Crypto wars + confusion on remittances

It has become a feature of the last decade. Whenever you hear the CBN taking some drastic action it usual has something to do with FX. The stories might get complicated and arguments might run around the obvious. Once you sharpen your lens though, the story is almost always the same: FX.

As I mentioned a couple of articles ago, the CBN has made it a policy objective to gain control of remittances, given that it is now the second largest source of foreign exchange. TL:DR; they want to do with remittances what they do with crude oil inflows: capture the dollars and allocate it to preferred sectors at “appropriate” prices.

The first target was the new fintech IMTOs. However, in the last few years crypto had also become a very useful option for evading CBN restrictions on FX use (on the demand side) and getting black market prices through a formal credible system (on the supply side). Many importers and companies with foreign obligations started using crypto to settle international transactions. Especially those without strict audit requirements. Many exporters also used crypto to get better rates than they would have gotten from official markets. A 20% premium is not a negligible matter you know.

The mechanics is simple. BTC and USD are traded freely internationally. So if you can buy or sell BTC here freely then it means you can buy or sell USD freely via BTC or other cryptos. This is before you even get to stable coins. A very effective bypass of the official FX market with its CBN manipulated rates.

But remember, the CBN is looking for those remittances. First it was forcing IMTOs to send hard cash. It can’t do the same for cryptos so I guess they opted to just tactically ban it anyway. I know it is not an official ban but its is the same type implemented for the 41 items list and IMTOs and erring exporters and so on.

Will the ban work? Where work equals redirecting remittance flows to official channels? Probably not. People are geniuses and this is crypto; the baby of decentralized government-free finance. Plus P2P is already a thing. Plus most of remittances is still just stuff!

This is also why many of the arguments made after the fact to justify the ban make little sense.

Which brings me to the second part. It is amazing the amount of confusion that has been caused by different definitions of remittances. To make it really simple: on one hand you have finance guys and accountants who define remittances as the amount of cash sent. Cash dollars or euros or bitcoin :). On the other hand you have economists and statisticians who define remittances as the value of stuff sent. Which includes cash but also include cars, shirts, TVs, laptops, purses, random gifts and so on. The finance / accounting definition is typically calculated by looking at financial transactions. The economists/statistical definition is estimated by looking at trade flows and balance of payments. and of course cash.

Which is why both numbers look very different. Does Nigeria receive $30bn worth of finance/accounting defined remittances? NO. Last estimate I saw a few years ago was about $3bn. Does Nigeria receive $30bn worth of economist/statistical remittances? Probably close. It is an estimate remember.

Importantly, if you are sitting in a fancy building in Abuja looking for $30bn worth of cash remittances to divert to your official foreign exchange market then I hate to be the one to break it to you, you are not going to find it. Although I’m sure the people in the stats department downstairs could have told you that.

On Inequality and Growth Strategies

Can we privatize our way to growth?

When you think of a country with inequality Nigeria typically does not come to mind. At least not in the same light in which we see inequality in South Africa or Brazil. According to the latest living standards survey by the NBS the country as a whole has a GINI coefficient of 35.1 which all things being equal is not bad. At least it is lower than the 40 to 50 range it was estimated at in the 90s. I know you can argue about hidden wealth and proper estimation, and all that. Certainly if you look at the gap between the bourgousie (that word always sounds so fancy) in Ikoyi and those eeking out a subsitence lifestyle on the farm then it certainly seems very unequal. That “real-life” observation that is seemingly at odds with the data is what I want to focus on today.

If you look at the dissagregated data on inequality by state and compare that to national inequality then it becomes easier to marry the idea that Nigeria has both high inequality and not so high inequality at the same time.

Essentially the data suggests that inequality in Nigeria is driven primarily by inequality accross places, not within them. The GINI for Nigeria as a whole is higher than that of 34 of the 36 states. In some cases much higehr. When it comes to inequality it appears the first question is where you are, not who you are.

This spatial inequality has all sort of implications. An obvious one is the idea that states have equal opportunity to increase internally generated revenue, which is definitely not true. It is obviously easier to increase IGR if you are at the richer end of the inequality distribution compared to if you are the poorer end. The underlying factor of course being an also unequal distribution of economic activity which is ultimately where IGR comes from.

On of the more interesting articles on the Nigerian economy I have read this year is this one. There is a lot of good analysis in the there but in the context of this piece the interesting bit is that argument for a new set of growth drivers: privatization and liberalization of transportation and logistics, privately financed infrastructure, and a food-centric industrial and trade policy. This to me reads as an argument for the liberalization of more of the still government-controlled sections of the economy and the deployment of capital to drive growth in those sectors, with obvious spill over effects on the rest of the economy.

To be perfectly clear I am for less government participation in many of these sectors, especially in logistics which is fundamental for any properly functioning economy, and I also think that as much as is possible infrastructure should be financed by the private sector especially given the current fiscal situation the government finds itself in.

Yet is is difficult to square that growth strategy with the reality of current inequality in Nigeria. By definition, a capital driven growth strategy benfits those with …. you guessed it…capital. And as the data suggests, most of the country does not have capital. Capital, like income, is concentrated in certain spaces. The implication is that a private capital driven growth strategy will exacerbate those inequalities and will probably replicate the type of growth we saw in the between 2000 and 2015. Good on paper but poor in quality and jobs.

The map above is the distribution of average growth between 1999 and 2012 from one of my papers. If you overlay that with estimated population distribution then you get an even clearer picture about why, despite the two high growth decades, we still somehow managed to find ourselves with little to show for it. Yes, the North East had negative growth on average over that period and prior to the emergency of Boko Haram. A second capital driven growth boom alone is likely to have similar outcomes and maybe worse.

Even infrastructure driven growth is no longer as people and jobs centric as it used to be. Excerpts from a recent paper on infrastrucure and economics:

"Today, infrastructure is far more capital intensive and far more likely to use skilled laborers who would be employed in any case. If infrastructure requires machines, more than less skilled people, then the scope for infrastructure policy to exert short-run effects on employment will be limited."

If a capital and infrastructure driven growth strategy is unlikely to deliver broad people centric growth then what is? Two things to say here.

I should also point out that I am not a believer in “equal” growth everywhere. I like to use the example of trying to engineer growth in the middle of the Sahara desert. It is unlikely and even if it were possible it would probably not be worth it. I do however think that equal opportunity is achievable and is a better strategy. The idea that, even if you happen to be born in the middle of the Sahara desert, you can aim to have just as good a quality of life elsewhere as anyone else. And in my opinion that is all about education. Not just going to school, but learning in general.

In the Nigerian context the spatial inequality problem rears its ugly head again. Education, especially basic education, is legally (not naturally or God-sent) a state and local government issue. And the hands are not equal. I took a look at the IGR per capita of some states, and there are a couple of states that collect as little as $5 per person per year. Fair to say those states, even with FAAC money, are unlikely to have the capacity to finance public education anytime soon.

Private individuals of course recognize the importance of education and per the living standards survey, it is one of the items high on the household expenditure list. In many states just below transport and health in non-food expenditure. But remember that 40 percent of Nigerians are in poverty and many others not far from it. If you dissagregate by state then the numbers look even worse with quite a few states topping 80% poverty rates. So, if the governments in many states do not have the means to finance education, and the individuals also do not have the means then Houston you have a problem. If education is one of the most important drivers of sustainable growth and large chunks of the country are not investing in education then there is only so far a capital/infrastructure driven growth strategy can go.

Secondly, given the current make up of Nigeria’s economy, any growth strategy has to be deliberate about engineering growth in unskilled-labour intensive growth. Education is all well and good but that takes time. For the here and now you need labour intensive growth. And given Nigeria’s structural challenges and scale, I believe that growth has to be driven by exports. This is also where I kind of disagree with a food-centric industrial policy. It is a lot more difficult to export food products compared to others. Even besides tariffs, the non-tariff barriers to food exports are much more challenging. To put it simply, people care a lot more about what they put in their bodies than what they put on them and the rules on food products trade is alot more challenging.

Also, food products and derivatives tend to be a lot more sensitive to infrastucture challenges. Your agbada will be perfectly fine even if delayed at the port for 30 days but your cocoa beans or yams and their derivatives might not do so well.

Nothing wrong in promoting food industry but I think if the target is exports, which I think it should be, then a better bet would be something more resilient to infrastructure challenges. If I was holding the darts I would aim squarely at the garments (not textiles) dartboard. We have the people and creativity to match. Although this is likely to be different depending on where in the country you are standing.

To cut all this long story short, I do not think a capital and infrasturcture driven strategy is likely to deliver the kind of growth we want. I see it as a necessary but not sufficient strategy as we economists like to say. A more credible and sustainable growth strategy would be deliberate about targetting some non-oil non-food export growth and importantly, capturing some of that growth and channelling it into broad nationwide investment in education (and health) for everybody regardless of which corner of the country you happen to be born in. For all that you need some notion of an effective government. Capturing and re-directing value is all about the public good and government. You, or we, need to somehow make our government work better to deliver that investment. We can’t privatize or entrepreneur our way around that one.

Reading between the lines

The money transfer edition

Another day another circular with new foreign exchange related regulations, and confusion everywhere. I got a lot of questions on this so I thought it would be useful to write a word or two.

First, the overall context. In the past decade the two of the largest sources of foreign exchange inflows besides portfolio funds have been crude oil and remittances. The CBN, who appears to have given itself a mandate to keep the USD-NGN exchnage rate fixed, has almost complete control of crude oil inflows. It unilaterally collects all governments’ inflows and recently it has tried (and maybe succeeded - I am not sure) to collect inflows from the oil companies too. It then uses this monopoly power to decide what and what can be done with FX.

Remittances though. That has been a lot more complicated. First, the bulk of remittances do not pass through the CBN. Most of it comes as stuff that is sent: cars, clothes, etc. At least we think so. No one is really sure. Whatever else comes as cash comes in through various channels: cash given to people, the old money transfer guys (western union and moneygram), banks (mostly for large transactions), and recently new fintechs and crypto. For most of these channels the CBN has almost no control over those inflows and what they are used for. Which means that people can use these inflows for anything including things “not valid for foreign exchange” according to the CBN.

This is the context in which to see the new regulations. In the big picture it is the CBN trying to gain some control of these remittance inflows. It’s plan? No off-shore transactions. You must bring the inflows in either digitally through banks (which it has control over) or in cash (which it hopes it has some control over at least as far as preventing that cash from going out again). The short term target is to satisfy the parallel market and reduce pressure on the USD NGN exchange rate. Will it work? Probably not. Why? The bulk of remittances still come in as stuff. And there is also crypto.

But as with all policy changes there is collateral damage. That, in this instance, is remmittance micropayments. The new fintechs, like world remit, transferwise and azimo, have been leveraging on banking and payments infrastructure and mobile connectivity to reduce the transaction costs invovled in international money transfer which has made micropayments possible. That model depends essentially on matching buyers and sellers without really having to move money accross borders. For instance, persons A to J want to send to Nigeria and persons K to Z want to send to the US. You match them behind the scenes and then at the end of the day move whatever the overall balance is in one transaction. In the Nigeria context, because there is literally an endless queue of people looking to buy dollars off shore for other things besides remittances (thanks to our weird FX policy and regulatory environment), most of the IMTOs don’t bother actually setting up shop in Nigeria as they technically do not offer transfers from Nigeria.

You can debate a bit about the validity of having IMTOs register in Nigeria even if they don’t offer services from Nigeria. But in terms of the collateral damage, the requirement to physically move foreign exchange to Nigeria either to banks or in cash breaks the business model for micro-remittances. The new transaction costs involved in sending $35 from the US to Nigeria have now become prohibitively high that it probably no longer makes sense to do so. Those of you who have followed the mobile money fiasco over the years will understand this very well. For example it costs $3 to send $35 to Nigeria via Western Union. A not so small 8.6%. Recieving also comes with its costs. Collecting $35 from a bank in Nigeria is difficult and time consuming and from cash payout partners probably even more difficult. Not to mention annoying.

A couple of IMTOs are still trying to see if they can make it work though. So we will see. I am not an entrepreneur but it is difficult to see how they can. How large are micro-remittances as a share of all remittances? I don’t know. But given the structure of the Nigerian economy I would bet it is not small.

Anyway, what is the long and short of this story? It is yet another example of another policy trying to control foreign exchange that comes with real costs to the economy. With policy makers once again choosing foreign exchange over the economy. Unfortunate.

Waiting for another oil boom?

Thinking randomly about how much of the policy space is dominated by simply waiting for oil prices to go up again. In essence waiting for another oil boom. But how likely is that? Took a look at some long term data and two things stand out.

First, in terms of actual income per person (without incorporating costs of production) from crude oil sales, the 1980s oil boom was way way larger than the 2010 oil boom. Especially once you adjust for inflation. The actual oil production was not that different but the driver was population growth. In the 1980s we had circa 70 million people. By 2010 we had 170 million, but still producing roughly two million barrels per day.

The second thing that stands out to me is that the booms are kind of exceptions. This is not to say that oil didn’t matter. During the lean years in between the booms we had some oil income but not a boom per say, and that did not translate into economic growth.

So what is the likelihood of another oil boom? Or rather, what oil prices, given our rather stable production, would we need to get another meaningful oil boom given our population and population growth rates?

From my calculations we would need oil prices between $150 and $200 to get another 2010s oil boom again. Probably not happening. To get another 1980s boom we would need prices between $400 and $500 per barrel. Definitely not happening. What does this all mean? The likelihood of another meaningful oil boom is very small, and maybe zero. So why exactly are we waiting for oil prices to go up for?

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