On Nigeria’s bold but rudderless attempts at structural economic reforms
On Nigeria’s bold but rudderless attempts at structural economic reforms
President Bola Tinubu’s lack of a focused agenda is blunting the impact of some of his bold reforms while also jeopardizing private sector growth
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I: Tinubu’s attempts at bold reforms are welcome, but they should not be viewed as ends in themselves
Given the many hardships currently buffeting Nigerian households, President Bola Tinubu’s Biya-esque travel to southern France for a few days in a new $100m jet did not make for good optics. His office euphemistically called the trip a “work stay,” which presumably he couldn’t do anywhere in Nigeria.
Even worse than Tinubu’s tone-deafness is the lack focus in his administration’s economic reforms.
To be fair, the administration deserves significant credit for taking on bold reforms — like liberalizing the naira and unifying the official and parallel market exchange rates, taking on the thorny issue of petrol subsidies (arguably the third rail of Nigerian politics), partially removing electricity subsidies, giving the central bank the leeway to aggressively fight inflation (including via higher rates), and recapitalization of commercial banks to ensure stability in the financial sector (a move that will unlock a new round of bank consolidations). The administration also deserves credit for tightening tax administration and is on course to meet its 2024 revenue target of $12b. A new tax bill that will streamline taxation in Nigeria is in the works. Even oil production is up(!) — even though revenues from the added volume will be gobbled up by terribly unwise petroleum-backed loans. In 2024 the economy is projected to expand by 3.8%. According to a Central Bank of Nigeria (CBN) survey businesses expect economic conditions to improve over the next six months.
Notably, Tinubu’s policy team has shown a willingness to respond to reality. When it became clear that the naira devaluation was absolutely crushing low-income households, the government restored petrol subsidies. It is fair to say that the symbolism of accepting defeat on this policy was huge (Nigeria is on course to keep spending over 3% of GDP on these much-needed subsidies). In the same vein, in July the government suspended tariffs and import duty on food, pharmaceuticals, and other essential products to provide relief from inflationary pressures.
Despite the mixed results, the reformist effort on display so far should be lauded despite. This is not meant to minimize the economic hardships faced by Nigerians (more on this below). It is simply an acknowledgement that there has been a marginal improvement in policy compared to the past. The three previous administrations failed to walk the talk on reforms and were largely dismissive of the Nigerian public.
That said, it is increasingly clear that Tinubu’s reforms have neither focus nor a clearly-articulated growth agenda. Consequently, it’s getting ever harder to shake the feeling that the administration sees reforms (and “orthodoxy”) as ends in themselves — perhaps best illustrated by the boastful citations of praise from the International Monetary Fund (IMF) and the World Bank.
Yet it is not enough to shout from the rooftops that you dared to end petrol and electricity subsidies, or that you liberalized the naira. The more important questions to ask are what the administration considers to be the main objectives of these reforms, how they impact ordinary Nigerians’ lives, and their effects on overall economic growth and mass job creation. How exactly are the reforms linked to improvements in agricultural productivity, growth in agri-processing, investments in transportation infrastructure, improvements in access to reliable power, and private sector growth? What is the underlying theory of change?
The numbers reinforce the urgent need to link reforms to specific sectoral outcomes. Growth in the non-oil sector has declined from 3.6% to 2.8%. This is also true for the all-important agricultural sector which has also slowed from 1.5% growth to 1.4%. As a sign of the continuing poor health of the overall economy, the transportation sector contracted by 9.1%, on top of a 44.2% contraction in the previous year (when fuel subsidies were scrapped).
In addition, the administration’s stated priority areas telegraph a lack of focus. They include reforms to achieve inclusive growth; strengthening security; boosting agriculture to achieve food security; unlocking the exploitation of natural resources (especially for energy access); enhancing infrastructure and transportation; improving service delivery in the health; education and social spending sectors; accelerating economic diversification through investments in tech, creative arts, manufacturing, and innovation; and improved governance. To put it mildly, this reads like a laundry list that belongs on a campaign platform or a donor conference. It’s not an action plan.
To claim to be focused on nearly every pressing issue is to be utterly unfocused.
The fact of the matter is that Tinubu needs to use his very limited political capital and the Nigerian state’s constrained administrative capacity judiciously. That means picking a few core areas for his first term and then designing the different elements of macroeconomic reforms to serve these ends (I would go with agriculture, energy, and transportation infrastructure). In other words, there must be a tight theory of change linking macroeconomic reforms to specific measurable sectoral outcomes.
Otherwise, the reforms will fail on two counts. First, they will not move the needle on developmental outcomes. Pushing millions of people into poverty will erase hard-earned human capital gains. Inflation and the naira devaluation will wipe out households’ hard-earned savings for naught. Finally, countless private firms will go under due to rising cost of inputs and suppressed demand. Second, painful reforms that are not accompanied by visible and attributable outcomes will come at enormous political cost and risk instability.
The lack of attention to specific and achievable goals is illustrated by the attempt to cushion households against the negative side effects of reforms. As he touted his reforms, Tinubu promised that he would cushion their impacts via efficiently targeted subsidies. This was the primary means of buying popular political support for reforms. However, a cursory look at the resulting social safety program reveals its comical inadequacy (even before accounting for implementation challenges) and therefore its inability to both cushion demand and buy political support:
To cushion the effect on citizens, especially the poor and vulnerable, the government announced a cash transfer program to provide 15 million households with 75,000 naira for a period of three months. This initiative is being supported by the World Bank through the Nigeria Social Safety Net Program-Scale Up.
That’s just under US $16 per household per month. On paper this might look like a large cash injection in a country where the minimum wage is about US$41 a month. However, it is a far cry from what Nigerian labor is demanding — a $159 minimum wage (for perspective, Nigeria’s current legal minimum wage is 14.5% of urban Kenyans’ minimum wage).1 The cocktail of poorly-sequenced reforms without specific achievable sectoral ends simply overwhelmed households and a large segment of businesses. Increases in the cost of fuel, food, and transportation were particularly ruinous. In short order the double whammy of inflation (now at 33.4%) and the naira devaluation left Nigerian households spending more than half of their incomes on food and transportation. You see that in the decelerating growth rates highlighted above.
In the spirit of being open to policy experimentation and learning, the Tinubu administration should take to heart the important lessons of the last 15 months. Shock therapy for the sake of shock therapy is overrated. Reforms must be focused on key sectoral outcomes and properly sequenced. Attention to specific achievable goals in a few sectors enables policymakers to evaluate whether their interventions are working and to buy political support through visible and attributable quick wins. Mass job creation on the back of private sector growth should be the North Star of all policy. Finally, it is always important to avoid the temptation to subordinate growth to the demands of timid and unimaginative policy orthodoxy. Sometimes good enough policy with achievable outcomes beats the best possible policy.
II: The political economy of Nigeria’s reforms (or why reforms without interested beneficiaries often fail)
Why hasn’t Tinubu been able to focus his reform efforts towards specific pro-growth outcomes? In my reading, Nigeria’s current reform efforts suffer from the problem of an empty policy space — a situation whereby those who stand to benefit the most from a policy change lack the means of organizing lasting coalitions to influence both policy design and implementation.
The key beneficiaries of focused pro-growth reforms would be Nigerian farmers, workers, and mostly private firms in the production (as opposed to trading) business. The reform policy space is empty primarily because these core beneficiaries are dispersed and often have conflicting incentives. The biggest losers would be networks of politicians (including Tinubu) and trading firms who currently benefit from policy distortions. The trading firms mainly include petroleum dealers (both importers and exporters) and various non-oil firms that merely serve as local distribution agents for global consumer brands (and don’t manufacture anything locally). Importantly, these would-be losers from structural reforms face relatively low costs of mobilization. They perfectly fit into Nigeria’s spoils system. This dynamic is illustrated in the Central Bank’s most recent business survey:
The optimism of respondents on the overall business outlook by type of business in the current month was driven by “exporter” (23.8 points), and “both importer and exporter” (6.3 points). However, businesses that are “neither importer nor exporter” and “importer” were pessimistic at -4.5 points and -2.0 points respectively.
To be blunt, the arbitrage/comprador economy likes what it sees in Tinubu’s stabilization reforms. The production economy not so much. And therein lies Nigeria’s biggest problem.
Notice that the emptiness of the reforms policy space gives disproportionate influence to a class of actors I can only refer to as technocrats without a mission. In times of crises, such technocrats design “stabilization” reforms in line with the prevailing epistemic consensus on how to achieve macroeconomic stability. However, the lack of specific interest-based demand for pro-growth reforms means that technocratic reforms often become ends in themselves rather than means to specific sectoral outcomes. Stated differently, when a policy space is empty technocrats are more likely to optimize prevailing orthodoxy rather than marshal good policies towards specific pro-growth objectives. To reiterate, the reforms simply become ends in themselves.
Two recent examples reinforce this point. First, there was the fight between regulators and Nigeria’s champion industrialist, Aliko Dangote. It later emerged that individuals in the administration were importing oil from Malta to undercut Dangote’s new $20b refinery on top of the national oil company failing to pay up for its 20% stake in the refinery. Second, the Nigerian government found its properties in Europe seized over a dispute with the subsidiary of a Chinese firm, Zhongshan Fucheng Industrial Investment. Zhongshan signed a deal to build and own 60% of a free trade zone in Ogun state. However, the state later reneged on the deal. The arbitration panel awarded $70m in damages that now amount to $81m after interest.
Why should we care about these two cases? For the simple reason that they present real tests as to whether Tinubu and his team are indeed pro-growth.
In addition to going a long way in solving Nigeria’s fuel and forex problems, the Dangote refinery is a $20b vote of confidence in Nigeria. At a time when industrial policy is back in vogue, most administrations would bend over backwards to crowd in more of such investments by their nationals. So why exactly would regulators to undercut it? While the matter has since been settled (Dangote stood firm), it left a bad taste. The episode demonstrated that, despite the ongoing reform drive, Tinubu and his team are still operating in a world of frenzied shakedowns and dealmaking without any coherent long-term objectives. Which begs the question: if even a proven national champion like Dangote (warts and all) cannot count on strategic policy support, what chance do fledgling small firms have?
Then there’s the matter of the alleged Ogun state shakedown. Regular readers know that I am not a fan of African policymakers’ reflexive genuflection to fair-weather foreign investors that run away with their capital at the first hint of a slowdown (more of that effort should go into enabling successful domestic anchor firms as a means of attracting foreign investors). However, the dispute between Ogun state and Zhongshan isn’t a question of a jurisdiction acting strategically to advance its economic interests. Rather, all indications are that this was a short-termist shakedown that backfired and now presents a serious reputation risk not just for Ogun state but Nigeria as a whole. While it is true that Tinubu inherited this problem, the fact that the federal government couldn’t step in to restore the credibility of sovereign guarantees for such investments speaks volumes. How unfocused do you have to be to chase away even Chinese firms?
Overall, the Dangote and Zhongshan sagas expose a federal government under Tinubu that has embarked on bold reforms but which seems to lack strategic vision to guide those efforts.
III: Conclusion
However good your mode of transportation, if you set out on a journey without a clear destination in mind, anywhere will do. Boosters of Tinubu’s reforms should internalize this dictum. Focusing on the boldness of the reforms rather than the guiding strategic vision and the impacts on Nigerian firms and households is a total waste of everyone’s time and money.
Everyone knows that Nigeria’s problems are many (and nearly all acute). But they cannot all be fixed at once. Neither can they be fixed by good policies (however bold) that lack strategic vision and sectoral specificity. To increase the chances of success, Tinubu should pick at most three focus areas and double down on them (even as he provides ongoing operational support to other sectors). The specific goals in his administration’s chosen focus areas should provide the strategic guidance to macroeconomic reforms. I cannot stress this enough: good policies without specific missions are futile exercises in “best practice” mimicry.
As always, I remain bullish on Nigeria.
For comparison, Kenya’s minimum wage ranges from about $67 in rural areas to $282 in major urban areas.
"the boastful citations of praise from the International Monetary Fund (IMF) and the World Bank"
What is this due to, superficiality, unpreparedness or political collusion?
A great article. As a Nigerian, I tell you that Tinubu is your run-of-the-mill corrupt politician. All he ever wanted was to be President. That's it. Any talk of industrial policy with regards to Tinubu is a waste of time.
Yeah, Dangote is a national champion, but Tinubu ( like most standard-issue politicians) only think of their own pockets first. Importing oil from Malta may be bad for Nigeria, but it is certainly great for Tinubu’s pockets , which thirsts for ill-gotten money.
As for Zhongshan Fucheng's in dispute with Ogun State, the shocking thing here is that it did not behave like other Chinese companies who are very careful when dealing with Nigeria. For instance, the Chinese construction firm building the Lagos Metro System only build when they are paid upfront by the Lagos State Government. No pay, no work. The approach of Chinese firms in Nigeria is in sharp contrast to their relaxed and generous attitude in other African countries. Awarding contracts and suddenly revoking them is a Nigerian tradition. Ask the South Korean firm that had to sue the Nigerian Federal government after a petroleum contract was arbitrarily cancelled.