October 15, (THEWILL) – In the ever-evolving landscape of economic and fiscal policy-making, Nigeria has been characterised by abrupt policy reversals, delays and sharp about-faces. These sudden shifts in government policies have often left a trail of confusion, economic instability and cast a shadow over the country’s credibility on the global stage. The recent policy reversal initiated by the Central Bank of Nigeria (CBN) is just the latest in a long list of policy somersaults the country has witnessed and these do not bode well for a country aiming for a stable and investor-friendly policy environment.
As those following economic developments in the country are aware of, on October 12, 2023, the CBN announced a significant policy reversal. It decided to lift the foreign exchange (forex) restriction on the importation of 43 items that were previously blocked from accessing dollars at the official market. In addition, the CBN pledged to enhance liquidity in the forex market through regular interventions and to allow market forces to determine exchange rates on a willing-buyer and willing-seller basis.
The origins of this reversal trace back to 2015 when the CBN introduced the forex restriction policy with the goal of conserving foreign reserves, supporting local production and stabilising the forex market. Under this policy, a list of 43 items, including rice, vegetables, textiles, and cosmetics, became ineligible for forex allocation at the official exchange rate. The CBN justified these restrictions on the grounds that these items were either locally producible or non-essential for the Nigerian economy.
The policy was implemented against the backdrop of a sharp decline in oil prices, which had significantly reduced Nigeria’s export earnings and foreign reserves. The CBN was under immense pressure to devalue the naira, which was pegged at 197 per dollar at the time. However, the devaluation was resisted to prevent inflation and to protect the purchasing power of Nigerians. The CBN believed that by restricting forex supply for non-essential imports, it could reduce the demand for dollars, defend the naira and encourage domestic production and diversification of the economy.
All of these have changed with the October 12 policy reversal, which sparked a debate regarding the gains and losses experienced under the initial policy. On the positive side, local producers benefited from reduced competition and increased demand for their products. Notably, there was an increase in rice and cement production. Moreover, some local manufacturers invested in capacity expansion and backward integration to meet the growing demand.
However, the policy had its downsides. It led to distortions in the forex market as importers shifted their demand to the parallel market where the naira traded at a much weaker rate than the official one. This discrepancy encouraged speculation, arbitrage and rent-seeking activities. Moreover, the policy escalated the cost of production and inflation for many businesses that relied on imported inputs or finished goods. For example, poultry farmers faced elevated expenses for importing maize and soybeans for feed production. The policy also curtailed consumer access to more affordable and higher-quality foreign goods.
The policy encountered criticism from various quarters, including importers, manufacturers, economists and international organisations. They viewed the policy as ineffective and unsustainable, arguing that it did not address the root causes of forex scarcity, such as low productivity, poor infrastructure and fiscal indiscipline. Now, it has been reversed and these 43 items are now unbanned in the latest of Nigeria’s policy reversals. With the CBN, there were also a couple of policy reversals limiting deposits, transfers and withdrawals of the naira and foreign exchange in bank accounts.
In truth, policy reversals are not unique to the forex market. Nigeria has witnessed a series of abrupt changes in other sectors. For example, the government’s decision to reintroduce the fuel subsidy regime recently after attempting to remove it at the inauguration of this new administration, INEC’s brazen decision to jettison the electronic transmission of results of the 2023 presidential election in real time to curb rigging, overtly delayed, reversed or abandoned infrastructural projects spread across the country, non-functional state owned crude oil refineries despite several botched policies to have them functional, incoherent automotive policy, the delayed or abandoned implementation of the 800-page Steve Oronsaye Panel White Paper Committee Report and many other policy reversals and delays which is why people now view government policy decision with a pinch of salt.
Policy reversals in Nigeria can be attributed to various factors. One major reason is the failure of existing policies to achieve their set objectives. When policies fall short of delivering the desired outcomes, governments are often compelled to make changes or abandon them to rectify the situation. These failures to reach objectives trace to a defect in effective decision-making when it comes to the nitty-gritty of policy making and the buck falls squarely on the desks of shoddy policy makers.
Additionally, changes in leadership can also trigger policy reversals, as new governments or leaders may bring different policy preferences and seek to undo or revise the policies of their predecessors. This can also be blamed on policy makers not doing enough at the point of formulation of relevant policies that can engender progress. There is also the potential of pressure from interest groups or external actors, including domestic and foreign businesses, civil society organisations, trade unions and international organisations, which can also exert influence on policy changes.
Yet, these frequent policy reversals and somersaults portray the government as unstable and inconsistent. These policy shifts erode trust, both among domestic and foreign investors, and raise questions about the motivations behind these changes.
Policy reversals in Nigeria have a range of negative consequences, including reduced investor confidence. This is because frequent policy changes create uncertainty and this discourages investors from committing their resources and capital to long-term projects. It also leads to increased uncertainty as businesses and consumers find it difficult to plan ahead and make rational decisions based on reliable information and expectations.
There is also the fact of discouragement of innovation and entrepreneurship. The truth is that frequent policy reversals undermine the incentive for businesses to invest in research and development, technology adoption, and market expansion. Furthermore, these reversals undermine policy credibility and accountability. When they occur too often, these reversals erode the government’s credibility and accountability, raising questions about the motives and interests behind the policies.
The most obvious of all is that this bad practice causes waste in public resources and creates opportunities for corruption, leading to the misallocation and misuse of public resources, creating opportunities for rent-seeking, corruption and rent-sharing.
To prevent these consequences in the future, policymakers should consider implementing the following measures:
Provide buffer periods before policy implementations – Instead of implementing policies with immediate effect, policymakers should provide reasonable transition periods (2-3years) that allow all stakeholders, including businesses, consumers and regulatory agencies enough time to adjust to the new policies. This would reduce the shock and disruption caused by abrupt policy changes.
Ensure evidence-based policy formulation – Policymakers should base their decisions on thorough research, analysis and consultation with experts, stakeholders and the public. Policies should be designed to address the root causes of economic challenges and not just the symptoms.
Maintain policy consistency and predictability – Policymakers should strive for policy consistency and predictability to build trust and confidence among investors and the public. Clear and transparent communication about policy objectives, strategies and outcomes is essential.
Consider the broader economic context – Policymakers should be mindful of the broader economic context and the interconnectedness of policies. Policies in one sector can have ripple effects on others. Coordinated and integrated policies that consider the economic ecosystem as a whole can lead to better outcomes.
Engage in regular policy evaluation and adjustment – Policies should be subject to continuous evaluation and adjustment based on feedback, data and changing circumstances. Policymakers should be willing to make data-driven adjustments to policies to ensure they remain effective and responsive to evolving economic conditions. The identification of some policies as “temporal” might also go a long way in shaping reactions to these policies.
When government policy formulators adopt these recommendations, the nation’s policy somersaults and frequent changes in direction that have created an environment of uncertainty and instability, affecting investor confidence and economic growth, will be halted.
By implementing policies that are evidence-based, predictable and supportive of long-term growth and development, Nigeria can pave the way for a more prosperous and stable economic future for its citizens, investors and residents.
