The real story behind the new demand management?

As the saying goes, if it looks like a duck and quacks like a duck then it is probably a duck. The balance of payments for the second quarter were published recently and as I suspected it is another quarter of a relatively deep negative current account balance. This explains the central banks renewed zeal for protecting the economy from imports and its cocktail of demand management policies. Of course the best way to close balance of payments problems is by exchange rate adjustments, because trying to collapse imports typically has the unintended side effect of collapsing the economy. But more on that some other time.

Thinking about our focus on Agriculture

We are supposed to have been focusing on agriculture recently but the growth in that sector has been slowing. The Q2 GDP numbers which were released last week show the agriculture sector slowing to the lowest it has been since 2010 bar one quarter in 2018.

If you look at the annual growth data then the numbers are even worse.

Altogether surprising since the sector has received the most policy focus from government recently. The easy thing is to say “Oh well the policy environment is bad and bla bla bla”. To be clear some of that is bad and things like the security crisis cannot be overlooked. But I don’t know.

I took a look at FAO data and it seems like a significant part of the growth since the 1980s has been built on just using more land.

Barring a few blips we have used more and more land for agriculture but the value of produce per hectare has not really changed much.

I know it looks like the value per hectare grew a bit but remember that prices are changing. Once you adjust for food prices (using FAO’s food price index) then with a few exceptions, there has been little growth in the value of agriculture produce per hectare.

There was a bump shortly after the return to democracy which lasted for a few years but that has collapsed and we seem to have returned to the levels of the 1980s. Essentially, it seems like a lot of the growth has been driven by just using more land.

But, land is limited, both for geographical and security reasons. Nigeria’s total land size is about 92 million hectares out of which an estimated 73 million can be used as agricultural land and which 37 million is actually considered arable land. For context in 2018 we used 56 million hectares for agriculture.

Which leads to the obvious next question. Have we reached peak agriculture land use growth? Is growth slowing because farmers are moving into less suitable land? Do we have to shift policy focus to improving yields which will have implications for land sizes and employment in agriculture? So many questions.

What is the most valuable crop per hectare?

Pulled up a bit of data today from the FAO statistical database while trying to find data on the trends in Nigeria’s food production. I noticed that they had the value of each crop produced and the amount of land used to grow that crop. Which means we can calculate a “value per hectare” for each crop. Remember, I have previously argued that we should be trying to grow the most valuable things not necessarily what we import. It should be noted that this value per hectare does not take costs into account and also does not deduct post harvest losses. Still it is some useful information on how valuable each crop is.

So, what does the data look like?

Vegetables are apparently the most valuable thing before taking costs and post harvest losses into account. If you are a policy maker you can already see the potential impact of dealing with the post harvest losses issue. There are other surprises on the list too.

If we restrict the crops to just those we use a lot of land for, which I define as crops that we use at least one million hectares of land to grow then…

If you are wondering why yams and cassava are high on the list it is because our yields with those crops are decent. In terms of the “should we grow rice” question we see that rice isn’t really high on the list. Rice is actually less valuable that maize for instance. Of course if yields change then the story changes.

There are many other issues of course. The most valuable thing to grow in one area may not be the most valuable thing in another area. The data here is just an average. But it should leave room for though. If we could grow maize, that according to this data is more valuable, should we really be trying to grow rice? Should we instead be trying to grow maize for export and then just import cheaper rice?

Then again this data is from 2016 and things may have changed significantly since then. But if things have changed and keep changing then how do we decide what the most valuable thing is?

A Short Story on Multiple Markets

It appears we may be heading back into the demand management era at least if I am reading the signals correctly. First there was milk and then the order to restrict foreign exchange for food imports. An “order” that the CBN doesn’t really have to obey to be honest. Anyway, given that we have been here before and written about all this already I thought it would be useful to share a short story I wrote originally published in the Guardian in 2016. Also added a bit of a follow up explanation. Enjoy.


In the town of Bali there is a market, Yelwa, where yams are sold. The chief in Bali decides who can enter the market to buy or sell. In the beginning, the chief did not really care who came or went. Across the river in Bali is another yam market, Ebba, where the chief has no authority. In Ebba anyone can come to buy or sell. Since anyone in Bali can go to whichever market they like with ease, the price of yams in the two markets is about the same.

One Tuesday the chief in Bali decides, for reasons unknown, that all the descendants of Suntai can no longer come to Yelwa market to buy yams. The Suntai family is big in Bali making up about 20 percent of the population. The Suntais vent their anger at the rules but eventually decide that it is not worth the fight. They also have the option of crossing the river to Ebba market where the chief has no authority. And so they cross in their droves.

The people selling yams in Ebba market see the new crowd coming and say to themselves, “See crowd oooo. This yam we are selling no dey enough. We must increase price now and make money from these people.” At the same time the yam sellers in Yelwa look around their market and see a crowd that is not as big as it used to be. The Suntais have been banned and they used to be big customers. They say to themselves, “If we want this yam to sell today, we have to reduce the price. If not, nobody go buy am.” Suddenly yams in Yelwa are cheaper than in Ebba. The yam sellers in Yelwa are still loyal to their chief so they stick around and continue selling.

The next Thursday the chief in Bali again decides to ban the Wakils from Yelwa market. The Wakils, also a big family, complain but have already heard what happened to the Suntais. They decide not to bother about the ban and just go to Ebba market across the river. The people selling yam in Ebba market see an even bigger crowd coming to buy their yams. They rejoice again and increase the price again. “If all of you want this yam you must pay o. If you no wan pay give chance, another person dey your back wey go pay”.

Meanwhile, at Yelwa market the crowd is even thinner. One of the yam sellers in Yelwa gets a call from his friend across the river. Yams are selling in Ebba for double the price. The seller decides that loyalty to the chief is not that important. “Na loyalty we go chop?” The seller packs up and carries his yams. “Where are you going?” other yam sellers ask. The seller says he is taking his yams to Ebba where people are paying double. Many other sellers follow suit.

On Sunday the chief of Bali is at it again. The chief decides to ban all the Lugujas from Yelwa market. The Lugujas do not bother debating. They just go across the river to Ebba. At this point the few yam sellers in Yelwa who were loyal to the chief get fed up. Almost all of them decide to carry their yams and go to Ebba to sell there. Even the few yam sellers who are afraid to cross the river instead decide to stay at home. The Yelwa market has become a barren wasteland. The only person left selling yams is the chief’s cousin who is selling yams from the chief’s own farm. The chief finally notices that the Yelwa market is dead and calls his adviser to explain what happened. The adviser says “But chief, you are the one that stopped the Suntais, Wakils and Lugujas from coming to the market. You drove them across the river and all the sellers have gone there too.” The chief replies, “But I had very valid reasons for sending them away. Honestly, the reasons were valid”. “Chief”, says the adviser, “the reason you sent them away does not matter. All that matters is that where the buyers go, the sellers will go as well. If you want the market to come back to Yelwa then you must let the buyers come back as well.”

This story is an allegory of the Nigerian foreign exchange market. The Central Bank of Nigeria, in its quest to fix the exchange rate implemented rule after rule restricting who could buy forex officially. The rules pushed buyers to the black market and resulted in the black market rate moving far away from the “official” rate. The more rules the CBN implemented, the further away the black market moved. The reasons behind the rules are irrelevant. All that matters is more rules lead to a bigger gap between the official and black market, and the gap is a major factor behind the economic instability the country is currently going through.


The simple principle to understand is the idea of multiple markets and multiple prices for the same good in different markets. Consider a simple example with four different markets for yams, A, B, C, and D. In all the markets the sellers of yam can go to any market they want. However in market A only buyers approved by the president can enter the market. In market B only buyers who can prove they are bonafide yam consumers can enter the market. In market C you have to show your national ID card, PVC, or passport to enter the market. Finally in market D there are no rules. Anyone can go and buy yams. If the supply to all four markets is the same then you can guess that prices would be different in all four markets. In the market where presidential approval is needed you would expect prices to be lowest. Very few would be able to get presidential approval so there will be fewer buyers for the same supply of yams leading to lowest prices. More people would be able to enter market B so the prices would be a bit higher than market A. In market C even more people would be able to participate and so prices would be higher in market C. Finally in market D everyone would be able to participate and so demand should be highest and prices highest.

In general given supply constraints, different levels of market restrictions can lead to different prices of the same commodity. Prices will be highest in the most open markets and lowest in markets with the most restrictions on who can buy.

The same principle applies in foreign exchange markets. Given restricted supply, the markets with the most open access, the black market, should have the highest prices, aka the highest exchange rates. The BDC with some restrictions should have lower prices than the black market. The Interbank market with even more restrictions than the BDC should have the lowest prices.

What happens if you increase the restrictions on any particular market? The demand in that market should reduce while the demand in the next less restricted market should increase. People should move from the new more restrictioned market to the less restricted market. The result of course is that the price difference between the two markets should increase.


Since the introduction of the NIFEX window the CBN has pushed for convergence in all markets by essentially selling as much FX to each market as it can. Rice importers are banned from official markets and move to the black market, but at the same time the CBN sells FX to BDCs or other connected fellows who then indirectly sell it on the black market, keeping the prices in both markets close. But what happens when the CBN starts to run out of FX and can’t sell as much to the BDCs, and still insists on keeping its market access restrictions?

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