It Never Rains…It, Erm, Snows?

“Nigeria is a special snowflake.”

A friend of mine says that all the time. I first met him nearly 25 years ago, and in that time, I’ve not met anyone with a comparable ability to combine dry wit with sarcasm, and hit the nail on the head every single time. It’s a skill I hope to learn, to keep me entertained in my wise old age.

The ‘special snowflake’ analogy is really not that uncommon, nor is it difficult to understand, even if you’re really not familiar with (or interested in) snow. But whenever he says it, I find that I am intrigued.

So this past week, I’ve been thinking about snowflakes. Also this past week, there was unusual snowfall in Saudi Arabia. And since the Saudis will be important determinants of our fiscal fate for the next three and a bit years, I’ve taken that as a sign that I’m on to something. 

Snowflakes though?

Stay with me.

Certain properties make a snowflake…well, a snowflake. But in as much as snowflakes are similar, they are actually pretty different.

First fun fact: (the one that many people like to repeat) no two snowflakes are exactly the same. That sounds clever, but it’s not particularly interesting or useful, because you could say that about (almost?) anything that occurs naturally.

This is more interesting: while snowflakes may look pretty similar to the naked eye, in fact they come in such a wide variety that scientists are fascinated by them. Human beings have doppelgangers, snowflakes probably don’t.

Second fun fact: nobody knows exactly why snowflakes are so different. What science does know is how they occur (through a process requiring about 100,000 water droplets for each barely visible snowflake) and their properties (they’re made of water droplets/water vapour and their molecules arrange themselves in a six-sided structure).

Third fun fact: physical conditions have a lot to do with how each snowflake looks. Each snowflake takes a unique path from the clouds down to earth through the various layers of air in its path, and so has a totally different set of circumstances to contend with. Quite literally, ‘na condition’.

If you extend that thought, it also means that no snowflake is, erm, special.

Each one is so unique that none can be all that special. A snowflake is a snowflake and their properties are the same (for example they will all form liquid water when heated). That doesn’t take away from the fact that it was uniquely hard going on the way down, or that snowflake fingers are literally not equal as a result.

So when someone calls you a ‘Special Snowflake’, they’re not paying you a compliment. They’re calling you uppity at best, possibly delusional, probably annoying.

Special Snowflake Syndrome is a thing and it can be quite serious:

‘This condition, if left untreated, can radically alter the carrier’s demeanor, to include any of the following: a complete devolution to child-like behavior, temper tantrums, and/or fits of narcissistic rage’.

Fine. So what?

The responses to my last post varied a fair bit. I particularly enjoyed those responses (sadly not all here on Medium) that challenged my conclusions either with theory/empirical evidence on the one hand, or current events on the other. I will try to do better next time.

I must admit though, many comments made me pull my edges out. For example:

‘This reflects the thinking of most economists I know. I do think, however, that the challenges require a bit more innovation than standard economic rhetoric.’

This is a classic example of Special Snowflake Syndrome. Your first clue is in the first sentence. Your second clue is in the second sentence.

Let’s use a medical analogy to paraphrase: “[I’m not a vet], but while I’m told by every vet I’ve come across so far that everything about this looks and smells duck-like (and that it should thus be responsive to duck-appropriate treatment), I think this is no ordinary duck. Who knows, it might even be a goose.”

Market principles, and the impact of actions that distort incentives and/or erode the confidence of agents in those markets, are so fundamental to economic outcomes that it’s super frustrating when words like ‘innovation’ are used in their midst. I’m all for context-appropriate economic policy (and innovative approaches thereby), but at some point, the outcomes are so predictable, either based on economic fundamentals or the benefit of economic history, that it’s painfully telling when fairly obvious next steps are shunned.

Say it with me: there are no special snowflakes.

What was supposed to happen did happen.

A handful of things have happened (sadly, predictably) in the last couple of weeks:

  1. ‘Demand management’ isn’t working very well. So Governor Emefiele has had to do something. We now have revised policy measures, on the one hand easing restrictions on foreign currency deposits, and on the other, probably compounding the issue by restricting sales to BDCs and driving even more demand to the parallel market. Why? The bottom has fallen out of the supply side, so reserves are still depleting too fast, even with ‘demand management’ (remember my tap/sink analogy?). Results so far are that despite the lifting of restrictions, people are hoarding their foreign currency cash holdings. Guess what? Confidence is shot. Quelle surprise. But I suppose it’s still early days.
  2. The spread between the parallel and official rates has widened further. First, to N285/$ when direct FX sales to BDCs were restricted last Monday (from N278/$ the Friday before) and then to N305/$ as at last Friday (a record low). That’s an almost 10% loss in value in the past week, following supposedly remedial measures.
  3. Big business has done what it does everywhere. It has negotiated a better position for itself than small businesses could ever hope to. Remember when I said Mr President’s plan for the CBN and MoF to negotiate capital needs with individual businesses ‘sounds like a great way for small businesses to be completely crowded out of official FX supply’? Well, Dangote Industries has been assured of its $14bn share of reserves. Two issues: (i) how many small businesses can hope to have the CBN governor tour their facilities? (ii) in case you missed it, Governor Emefiele just effectively promised Aliko Dangote a discounted (official) rate on the US$. That’s important because, as I’ve pointed out before, a two-tier system is a market subsidy, and the cost is reflected in a spread between the official and parallel rates that is borne by the system. It doesn’t just disappear.
  4. Investors continue to vote with their feet. As at last Friday, the stock market was on its sixth consecutive day of declines. Bloomberg tells me this was the second largest weekly decline among 93 stock market indices it tracks, and an 18% year-to-date decline, making 2016 so far, the worst performing year for Nigerian equities since ‘at least 1999’. Let’s see what the NSE does tomorrow (Monday).

And while monetary policy bumbles along, the fiscal side leaves much to be desired.

The missing budget debacle has been unbelievable, and according to the latest news the presidency has finally decided to come clean and has asked to withdraw and re-submit the budget for consideration by senate. It would be nice to actually get on with the job of applying fiscal stimulus.

If all else fails, appeal to sentiment.

In the meantime, appeals to sentiment have started. Businesses suffering under the pressure are being urged not to let staff go ‘now’ (which of course begs the question, ‘if not now, when?’). Because, I suppose, the task of creating 3m jobs per annum is made that much harder if companies start to haemorrhage personnel. But the thing is, these are businesses, not charities. They need to deliver returns and the loss of margin has to be borne by someone. It’s a new low when you have to beg investors to shoulder losses. It would be funny if it weren’t so desperate.

I wholeheartedly agree with Dr. Ngige when he says the private sector is critical to job creation and should be a larger employer of labour than the government. He seems not to realise though that the private sector has overwhelmingly driven job creation in the last four years, and that the government playing its own part is crucial for creating an investable, growth environment for it to continue to do so. If the dynamics of job creation have changed (and they clearly have), the private sector has probably had much less to do with it than the government has.

So now what?

I still believe the first step to stemming this seemingly overwhelming tide is devaluation.

Why? Two reasons: signalling and the supply side.

The CBN and the Federal Government have lost a lot of credibility since President Buhari took office. Investors (yes, local and international) need to believe that this is a government that will not continue to inexplicably cede goodwill and momentum, bury its head in the sand, or pursue polices that are pretty much destined to fail.

By devaluing, the supply side can at least begin to recover and investors and businesses have better certainty to make decisions. I am hoping devaluation will be swiftly followed by a further loosening of restrictions on FX movements, for the benefit of businesses everywhere.

But I expect Governor Emefiele to continue to fight it. Cognitive biases have no doubt set in and ‘escalation of commitment’ is a thing.

There is still not much evidence that inflation will spiral out of control if the currency is devalued, so the government’s strongest argument against it is still a weak one. I’ve said in the past that I think we need to worry less about inflation and look instead to a growth-mindset. There will always be a level of growth at which, if achievable (and that’s a big ‘if’), you should be willing to sacrifice a level of inflation.

Data published today by the NBS shows inflation at 9.6% year on year. Yes, there will be a timing lag between a devaluation and inflation, but a change of 100–150 basis points despite the past year’s steep drop in exchange rates tells me that the risk of a passthrough isn’t as high as we are being led to believe. A friend that I trust puts this down to consumer confidence: prices can only rise if the bottom doesn’t fall out of the demand side. But even the CBN’s own research casts doubt on the assertion.

Less than 48 hours to go.

Governor Emefiele will go before the senate on Tuesday, and I am looking forward to hearing from him. I think he’s been summoned under a not entirely fair premise – he is not solely to blame for a price of N305/$ (there is the small matter of oil prices, you know). However, I also think he has pretty much failed in his fundamental roles of providing stability and bringing certainty to the system.

It’s only fair at this point that I also admit to not being on the list of his biggest fans. I have found the language he has chosen in justifying his policy decisions to be unnecessarily divisive (pitting various social classes against each other in the name of “frivolous demand”) and I consider a CBN governor who encourages Nigerians to begin to think more like the Dangote Groupand threatens legitimate business owners to return their operating licensesif they don’t agree with his actions, to be retrogressive. I wonder if he would say such things if big name entrepreneurs like Aliko Dangote ran BDCs.

In my view, the current business environment is patently anti-business and that needs to be fixed ASAP. Besides which, there is a clear lack of co-ordination between the fiscal and monetary sides (assuming they are still somewhat separate).

I think Oscar Onyema couldn’t have put it any better last week:

“We anticipate the return of investors who had remained on the sidelines throughout 2015. This return is predicated upon the return of investor confidence as a result of effective implementation and communication of the government’s economic blueprint, credibility in monetary policy stance, relative stability in the macro economy (oil price stability above benchmark targets and increase in tax collection to Gross Domestic Product ratio, among others) and improved security.”

Me too, Oscar, me too.

E.

***

Originally published on medium on January 17, 2016.

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