Good afternoon, Vice President Shettima, Minister Bagudu, Chairman and CEO of NESG, distinguished ladies and gentlemen. Thank you NESG and Minister Wale Edun for the invitation to my boss President Ajay Banga to participate in the discussions today. Ajay sincerely regrets that he could not be here, and he sends his regards. I am a poor substitute, but I am very happy to attend in his place. Nigeria is an important country at a critical crossroads. Today, I would rather be here than anywhere else. I was asked to speak about “the most pressing challenges affecting Nigeria and Africa’s economic development and growth”. I am going to focus on Nigeria for a simple reason: Africa goes as Nigeria goes. Given its size and significance, the success of Nigeria’s reforms will give a big boost to countries across the continent. 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. And I think it is. As we gather here, there is suffering in all sections of Nigerian society, but especially among the poor and the young. They want good schools and colleges, affordable healthcare, decent jobs, and safe conditions which allow them to make full use of their potential. High inflation is hurting everyone, but it is hurting the poorest people the most. Oil wealth that ought to be used for the welfare of all Nigerians has for too long been used to benefit the elites. The elites are also being hurt by the reforms that started last year, but they did well in the past and they have buffers. Ordinary Nigerians are being hurt more by the reforms, they were also hurt by the policies of the past, and they have no buffers. Their welfare should be uppermost in our minds. You are probably thinking: Did you come all the way from Washington to tell us this? Tell us something we don’t know. So, I will talk about things that you can see more clearly from far away. I will remind you that the problems that are being tackled today in the Nigerian
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economy first surfaced more than 40 years ago, when oil prices began collapsing in the early 1980s after the big boom of the 1970s. I will make a brief detour into history, because it is important to do so. The wise say that those who ignore the lessons of history eventually relearn them—in much more painful ways. To start, remember the three crucial aspects of oil. First, it is an exhaustible asset. Second, it is a fickle asset—its prices are among the most volatile of commodity prices. Third, it is a national asset. This means that—like Nigeria’s forests and rivers and seas—its benefits should be shared across every segment of the society and across all generations.
Over the last forty years, oil has come to dominate in the Nigerian economy. Nigeria’s economic growth, exchange rate and stock market move with the oil price. 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 7 to 10 percent of GDP. Current account deficits ballooned, along with external debt. In short, Nigeria’s fiscal policy became highly procyclical, so the government’s policies amplified oil price volatility instead of reducing it. Instead of insulating ordinary Nigerians from the vagaries of oil markets, the government made them even more vulnerable. This was the first mistake. Oil prices began falling in the early 1980s. This meant that the value of the naira fell as well. But, instead of the letting the exchange rate adjust to the new reality, Nigeria decided to prop up the naira. The government tightened foreign-exchange-rate 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 unofficial exchange rates. This meant that ordinary Nigerians would have to pay many more naira to buy dollars than better connected people. This was the second mistake.
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These two mistakes led to two bad outcomes. First, businessmen began chasing import licenses at the official exchange rate because it guaranteed them a profit—at the nation’s expense. Second, agricultural and manufacturing exports were decimated because the difference between the parallel and official exchange rates essentially became a crippling tax on exports. Between 1970 and 1982, the production of Nigeria’s major cash crops—cocoa, rubber, cotton and groundnuts—fell between 30 and 65 percent. By the middle of the 1980s, cocoa was pretty much the only agricultural export left—but its volume had shrunk by 50 percent. Nigeria’s share in world cocoa production fell by half to 8 percent. Nigeria had in short order become both oil-dependent and grossly distorted. It was now an undiversified economy with a rent-seeking society. Nigerians soon realized the dangers this posed to this great nation. Some of you are old enough to remember that Nigeria attempted a serious reform package in 1987; my colleague and friend Brian Pinto was a young economist back then, and he was here at the time. He and Finance Minister Wale joined the World Bank’s prestigious Young Professionals Program at about the same time; they are both in Abuja today. 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, an external debt overhang had developed, and it strangled the economy for the next two decades. The 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. Nigeria isn’t the only country to learn this lesson. Venezuela and several other oil-exporting countries have learned the same lesson. Like Nigeria, they have also learned it the hard way. I know I have depressed you so far, so let me tell you a more cheerful story. Let me give you an example of a country that managed its oil wealth well. This country adopted an oil-price fiscal rule that not only insulated the non-oil traded goods sector against oil price volatility but also
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helped to build a cushion of foreign-exchange reserves. It managed its oil wealth with an eye to the future, helping not just the current generation but also those in the future. I know that many of you are thinking that I am talking about Norway, which is—with good reason—held up as an example of how to manage resource wealth well. Actually, I am 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 a debt overhang that was choking the economy. The payoff was immense and immediate: for the first time in its history, Nigeria notched a BB- sovereign credit rating. It started to attract FDI. And everyone started to talk of “Africa Rising” Some years before that, Norway had taken a course very similar to Nigeria’s between 2003 and 2007. Norway was quick to learn from its policy mistakes during the 1970s, when fiscal policy was procyclical, as in Nigeria. Governor Olsen of Norway’s central bank noted in a December 2015 speech: “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.” The main difference between the Nigerian and the Norwegian experience is that Norway stayed the course—for much longer. To be sure, there are other differences between Nigeria and Norway. Nigeria’s population is much bigger relative to its oil wealth. Its demographics are also quite different: almost three-quarters of Nigeria’s population is under the age of 30. Its economic governance institutions have yet to be made credible. But the basic principles that should guide reform are the same, and they are:
• One, learn from your policy mistakes;
• Two, let the market determine the exchange rate;
• Three, keep public debt sustainable;
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• 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;
• Seven, above all, stay the course. Let me repeat that: Nigeria has to stay the course. It might take another decade to fully reap the dividends. But, if you stay the course, you will begin reaping them soon, as surely as night follows day. That is the end of the history lesson. Let’s talk about today. Nigeria is once again at a 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 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 in the world. In the 1990s, India took the position of the number one poor country from China. A few years ago, Nigeria took the position of number one poor nation in the world. The difference is that while India and China have more than 1.4 billion people each, Nigeria’s population is about 225 million. That is about the same as just two of China’s largest provinces and just bit more than India’s largest state. A great nation like Nigeria should not let this continue. The song we heard earlier said that Nigeria will survive. Of course it will. But the aim of a great nation should be to thrive. The President’s “signature reforms” are essential to break from the past and chart a more hopeful course for all Nigerians. These reforms include the unification of what used to be multiple exchange rates. They include allowing the unified rate to be determined by the market. And, of course, they include the elimination of the PMS subsidy.
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Let me briefly take up each in turn, to show you how much oil wealth was being squandered in the not-so-distant past. Last year, before the reforms, the official exchange rate was roughly 465 naira per dollar. The freely determined parallel rate was closer to 700, meaning that for every dollar allocated at the official rate, the loss amounted to 235 naira. The total loss in forgone Federation revenues from oil, customs, and taxes on imports amounted to 6.2 trillion naira in 2022. That was more than 3 percent of GDP. You can do a lot with 3 percent of $300 billion. The cost of subsidizing petroleum and keeping its price below market levels amounted to 4.5 trillion naira in 2022. That was another 2 percent of GDP. You can do a lot with 2 percent of $300 billion. Together, these two subsidies—the implicit one from the exchange rate and the explicit PMS subsidy—amounted to a staggering 10 trillion naira a year by 2022 or $15 billion at the free-market exchange rate. You can do a lot of good with 15 billion dollars. These were just the direct fiscal costs. The indirect costs may be multiples more. These costs included a huge implicit tax amounting to some 35 percent on non-oil exports, including agriculture and manufacturing. And Ways and Means advances became the primary way of financing the government to offset the cost of the exchange rate and PMS subsidies. As a result, debt service consumed all revenues by 2022, and public debt was burgeoning. Nigeria was on the brink of a full-blown fiscal crisis and collapse in confidence in the naira. People debate the options that President Tinubu had when he was elected. The truth is that he had very little choice. It is also true that implementing such far-reaching reforms is impossible without solid political commitment from the very top. The price of PMS has quintupled since the subsidy cuts, imposing terrible hardships in Nigerian society. The central bank has had to hike its policy rate by a huge 850 basis points—nearly 9 percentage points in the last nine months—to increase confidence in the naira and anchor inflation expectations. Central Bank of
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Nigeria financing of fiscal deficits has finally ended. Governor Cardoso has been putting Nigeria on the correct course. But this only the beginning. Nigeria will need to stay the course for at least 10 to 15 years to transform its economy and become an engine of growth in Sub-Saharan Africa. This is the lesson from the past 40 years, as well as from the experience of countries as diverse as India, Poland, South Korea and Norway. Nigeria’s reforms from 2003 through 2007 were exactly what was needed—but they were not sustained. Today’s fiscal, monetary and exchange-rate reforms are hurting everyone, especially ordinary Nigerians who are struggling with the high prices of food and transportation. The government must do everything in its power to protect the most vulnerable citizens against hardships, because their livelihoods and the lives of Nigeria’s 110 million children depend on it. And it must stay the course on reform—because Nigeria’s long-term future depends on it. During the coming year, Nigerian policymakers have to do three things:
• First, prioritize non-oil growth. 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. To protect the poor and maintain competitiveness, the central bank will have remain laser-focused on inflation. It should resist the lure of volatile 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 as a cushion against oil price volatility. Governor Cardoso is doing all these things.
• Second, help every vulnerable household cope with inflation and high prices. The government is rolling out a large-scale, targeted, temporary cash transfer program that has already reached between 4 and 5 million households. It should quickly extend this to 10 million households. Over the next few years, it should also institute a cost-effective safety net to protect its most vulnerable citizens, financing it with part of the savings from the ending of fuel subsidies and exchange rate distortions.
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• Third, make the economy more business ready. The chairman of NESG provided a very good list of what is needed for private enterprise to flourish. Let me summarize it briefly. Nigeria’s need for jobs is immense. In the next 10 years, more than 12 million young Nigerians—both women and men—will enter the workforce. Generating jobs for them will be greatly 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, and improving security. It means improving the rules and regulations for private enterprise and making compliance less onerous. Failure would set back reform efforts across the continent, besides ruining the future of yet another generation of young Nigerians. Nigeria’s elites must support of the reforms: in helping to build a prosperous and stable Nigeria, they will be making an enormous bequest of wealth to their own children and grandchildren. Nigeria will not have to do this alone. The World Bank Group will help in every way that we can. The World Bank team in Nigeria is one of the best we have anywhere. You have here a superb country director in Ndiame Diop and a top-notch team of economists, energy specialists, and operations staff who have the expertise and—more importantly in difficult times—the experience that the moment demands. But perhaps most important, as I prepared for this visit, I have seen the great affection and admiration they have for everyday Nigerians. The Nigerian government can count on their support, 24-7. And our team in Abuja can count on all the support they ask from the entire World Bank Group. I cannot be any clearer about the support for Nigeria’s reforms from the World Bank. Thank you very much for listening. Indermit
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