When President Muhammadu Buhari was first elected President in 2015, Nigeria and Egypt were facing similar economic travails. Both nations had experienced drastic drops in their foreign exchange earnings from oil and tourism, and as a result were suffering chronic shortage of foreign currency and an inability to bridge budget funding gaps with loans from international lenders. Furthermore, both nations had resisted calls for a market-based exchange rate policy and instead adopted protectionist measures to maintain the values of their currencies.
In November 2016 however, Egypt embarked on a different economic path. With its economy on the brink, the Egyptian government agreed to a $12 billion International Monetary Fund (IMF) bailout which was contingent upon the adoption of a market-based exchange rate policy i.e. a float of the Egyptian Pound, as well as the phasing out of various government subsidies. Despite entreaties to embark on a similar path, Nigeria opted for a ‘managed float’, a system of multiple exchange rates and import restrictions which allowed the Central Bank of Nigeria (CBN)maintain the artificially high value of the Naira without making the needed structural reforms.
In the aftermath of Egypt’s acquiescence to the IMF’s bailout conditions, the Egyptian Pound crashed and lost 50% of its value, while inflation climbed to as high as 33%. Nigeria on the other hand only saw a 20% decrease in the value of its currency while the nation’s inflation rate settled at about 14%. The contrast in the immediate fortunes of both countries led several Nigerians to believe that the CBN adopted the right approach.
On the surface, the Central Bank of Nigeria’s managed float seemed to have solved the nation’s problems. The nation’s dollar shortage eased and foreign portfolio traders who had dumped the bank’s securities returned. The reality however was that the CBN’s adopted policy had only postponed the day of reckoning for the Nigerian economy. Basically, while Egypt had bitten the devaluation bullet and suffered its immediate consequences, but in the process, positioned itself for long term economic stability and growth; Nigeria had decided to embark on a different route by employing unconventional methods of maintaining the value of the Naira and postponing its day of reckoning.
Three years down the line, the results are in: one nation is reaping the benefits of its decisions, and that nation is not Nigeria.
Data made available in the past week has shown that inflation in Egypt, which had climbed to 33% after the IMF bailout, slowed to single digits for the first time since the Egyptian Pound was floated in late 2016. The Egyptian central bank also disclosed that core inflation, which excludes price volatile items such as food, had also slowed to 6.4% in June. On the other hand, Nigeria, which was in a similar situation to Egypt in 2016 but chose a different approach, continues to experience double-digit inflation, with the Nigerian Bureau of Statistics estimating the national inflation rate to be 11.2%, one of the highest rates on the continent and well below the CBN’s 6-9% target.
Furthermore, in terms of economic growth, Egypt is currently the healthier of the duo. While the Nigerian economy has been stuck in low growth for three years and is projected to only grow by 2-3% this year, the Egyptian economy is projected to grow by 6%. This means that the Egyptian economy will grow at more than double the projected growth rate of the Nigerian economy. In addition to this, the Egyptian pound has emerged one of the best-performing currencies globally.
In another sharp contrast to Nigeria, the Egyptian government has continued to phase out government subsidies which hitherto consumed a significant chunk of government revenues. In less than three years, the Egyptian government has succeeded in reducing subsidy spending by over 50%. This is a sharp contrast to Nigeria where the Buhari administration has continued to subsidize petroleum products despite committing to eliminate it.
In addition to these, data from the United Nations Conference on Trade and Development (UNCTAD) reveals that for the second consecutive year, Egypt will be the largest recipient of Foreign Direct Investments (FDI) in Africa. Nigeria, which earlier in the decade occupied this position, has experienced a plunge in FDI and is no longer among the top five FDI recipients in Africa. A galling statistic which illustrates the nation’s fall from grace in light of the nation’s reluctance to engage in structural economic reforms.
On the flipside, as impressive as the headline statistics from Egypt are, the story has not been completely rosy. There remains discontent across Egypt over the increased cost of living as a result of the phasing out of government subsidies. Nevertheless, there is no doubt that the country is on the right track to long term economic stability and growth. Nigeria on the other hand remains stuck in a vicious cycle brought about by an unwillingness to confront reality and endure short term inconveniences in hope of a prosperous future.
Overall, the key lesson to inculcate from Egypt’s experience is that structural economic reforms and fiscal prudence are key to ensuring the long-term growth and stability of any economy. As Nigeria continues to grapple with poverty, youth unemployment and mounting public debts, this lesson cannot be overemphasized.
The message from Egypt to Nigeria is clear: endure the short-term inconveniences and reap the long-term benefits of fiscal prudence. There is no other path to sustainable economic growth.
Olanrewaju Rufai
