The long run is a misleading guide to current affairs. In the long run, we are all dead – John Maynard Keynes, in A Tract on Monetary Reform, 1923.
President Bola Ahmed Tinubu’s policies can be couched in one word: reforms. And the ongoing reforms of his administration will continue to receive bashes and accolades, depending on who is speaking, until their outcomes crystalize. What the reforms ultimately give to Nigerians, who are currently exasperated under the weight of the harsh policies, will provide the final verdict on this administration.
Sometime in 1989, General Olusegun Obasanjo, then a former military Head of State, issued a statement in which he called on General Ibrahim Babangida, who was the military President of Nigeria at the time, to pursue his Structural Adjustment Programme (SAP) with a human face. That was regarded as a stinging attack on Babangida’s SAP, his popular home-grown economic programme that changed the face of Nigeria’s business environment. So, the story went viral, as we would say in today’s parlance, which hardly existed then.
Since then (and even before), Nigeria has witnessed a plethora of reforms by successive administrations, including OBJ’s, spanning the eight years from 1999 at the return of civil rule in the country. Whether economic or political, reforms have as their objective the drive to make an economy perform better than it has been doing. Reforms are designed to address identified defects in a system.
Obasanjo’s reforms gave Nigerians the mobile telephone, so we could communicate with the rest of the world. When he introduced the GSM into Nigeria in 2001, our teledensity (the number of telephone lines per 100 inhabitants) was just 0.4%, and there were only two countries that Nigeria was better than in the world: Mongolia and Afghanistan. In March 2024, Nigeria’s teledensity rose to 101.16%. It had risen higher than that in some previous months.
However, the trouble with such future-looking reforms is reflected in Keynes’s quote above, that in the long run, those who bear the brunt of reforms from the beginning may not be around to partake when the promised benefits begin to stream in. In other words, sharing the gains and pains of reforms is a challenge that reformers have to figure out clearly. How long should the pain last? Who gets the gains when they start coming?
Unlike Keynes, those who engage in reforms are believers in the long run. Reforms are undertaken in the belief that changes put in place today will guarantee better performance in the future through an improved, strengthened economy.
What are the elements of Tinubu’s reforms, and how have they fared this one year? The core of these reforms has been a repricing of goods and services, the defect that led to a misallocation of resources. Chief among these are the pricing of petroleum products in Nigeria and the naira. Petroleum products were being sold at less than their costs to society because the government was subsidising the consumption, we were told. On the foreign exchange market, the naira had multiple prices, a situation that created arbitrage opportunities. With that, some smart people would buy foreign exchange at the lower official price and turn around to sell in the parallel market without even taking a step. That price differential has, over time, made a few people billionaires. These needed to be changed. That led to the need for a petrol price adjustment.
“The reason was that the price did not reflect the cost. The subsidy was costing the government too much, and the reasoning was that the amount spent on subsidy could be put to better use,” says Damilare Asimiyu, macroeconomic strategist and head of research at Lagos-based Afrinvest Consulting.
The second leg is the deregulation of the foreign exchange market. This involved floating the naira to achieve possible parity between the official and the parallel market rates.
Commenced by the second week of June 2023 (approximately two weeks into the life of the new administration), this policy initially widened the difference between the rates. As the naira depreciated on the official market from about N460/$ in the official market to N700/$, it also fell from about N700/$ to N900/$. Nigerians thought they had seen the worst then, but more was to come.
The underlying objectives of many of Tinubu’s policies are good, but the execution strategies are flawed, says Asimiyu. He cited as an example the removal of subsidy payments on PMS, which he says is no doubt a good policy as the fiscal war chest to support it is no longer there (the deficit to GDP has over the last eight years exceeded the prudential limit of 3.0%, causing the debt profile to swell five-fold from around N20.0 trillion in 2014 to N97.3 trillion in 2023).
“However, the rash removal without a well-thought-out arrangement on how to cushion the knock-on effect on the masses, especially with lingering food challenges, underscores the flaws in the execution,” he says. “The same also applies to the policy to float the naira in one sweep, not minding the perennial low productivity and, by extension, large import needs.”
Nigerians will not forget in a hurry President Tinubu’s declaration, right from Eagle Square, Abuja, where he had just been sworn in: “Fuel subsidy is gone!” That became perhaps the fastest, most market-moving presidential utterance. Even before the word was out of his mouth, petrol dealers across the country had adjusted their pump prices, and life for Nigerians has not been the same again since then.
Asimiyu believes that both the FX and subsidy removal policies could have been done in phases, while the government worked to strengthen key infrastructure that would aid productivity and tame insecurity. “The rash removal has led to the exit of several multinationals, the devastating earnings performance of several businesses, and a pressured labour market. Based on the current realities, the government seems to have re-introduced both PMS and FX subsidies because the economy was almost grinding to a halt,” he noted.
The prong of the administration’s policies is the Banking Sector Recapitalisation. The policy is tied to the administration’s hope to grow the Nigerian economy to the $1 trillion mark. Such a size of the economy, said the Central Bank of Nigeria (CBN), requires a certain minimum of bank size to support it.
“The broad objective of the programme is to engender the emergence of stronger, healthier, and more resilient banks to support the achievement of a US$1 trillion economy by the year 2030. Bigger banks with a larger capital base and capacity can underwrite larger levels of credit, which is critical to lubricate and catalyse the growth of the economy,” the CBN said as it announced the exercise.
How has Tinubu’s reform fared so far? The scorecard has been in red for the most part. Nigeria’s inflation rate in May 2023 was 22.41%; a year later, it is 33.2%, representing a whopping 10.79 percentage point’s increase. The policies have failed to halt the inflationary pressure; instead, they have stoked it. But the government tells Nigerians that it will get better. Things will, at first (in the short run), get worse before they improve (in the long run). To douse the inflationary spike, the CBN has raised its monetary policy rate (MPR), currently 4.74%, yet inflation remains untamed.
Go to another important economic indicator: the exchange rate of the naira. The exchange rate of the naira on May 3, 2023, was N745/$; on May 30, it was N770/$; on May 26, it was N780/$. However, on May 3, 2024, the naira had dropped to N1,402.57 to a dollar, twice the amount to buy one dollar a year earlier. By the second week of May, the rate had fallen further to at least N1,440 for a dollar.
In late January, the naira plunged to an all-time low of over N1,700/$ on the parallel market and was indeed headed for something much lower, while the rate on the official market also trailed that. It took a combination of monetary and physical actions to arrest the fall of the naira. The authorities blamed the downward trend on some factors, but largely on currency speculators. To curb this, the government unleashed the Economic and Financial Crimes Commission (EFCC), police, and other security agencies on currency speculators.
Dr. Emeka Ucheaga, Chief Executive Officer of EUA Intelligence, a Lagos-based financial consulting firm with expertise in macroeconomic and global market analysis, blames Nigeria’s macroeconomic dislocation on the sad fact that “we’ve sort of lost control of the dollar.” He says this is the real trigger for the spike in the inflation rate and fuel price.
“You can imagine how worse off our government’s financial position would have been if we didn’t attempt to remove subsidies and raise fuel prices. Of course, subsidy appears to be back in some form due to the higher landing cost of fuel than is available at the pump station, but I think if we didn’t adjust fuel prices as early as we did, then the size of the financial hole would be significantly larger.”
He believes there are lots of positives from the economic policies of the president, but says “the top of the agenda has to be to stabilise the currency under N1000/$1.
“This will bring inflation under control and allow the CBN to begin easing interest rates lower again for businesses to access funding at a lower cost, which will jumpstart the economy again.”
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