Nigerian Economy in 2016: Withdrawal Symptoms

Nigeria in 2016 may show signs resembling an addict struggling to get off a chronic addiction to some highly intoxicating substance! Since 1973 we have been high on oil, and except for several interludes in the intervening period, we have had a party spending and sharing proceeds of oil. The first oil boom lasted from 1973 to 1980, exactly seven years as “predicted” by the Biblical seven years of plenty! The first post-oil boom austerity started in 1980, and got most severe in 1986 prompting the Structural Adjustment Programme (SAP) wherein we devalued the erstwhile fixed exchange rate system, deregulated and liberalized, and cut government spending. Before the resort to SAP, we had tried denial – exhausted our reserves as we hoped oil market glut and price declines were a temporary phenomenon; then we borrowed from external creditors and multilaterals to sustain our spending; we tried administrative rationing of foreign currency through import licensing, and then trade-by-barter (counter-trade) until after all denial was extinguished, we faced structural adjustment, and the ensuing pain. The problem of course was that we restructured as a last resort, after becoming highly indebted to the Paris and London Clubs, and multilateral agencies!

So from 1980 to 1994, when we had a brief Gulf War respite, Nigeria was broke and insolvent and poverty and low economic growth became pervasive. Nigerians emigrated everywhere possible – doctors and nurses to Saudi Arabia and other parts of the Middle East, and then the UK and USA; young men and women scattered all over the West; and the poor who could not reach these destinations, to other parts of Africa and Asia! Fortune smiled on us a second time as the return to civil rule coincided with a gradual rise in oil prices from 1999. President Obasanjo and NgoziOkonjo-Iweala leveraged savings from resurgent oil prices and economic reforms to persuade creditors to wipe away most of our debt; and Nigeria returned to the path of economic growth, commencing the process of rebuilding a marginalized middle class, but yet paid insufficient attention to redressing poverty and unemployment. We did not suffer macroeconomic distress from oil price declines during the 2008-2009 global financial crises because of large fiscal buffers ($65bn in official reserves and “excess crude accounts”) and swift Naira devaluation from N117/$ to N158/$.

In 2015 and early 2016, oil prices have fallen by 70 percent from $110 per barrel to less than $30! Policy responses have mostly been in denial – current exchange rate policy has evolved from bewildering to strange and has been reactive and confusing. Foreign investment has shrunk to near zero, GDP growth has slowed and economic actors are numbed due to shocking levels of policy uncertainty emanating chiefly from the CBN. Exchange rate policy has become slightly more rational in recent weeks, probably due to the intervention of IMF’s Christine Lagarde, but the weighty decision regarding a devaluation the markets regard as inevitable, as this columnist predicted since August 2015, remains outstanding. Our drug, oil, is no longer viable, at least in the short term, but we find withdrawal difficult and a change of mindsets traumatizing! It increasingly appears that some of the policy befuddlement is due, at least partly, to state capture of policy making organs by private interests as policy is turned and twisted to work for private agendas.

There are three structural signs of Nigeria’s four-decade old addiction to oil – high recurrent spending due to a bloated and inefficient bureaucracy and a prebendal, distributive political structure; irrational subsidies on imported petroleum products which institutionalised fuel imports rather than building domestic refining capacity, leading to the gross absurdity of a crude oil-rich economy importing refined products produced in other nations; and imported consumption due to an exchange rate system that subsidises imports rather than production or exports – the current subsidy on “official Dollars” for those privileged enough to access it is as high as N100/$ making round-tripping and influence peddling inevitable! Fortunately we are no longer able to afford these three wasteful propensities and whether we like it or not, their days are numbered! Ending them is in fact in our interest, but the Nigerian elite and policy makers behave as though these decisions are bad decisions that we are being forced to take. Like the recovering addict, our withdrawal symptoms are real and painful, but it is in our interest to wean ourselves off oil, and build a robust, diversified, productive economy.

It is likely that in 2016 we will be forced to begin reconciling ourselves to the real exchange rates of the Naira. Fuel subsidies have been “removed” because of fixed exchange rates and unprecedented low oil prices – once any of these two reverses, we will have arguments again over fuel subsidies. It is wise to formally and publicly end the subsidy regime and bring certainty and investments into the downstream petroleum sector. We, of course, still need fiscal certainty in the form of realistic new laws for the upstream sector as well. We are on the way to consolidating power sector privatization with new tariffs and if the 2016 budget deficit can be financed, to improving infrastructure in power, works, housing and transportation. Here again, the exchange rate decision stares us in the face – Nigeria is unlikely to be able to obtain support from the international community for deficit financing and foreign direct investment, if exchange rates remain at current levels.

Opeyemi Agbaje