Engineering economic recovery in Nigeria amid hardship

For ten days in August 2024, angry Nigerian youths trooped out against the unsustainably high cost of living occasioned by inflation rates above 33 percent. Before the protest, the federal government, which expectedly opposed it, sought the assistance of some local leaders to persuade the youths not to engage in the public demonstration of anger about the state of the economy. The authorities expressed the fear that the protest could be hijacked by criminal non-state actors and might lead to huge economic loss.

The youths and their supporters argued that they had constitutional rights to complain against government policies which turn out to increase the level of poverty and despair of citizens and in effect, raise the level of suffering of the people. The government, on the other hand, argued that its reform policies were necessary medicine before economic recovery could be realized. It is on this wise that a national stalemate arises: the government sticking to its guns and the youths calling for reversal of recent economic reforms.

It is in this rather dangerous situation that the intervention of non-political experts on the economy is mandatory. By economic experts, I mean scholars and researchers who specialized in the discipline of Economics and have considerable experience in policy advocacy and research, and whose work is clearly distinct from the assignments of bankers, accountants, businessmen and politicians. I will return to the fatal error of confusing the role of economists with those of related professionals.

It would be incorrect to believe that the causes of Nigeria’d economic difficulties are recent. But we cannot deny the fact that specific economic decisions taken in the last year under the current regime which assumed office in May 2023 worsened the situation to the extent that a large percentage of citizens find it hard to provide for normal daily needs for decent living. The danger now is that the unwillingness or failure of the government to respond to the cry/demands of the people may open the floodgate of social and security instability. Let us identify the causes of economic collapse/problems in Nigeria.

Drastic change in economic philosophy

We have to go as far back as 1978 when the Constituent Assembly Report recommended that the Nigerian economy change from a public sector-directed to a private sector-led one. This recommendation was accepted by succeeding governments that almost all state-owned parastatals were fully privatized. The privatization of banks and other financial institutions, oil and gas, power, among others, left these sectors in the hands of domestic and foreign oligarchs who had the power to determine output and prices. Since these oligarchs had considerable influence over politicians and policy makers, the government lost influence over production and pricing of goods and services. The interest of the public was sacrificed in this way to satisfy the insatiable appetite for the profit of the private sector. This problem has assumed a crisis proportion since 2015.

Structural Adjustment Programme (SAP)

The introduction of and continued influence of the SAP in 1986 set the stage for the current economic crisis. Before then, the mixed economy system adopted by Nigeria ensured considerable stability in the form of non-inflationary growth with balance-of-payments stability. This was achieved by the government through reliance on professional economic advice from the academic community and advisory research institutes. SAP radically changed all that. Prices were now determined by so-called market forces, subsidies were removed, the banking sector was deregulated, the foreign trade sector was liberalized, and the naira was floated. Moreover, the economy lacked the productive capacity to take advantage of the opportunities opened up by globalization. The result was catastrophic external deficits adjusted by massive devaluation, de-industrialization, collapsing enterprises, inflation, and high rate of unemployment.

A major mistake, which is still sustained by the present government, is continuous devaluation without satisfying the conditions, floating of the naira without fixing upper and lower bands, and allowing an illegal parallel market for foreign exchange to operate in such a way as to provide room for speculation against the naira, thus exerting a continuous downward pull on the value of the naira. As a result of this monumental error which has lasted for more than four decades, the value of one unit of naira has declined from one unit to one dollar in 1986 to N1,600 to $1 in 2024. In spite of this degree of devaluation, Nigeria continues to record the balance of payment deficits. This is a sign of an unstable foreign exchange market. Such a market requires different policies from those adopted so far.

Wrong fiscal and monetary policies

It is expected that in situations of imbalance in the economy, the government introduces financial policies to promote adjustments. In the circumstance of Nigeria, a restrictive fiscal posture would drastically reduce wasteful expenditure (especially on luxury imports), blocking all revenue leakages and limiting ways and means borrowing from the Central Bank, but the exact opposite of required policy prevailed. As a consequence, we have a major intensification of budget deficit and external debt problems in 2024.

Similarly, inflation-targeting monetary policies, which work well for developed countries like Australia, Canada, the United States, and the European Union, have not had the desired effect in Nigeria. Rather, the repeated raising of short-term interest rates has had the contradiction of what was expected. Raising interest rates attract cash deposits from banks into the money market, thus lowering capitalization of banks and their ability to lend to productive enterprises. In this way, implementation of inflation-targeting monetary policies, far from checking inflation, has worsened it as more productive enterprises close down and the few surviving ones are forced to increase prices in line with increases in their costs.

Mismanagement of the oil and gas sector

The problems in the petroleum sector were analyzed, and solutions proffered to the federal government before and after the start of the Fourth Nigerian Republic in 1999. The resolution included the following: A complete, honest turn-around maintenance of the four public sector-owned refineries; Allow modular refineries to be established in the oil-producing areas; stop all imports of refined petroleum products.

With the passage of the Petroleum Industry Bill into law, the private sector gained access into upstream and downstream production. Companies were entitled to export crude as well as import refined petroleum products. But for whatever reason, Nigerian refineries were denied the supply of domestic crude and have led to import crude from foreign countries. The sudden removal of subsidies on imports of refined petroleum products and the floating of the naira in the foreign exchange market resulted in an unprecedented surge in inflation rate which has raised the level of poverty to a crisis level. The government has to address this problem before more desperate protests take place.

The government’s response to the current crisis is inadequate. Preventing demonstrations has failed; the introduction of palliatives is not a solution to this problem and is open to abuse. The solution to the national economic problem will not require as much money as has been spent by the government. What is required are effective policies and their effectiveness in addressing the existential interest of citizens.

One important problem remains to be resolved. As hinted earlier, there is a worrying tendency of the Nigerian government and politicians to dance to the tune of foreign governments and multilateral institutions. In the case of Nigeria, such policy advice is uncritically accepted by leaders over the more appropriate policy recommendations of Nigerian economists who take into consideration the peculiarities of the Nigerian economy. This contrasts with the attitude of the Indian, Chinese, and South Korean Governments, who, though holding regular consultations with International Financial Institutions, always take critical economic decisions based on rigorous economic analysis of their economists.

The way forward

Nigeria needs to break the face-off between the government and the promoters of protests. The authorities should now be aware that its policies have adversely affected the standard of living of Nigerians. At this point, the government should arrange for meetings of non-political experts to examine the current economic condition, including those highlighted during recent demonstrations.

Based on the foregoing, the following recommendations need to be considered: (i) The Federal Government should revoke recent economic decisions that have caused intensification of poverty and despair; (ii) The government should ensure modular refineries are supplied crude which should be paid for in naira; (iii) Total production of refined petroleum products should include supplies to all neighboring countries at prices lower than current world prices to the extent they enter into trade liberalization agreement with Nigeria; (iv) Prices of refined products should be regulated by experts to discourage monopoly or exploitation of the country by oligarchs; (v) Oil-producing areas, largely marginalized in production, management and ownership stakes, should be effectively engaged; (vi) The oil and gas sector should be commercialized, not privatized.

Others: (vii) All forms of oil theft must be stopped; (viii) Balance-of-payments surpluses in the oil and gas sector should be utilized to raise naira’s value until it reaches a level that supports non-inflationary growth (economists with econometric expertise should be involved, not politicians/appointees); (ix) As soon as the appropriate exchange rate is identified, a limited band is established around parity to prevent destabilizing movement in exchange rates; (x) Upward movements in short-term interest rates which have failed to check inflation and depressed domestic production should be dropped to promote domestic investment and production; (xi) The government should realize that policies (suggested above) which lower costs solve current problems instead of palliatives which merely address symptoms.

In conclusion, the Federal Government of Nigeria should be critically cautious when considering policy proposals that come from foreign sources and re-examine its so-called “commonsensical” economic orientation, which ignores professional economic advice from domestic experts.

Prof Eghosa Osagie is former Director of Research, National Institute for Policy and Strategic Studies (NIPSS)