So, I’m happy because Nigeria is an important country at a very critical juncture, and I would rather be here today than anywhere else. So, I was asked to talk about the most pressing challenges affecting Nigeria and Africa’s economic development and growth. So, I’m going to focus on Nigeria for a very simple reason, because Africa goes as Nigeria goes.
So, given its size and significance, and the success of Nigeria’s reforms that are happening today, will give a big boost to countries across the continent. And because the whole world has a stake in Africa’s future, the whole world needs to pay attention to what Nigeria is trying to do today, and actually the whole world is paying attention. So, as I speak, though, there is a lot of suffering in all sections, in all parts of Nigerian society, but especially among the poor and the young.
They want good schools, they want decent colleges, they want decent healthcare, good jobs, and safe conditions that allow them to use this potential, to make full use of this potential. But high inflation is hurting everyone today. It is hurting them the most.
So, oil wealth that should be used for the welfare of all Nigerians, has for too long been used to benefit just the elites. The elites are also being hurt by these reforms that started last year, but they have done very well in the past, and they have built big buffers. The ordinary Nigerians are being hurt even more, and they were hurt much more by the policies of the past, and they don’t have the buffers.
So, their welfare should be uppermost on our minds today. So, you’re probably thinking, tell us something we don’t know, having come all the way from Washington to tell us this. So, I will talk today about things that you can probably see more clearly from far away than from close up.
So, I will instead remind you that the problems that are being tackled today in the Nigerian economy first surfaced more than 40 years ago, when oil prices began collapsing in the early 1980s, after the big oil boom of the 1970s. So, I’ll make a brief detour into history, because I think it is important to do so. It is important because the whites say that those who ignore the lessons of history eventually relearn them, but in much more painful ways.
So, I want to start by saying there are three crucial aspects of oil. The first is that it is an exhaustible asset. Everybody knows that.
The second, it is a fickle asset. Its prices are among the most volatile of all commodity prices. The third is that it is a national asset, and this means that like Nigeria’s forests, seas and rivers, its benefits have to be shared across every segment of the society and across all generations.
So, over the last 40 years, oil has come to dominate the Nigerian economy. Nigeria’s economic growth, its exchange rate, stock market, all moved with the oil price. But this was not always the case.
It happened because of poor fiscal and exchange rate policies during the oil boom of the 1970s. Massive increases in oil prices brought massive increases in wealth. Yet Nigeria’s fiscal deficit shot up to between 7% and 10% of GDP.
What happened also was that the current account also ballooned along with external debt. In short, what happened was that Nigeria’s fiscal policy became highly pro-cyclical. So, what ended up happening was that the government ended up amplifying oil price volatility instead of reducing it.
Instead of insulating ordinary Nigerians from the bakeries of oil markets, the government made them even more vulnerable. This was the first mistake. Then oil prices started to fall.
They started to fall in the early 1980s. This meant that the value of the Naira fell as well. But instead of letting the exchange rate adjust to the new reality, Nigeria decided to prop up the Naira.
The government tightened foreign exchange controls and import licensing requirements. In doing so, it set the stage for a parallel exchange rate market to emerge, creating a big gap between the official and the unofficial exchange rate. This meant that ordinary Nigerians would have to pay many more Naira to buy dollars than better connected people.
This was the second mistake. These two mistakes led to two bad outcomes. The first was that businessmen began chasing import licensing at the official exchange rate because it guaranteed them a profit at the nation’s expense.
The second is that agricultural and manufacturing exports were decimated because the difference between the parallel and the official exchange rate essentially became a crippling tax on exports. Between 1970 and 1982, the production of Nigeria’s major cash crops, which is cocoa, rubber, cotton, and groundnuts, fell between 30% and 65%. By the middle of the 1980s, cocoa was the only real agricultural export left.
But its volume had actually shrunk by 50%. Nigeria’s share in cocoa production fell by half to 8%. Nigeria had in short order become both oil-dependent and grossly distorted.
It was now an undiversified economy with a rent-seeking society. Nigeria soon realized that this posed dangers to this great nation. Some of you are old enough to remember that Nigeria attempted a serious reform in 1987.
My colleague Brian Pinto, who is here today, was a young economist at the time. He and the finance minister, by the way, joined the World Bank’s prestigious young professionals program at around the same time. I think they’re both in Abuja today.
But essentially what this meant was that this involved reducing fiscal deficits and trying to return to a market-determined exchange rate via the second-tier foreign exchange market known by its acronym SFEM. But by then, external debt overhang had developed and strangled the economy for the next two decades. This lesson is worth repeating.
A very short period of poor oil wealth management, which benefited a handful of rich people, had painful consequences for nearly all poor Nigerians, which persisted for a generation. Now, Nigeria isn’t the only country to learn this lesson. Venezuela and many other oil-exporting countries have learned the same lesson.
Like Nigeria, they’ve learned it the hard way. So this is all very depressing, so I’m going to tell you a more uplifting story. So let me give you an example of a country that has managed this oil wealth well.
This country adopted an oil price fiscal rule that not only insulated the non-oil trade input sector against oil price volatility, but also helped to build a cushion of foreign exchange reserves, a big cushion of foreign exchange reserves. It managed this oil wealth with an eye to the future, to helping not just the current generation, but also future ones. So I’m sure that all of you are thinking, especially the Nordics here are thinking, he’s talking about Norway, which is often held up, and correctly so, as practice.
Actually, I’m referring to Nigeria between the years 2003 and 2007. During those four years, Nigeria implemented fiscal and exchange rate reforms. It introduced unprecedented transparency into the recording and allocation of oil revenues.
It renegotiated its Paris Club debt, which had created this debt overhang that was choking the economy. And the payoff was immense and immediate. For the first time in its history, Nigeria notched a BB- sovereign credit rating.
It started to attract the FDI. And everyone, not just in Nigeria, everyone started to talk of Africa rising. Nigeria rising is Africa rising.
We know this from the past. It will be true in the present, and it will be true in the future. Actually, not long before that, Norway had taken a course very similar to Nigeria’s.
Norway was quick to learn from its policy mistakes during the 1970s, when fiscal policy was second just as it was in Nigeria. The governor of Norway’s central bank actually noted in a 2015 speech, he said, we learned from our mistakes. The oil fund mechanism in 1990 and the fiscal rule in 2001 were introduced to discipline fiscal policy in such a way that Norway’s petroleum wealth would also benefit future generations.
So the main difference between Nigeria and Norway is not that they didn’t put in place good policies. One did and the other one didn’t. The main difference is that Norway has stayed the course for much longer.
Now it’s true that there are also other big differences between Nigeria and Norway. Nigeria’s population is much bigger compared to its oil wealth. Its demographics are also quite different, in many ways much better.
But its economic governance institutions are less credible. They need to become much more credible. But the basic principles that guided the Norway reform and the Nigeria reform are the same.
And they are, one, learn from your policy mistakes. Two, let markets determine the exchange rate. Three, keep public debt sustainable.
Four, adopt oil price-based fiscal rules. Five, make accounting and allocation of oil revenues fully, completely, painfully transparent. Six, devise a public investment program that promotes the diversification of the economy.
Above all, this is the difference between the Norwegian experience and the Nigerian experience, stay the course. Stay the course. It might take a decade to reap the dividends.
But if you stay the course, you will surely reap the dividends. Surely, as surely as time follows day. Now, that ends my history lesson.
Let’s talk about today. So today, Nigeria is once again at the crossroads. It has begun to implement a far-reaching, politically difficult reform with national, regional, and even global repercussions.
Without solid progress in Nigeria, the sustainable development goals that we all talk about will remain out of reach. Nigeria, after all, is now the country with the largest number of people living in extreme poverty, not just in Africa, but across the world. So in the 1990s, by the way, India took this position of the number one poor country from China.
But a few years ago, Nigeria has taken that position as the number one poor country in the world from India. But the difference, of course, is that India and China have more than 1.4 billion people each. Nigeria’s population is just about 225 million.
That’s about the same population as just two of China’s largest provinces, and just a bit more than India’s largest state. A great nation like Nigeria should not let this continue. I heard the song that Nigeria will survive.
Of course Nigeria will survive. It’s a great nation. But great nations also thrive, and I hope that Nigeria will thrive, and soon.
The President’s signature reforms are essential. They are essential to break from the past and to chart a more hopeful course for all Nigerians. These include the unification of what used to be multiple exchange rates.
They include allowing that unified exchange rate to be determined by the market. And, of course, they include the elimination of fuel subsidies.
So last year, before the reforms, the official exchange rate was roughly 465 Naira per dollar. The freely determined parallel rate at that time was closer to 700, meaning that for every dollar allocated at the official rate, the loss to the government was close to 250 Naira, every dollar. So the total loss in foregone federation revenues from oil, customs and taxes on imports amounted to 6.2 trillion Naira in 2022.
This was more than three percent of GDP. You can do a lot with three percent of 300 billion dollars.
Now the cost of subsidizing PMS and keeping its price below market levels amounted to 4.5 trillion Naira in 2022.
That was another two percent of GDP. You can do a lot with two percent of GDP, two percent of 300 billion dollars. Together, these two subsidies, the implicit one from the exchange rate and the explicit PMS subsidies amounted to a staggering 10 trillion Naira a year by 2022, or 15 billion dollars at the free market exchange rate.
You can do a lot with 15 billion dollars. By the way, these were just the direct fiscal costs. The wider costs may have been even greater.
They included a huge implicit tax amounting to some 35 percent on oil exports, including manufacturing and agriculture, and ways and means advances became the primary way of financing the government to offset the cost of exchange rate and EMS subsidies. This meant inflation, of course, and as a result, debt service consumed all revenues by 2022 and the public debt was burgeoning. Nigeria was on the brink of a full-blown fiscal crisis and collapse in the continents of the Naira.
People talk about the options that Nigeria had at that time, the options that the president had at that time. He did not have that many options. Okay, but implementing such a far-reaching reform is impossible without solid political commitment from the top.
The price of PMS has been double since the subsidy cuts, imposing terrible hardship across the breadth of Nigerian society. The central bank has had to hike its policy rate by a huge 850 basis points, that’s almost 90 percentage points, in the last nine months to boost confidence in the Naira and anchor inflationary expectations. But the central bank financing of fiscal deficits has finally ended and Governor Cardoso has been putting Nigeria or helping to put Nigeria on the right course, on the correct course.
But this is only the beginning. Nigeria will need to stay the course at least another 10 or 15 years to transform this economy. And it will become an engine of growth in sub-Saharan Africa and it will have to transform sub-Saharan Africa.
It’s very difficult to do these things but the rewards are massive. So this is the lesson from the last 40 years as well as the experience of countries such as India, such as Poland, such as Korea, such as Norway. So again I’m going to say something unpopular perhaps.
But Nigeria’s reforms from 2003 to 2007 were exactly what was needed but they were not sustained. Today’s fiscal monitoring and exchange reforms are hurting everyone, especially ordinary Nigerians who are struggling with high prices of food and transport. The government must do everything in its power to protect the most vulnerable citizens against hardships because their lives and the lives of Nigeria’s 110 million children depend on it.
And it must stay the course of reform because Nigeria’s long-term future and the future of these 110 million children depends on it. Now during the coming year, and I’m almost at the end, during the coming year Nigerian policy makers have to do three things. The first is to prioritize non-oil imports.
This requires a competitive exchange rate which Nigeria now has. The Naira’s real exchange rate is at its most competitive in at least 20 years. This is a great opportunity for the private sector.
To protect the poor and maintain competitiveness, the central bank must stay focused on inflation. It should resist the lure of short-term capital inflows that might push up the Naira’s value too quickly and crimp non-oil growth. It should rebuild foreign exchange reserves instead as a cushion against oil price volatility.
Again, I think Governor Paterson is doing many of these things. The second thing is to help every vulnerable household cope with still higher inflation. The government is rolling out a large-scale targeted temporary cash transfer program that has already reached between four and five million households.
It should quickly extend to 10 million households, perhaps more if necessary. Over the next few years, it should also install a cost-effective safety net to protect its most vulnerable citizens, financing it with some of the savings from the ending of fuel subsidies and exchange rate distortions. The third, it has to make the economy more business-ready, and I think that the NESG put out a very clear agenda for what needs to be done there.
I’ll just summarize. Nigeria’s need for jobs is immense. In the next 10 years, more than 12 million young Nigerians, both men and women, will enter the workforce generating jobs for them.
It will only be facilitated by the private sector, and it will be facilitated by large-scale domestic and foreign private investment in the non-oil sector. Attracting such investment means boosting the national power grid, improving transportation, improving security, and improving the rules and regulations and enforcing them for private enterprise. So failure would set back reform efforts across the continent, besides ruining the future of yet another generation.
Nigeria’s elites, so we are all elites here in this room, must unite to support these reforms. In enabling a broadly prosperous and stable Nigeria, they will be making perhaps the most valuable and the biggest request to their own children and grandchildren. Now, the World Bank team in Nigeria is one of the best we have.
You have here an excellent country director in Njabendio, you have a top-notch team of economists, of energy specialists, operation staff, they have the expertise that is needed. Most importantly though, especially in difficult times, they have the experience that the moment demands. Many of these experts that you have here in the Abuja office are people who are veterans of similar reforms in places like Indonesia and many other places.
You should take full advantage of it. But the one thing that struck me about our team here, as I prepared for this as I prepared for this visit, the most important thing that I learned about them is that they have great affection and admiration for everyday Nigerians. The Nigerian government and the people can count on their support 24-7, and this team will get all the support they ask for from the entire World Bank group.
I could not give you a stronger than that. Thank you very much.
Join BusinessDay whatsapp Channel, to stay up to date
Open In Whatsapp
