The
Partnership Initiatives for Niger Delta (PIND) recently sent Dr. Ogho Okiti and
Mr. Al-Habib Onifade out into the field to find out the impact of the naira’s
devaluation on different parts of four key agricultural value chains (palm oil,
cassava, aquaculture and poultry) in the Niger Delta. The question of whether
to devalue the naira was of course a big debate in Nigeria in 2015 and 2016
with the President himself weighing in.
The
binary nature of the debate meant there was very little time devoted to the
question of what to do next after the naira was devalued. The inevitable
devaluation happened and Nigeria simply walked into it. This report is thus
useful for insight into what happened to the aforementioned parts of the
agriculture industry after the effects of the devaluation had flowed through.
In the
main they looked at two effects – income and substitution. That is, how did the
devaluation affect people’s incomes? And – how did it change behaviour in terms
of how people switched products? Naturally, the impact of the devaluation was
felt in different ways in different parts of the agriculture value chain, but
one can summarise by saying it made everything more expensive.
Imported
goods got more expensive for obvious reasons – more naira was needed to buy the
same amount of stuff. But the reason the local substitutes got more expensive
is that when people ran away from expensive foreign products, the local guys
were not able to meet up with increased demand and had to increase prices. This
was partly because things like fertiliser and pest control, needed to increase
productivity, are all imported and had to be paid for upfront. This
automatically ruled out a lot of smallholder farmers from taking part in the
benefits of the increased demand for their products. This is something that
could have been mitigated with policy responses but farmers were pretty much
left to their own devices.
Another
thing the research paper highlights is, how much poorer the combination of
lower oil prices, naira devaluation, inflation, and population growth, made
Nigerians. The researchers calculated that GDP per capita fell from $2,200 in
2014 to $1,180 in 2016 – a shocking 47% drop. Again, when something like this
happens, one way to reduce the impact is by ensuring that people have access to
cheaper goods. But as we’ve seen, it was not only the devaluation that raised
prices, it was also deliberate policy of banning the import of some items that
caused local prices of things like palm oil to shoot up.
A big
part of the debate around devaluation of the naira and economic policy in
general has been that Nigeria should produce its own food and not import. Be
careful what you wish for. This policy has largely been ‘implemented’, based on
the findings of this research paper, and the results are not altogether pretty.
Taking rice as an example, the price of foreign rice increased following the
devaluation. But the price of local rice went up as well. This meant that the
overall demand for rice went down even though demand for local rice went up. In
other words, ‘the substitution effect was greater than the income effect.’ A
second order effect of this was that, the overall drop in demand for rice was
replaced by an increase in the demand for garri and other cassava products.
There have even been newspaper reports of increased cyanide poisoning because
of people switching to garri away from rice.
One final
interesting effect had to do with crop protection products. The researchers
found that most of such products used in Nigeria are produced in China under
commission from Nigerians who then brand them for sale locally. A lot of these
businesses shut down completely in the wake of the devaluation while others who
survived increased their market share – the researchers founds one such company
that increased market share by 28% and value by 45% (the difference reflecting
increased prices). But something else happened beyond devaluation to cause this
shift. The Chinese government cracked down on producers of sub-standard crop
protection products in China and many had to shut down. This reduced production
capacity from the Chinese side meant that prices of these products increased in
China. In other words, Nigeria was at the mercy of a Chinese government policy
that had nothing to do with the naira’s devaluation. Between 2014 and June this
year, the prices of some of these products increased by as much as 157% as a
result.
What are
we to make of all these? The obvious lesson is that the actual devaluation of
the naira was the easy bit. There was no point wasting so much time on that
part of the equation because after devaluing, there was still plenty of work to
do. Devaluing the currency was to allow the economy to adjust to its new
reality but even that adjustment required an understanding of its impact and
how best to cushion the blow.
The other
lesson is that the economy is an incredibly complex machine. I’m always
reminded of a quote by Larry Summers – former US Treasury Secretary and World
Bank Chief Economist – where he said, ‘it is not easy to understand how an
economy works.’
They say
you should never let a good crisis go to waste. Nigeria is now out of recession
officially so maybe there is no incentive for policymakers to consider a report
like this. But the effects it highlights can be lessons for good and bad times
in terms of how to respond to difficult situations and where exactly to channel
resources.
The
report is available on www.pindfoundation.org
Source: www.guardian.ng
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