Tinubu and the burden of reform

by Seun Awogbenle

Since coming into office in May 2023, President Bola Tinubu has attempted to implement a range of market-oriented reforms. Key among them is the liberalisation of the foreign exchange market, from a hard peg to a free float, and the removal of petrol subsidies, which have lasted for several years.

Proponents argue that the reforms have the potential to help the country get its macrobalances together, find fiscal headroom, stabilise the economy, and put it on the path of real growth. Already, Government is counting its gains, with improvements in foreign reserves, remittances, federation revenue, and the potential to make exports competitive. However, in real terms, the situation has also delivered hardship, pain, and despair to the greatest number of Nigerians, with the decline in household income, soaring food prices, increase in energy bills, rise in the cost of transportation, and unprecedented cost-of-living crisis.

The situation has reopened a wider conversation on the efficiency of the standard reform package, the reform and pain nexus, and the precarious nature of public policy. If there is anything I know from assessing different policies across regions, it is that there are no easy choices; for every decision there are potential benefits and costs, and that in attempting to solve one problem you end up creating another set of problems. This is why I think policymakers sometimes deserve our sympathy.

And this situation is not peculiar to Nigeria, especially with the current global economic headwinds. Governments all over the world are making tough choices to reorder their fiscal priorities. In the end, it is always down to trade-offs. In the UK, for example, the government is caught between meeting the 2.5 percent of GDP defense spending of the NATO commitment while other social services and infrastructure suffer or otherwise. In the Autumn budget, the government also raised tax by £40 billion, cut winter fuel payments for pensioners, and removed VAT exemption for private schools.

For a long time, Nigeria lived a lie with its public finances and was only biding its time before the economy would come crashing down. Those years of profligacy, waste, and inefficient subsidies could simply not continue. Therefore, the reforms, though poignant, were necessary, even if only to halt the slide and stop the country from a further downward slope. For example, the foreign exchange regime under the former Central Bank of Nigeria (CBN) Governor, Godwin Emefiele, encouraged arbitrage and fraud. It made many opportunists and overnight billionaires who did not have to lift a finger to do any honest day’s job other than to buy foreign exchange and resell at a higher margin.

The World Bank in October revealed that in 2022, Nigeria spent N5.2 trillion on foreign exchange subsidies and N4.5 trillion on petrol subsidies, making an estimated $15 billion, or about 5 percent of GDP, on foreign exchange and petrol subsidies alone. The subsidies, no doubt, exerted significant pressure on the country’s limited foreign exchange earnings and foreign reserves, leaving no fiscal headroom for investment in critical infrastructure and social services.

However, the pro-reform arguments could not inevitably explain away the staggering misapplication of the corrective prescriptions. The process of implementing the reforms is as important as the reform itself. The major challenge with the reform today is that shock therapy, an attempt to remove all the subsidies at once and as quickly as possible, was a bad idea. It is what has created the hardship we see today. The reforms should have been sequenced in a way that provides people with time to make necessary adjustments and build resilience.

Similarly, the government removed the subsidies without meeting the condition for the reforms or putting in place a plan for the fallout. Take the foreign exchange reform, for example. It was always going to be unsustainable without consistent supply—oil production had dipped and non-oil exports were yet to peak. This explains why the naira is currently overvalued. The reforms were also carried out without the cushioning and reliefs that could make the shocks bearable—an example is the CNG initiative and the wage award; these were plans that should precede the reforms.

Even when the scale of the challenge had become glaring, the government’s response was incredibly slow and tardy. It took almost a year after the subsidy removal to agree on a new minimum wage. The government has also promised to exempt duty on food imports since August; this is yet to happen. There are also issues around the lack of leadership, with cost-cutting measures, and the near absence of a crisis communication strategy, which should account for the urgency of now.

Nigeria badly needed to reorder its fiscal priorities, even if only to halt the slide, but the reforms have not come without their fair share of pain, and evidently majority of the people are growing tired because their capacity for pain has been tested, and as with most reforms, they take time. But no one would blame them, because hope deferred, as they say, makes the heart grow weary.

While I believe that Nigeria would need to stay the course, government must work harder to ease the pain of the reforms in a way that the people are not overstretched beyond what they can handle. This would be my homily.

Seun Awogbenle, a Development and Public Policy Professional, writes from United Kingdom. He can be reached via seunawogbenle@gmail.com.