A Crisis Too Good to Waste

Nigeria is currently living through a peculiarparadox. The ongoing episode of high prices of crude oil has not translated to the usual oil boom for Nigeria, one of the world’s leading oil producers.As the poster-boy of the counterintuitive ailment called the paradox of plenty, Nigeria is not strange to paradoxes. But this is different and quite rich.

Oil-producing countries are usually flush with petrodollars during oil price spikes. Some of them may fritter away the windfalls and they usually come to an assured grief when oil prices eventually tank. But they don’t gnash their teeth through the boom. This has been the pattern, even for Nigeria. Until now.

According to one of the two reports on Nigeria released by the World Bank in Abuja on Thursday, the price of crude oil has increased by over 150% between 2020 and 2022. Yet, Nigeria’s net oil revenue is expected to decline by about 20% from N2.97 trillion in 2020, a year of significantly low oil prices due to low demands arising from the global restrictions of the COVID-19 pandemic, to N2.38 trillion in 2022, a year of historically high oil prices.

Instead of rising in tandem with high oil prices, Nigeria’s foreign reserve is shrinking, dropping from $41.8 billion in October 2021 to $38.1 billion in November 2022. At a time when other oil-producing countries are growing their wealth funds and balancing their budgets or even achieving budget surplus (Saudi Arabia recently reported a budget surplus of $27 billion), Nigeria’s fiscal deficit is growing.

“Oil price booms have historically supported the Nigerian economy but this has not been the case in 2021–22,” says the World Bank in its December 2022 Nigeria Development Update, titled Nigeria’s Choice.“In fact, Nigeria’s recent economic performance has been more like that of an oil-importing country facing headwinds from high global energy prices.”

The World Bank gives reasons for the strange inverse relationship between global oil prices and government revenues: ruinous and ballooning petrol subsidy and lower oil production, which itself is caused by a cocktail of ailments— “high production costs, theft and insecurity, joint-venture cash-call arrears, and inadequate investment.”

In my piece on this page two weeks ago, I added another layer: the simultaneous effect of the reduction of the federation share of oil produced and how the reduced federation share is allocated largely to domestic consumption, which is paid for in Naira, at the expense of federation export, which brings in dollars.

Even for a Nigeria used to many lows, this present pass is a strange place, a quaint depth descended for the first time. But as novel as it is, this dark milestone will not be a big surprise to those who have been paying close attention. It is a mere confirmation, albeit a profound one, of not just the well foretold decline of Nigeria’s oil sector but of the ill-health of the overall economy usually masked by episodes of oil booms.

Without a doubt, the management of the economy in the past few years has been significantly below par. But there are also structural dimensions to Nigeria’s economic malaise including not just the exposure of government’s finances to the volatility of the oil market but also a larger economy defined by low productivity, low level of economic complexity, and limited opportunities for quality jobs, poverty reduction and wealth creation.

An oil windfall would have provided a breather, the usual false relief. But apart from surfacing our proclivity for waste, an oil boon would also have served as an excuse to paper over both the recent and historical dimensions of our economic crisis. As usual, we would have carried on as if nothing was amiss and would have engaged in our characteristic work avoidance.

Not having an oil windfall this time around, as painful, avoidable and regrettable as it is, can thus be seen a rare opportunity to face up to the hard and painful decisions we need to take and the adjustments we need to make to put our economy on a sounder footing. In that sense, we should embrace and welcome this crisis. We should not waste it.

The World Bank has provided an authoritative snapshot of the state of our economy plus some considered suggestions and reasonable policy choices. The bank held a high-level dialogue at the presentation of the two reports (the other report is the Country Economic Memorandum, titled ‘Nigeria: Charting a New Course’).

The dialogue featured frank discussions with Governor Nasir el-Rufai of Kaduna State, Governor Godwin Obaseki of Edo State and Mrs. Sarah Alade, the Special Adviser to the President on Finance and Economy.

There is a lot to unpack from the two reports and the discussion at the Thursday presentation. I will highlight only three broad themes in this piece. The first theme is about how grim the present economic situation is, how vulnerable we are to another shock, and how not making necessary course correction could land us in Sri Lanka, to use el-Rufai’s words.

“Nigeria is in a challenging and deteriorating economic situation,” states the World Bank in the Nigeria Development Update (NDU). Despite high oil prices, all major indicators are flashing red, negatively impacting both government’s finances and citizens’ pocketbooks and overall welfare. Debt service, which is crowding out expenditures critical to human development, is projected to gulp 96.3% of government revenue in 2022 and get to 124% in 2023, meaning we will need to borrow to meet debt service obligations.

High inflation has considerably eroded the purchasing power of the most vulnerable citizens, with N30, 000 minimum wage of 2019 now valued at N19, 335. World Bank says inflation has pushed an extra five million Nigerians into extreme poverty in 2022 alone.Beyond the War in Ukraine and the strengthening dollar, the Nigerian government is not blameless about the high inflation that is pushing more Nigerians into misery.

The second big theme for me is that the current path is not destiny. The World Bank used two examples to show that a different path is possible. One is the comparison with Indonesia, a country similar to Nigeria in many ways: large and diverse populations, huge natural resource endowments, long years of military rule and—according to World Bank Country Director, Shubham Chaudhuri— ‘noisy’ democracies.

In 1970, the GDP per capita of Indonesia was about half of Nigeria’s. But Indonesia caught up with Nigeria around 1982 and kept rising, even when subjected to occasional shocks like the Asian crisis and COVID-19. Nigeria keeps ‘floating along’ in the business-as-usual mode of stunted growth, while Indonesia embraced key structural reforms. In 2022, Indonesia’s GDP is almost triple that of Nigeria.

The second illustration of the possibility of a different path is from Nigeria itself: the country enjoyed a spell of sustained growth in the 2000s following implementation of a slew of reforms and some interventions, like telecoms and pension reforms, that expanded opportunities for investment, capital formation and job/wealth creation.

The World Bank thus contends that Nigeria can learn not just from a country similar to itself but also from its own history in order to rise to potential, instead of just muddling along or doing business as usual or even plunging to a level wherethings fall apart.

The third theme for me is that taking a different path will not be an accident or luck. It will involve taking deliberate steps and will necessitate embarking on sustained, coherent and well-paced set of reforms for a prolong period. The World Bank has outlined key prescriptions under three areas and in different time horizons, stylised as sprints, medium-distance runs and marathons.

The broad prescriptions are: restoring macro-economic stability, boosting private sector development and competitiveness, and expanding social protection. The bank estimates that improvement in trade facilitation, governance, infrastructure, regulation, and increasing access to finance, education and health can cumulatively add 6.7% additional growth yearly to Nigeria’s GDP over the next 20 years.

However, the bank also acknowledges that embarking on wide-ranging reforms will not be a walk in the park. “Making and following through on the choice to rise to potential will not be easy, as the critical reforms would require not only good design but also sustained implementation and consensus among Nigerian elites,” says the World Bank in the NDU.

“Trade-offs and compensation measures will also need to be weighed, effectively communicated and followed through on to achieve the buy-in from stakeholders (for example, around effectively redirecting the current unsustainable, opaque, wasteful and regressive expenditure on the premium motor spirit, PMS or petrol, subsidy).”

The positions of the World Bank in these papers are broadly in alignment with the submissions of the first policy paper of Agora Policy, a think tank that I lead. Prepared by Nigerian economists and produced with the support of MacArthur Foundation, the Agora Policy report is titled “Options for Revamping Nigeria’s Economy.” There are other policy interventions, including by the Nigeria Economic Summit Group (NESG), that have come to the same conclusions.

This means that there is some broad consensus about what is needed first to stabilise our economy then bring it to sound health. These things are about good economics but they also need good politics and good communication to work. Especially for those decisions that will inflict pains on and require more sacrifice from the already pressed populace, we needa government with the spine, the social capital and the skills to get critical stakeholders onside.

As we confront the historic absurdity of high oil prices and revenue shortfall for an oil-producing country, we need to embrace the crisis and use it as an opportunity embark on the urgent task of positioning our economy to achieve, and even surpass, its potential. This is a crisis too good to waste.