The P in the equation

The P in the equation

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It is often said that if you seek any good or service hard enough in Lagos you will find it, but of course there will be a price to pay for it.

A trip to any of the pulsating street markets in the mega city of 21 million people, Balogun, Oshodi, Mile-12, Yaba, will reveal capitalism at its purest form, not particularly dissimilar to the trading pits of Chicago which were in the 1970s (before Computers took over) crammed with hundreds of shouting futures and options traders.

As wheat, corn, cattle and hogs flowed into Chicago, a marketplace emerged and businessmen formed the Chicago Board of Trade (CBOT) in 1848 and the Chicago Produce Exchange, a forerunner to the Chicago Mercantile Exchange (CME), in 1874.

Participants at the CBOT and CME, (which have since merged in 2007 to form the CME Group), often unruly jostled to buy and sell futures and options contracts for cattle, wheat, bonds and interest rates, just as their Nigerian counterparts haggle to buy or sell a piece of clothing in Balogun or Foodstuff in Mile-12 market today.

Some 170 years after the birth of the CBOT, the laws of demand and supply, and the role of markets in efficiently setting pricing of goods and services cannot be wished away, despite attempts to do so by politicians in Abuja.

Free markets and the liquidity they provide are what has built up the most developed countries in the world, and Nigeria cannot afford to be an exception if its leaders truly mean to better the lives of their citizens.

Often you hear some analyst saying something like “oil-rich Nigeria, has earned xyz billions of dollars in xyz number of years but still has decrepit infrastructure, inadequate to drive growth in its economy.”

That narrative (wasted oil wealth) good on paper, is probably only 20 percent of the story and I am being generous here.

What those making these statements often fail to state is that no nation on earth has grown rich from simply pumping oil (or any other precious commodity) from the ground and spending it, without developing deep financial markets from which private firms can raise capital to deploy alongside the Government.

Before the 2004 Pension reforms, there was little or no long term funds available in the Nigerian economy, Insurance Companies who collected premiums on life and other cover couldn’t deploy such capital into matching investments, and the Government or corporates couldn’t issue long tenured bonds because there were no long term pool of capital.

Today there are N9 trillion in Pension assets, 72 percent of which is invested in Federal Government securities.

More of the Pension funds should probably be invested in hard assets such as toll roads and bridges, railways and Airports, however, that will not happen right away without reform of Nigeria’s Public-Private Partnership (PPP) laws.

However the point is that market places such as the Nigerian Stock Exchange (NSE), and the FMDQ OTC Securities Exchange provide the platform for liquidity, Price discovery and secondary trading of securities like FGN Treasury Bills, Bonds, Stocks and Derivatives.

The absence of free markets for petrol and electricity is what is leading to dysfunction in both sectors.

In the past 5 years, there have probably been 10 major periods of petrol scarcity, while electricity is perennially unavailable to Nigerians, despite the massive demand.

This violates one of the basic laws of demand and supply in economics, which states that if demand for a good or service increases, it leads to a higher price, which in turn incentivizes suppliers to ramp up production to take advantage, and increase quantities supplied, until prices reach an equilibrium.

It is absurd that there is no rush by firms to increase supply of electricity to energy starved Nigerians, or that no new refineries have been built in 30 years to take advantage of a growing population that needs fuel to power its cars and homes.

The answer to the riddle is that the Government has taken away the P in the equation.

That is Government has mandated itself as the Price (P) setter for Petrol which it capped at N145 per litre since 2016 and electricity capped at N10 per kilowatt hour, since at least 2015.

The distortions and scarcity caused by Government fixing/influencing prices is evident in other areas of the economy as well.

These include Foreign exchange (fx) unavailability (before the introduction of the Investor and exporters window), banning the imports of products for which supply is currently inadequate locally, and the scarcity of decent housing in most Nigerian cities due to the odious land use act which creates an artificial scarcity/ distorts pricing of land by making it difficult for citizens to freely buy and sell their property.

The wheat, cattle, corn and hog traders of Chicago learnt more than a century ago that free exchange of goods and services at a price determined by the interplay between demand and supply, could build great wealth for the city and themselves.

The politicians in Abuja might take note to heed this lesson, 170 years later.

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