Economic Crisis: How Nigeria Failed to Learn from History
EromoseleAbiodun writes that failure to diversify the economy, prolonged years of military misrule, corruption, and policy errors have brought the Nigerian economy to its current state
Thousands of people have lost their jobs since last year and the few ones who still have jobs are either on half pay or never earned salaries in months. To make matters worse, the government of the day seems not to have a plan to steer Nigeria out of the current conundrum. How did we get here? Long years of military rule, failure to diversify the economy from crude oil and endemic corruption were said to be some of the drawbacks.
A former military ruler, the late General Sani Abacha, who was listed as one of the most corrupt Nigerian leaders, once said: “Our strategic parastatals are known sources of decadence. They are, in the public eye, bottomless pit through which enormous resources of the state are needlessly drained. They swallow so much public funds, yet remain public nuisance of monstrous proportion. Their inefficiency stares the public, whose resources sustain them, in the face. They charge exorbitantly for services they barely deliver. They are hardly able to meet their financial commitments. Rather, like Oliver Twist, they keep coming back for more funds.”
Despite his claims, it is obvious that the Nigerian economy suffered a severe blow during the prolonged years of military regimes of Gbadamosi Babangida, Abacha and Abdulsalam Abubakar. At that time, life became miserable, while opportunism and greed thrived in the socio-political and economic environment of the country. The economy was battered and on the verge of collapse as social policy, economic and political institutions were undermined.
Early 1980s as in the 1970s
A major feature of Nigeria’s economy in the 1980s, as in the 1970s, was its dependence on petroleum, which accounted for 87 per cent of export receipts and 77 per cent of the federal government’s revenue. Falling oil output and prices contributed to another noteworthy aspect of the economy in the 1980s—the decline in per capita real gross national product (GNP), which persisted until oil prices began to rise in 1990.
Indeed, GNP per capita per year decreased 4.8 per cent from 1980 to 1987, which led in 1989 to Nigeria’s classification by the World Bank as a low-income country (based on 1987 data) for the first time since the annual World Development Report was instituted in 1978. In 1989 the World Bank also declared Nigeria poor enough to be eligible (along with countries such as Bangladesh, Ethiopia, Chad, and Mali) for concessional aid from an affiliate, the International Development Association (IDA).
Another relevant feature of the Nigerian economy was a series of abrupt changes in the government’s share of expenditures. As a percentage of gross domestic products (GDP), national government expenditures rose from 9 per cent in 1962 to 44 per cent in 1979, but fell to 17 per cent in 1988.
In the aftermath of the 1967-70 civil war, Nigeria’s government became more centralised. The oil boom of the 1970s provided the tax revenue to strengthen the central government further. Expansion of the government’s share of the economy did little to enhance its political and administrative capacity, but did increase incomes and the number of jobs that the governing elites could distribute to their clients. The economic collapse in the late 1970s and early 1980s contributed to substantial discontent and conflict between ethnic communities and nationalities, adding to the political pressure to expel more than two million illegal workers (mostly from Ghana, Niger, Cameroon, and Chad) in early 1983 and May 1985. The state also privatised many public enterprises by selling equity to private investors, while restructuring other parastatals to improve efficiency. The federal government encouraged private investment in the late 1980s, allowed foreign ownership in most manufacturing, and liberalised and accelerated administrative procedures for new investment.
Structural Adjustment Programme
The Babangida’s administration, which came to power in August 1985 at a time of depressed oil prices, undertook its structural adjustment programme between 1986 and 1988. In September 1986, the government introduced a second-tier foreign exchange market (SFEM), sold on auction for a near equilibrium price and used for export earnings and import trade requirements.
Under SFEM, the naira depreciated 66 per cent from N1=$0.64 to N1.56=$1. It declined further in value through July 1987, when the first and second tiers were merged. When adopting the SFEM, Nigeria abolished the ex-factory price controls set by the prices, productivity, and incomes board, as well as the 30 per cent import surcharge and import licensing system. It reduced its import prohibition list substantially and promoted exports through fiscal and credit incentives and by allowing those selling abroad to retain foreign currency. Although this action opened the way for an IMF agreement and debt rescheduling, the military government declined to use an allocation of Special Drawing Rights in IMF standby funds.
The effect of the SFEM in breaking bottlenecks, together with the slowing of food price increases, dampened inflation in 1986, but the easing of domestic restrictions in 1988 reignited it.
Real interest rates were negative, and capital flight and speculative imports resumed. In 1989 the government again unified foreign exchange markets, depreciating-but not stabilizing-the naira and reducing the external deficit. Manufacturing firms increased their reliance on local inputs and raw materials, firms depending on domestic resources grew rapidly, and capacity utilization rose, although it was still below 50 per cent.
Concurrently, non-oil exports grew from $200 million in 1986 to $1,000 million in 1988. This amount, however, represented only 13 per cent of export value at the level of the 1970s, and cash crops like cocoa dominated the export market. Large firms benefited from the foreign exchange auction and enjoyed higher capacity use than smaller ones. Despite dramatically reduced labour costs, domestic industrial firms undertook little investment or technological improvements.
The morning of May 1999
Nigeria was a pariah state before Chief Olusegun Obasanjo assumed office as civilian head of state. Military rule had a devastating effect on the Nigerian economy. Economic planning was haphazard, policies distorted, and implementation processes undermined. In addition, corruption, fraud and general mismanagement became the order of the day.
However, the morning of May 1999 witnessed a turning point in the political history of Nigeria as civilian political leaders were sworn in. The birth of the fourth republic became a reality after a prolonged military rule. The newly born fourth republic became highly instructive considering the scope and array of economic and political problems bequeathed to the country by the prolonged years of military rule and which the newly elected civilians have to cope with. Meanwhile, the performance of the Nigerian economy in 1999 was mixed. Inflationary pressures eased, especially during the second half of the year. At this period, inflationary pressures had decreased to 6.1 per cent. This was a great decrease as it had risen up to 70 per cent in 1995 and 1996.
This coincided with a period of expansionary fiscal deficit and money supply growth. Also, the naira exchange rate was stable as dollar exchanged for N92.00 to a dollar as at the last quarter of 1999. However, the later part of year 2000 witnessed a drastic increase in the exchange rate. At this period up to the second half of year 2000, a dollar was exchanged for NI35.00. This showed a decrease of about 50 per cent in the value of the Naira.
Learning from history
An Economist, and former Presidential Candidate of the African Democratic Congress (ADC), Prof. Pat Utomi believes Nigeria failed to learn from its 1983-85 financial crisis, blaming it on what he described as the knowing-doing gap of the Nigerian people.
Airing his views via his official Facebook page, Utomi advised the federal government to wake up before the situation goes beyond control.
According to him, “When anxieties with the state of the economy rose, as Oil prices went South in 2015, I was struck by how we went from worry to panic and how many actions failed to recognize similar experience from our recent history and more than enough knowledge on what happened before and what was trending in the global environment. That such knowledge was untapped caused me to begin to rethink many things.
“How does Nigeria always manage to lose institutional memory, and what is responsible for the Knowing-Doing gap that seems to prevent us from properly handling routine problems without generating crisis of earthshaking proportions. Surely we do not need Harvard Business School Professors Jeffrey Pfeffer and Robert I Sutton to see that there is a huge Knowing – Doing gap in the policy arena in Nigeria.
“Pfeffer and Sutton had in year 2000 wondered how come so many firms show significant gaps between what they know and what they actually do. You can see this applies to governments the moment you go to the many talk shops of Nigeria and from there cast a glance at the policy action arena. When at one of these events recently someone reminded me of another one a few months before when it seemed a vow to defend the Naira was being taken.”
He added: “He reminded me that I had said pressure on the Naira, with a significant dollar earnings dip, was not the end of the world but that a floating “managed” exchange rate mechanism Bismark Rewane had talked about was appropriate response and also that in addition a clear game plan on how the financing from declining Oil receipts, could be bridged to tide over a temporary challenge by quick borrowing of dollars to shore up supply with other measures to block leakages could boost confidence.
“I suggested teams of people credible in economic and financial circles; head off to critical global capitals to show where we were going. I was convinced that would have stimulated confidence in Nigeria at a time the gap between the nominal exchange rate and our purchasing power parity line was no more than six naira, as Bismark Rewane pointed out.
“Had the teams out there telling the world about the new thrust of policy and growth potential in which decline in contribution of dollars from a sector contributing to a small portion of GDP was causing tightness, investment flows will make up for Foreign exchange supply lost, just as a little borrowing could bridge the financing gap and stave of currency speculations.”
Focusing on a clear strategy
Utomi added: “It seems to me that instead of focusing on a clear strategy of short, medium and long term perspective plan anchored diversification of the base of the economy and the tactics to hold off raiders of the currency by inspiring confidence based on plans for the future, we slipped into this spurious discussion of symptom called devaluation of the naira.
“I never could understand why knowledge from 1983-85, in Nigeria, and the Asian financial crisis, failed to inform the passions spewing out or the subject from people with access to people who could better inform them. One of the truly enduring explanations of how Nigeria went into de-industrialization from the 1980s, even before becoming fully industrialized is a comparison of Nominal exchange rate divergence from purchasing power parity.”
He further stated that, “A review will show that the regions of the world where nominal exchange rates and the Purchasing Power Parity line were a close fit had more growth and prosperity. Between Africa, Latin America and Asia in the 1980 and 1970s South East Asia was that zone.
“What I found even more paradoxical was that those who favour state centrals to drive development and therefore should embrace some of the postulates of the South Korean Economist at Oxford Ja Joo Chang are signing off on the European Union ECOWAS Economic Partnership Agreement (EPA). This is quite curious.”
IMF points way out
When she came to Nigeria earlier this year, Managing Director, International Monetary Fund (IMF) Christine Lagarde urged Nigerians to brace up for harder times, following the massive fall in the price of oil globally.
Lagarde, who called for increase in Value Added Tax (VAT), stressed that it has become imperative for the federal government to broaden the country’s tax base against the backdrop that Nigeria has the lowest VAT rate in the African continent.
According to her, “the current VAT rate is among the lowest in the world and well below the rates in other ECOWAS members—so some increase should be considered.”
Although the IMF MD was careful not to endorse the devaluation of naira against major international currencies, she, however, urged the federal government to adopt a flexible monetary policy that will better serve the interest of Nigerians.
The IMF boss, who called on the federal government to reduce cost of governance, said that the contentious fuel subsidy must be removed to allow government spend on infrastructure, housing, education, health, among others.
She, however, cautioned Nigeria against obtaining loans, noting that it was at the moment affecting the country and subsequent borrowing could hurt the nation’s economy in the long run.
She said: “On recurrent expenditure, efforts should be made to streamline the cost of government and improve efficiency of public service delivery across the federal and sub-national governments. Transfers and tax expenditures should also be addressed. For example, continuing the move already begun by the government in the 2016 budget to eliminate resources allocated to fuel subsidies would allow more targeted spending, including on innovative social programmes for the most needy.”
She continued: “Indeed fuel subsidies are hard to defend. Not only do they harm the planet, but they rarely help the poor. IMF research shows that more than 40 per cent of fuel price subsidies in developing countries accrue to the richest 20 per cent of households, while only 7 per cent of the benefits go to the poorest 20 per cent.
“The move by the government to remove fuel subsidy is good. Those people who need the subsidy can receive cash transfer. Fuel subsidies are hard to defend. Subsidies are no longer good. But I hear that it will hurt the poor. Forty per cent of fuel subsidies in rich countries go to rich families. The people do not really need the subsidy. Look at the number of people who stay in stations trying to buy fuel. There is a small acceleration expected in 2016. Growth in the last 10 years has slowed down in Sub-Saharan African countries. Oil prices will remain low and low for a long time. Oil producing countries must factor this in and model their economic policies towards this direction. Nigeria is facing mounting pressure. There will continue to be abundant supply of oil, but low demands. It is very unlikely that we will see any rise anytime soon.”
Administering fuel subsidies
Moreover, she said Nigeria experience of administering fuel subsidies suggests that it is time for a change—think of the regular accusations of corruption, and think of the many Nigerians who spend hours in queues trying to get gas (fuel) so that they can go about their everyday business.
“At the same time, we should not forget the huge challenges facing Nigeria’s state and local governments. These sub-national governments—which account for the bulk of social spending—have only limited tools to manage the impact of declining oil revenues. My message here is to manage better the smaller purse, while building capacity to increase internally generated revenue,” she said.
Lagarde urged Nigeria to build regional cooperation among West African countries because whatever affects Nigeria directly or indirectly affects other countries within the sub region.
According to her, “This is always a moment I cherish. My first visit to Nigeria was in late 2011. At that time, Nigeria was emerging from the global economic crisis. Nigeria is the prime destination in Africa. Nigeria has gone through democratic transition which is a good thing. When investors know that transitions can happen successfully, they have more confidence.
“The richness of Nigeria has to do with the population. Nigeria is a huge market and people who are prepared to put their money here look at the population. Oil prices have fallen sharply. The geopolitical tensions have increased. These things are happening at a time the country needed to lift the standard of living of Nigerians. Nigerians are known for their courage and doggedness. Nigeria cannot waste time. There is no time at all.
“Government must step up revenue mobilization and reduce leakages. Every 50 kobo collected from 30 per cent of the country’s revenue goes into the servicing of local and foreign debts. The government must focus on power, transportation and housing. These three areas will create wealth. They are critically important. Efforts should be made to reduce the cost of governance. “As I am told, Nollywood currently employs over one million Nigerians. Poverty and inequality still remain high in many parts of the country. Mortality rate is still high.”
Speaking on the need to strengthen institutions of government empowered to tackle corruption-related issues, Ms Lagarde revealed that over $1 trillion was given and received as bribes globally every year.
She equally revealed that corruption makes up five per cent of global GDP.
The IMF boss who urged the National Assembly to come up with laws that will address corruption and block leakages in the system, said: “Corruption is touted to be five per cent of the global GDP and over $1 trillion is said to be given as bribes globally every year. Today, Nigeria is looking ahead. The future is greater than the past in Nigeria. But the sooner the government delivers, the better it will be for Nigeria and Nigerians.”
Commoditised foreign reserves
As part of measures to strengthen the naira and grow the local economy, Cross River State Governor, Professor Ben Ayade advocated for payment of contractual fees and charges to multi-national companies in local currency.
Ayade, who stated this when he received the chairman and other members of Senate Committee on Petroleum Resources Upstream on a three-day workshop in Calabar, said that it is by so doing that the emphasis on dollars will be less and the value for naira better appreciated.
He said: “The dollarisation of contracts in the oil and gas sector is another crippling issue in this country. It is only in Nigeria that contracts are awarded in dollars and denominated in dollar. The international exchange rate is fast changing, a lot of people prefer to do business in their local currency, and we have countries that have made laws that stipulate a minimum irreversible exchange rate between their currency and the dollar; We should not be an exception.
“Like every determined government, we should not allow the exchange rates of our naira to escalate based on market forces of demand and supply, that is to say that we have a vehicle without a driver.”
He further argued that the activities in the oil and gas sector in the country which allow for the sale of crude oil in dollars, with the dollar not returning to Central Bank of Nigeria, is another issue which should be tackled under the local content law.
“With our main exports, we should not have this kind of exchange rate that we are having in naira today. It may be synthetic, it may be a little artificial, it could be black market induced but we have failed to establish a framework that can give the naira its value.
Must we always put the naira against the dollar? Ayade asked rhetorically, noting that “in most countries like United Kingdom , some of their foreign reserves come in form of gold. Why must our foreign reserves be in our dollar, why can’t we commoditise our foreign reserves?”
The governor, who reasoned that the country was blessed with abundant mineral deposits like bitumen, gold, iron, among others, stressed the need to convert these into foreign reserves in material terms and bring the naira to shore up its value.
Accordingly he noted, “There must be a deliberate local content policy to protect the naira as a local currency even as we need to understand the local content policy beyond the perspective of the narrow issues of the oil and gas industry.”
Ayade urged the federal government to take a deliberate policy as well as ensure full implementation of local content act to shore up the value and strengthen the naira while advising that all LNG shipments sales out of Nigeria be paid to CBN directly.
FG’s position
While receiving members of the National Mathematical Centre, led by its Chief Executive Officer (CEO), Prof. Adewale Solarin in Abuja recently, the Minister of Science and Technology, Mr. Ogbonnaya Onu, believes past administrations failed to diversify the nation’s economy because of the lack of recognition of science and technology as driver of growth and development.
The minister regretted that 20 years after the country’s independence, it did not create the ministry of science and technology, adding that China, India and Singapore created the ministry as soon as they attained independence.
The absence of science and technology, the minister said, has left Nigeria even as the six largest exporter of crude oil to be importing refined oil, petrol fertilizer and toothpicks even when it has all the material and human resources.
“Even with the mono product economy, if we had diversified, our economy would have been far stronger than it is today. This become imperative because the major assignment that I have in this ministry to make the average Nigerian appreciates the importance of science and technology to the country’s wellbeing.” he said
He said no nation can attain relevance in the international community today without the application of science and technology in its growth road map.
