Need to Risk-proof Nigeria’s Fragile Reforms

Postscript by Waziri Adio

Reforms, especially the contentious types, can be fragile. They need careful nurturing, protection even, to yield results and in the desired quantum. Reforms are rarely painless and the gains may be late or elusive. When the definite pains of change linger, the promise of a brighter future is hardly strong enough to checkmate pushbacks. Unravelling is likely to follow, at greater cost to the society. This is a probability that should keep reformers and reform advocates constantly awake.

President Bola Tinubu has been drenched in praises, including from unusual quarters, for moving swiftly in removing petrol and foreign exchange subsidies within a fortnight of assuming office. He has been described as audacious and sagacious. He should soak in the adulation, but should not get carried away. As I mentioned in my last piece on this page, public adulation (both domestic and external) can be fickle.

Besides, announcing a removal or suspension is not all there is to reforms. What has happened at best is a good start. But then, reform is not a sprint. It is a marathon. So, after starting out well, President Tinubu needs a robust plan that will see him through the tortuous and sometimes lonely and slippery terrain to podium success. He needs a comprehensive reform strategy.

I don’t have any doubt that the president has taken the right decisions in removing the ruinous and ineffective petrol subsidy and in attempting to reform the arbitrage-ridden, multiple forex rates regime. My sense is that a sizeable number of Nigerians and most of those who closely monitor Nigeria’s economy agree that these are necessary changes. The unvarnished truth is that Nigeria’s economy was hurtling towards a catastrophic crash, which would have had dire economic and social consequences for most Nigerians, especially the poor.

So, if the two policy decisions are desirable and positive, why will they be at risk? They are at risk because of certain complications.

The first complication arises from the fact that the projected economic crash still remains at the conjectural level for most Nigerians. A crash avoided is not as real as a crash experienced. Most Nigerians simply do not have an idea of how bad continuing on the previous trajectory could be for them and for the country.

Yes, some Nigerians had come to know that our public finance was all over the place, and that we were living on borrowed times with debt spiralling, debt service surpassing government revenue, petrol subsidy becoming unaffordable and unsustainable, and foreign exchange reserves, unrationed, standing the risk of dropping below our import requirements. But such knowledge or conviction was not universal.

Most Nigerians, a month ago and even now, could not wrap their heads around where we were headed. Sri Lanka is a faraway country, and the last time that Nigerians had to queue for hours to buy rationed portions of basic necessities of life was about four decades ago. Even the memories of those who lived through that harrowing episode have become hazy. The argument for and against living dangerously would have been settled if Nigeria had hit the inevitable rock bottom. But we didn’t. To most people, the avoided crash is at best an abstraction, a counterfactual, not part of their recent lived experience.

This factor acquires more salience when combined with the second complication: the concrete and immediate costs of the reforms. Subsidy removal led to the increase in the price of a litre of petrol from N165 to between N488 and N540. This immediately shot up the prices of most goods, especially the costs of transportation and food. While the forex reform succeeded in narrowing or eliminating the gap between the official and parallel market rates, it is likely to lead to even higher petrol prices. The upshot of this twinning is a further spike in inflation, poverty and unemployment rates currently suffocatingly high at 22.4%, 40% and 33.3% respectively.

Unlike the first complication, the pains of reforms are not abstract. They are real and raw. And they are not likely to wear off soon. The poor who ironically didn’t benefit much from the petrol and forex subsidies will bear the heaviest burden because they have less room for manoeuvre than the middle and upper classes. The latest Nigeria Development Update (NDU) of the World Bank, released on Tuesday, revealed that four million Nigerians were pushed into poverty in the first five months of 2023 due to high inflation. The same report projects that additional 7.1 million Nigerians are at risk of descending into poverty if the current reforms are not well managed.

For the growing number of Nigerians who are feeling the pinch on different fronts, rosy endorsements of the petrol and forex reforms by Western investment bankers, multi-lateral financial institutions and foreign media houses do not count for much. Same as stories about the pains inflicted on petrol smugglers, neighbouring countries that used to benefit from cheap petrol smuggled from Nigeria, and high-heeled beneficiaries of forex subsidies. These endorsements and stories do not lessen the pains in any way or offer any succour to Nigerians who now have a harder battle of paying their bills. This is especially so when most of these Nigerians have hardly felt the impact of government in their lives but cannot the escape the negative impacts of government actions and policies.

The third complication is that while the pains are likely to linger and possibly compound when other needed reforms are introduced, the gains will take a while to materialise. In the NDU titled “Seizing the Opportunity,” the World Bank captured this aptly: Nigeria has surely avoided a cliff, but it still has a mountain to climb. Petrol subsidy removal should yield improvements in GDP growth, drop in inflation after the short-term spike, and reduction in budget deficit. But challenges with rising debt, high debt service, inadequate revenue and fiscal balance will likely remain. Also, while the forex reform will significantly narrow or even eliminate the premium between official and parallel rates, it also has negative implication for inflation and public debt, estimated to increase to 46% of GDP by the end of 2023.

The World Bank report provides data to show that Nigeria is better off on key macroeconomic parameters with the reforms than without reforms. This is a compelling argument. But there are also additional complications. The World Bank projects that in 2023 Nigeria will save N3.9 trillion from petrol subsidy removal. But this will not necessarily translate to more money for the three tiers of government immediately.

The national oil company claims it is owed arrears of N2.8 trillion. Even the projected balance of N1.1 trillion may not be available to the public purse as the Federation share of oil had reportedly been pledged in advance to oil traders in exchange for petrol. Beyond the alibi of oil theft and shrinking production, how Nigeria’s oil and gas sector rapidly unravelled at a time of high oil prices is worthy of a forensic examination. 

Back to the complications. The reforms are underpinned by certain assumptions, which may not hold, at least in the immediate. For example, petrol subsidy removal should result in more money available for public spending. But even when it is further assumed that the additional resources would translate to better spending in areas that will directly impact citizens, the reality is that the savings and additional revenues may remain conceptual at least for now.

Also, it was assumed that forex reforms would improve investment and forex inflows, and that increased supply would lower the exchange rates at the parallel market, which was where most Nigerians were sourcing their forex. Even when the Naira is now adjudged to be overvalued, forex supply has not remarkably improved because investors can get better returns elsewhere. And without increase in forex supply both official and parallel rates will likely stay above pre-reform levels.

These complications, individually and in concert, put the reforms at serious risk. Social and political pressures are likely to build and can force a reversal. As stated earlier, the present calm should not be taken for granted. Isolated and muted criticisms can quickly multiply. Before long, the ideological and partisan critics will strike a deep chord with the growing army of citizens reeling under personal pains and straining to see the light at the end of the tunnel. The effusive endorsements and puff stories will make little difference when such a convergence is allowed to happen.

This should be avoided, at all costs. Abandoning the reforms or not properly managing them will set Nigeria back by many years. Not seeing the reforms through will not only doom the current reforms but will also narrow the space for other needed reforms. The failure to remove petrol subsidy in 2012 became a cautionary tale. It haunted not just the administration in power then but also the one that took over three years later and stayed in office for eight years.

Petrol subsidy remained politically sensitive, even after a law mandated its removal. It took a whole of 11 years to return to it, and by then things had become considerably worse. Petrol subsidy was largely implicated in zero remittance from oil sales by the national oil company at a period of historically high oil prices. Petrol subsidy succeeded in wiping out more than 50% of the gross oil and gas revenues in 2022, and in gulping 26% of the federal budget in the same year. If we miss the opportunity again this time, we may not be able to return to this reform agenda until we hit rock bottom, and by that time it would be too late.  

In response to some of the complications and costs identified here, the government and its partners need to move swiftly on many fronts. One, it is important to frontload the reliefs. Consultations cannot go on forever. The $800 million loan from the World Bank can be a good starting point if the cash transfers to poor and vulnerable households are transparently and efficiently disbursed. But that can’t be the entire package. At current official exchange rate, $800 million is just about N610 billion. That is not a terribly large amount of money for the number of households targeted. It is also just a little over what we were spending on petrol subsidy per month in the earlier part of 2023. Nigerians need to know what the entire package is, how it will address the channels through which they would be negatively impacted, who will be responsible for delivering what and when. Speed is of the essence here. Someone whose standard of living is being wiped away by rising prices cannot take solace in an elusive better future. Anyway, in the long run, as John Maynard Keynes reminded us, we will all be dead.

In addition, the administration needs to unveil a plan for cutting wastes and leakages in government. It also needs an appropriate and effective communication and marketing strategies for the reforms. There may be some comprehensive and clear strategies somewhere but that is not evident. Government has to take the lead in coherently selling and articulating the reforms, in proactively countering misrepresentations and in building trust and consensus. It is naive to expect that everyone would get it or to think that portfolio and direct investments would just start pouring into the country because of the steps taken so far. Assurances and concessions are needed.

The government also needs to strongly press its partners, especially those that have been actively pushing for reforms for some time now, to open their wallets. They need to show up massively and more concretely for Nigeria not just in terms of fine words and great ideas but also with concrete actions. They need to line up—and quickly too—more investments, better trade terms, enhanced development aids/grants and even more concessional loans to withstand the initial shocks and to ease forex supply and ensure a fair and stable value for the Naira.

It is time for the World Bank, IMF, the UN, the US, the UK and other partners and countries to put their money where their mouth is. There is a lot riding on Nigeria getting the reforms right and putting its economy on a proper footing. It is in the strategic, enlightened interests of Nigeria and its partners that Africa’s largest economy and most populous country rises up to its promise.