NIGERIA is currently going through its worst economic crisis in three decades.
Although there are historical issues, which continue to contribute to its challenges, much of its recent economic upheavals started occurring soon after the inauguration of President Bola Tinubu on May 29, 2023.
As of June 2024, the country's annual inflation (CPI) rate had reached a staggering 34,19% - the highest figure since 1996 (28 years ago). By February 2024, Nigeria’s currency, the naira, plummeted to 1,524 naira to US$1, reflecting a 230% loss of value from the same period, in the previous year.
The country is too dependent on crude oil (which is primarily extracted by the government), which accounts for around 66% of government revenues. That also implies its economy is highly informal.
Regional countries which have a significant formal sector, such as South Africa, for example, earn as much as 40% of government revenues from personal income tax, which is levied on workers in the formal sector.
Corporate income tax goes on to provide even further revenue streams, beyond the 40% from personal income tax (in South Africa). Oil also accounts for about 90% of Nigeria's export revenues, which indicates a failure to diversify both the economy and exports.
Resultantly, the country largely exports crude oil (owned by the government), and then uses the same revenue to import refined products, such as petrol and diesel from other countries.
The country has a tiny manufacturing sector, which contributes only 9% to GDP. Nigeria is also not food-secure and depends on imports for its requirements of agricultural commodities.
All these make it a net importer, and add to pressures on the local currency, the naira, causing it to lose value against foreign currencies. Crude oil extraction and new investments are sometimes curtailed by rampant violence (banditry), the vandalism of crude oil pipelines and theft of oil and other public infrastructure.
The Nigerian national power grid supplies only 4 000 megawatts for the country's 220 million people. That means most of the population have no access to electricity from the national grid.
Consequently, Nigerian households and businesses are greatly dependent on petrol-powered generators for their energy needs. In contrast, South Africa, with a much smaller population of 63 million, for instance, has a consistent energy supply of 35 000 MW. The lack of adequate electricity infrastructure therefore continues to limit Nigeria's economic potential.
Although Nigeria is located far-off from Zimbabwe, it is essential to analyse its economy and the recent developments there, since some of them have a strong link to Zimbabwe’s own economic experiences.
By discussing such issues, it can be possible to eventually provide recommendations through, which both countries can resolve their challenges.
Causes of the crisis
Ironically, the latest upheavals in the Nigerian economy, arise from the noble intentions of its current President, Bola Tinubu. Upon his inauguration on May 29 2023, President Tinubu, immediately chose to remove the petrol subsidy (diesel and paraffin subsidies were scrapped in 2003 and 2016, respectively) through which the government would partially pay for all petrol purchased within the country’s borders.
The removal of the subsidy was meant to reduce pressure on government finances, since it (the subsidy) typically constituted a huge 15% of the government's total annual expenditures.
Consequently, the price of petrol, which used to retail for 189 naira (US$0,12) per litre, increased by 196% overnight, and began to retail for 557 naira (around US$0,36) per litre.
The elimination of the fuel subsidy means that there is no more room for some unscrupulous Nigerians to hoard cheap local petrol so that they can sell it in neighbouring countries at a higher price (also known as arbitrage).
All this was previously happening at the expense of the government, with estimates suggesting that at least 56% of the country’s petrol "consumption" was being smuggled into neighbouring countries for resale at higher prices.
With the removal of the subsidy, the Nigerian government will have a greater capacity to fund critical infrastructure like power stations, roads and to spend more on essential services such as security (police, army, etc).
On June 14 2023, President Tinubu went on to remove the pegging of the naira to the US dollar and other foreign currencies, choosing instead that market forces of demand and supply should determine the naira's true value.
This also led to the depreciation of the naira. Although the naira has depreciated so far, the liberalised exchange rate should limit further corruption and dishonesty in Nigeria's foreign exchange market. This is because a floated (liberalised) exchange rate removes opportunities for arbitrage, whereby some market participants simply purchase the cheap foreign currency from the formal banking sector, whilst they go on to sell it in the "black market" for a profit. Perhaps the only futile (useless and regressive) issue pertaining to President Tinubu's economic reforms are the price controls, which the Nigerian government invoked.
Unfortunately, these have led to hoarding and shortages of commodities in various markets, as suppliers choose to release them for sale in the black market (at higher and cost-reflective prices) or at a time when legal prices are higher and also cost-reflective (signalling the true value of the goods). To ameliorate the worst effects of the crisis, the government is providing cash transfers of 25 000 naira (US$16), each month to some of the poorest households.
Also, the country’s national grain reserve was ordered to distribute 42 000 tonnes of grains to the poor in February 2024. This, however, is too little for the huge population in Nigeria, although it can be helpful to some of the vulnerable people.
Additional propositions
The economic reforms of President Tinubu are something to be respected by anyone who understands economics. It is unfortunate that they will cause a temporal crisis within the short to medium term (1-3 years).
However, if the reforms are maintained, Nigeria's economy should realise a more vibrant level of growth from the medium to long term (in 3-5 years). President Tinubu's target of achieving 6% economic growth per year can then be fulfilled at least two years before Nigeria's next election in 2028.
Apart from the mentioned reforms, there are also more initiatives, which the Nigerian government can implement, in order to revive its economy quicker. Some of them arementioned below.
Firstly, the country should support the value-addition of its critical natural resources such as crude oil. This would reduce its appetite for imports and help to strengthen the value of the naira.
That also means crude oil refineries in the country need to be supported, even though the changing of local (Nigerian) competition laws.
The consolidation (merging) of Nigerian oil refiners can reduce their costs and enable them to afford the best technology for their industries, whilst growing their processing capacities.
High-value exports of petrol and diesel from Nigeria to the rest of the African continent would then be possible, whilst the industry would create more jobs for Nigerians.
Secondly, if possible, Nigeria may need to establish a foreign exchange market, whereby, the various local banks can purchase foreign currencies at their own self-determined rates.
This means that the banks will have the freedom to choose the rates at which they pay for foreign currencies, instead of being guided by the central bank (of Nigeria). If this were to happen, the banks would likely set their exchange rates to be almost similar to the black market, or even better than it.
Once this happens, the Nigerian public can be expected to increasingly use the banks for their purchases and sales of foreign exchange. This is because when banks offer the same rates as the black market, the banks would provide additional benefits such as safety and credibility.
If this can be made to persist for long enough, that would result in the death (decline) of the black market in Nigeria and the stability of the naira. The central bank would then use the average price of the three banks with the best exchange rates, for settling its naira payments to exporters who surrender a portion of their foreign currency earnings to the bank (Central Bank of Nigeria).
Thirdly, the savings from the cancelled fuel subsidy should be used to improve security, so that thieves, vandals and insurgents are curtailed.
The government may then collaborate with all forms of private security in Nigeria, paying incentives to private security officers who facilitate the apprehension of insurgents and thieves. This would add more headcount (from the private sector) to the security system of the nation. Funding can also be committed towards fighting corruption. This may also include the payment of incentives to individuals who assist in the arrest and conviction of the corrupt.
"Low-hanging fruits"in the fight against corruption would include - investigating all Public Private Partnerships and existing government procurement contracts. Inflated prices and undelivered goods would easily expose criminal activity.
Prioritising security and anti-corruption initiatives ahead of health and education spending would be essential because it can immediately improve Nigeria's business environment, such that investments would surge (increase) in the country.
The higher government revenues to be realised from the increased business activities due to improved security and the curtailment of corruption would provide more finances, which the government can then eventually use to fund education and healthcare, in a more sustainable (guaranteed and long-term) manner.
In the medium to long term (three years or longer), the Nigerian government needs to build more power stations and other critical infrastructure. This will attract large manufacturing companies, including multinational organisations, to the country.
In-turn, the contribution of manufacturing to Nigeria's GDP would then increase.
Since the country has a huge population (of 220 million), the Nigerian government will need to choose its policy options based on consultation with key stakeholders and ensuring that there is consensus (agreement) and clarity, before implementation of new policies.
That means private sector businesses, the informal sector, labour representatives (trade unions) and households, will need to be involved in the formulation of public policy, for maximum effectiveness.
The economy will also need to be formalised so that the government can earn greater revenues through both corporate and personal income taxes.
This may be done through gradually closing down informal businesses in the prime commercial areas (such as the Central Business Districts), thereby, making space for formal businesses in the same areas.
Formal businesses (especially in manufacturing) should also be encouraged to merge so that they can share their expertise and budgets and enjoy economies-of-scale, as they position themselves to serve a larger share of the Nigerian market.
The success of massive formal sector businesses in the non-oil sector can also result in the diversification of Nigeria's exports. Huge formal sector firms can also be able to limit the demand for foreign currencies, since Nigerians would need to import fewer goods, as more of them (goods) would then be produced locally.
Conclusion
In conclusion, the Nigerian economy is going through challenging upheavals.
Coincidentally, some of its experiences relate to Zimbabwe's own recent past and present situation. In that regard, the recommendations made in this article should also be considered for Zimbabwe's reform strategies.
Tutani is a political economy analyst. — tuanikevin@gmail.com.