customer as against the current practice where consumers are ambushed by petty importers who are unable to give these assurances. This would go a long way to ensure consumerism and consumer protection.
Also, by way of trade protection, the registered importers may organize themselves into unions according to their respective trade lines and help combat the incidences of counterfeit products so as to protect their market share/profit, licenses and avoid regulators knocking their doors. The intuition is that these importers are better positioned to curb the menace of substandard items, and with the right incentives, would develop the internal interest to do so.
We have signed the continental free trade agreement which opens our borders to a flood of importers from across Africa: if we cannot manage our own importers, what is to say we would be able to manage the multitude of importers from all over Africa? Yet we do not need to implement draconian policies that isolate us from the rest of the world. We need rather work towards increasing competitiveness by enhancing productive efficiency through technology and the requisite infrastructure. We have given conditions to reopen the borders; we may need also to build a database or register of importers.
April 2015 I took a 30 minutes break on a field job with the institute of Biodiversity when I got into this conversation with Mrs Garlinde, the coordinator. She was taking a break too. She opened the conversation by asking where I was from. Like most Germans, She has been to South Africa and Namibia, but not to Nigeria. “I’ve heard so much about Lagos though” she added. Same line Professor Freytag used the other day I thought. Then the big question: “do you have transportation means in Nigeria”? At that question my eye brows came closer as wrinkles formed on my forehead. But then again I thought, in that moment, quickly “what could she intend to ask”? All in my mind I rephrased it to: “is it easy for a visitor to move around in Nigeria? Is there an efficient transport service”? My answer to her intended question got me thinking towards a road transport policy.
First, I took the bold step to admit the near impracticality of having developed railway network – the financing, infrastructure and politics in consideration – in even in the long run. The main reason being that we ‘populated before development’ instead of the reverse. Moreover, how have we fared on road transportation? Poor road network yet in decrepitude. Let’s begin from the simple to the less simple. Let’s face road transport development.
We have a road transport system, but not a transport service. They surely would ‘convey’ persons or goods to destination, but how you or the goods get there is the story: comfort is not in the calculus, buses have no air-condition (in this tropical weather). The seats, made of woods and iron materials have jagged edges; the sitting arrangement, the noise, the smoke, everything just paints a lucid idea of chaos. In Lagos, the traffic draws global attention: small-rickety buses, motorcycles, long trucks and cars come to a halt, contributing to a hone parade. There is utter deregulation in that sector to a fault. Perhaps mis-deregulation tries to describe the structure. Every Nigerian adult is a transporter once he can afford a rickety bus or motorcycle; licencing is a known shady business. Drivers are ill-trained hence high rate of road mishap. Drivers involved in ghastly accidents get to keep their licences and return to driving. Teflon, no sanction! Transport fares are haggle determined; in that process, acerbic words are exchanged. No gentleman, no lady, no decency.
Nonetheless, the sector provides employment to many. It’s about the easiest private investment and income earner for any poor household. It is one of the largest informal sectors in the economy. Any policy intent on fairness must incorporate these stylized facts. Scaling the disservice against the service and bias that comes with it presents no easy decision rule; but the status quo is not Pareto efficient. Something could be done to improve the lot of most without making any worse for others.
The key is to introduce some degree of regulation in the sector. Policy makers must make this billion Naira sector attractive for credible investors by setting entry and operative standards that guarantee that the necessary services are provided: operators would be duly registered as transport companies, minimum number of buses and drivers- say minimum of 20 buses with 30 drivers to work in shifts, long bus types, fully air-condition, built-in address system, two exit doors, and secured drivers’ welfare. A fair way to initiate such policies is by initial public service which we have already seen in the BRT model. The next stage would be the announcement to set industry standards and evaluate mass reactions to such plans and to embark on public enlightenment programs. Next is to hold PPP and stakeholder seminars and workshop to attract investors and present the policy implementation timelines. The next great thing to do would be the welfare calculus for loss minimization: The early phases of such restructuring would likely increase unemployment, social vices and transport costs. Since this known, it is not uncertainty, but a risk worth taking. Therefore, policy makers must cushion the impact by designing orientation programs and training for these ‘erstwhile’ drivers and road workers so that they remain relevant in the new framework. Still many would be retrained and reemployed as drivers; others would be harnessed to community works such as road cleaning and maintenance, flower planting and waste collection. Deregulated sales of tickets also have employment effects. On costs, transportation could be subsidized at the initial stage or state-owned buses could serve as benchmark on pricing policy. These programs should begin before the policy is effective so as to minimize lag related loses. Expectedly, the overall welfare effects would act to minimize any loses from unemployment and related social costs over time.
The result would be enormous: we would see dignity in driver’s job, increased welfare for all, service improvement for all especially for tourists and visitors, reduced road use by private drivers and thus traffic, decline in fuel consumption and emission thereof, drastic fall in accidents and longer lasting roads which implies reduction in reconstruction and maintenance costs. Government would easily administer road taxes and revenue collection. SMEs and start-ups would flourish around the transport sector which in the long-run would reduce unemployment. The sector would be formalized and huge number of employees would be integrated into the formal banking system- implication for cashless policy.
I have discussed this idea colloquially with friends, colleagues and family in hope that one day it would reach relevant authorities. And on February 6, 2017 the Lagos state governor, Akinwunmi Ambode made a speech at the Centre for Values in Leadership to restructure the road transport sector. However, the speed at which he aims to go about it worries me. Perhaps he wants it all done in his tenure; but good policy badly implemented would be bad policy in retrospect. Developed roads, bus stations, traffic lights, training institutions and licencing office are prerequisite for this policy to work.
I want to thank you for your dispassionate critique of my long standing proposal for a payments reform that would among other things significantly improve the Naira value, and, reduce inflation and the cost of borrowing and also ultimately eliminate the payment of stupendous subsidies, on petrol price annually.
However, permit me to comment; on some aspects of your article;
“This implies that the statutory beneficiaries, who bear these dollar warrants, negotiating from a position of strength, would demand more naira for each dollar under the liberal framework, and the banks, tempted, to increase their stock of valuable dollars, would comply!”
Comment:
I can understand how you arrived at the above conclusion, however, kindly permit me to say that your expectation is indeed possible, if the CBN continues to recklessly apply its modulating instruments of Cash Reserve and liquidity Ratios, which are normally adopted, as you know, by CBN, for controlling credit expansion by banks. In other words, perceived surplus Naira liquidity that may overwhelm the Naira against the dollar in the market place, can actually, still be appropriately modulated by the adoption of compelling and supportive CRR and liquidity Ratios by CBN.
However, with much reduced liquidity in the money market, the banks will be, cautiously wary to purchase forex with more Naira, as this may jeopardize their Naira cash positions and further reduce their ability to make money from extending credit to customers or to even meet the cash demands of their customers. Besides, with the adoption of dollar warrants, the process of dollar sales will no longer be the usual ‘gbanjo’ auction, as in the previous monopolist market structure, because, significantly larger dollar sums will be unleashed on the market simultaneously, by multiple beneficiaries of fiscal allocations. Invariably, with a market flushed with dollar warrants and reduced Naira liquidity, banks will actually be in a stronger position and it would be in their interest to negotiate for less Naira for each dollar.
In addition, under this arrangement, the dollar purchased by banks from the several beneficiaries of dollar allocations will still remain in the custody of the Central bank, rather than in the custody of banks. The system of immediately transferring custody of dollars directly to banks has evidently given rise to much malfeasance in forex transactions.
However, with the adoption of dollar warrants, banks which purchase the dollars, will only sell the dollars to customers to settle the bills of foreign suppliers of approved goods and services, by directing CBN to make remittances (from balances in their (banks’) individual domiciliary account), after providing CBN with confirmation documents, such as attested bills of laden and other such instruments, before CBN would remit the dollars in the domiciliary account of any bank to foreign suppliers of goods and services. As you know, it would be totally reckless for any bank to keep accumulating dollars and ultimately jeopardize its own Naira cash position in a money market with barely optimal rather than excessively surplus Naira liquidity, which would require mopping up at great cost.
The payment of dollar denominated allocations with CBN dollar warrants, would undeniably reduce the CBN’s need to continuously mop up so called excess Naira liquidity from the market, with such high cost that you will agree are ridiculously out of tune for risk free sovereign debts. You will readily appreciate also, that it is probably more profitable for banks to continue to enjoy such bonanza of huge interest payments from investing in risk free T/bills, than the risk of lending to the real sector at perilous rates well above 20%.
“Dollar Debts: generally, developing countries are not able to borrow in their domestic currencies; and infrastructural gaps imply that they require huge dollar borrowings to buy foreign technologies to minimize gaps.”
Comment
I am not sure why you believe that developing countries are not able to borrow in their domestic countries. Indeed, wherever, this is so, it will be because local cost of borrowing is extremely high. Notably, however, as you know, higher rates of inflation will compellingly drive higher cost of borrowing. This is so rational!
Consequently, for the real sector to thrive successfully, and compete effectively against imports, inflation must come down to best practice lower single digit rates, so that real sector investors can borrow for not more than 5%. Furthermore, the stronger the Naira becomes, surely, the cheaper also it would be to service foreign debts.
I do not see how cost of funds can come down to best practice levels below 5%, when double digit inflation rates subsist. Similarly, I do not see inflation receding below 5%, if debilitating excess liquidity remains a perennial burden that compels CBN’s unceasing liquidity mop up, which, in turn, invariably drives up the cost of borrowing and crowds out the productive sector from easy access to cheaper funds. How can we grow jobs, when factories are closing shop?
“Dollarization: floating the exchange rate would lead to massive devaluation of the domestic currency as we saw in the last attempt by the CBN to liberalize the market in 2016/2017.”
Comment
I am not aware that the CBN ever made any serious attempt to float the Naira exchange rate, not even between 2016 and 2017, when the Apex bank totally lost control of the forex Market. You cannot float the Naira exchange rate on a monopolistic platform.
Until, the CBN’s monopoly and structure of dollar auctions for Naira are dismantled, it will be impossible to float the Naira exchange rate. Surprisingly, some observers have commented that my proposal will dollarize the economy; this is of course, far from the truth; the economy is already consciously dollarized by CBN, with the process of constantly auctioning relatively small rations of dollars in a market that is undeniably suffocated with Naira liquidity, which is in turn, also undeniably instigated by the additional Naira directly substituted for dollar allocations by the same CBN.
Generally, monopolist market structures, create socially oppressive pressures and serious distortions in any market, and will certainly, also challenge efficient resource allocation. It is explainable that the present monopoly in petrol supply is clearly sustained by a Naira exchange rate, that is out of tune with our foreign reserves and earnings capacity. You can understand that a stronger Naira will immediately crash fuel price and make it cheaper to buy petrol in Nigeria than to smuggle the commodity to neighbouring countries for sale. In any case, deregulation of petrol price will only become realistic with a stronger Naira engendered from a liberalized forex market.
“It is possible for the CBN to run simulations based on the idea, followed by a trial depending on the results of the simulation. He deserves recognition, if not an award.”
Comments
I will eagerly welcome any attempt at simulation of proposed payments reform. About 2 years ago, I was in the company of Dr Frank Jacob, President of Manufacturers Association of Nigeria and two others, to attend a meeting with CBN in Abuja. Dr Sarah Alade (Deputy Governor) who was at the meeting, admitted that they were conversant with my position on a payments reform, however, unfortunately, their attempt to adopt and implement this same payments reform was shot down in 2007 by Michael Aondoakaa, who was the Attorney General during Yar Adua’s tenure.
On further investigation (see Segun Adeniyi’s book), I found that, Aondoakaa actually shot down Soludo’s decision to amend and print New Naira currency profile without Presidential approval as constitutionally required.
Of course, Aondoakaa was right, but the Attorney General didn’t and couldn’t have stopped the CBN from implementing any payment reform that would induce or sustain price stability in the economy. CBN’s power to sustain price stability is enshrined in the 2007 CBN Act. Sadly, however, Soludo chickened out of what was not even a confrontation and unfortunately threw away the baby with the bath water!
So you may be mistaken Mr Okafor, if you think the CBN does not understand the significance of the payments reform I have canvassed in the last 15 years. They know and I hope you don’t mind my saying so, they probably know much better than you ever imagine.
It is because they cannot assail my position without bringing to question the odious rationale behind borrowing trillions of Naira every year and simply sterilizing such funds from any useful application, especially when these loans carry ridiculously high interest rates. It is ironical that the CBN would turn round to blame the banks for not lending to the real sector, when in fact the same CBN is the real villain.
My dear friend, believe it or not, it is an unfortunate but deliberate scam! Our people will continue to suffer if we don’t cry out.
Nonetheless, I suggested to the CBN team at our above meeting to simulate the impact of my payments proposal on the economy to convince Naysayers about its efficacy. Unexpectedly, however, Dr Alade suggested that they will prefer that I should personally carry out the simulation and bring the result to their attention!!
As for the Award, you suggested, well my personal satisfaction would be the adoption of the payments proposal I have canvassed for over 15 years. That is all the award I want, because millions of Nigerians will climb out of poverty and Nigerian experts and families in the Diaspora will consider returning to their fatherland and contributing to its growth.
Furthermore, if the Nigerian economy is liberated, other challenged economies in Africa may borrow a leaf from our success, and more Africans can rise from the depths of poverty to relative prosperity.
Dear Mr Okafor, I have gone to such length to further explain the payments reform that I have canvassed for over 15 years, because, I think, you truly care.
Remain blessed and enjoy the peace that should accompany the Easter break.
Henry Boyo
A simple internet search yields a common result that housing deficit in Nigeria is about 17 million units. But two important things have happened recently: the National Bureau of Statistics revealed that we are of 198 million people, and international agencies put current poverty figures at 87 million people. Intuitively, if population and poverty have increased, the number of people out of homes must have increased and the deficit in housing, worsened.
It is so distasteful when you catch red-handed the insensitivity of the government and its agencies. I have only recently learned about the Federal Housing Authority’s Diaspora City launched in 2017 to build houses and estates for Nigerians living in the diaspora! The plan is a tripartite arrange among three government agencies – Federal Housing Authority (FHA), Federal Ministry of Works, Power and Housing, and Independent Corrupt Practices and Other Related Offences Commission (ICPC). So it is a wholly government initiative as they have shaken hands with the presidency. And the sole beneficiaries are Nigerians living and working abroad including those in the diplomatic missions. Planned in two phases, the Managing Director of FHA, Professor Mohammad Al-Amin justifies that it would meet the housing needs of Nigerians in diaspora and foreign mission as well as serve as another non-oil revenue stream for the country. Describing the trend in diaspora remittances he implied that the government needs to extract its own portion of it. The ICPC chairman, Barrister Ekpo Nta claimed that the agencies cared so much about the stories of family members who swindle or embezzle funds repatriated by their relatives abroad for projects in Nigeria. Nice try guys, but we got you!
Any discerning mind familiar with housing and settlement crisis in Nigeria would notice the sheer absence of sincerity, only cheap popularity through optically elegant projects. The discerning mind would also wonder why there is not a mention of housing deficit particularly for Nigerians in diaspora as necessity for this initiative. There is not one! Nigerians in the diaspora who can afford home-ownership already own homes or know their ways around. I have argued in an earlier essay that there are numerous “ghost estates” largely unoccupied across the target cities of the Diaspora plan. Why are Nigerians abroad not buying them? The FHA should have pondered. The overt justification for this initiative is the greedy look at the diaspora remittances, and the covert strategy is to allocate land and properties to hand-picked agents of the establishment. Paraphrasing Fela Kuti, this is absolutely “government magic” in broad daylight. I am particularly still in distaste about the private-sector-led Eko-Atlantic city in collaboration with Lagos state government, and now this?
The 17 million housing deficits does not include Nigerians “living” abroad, so what explanation could justify an initiative to build houses for Nigerians not living in Nigeria whereas Nigerians in Nigeria have no homes to live in? The web-page of the FHA, exposes the intentions of the government: beside the diaspora city shenanigan, the list of current projects (as well as past projects) are luxury apartment buildings in Apo, Abuja. Where you would find low-cost housing, it is about bungalow projects in Otta, Ogun state. Even worse, you would find that the time span of its “future projects” is still 2009-2013 in 2018, five years after! Noticeably, there seem to be false cultural notion or synonymity between affordable housing and bungalow within governments: this is only convenient as in decent climes; affordable housing is almost synonymous with condominiums. Another important observation on the FHA web-page which resonates across other sectors of the economy is how funds are immediately available when governments and its agencies want to build luxury units or projects that yield easy returns, but when it is about low-cost housing or risky projects, funds become insufficient, they begin to seek partnerships. No wonder the Diaspora city plan is an inter-agency collaboration to ambush the diaspora remittances.
The glut of estate agencies and realtors in the country and the abnormal profits they continuously extract suggest that social housing scheme can also be profitable if the government ventured. But I wonder why government shy away from affordable mass housing projects. The only explanation would be poor comprehension of the importance of housing in enhancing standard of living and development. Housing is a major part of household consumption and savings motives in developing countries. Therefore, improving housing conditions and costs would have significant welfare implications. It is critical for city development and urban planning. Government needs to return to the housing market with the urgency to solve the growing housing and settlement challenges in the country. It would have to be consolidated on a social optimum model – it is disturbing to see private sector technocrats appointed to positions of public office using the same capitalist-profit-making models of the private sector in place of social/service models in public sector, being therefore practically unable to differentiate the philosophies of both sectors. This insincerity and penalization of the poor masses has to stop and now!
Amam holds a master’s degree in Economics and Strategy from the Friedrich Schiller Universität Jena, Germany. He consulted for africon GmbH, supporting international companies with their go-to-market strategies into African markets. He worked within the Competency centre, Energy and Environment of the Delegation of German Industry and Commerce (AHK) in Nigeria. He has had other consultancy stints with Heinrich Böll Stiftung, Nigeria as a member of the working group on Housing, Slums, and Informal Settlement; and the Lagos Business School where he researched mostly on Non-profit management and the grand challenges. He was a regular contributor to Businessday opinion editorials where he wrote on socio-economic topics. He has built relationships working with reputable professionals across Nigeria and beyond.
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Amam brings his diversity to lead strategy and engagement in Native Insight all the while standing as a co-chair, Economics & Societies. Amam is a strategist whose interests span the science of society, markets, business, sustainability, and development policies around Africa. He cares about volunteering; loves cooking and good music.
In 2008, Enhancing Financial Inclusion and Access (EFInA) conducted a survey that revealed that 52.5% of the adult population in Nigeria were excluded from financial services. It called attention to the level of financial exclusion in the country. The Global Financial inclusion index was later developed in 2011 to track global efforts towards financial inclusion. Following the wind, the CBN developed a National Financial Inclusion Strategy (NFIS) in 2012 with the ambitious goals of achieving 80% total financial inclusion and 70% formal financial inclusion by 2020.
The NFIS specifically aims to increase by 2020, the number of adults with access to payment services to 70% (from 21.6% in 2010), access to savings accounts to increase from 24.0% to 60%, and credit from 2 to 40%, Insurance from 1 to 40% and pensions from 5 to 40%, all within the same period. The targets were benchmarked around peer countries as well as other growth factors in the domestic environment. However, in the exposure draft of the NFIS released on July 6, 2018, the Central Bank of Nigeria admitted that Nigeria is not on track to meet the 2020 targets; which is less than a year away.
The Global Findex report 2017 show that with an estimate of 100 million unbanked adults, Nigeria joins six other countries including Bangladesh, China, and India as the top contributors to the global financially excluded of 1.7 billion. The number of adults with a formal bank account fell from 44% to 39.7% between 2014 and 2017. The number of adults with financial institution account fell to 39.4% from 44%, with a gender disparity of 51% and 27% for male and female respectively. The percentage of adults who saved money in a financial institution and those who borrowed with a credit card were 20.6% and 5.3% respectively. The number of those with mobile money account is still incredibly low at 5.6%, below the Sub-Saharan African average of 20.9%. According to EFInA, the total financially excluded is as high as 41.6% in 2016. It is therefore pertinent to draw lessons from successful countries with similar conditions in Latin America
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Source: Global Findex Report 2017, BRIU analysis
Latin American Countries such as Brazil, Panama, and Peru have made significant and consistent improvements in financial inclusion through the years from 2011 to 2017. In the period, Peru recorded an astronomic rise in the number of adults with accounts, from 20.5% (2011) to 42.6% (2017); whereas Panama recorded 24.9% and 46.5% in the same period. In the lead on adults with accounts in financial institutions, Chile (73.8%) and Brazil (70%) surpassed the Latin American average (54.4%) in 2017. For both countries, the gender and educational disparity in accounts-ownership show impressive records. The percentage of adults saving at a financial institution in Brazil and Chile was 14.5% and 21.1% above the regional average of 12.2%; and on access to credit via credit card in the last year, both countries recorded 26.3% and 30.9% – against a regional average of 20.8%.
In Brazil, the progress has been attributed to the expansion of the national correspondent banking networks, growth in microfinance and cooperatives as well as targeted conditional transfers to increase the income levels of the low-income workers under the BolsaFamília program. The correspondent banking model permits accessible retailers such as food vendors, gas stations and drug stores to act as intermediaries for basic financial transactions, thereby bridging the gap between formal and informal financial structures. The Brazilian government also promoted financial literacy and adapted regulation of financial services to the needs of the underserved low-income groups. In Chile, it was a sincere commitment to the Maya Declaration in 2011 – to which Nigeria is a signatory. The Chilean government introduced an electronic payment system for transfers of state benefits, launched an extensive financial education program for beneficiaries of state transfers and developed a complementary financial inclusion survey. A state bank, Banco Estado, was established with a defined financial inclusion strategy to drive efforts on achieving financial inclusion.
All that notwithstanding, some progress have been made by both policymakers and stakeholders to improve access to financial services in Nigeria. The Brazilian correspondent banking is similar to the Agent banking in its early stages in urban centres across the country; while the BolsaFamília is to the National Social Investment program (NSIP). More so, The CBN and the Nigerian Communications Commission (NCC) signed a memorandum of understanding in other to facilitate mobile money operations on the premise that more adults in Nigeria owned phones than bank accounts. This initiative has given birth to a synergy between commercial banks and telecoms operators as well as enabling the development of financial technology (FinTech) operators such as Paga, Quickteller, Paydirect, Alert and eTransact. The collaborative effort between the CBN and the NIBSS to create a regulatory sandbox which allows FinTech start-ups to test solutions under controlled environment has enabled a start-hub conducive for creating sustainable businesses and expansion of the FinTech space to reach the last mile. The agent banking model that incorporates trading businesses as transactional outlets of banks and the most recent Payment Service Banks which is a model of the Non-Bank led financial inclusion strategy is also the efforts to serve the unbanked.
The direction of policy strategies seems to be towards leveraging ownership of mobile phones and access to the internet which happens to be the strongest improvement area for African countries according to the Global Findex report, 2017. Therefore, a combination of policies that encourage participation within the mobile money space and an expansion of the agent banking model into other states of the federation would go a long away, noting that most of these models are still being piloted in urban centres where the incidence of financial exclusion is less critical. The electronic payment method should be deployed in the conditional cash transfer schemes of the NSIP which is still done in cash at some local levels. Effective financial education for the most vulnerable cannot be overemphasized. Since the drive on financial inclusion in 2008, only about 10% declined has been achieved, amounting to 1% per annum on average. There is still a long way to go; all hands must be on deck.
The labour theory of value argues that the value of a good or service derives from the units of labour that produces it. It describes labour as the source of value. True or false, it highlights labour as an important factor of production or economic agent.
If increasingly, workers cannot afford the product of their labour, whether by outright exploitation or by worsening economic conditions – which confiscates income, it provides grounds for economy-wide wage review. Minimum wage is legislation on the lowest remuneration payable by employers to employees. On the side of the worker, it is the wage below which employees should not offer their labour. Typically, labour exploitation, rising inequality and poverty are reasons for minimum legislation.
The expectation is that legislation on the minimum wage payable to workers would improve their standard of living, reduce poverty and inequality. A satisfied worker would be more efficient at work, and output would increase. But the standard representation of the labour market shows that the application of minimum wage disrupts the efficient working of a competitive market, resulting in a glut in unemployment. Increasing the minimum wage above the market clearing level would increase the wage bills of firms. And as firms adapt, they reduce employment or transfer the cost to consumers of goods – the inflationary effect of minimum wage. However, the evidence is mixed as to how minimum wage affects employment and therefore poverty as empirical studies show contradictory evidence in different economies. In clear terms, minimum wage increases the wages of those who retain their jobs and reduces the benefits of those who lost theirs. Therefore, the effect on poverty overall is ambiguous.
What we know about minimum wage
The effect of minimum wage varies from country to country depending on the pre-existing labour market condition and the economy at large.
High unemployment can condition the average wage payable to workers; the effectiveness of minimum wage and black-market in the labour market.
Minimum wage increases the supply of labour, if not demand.
Rising misery level influences/necessitates a review of minimum wage
The case for Nigeria
Minimum wage negotiation in Nigeria is never gentlemanly; it is often a brawl between the government and the labour union degenerating into a nationwide strike. In 2010, the Nigerian Labour Congress (NLC) had organised a nationwide protest for an upward review of the minimum wage which at the time was N7, 500 and did not reflect the realities of the time. It ended in a one-day strike following the Belgore committee report and a minimum wage of N18, 000 (a deviation from the N52, 200 demanded) was approved by the National Council of states. Before then, the Wage Review Agreement of 2000 which outlined the stages of wage review by 25 percent in 2001 and 15 percent in 2003 on the existing wage was abandoned; only 15 percent review was made in 2007 increasing the value to N7500. In 1981, Hassan Sunmonu began an agitation for minimum wage review to N300. The agitation culminated in a nationwide strike under the Shagari administration. The eventual settlement was at N125, less than half of the sum demanded.
Today, the agitation is strongest; perhaps the forthcoming elections present the opportunity to back the political class into a corner. The agitation began to brew since 2016, when the NLC leaders, in a press briefing, called for a review of the minimum wage to N56, 000 on grounds that the five-year periodic review as laid out in the Belgore Committee report is long due since the last one in 2011. The scenario as it plays out in Nigeria leaves the discerning mind wondering why governments – federal and states – are vehemently antithetical to wage reviews as against what obtains in other climes where governments and political parties debate the implications and willingly act on the outcome of the minimum wage reviews to curb labour exploitation in industries.
In the United Kingdom, the Low Pay Commission advises the government every October about the future of the national minimum wage. In 2015, setting a wage floor was a key agenda in the demands of the Social Democrats (SPD) to enter a coalition with Merkel; this led to the establishment of a minimum wage commission, Mindestlohnkommission. In an ideal situation, it is the organised private sector and the manufacturers association that should decry inability to pay a wage considered too high; but a good majority of the private employers who are constitutionally obliged to pay the minimum wage already exceed it. The implication is that it is the government, in our case, who is the chief exploiter of labour.
The major grounds for strong resistance against a wage review especially by state governments include the inability to pay, inflation and the unemployment implication. A number of state governments have openly declared their inability to fulfil a reviewed wage and evidence are available about states who are unable to pay the current wage against a backlog of arrears. But should governments’ inability to meet its own obligation excuse mass immiseration? The situation is an indictment on the size of governments and its slack maximizing bureaucracy. In the light of the current high unemployment, downsizing is not much an option. State governments must be efficient in allocating resources and ingeniously increase revenue streams.
The inflation argument is that the quantum of money to raise the minimum wage would cause an increase in price level. Firstly, it is not stylized to argue that a wage review would increase unemployment and inflation simultaneously – Philips curve. Minimum wage reviews are ideally targeted at the low-income group to increase welfare and reduce inequality. The marginal propensity to consume (MPC) of low-income earners is high for an increase in income. Therefore, this consumption spending due to the increase in wage would increase aggregate demand, output and growth, such that the inflation expectation may not hold. Again, in the light of the Minimum wage Act, the review would not affect firms with less than 50 employees, part-time workers, workers on commission, and seasonal employment. Since a significant number of the private sector employers pay above the minimum wage, one can argue that the review affects only a relatively small group of workers, such that any inflationary implication is infinitesimal.
The unemployment implication argues that an increase in wages would increase the wage bills of firms. But I have argued above, firms already pay higher wages and are not significantly affected by the review. And since the minimum wage act as pointed out excludes employers in the informal sector, and SMEs all of which constitute a major employer of labour, the unemployment effect in our case may be well exaggerated – limited only to civil servants. For instance, the survey conducted in 2013 by Small and Medium Entreprises Development Agency Nigeria (SMEDAN) and Nigerian Bureau of Statistics (NBS) revealed that the total number of MSMEs stood at 37,067,416 (Micro: 36,994,578; Small: 68,168; and Medium: 4,670).[1] The total number of persons employed by the MSME sector as at December 2013 stood at 59,741,211 (Micro: 57,836,391), representing 84.02% of the total labour force and contributing 48.47% to nominal GDP. Interestingly, 97.74% of the total number of Microenterprises is Sole proprietorship.
Conclusion
I have argued here that the direction of the debate on minimum wage is not founded on sound economic principles, but on the emotions of those who pay the piper. In fact, the resolve to pay N27, 000 as minimum wage by the government reduces to N900/day and is insufficient per se given the economic realities. This N900/day at N360 per dollar only slightly exceed the extreme poverty threshold of $1.90/day We have recently learned that South Africa would pay the equivalent of N126, 480 as minimum wage in 2019. Another rather interesting aspect of the matter should be the insufficiency of the minimum wage act to reflect the flexibility in the work environment and changes in the future of work. The work environment is not as rigid as it used to be; more and more people are engaged in freelance employment, contract jobs, commission-based employment, and part-time employment. The Act, as it excludes these groups, creates room for labour exploitation.
[1] Note that Micro and Small enterprise is defined by the number of firms employing between 1-49 employees
