The hardest things should come first for Nigeria’s President-elect Bola Tinubu who has a long list of reforms to push through if he must fix an economy in turmoil.
Tinubu, who will be officially inaugurated today as Nigeria’s president, takes over a divided country with significant macroeconomic challenges that cut across the real, monetary, fiscal and external sectors.
Confidence in Africa’s largest economy is weak, insecurity is rife and the business environment is constrained.
Analysts polled in a BusinessDay survey on what Tinubu should prioritise in his first 100 days in office were of the view that fixing the foreign exchange market, removing the petrol subsidy and raising revenues should be on the front burner.
Fixing the FX market is key to restoring investor confidence in the country, while removing the petrol subsidy and improving government revenue generation will help put the government’s battered finances back on track.
“They should do the hardest things first,” Andrew Alli, CEO of SouthBridge Group, a pan-African financial services firm, said.
“This would be floating the currency and removing the fuel subsidy,” Alli, former CEO of the Africa Finance Corporation, said.
Floating the currency, according to Alli, will “provide for a proper two-way market for the naira, allow it to find its level and, importantly, allow for it to adjust as the country’s economic performance and the global situation dictate.”
Nigeria resisted advice to float the naira under outgoing President Muhammadu Buhari despite the harm it has caused the economy.
The premium between the official and parallel market is as high as 60 percent, creating opportunities for arbitrage while discouraging foreign capital inflows into the economy. The unrealistic official rate, which Nigeria has maintained since 2017, has sparked an acute scarcity of the greenback and pushed several businesses, which source dollars from the black market, to the brink.
“In my opinion, restoring confidence in the economy with respect to the unclear FX regime, debt management, revenue generation (fixing oil theft and expanding tax and non-tax revenues) and a more efficient expenditure framework is crucial and can be handled in the first 100 days,” Yemi Kale, Nigeria’s former statistician-general and chief economist at KPMG Nigeria, said.
The analysts interviewed by BusinessDay said Nigeria should avoid a one-off devaluation, especially given that if done half-heartedly, will not restore the confidence of international investors.
“Many Nigerians are afraid of a free float because they are concerned what value the naira will end up at,” a top Nigerian economist who did not want to be named said.
“However, some of those fears may be unfounded given that if floated, the naira will end up at a rate close to the black market rate, which is the rate at which the economy effectively already runs,” the economist said.
Removing petrol subsidy quickly and fully will also be important, the analysts said.
“The World Bank has approved an $800 million loan to cushion the effects of the subsidy removal; so time shouldn’t be wasted in implementing this measure,” Alli of SouthBridge Group said.
“The government should be prepared to tailor its palliatives once it’s clear where the long term and hardest impacts will be. As these are hard to predict, due to second and third order effects, too much pre-planning is not likely to be helpful. Close monitoring and speedy reactivity will be more useful,” Alli added.
The reforms before Tinubu are tough measures for Nigerians and will cause hardship for many, even if they are unavoidable.
Some analysts made the case that it is therefore important that the government is seen to be sharing the pain with the population through the introduction of fiscal prudence measures or spending cuts.
Nigeria may be seen as spending too little when broad measures like government spending as a percentage of GDP are considered. The problem however is that most of that spending is inefficient.
Despite its vast development needs, Nigeria spends only $220 per Nigerian per year, and at merely 12 percent of GDP, this is one of the lowest levels of spending in the world, according to World Bank data. The low public spending translates into poor development outcomes, according to analysts at the World Bank.
“Poor outcomes are not only a result of a low level of spending, but also inefficient spending,” analysts at the World Bank said.
“Nigeria continues to finance regressive and inefficient petrol, electricity, and exchange rate subsidies. Government’s net oil revenues could be 52 percent higher if it did not subsidize petrol — a product that is largely consumed by wealthier households: the poorest 40 percent of the population only consume 3 percent,” the analysts said.
Measures to tackle the government’s waste and profligacy as well as some short-term optical measures, like banning most overseas travel for public servants and restricting those who are allowed to travel to economy class, would help to send an important signal.
Cutting wasteful spending and boosting public revenues is also key in tackling Nigeria’s debt burden. Nigeria spent a whopping 92 percent of its revenues in 2022 repaying interest on loans taken from international investors.
Many, including the finance minister Zainab Ahmed, believe Nigeria has a revenue problem rather than a debt problem. That highlights the need for Nigeria’s revenues to improve. The government makes only 6 percent of GDP in revenue, well below the Africa average of 15 percent.
Andrew Nevin, chief economist at PwC Nigeria, however believes Nigeria has neither a debt nor a revenue problem but a growth problem and Tinubu needs to address that.
“If Nigeria were growing at 10 percent a year, the country could have tax revenues growing at 15 percent a year, and the system would work, but right now it’s not working,” Nevin said.
“People don’t want to invest in this country because we’re not growing. So I think we’re in a crisis right now and the new government will need good policies to fix them,” Nevin said.
Read also: Why Tinubu must be decisive on subsidy, strengthen energy sector –Expert
When not in recession, Nigeria’s economy has grown at a pace too slow to create jobs for its bulging population. Tinubu says he will target 10 percent economic growth in his first term in office but was not explicit on how he intends to achieve what will be uncharted territory for Nigeria in over a decade.
Putting the country’s dead assets to good use is one of the steps Tinubu must take to boost economic growth, according to Nevin.
PwC estimates that Nigeria holds at least $300 billion or as much as $900 billion worth of dead capital in residential real estate and agricultural land alone.
Naming a well-qualified cabinet, who all cohere around a common development vision, should also be a priority for Tinubu as it would send a very strong and positive signal, according to analysts.
“Getting the right team with respect to round pegs in round holes is absolutely necessary but not sufficient, giving these individuals unrestricted access to the president, strict KPIs with timelines and consequences and freedom to do what is necessary will be equally essential,” Kale said.
