The burden of the smallest popular votes since 1999 looks set to test the resolve of Bola Tinubu, Nigeria’s President-elect, as he takes the reins of a creaking economy in dire need of unpopular reforms.
Tinubu, a former Lagos State governor, is the first person chosen to lead the country with less than 50 percent of the vote.
The President-elect did not also win some major cities, namely, Lagos, Kano, Kaduna, Enugu, and Jos. And his rivals have yet to signal that they accept the legitimacy of the election.
Suffice to say, the glass is not looking half full as Tinubu, a former accountant and politician for more than 30 years, must make tough calls to reset the reins of Africa’s largest economy, a nation of more than 200 million suffering from widespread poverty, deepening fiscal crisis, and widespread insecurity.
“Nigeria is at the point where the questions have changed from ‘will there be reforms?’ to ‘when and how will the reforms be implemented?’,” Financial Derivatives Company Limited (FDC) said in its latest monthly economic update.
“Institutional and policy reforms are inevitable. Nigeria must rethink its policy framework (including monetary and fiscal policies) to ensure that it is not only people-centric but also enhances sustainable growth and macroeconomic stability,” FDC added.
There are at least five reforms awaiting Tinubu when he takes over in less than a week.
Since 1999, every government has acknowledged the need to put an end to petrol subsidies, but few had the political will to walk the talk.
Despite calls coming from home and abroad, different governments have bowed to strike threats from labour unions, and some economists worry that the decision may fuel inflation.
The biggest issue, however, is that no government has created and implemented a plan to phase it out, despite calls from many economists to do so.
“Nigerians need to be made to understand that continuing the petrol subsidy works against their interest,” Kingsley Moghalu, a former deputy governor of the Central Bank of Nigeria (CBN), said. “Subsidies are not, in and of themselves, a crime. They can be found even in strongly capitalist societies.”
“But it makes far more economic sense to subsidise production and productivity, which is what has happened in successful economies than to subsidise individual consumption – which is what we do in Nigeria with petrol subsidy,” Moghalu said in an opinion article.
Abubakar Suleiman, an economics professional, said any government that can’t end petrol subsidies will struggle for growth.
“We are committing ‘Petrocide’ with this subsidy scam. Petrol is cheaper in dollar terms today than it was during Buhari’s first coming! Think about how irrational that is for a country with over 10 million out-of-school kids,” Suleiman tweeted.
During the campaign period for the presidential election, Tinubu had stated that protests from Nigerians won’t stop him from removing the subsidy.
Before Tinubu, President Muhammadu Buhari claimed it was a fraudulent exercise and made a similar promise before he was elected in 2015; however, when he came into power, he kicked the goalpost down the road. So far, he has spent over N10.9 trillion on fuel subsidies.
Multiple FX rates
Nigeria’s exchange rate situation has been a long-standing issue that has affected the country’s economy and its citizens. Last year, its currency ranked among the world’s worst-performing, outdoing only Ghana’s cedi and Sri Lanka’s rupee.
FDC said the incoming government must “stop defending the naira and start defending the markets”.
International investors held only 16 percent of the shares listed on the Nigerian Exchange in 2022, down from 58 percent in 2014, a signal that the dollar flow into the market is fast drying up.
“The strength of the naira lies in the benevolence of the market, and as we’re taught, the market is efficient. The exchange rate adjustment is indispensable to repositioning the economy,” FDC said.
The dollar exchanged for N461.67 at that market and, according to parallel market rates tracker @naira rates, N755 on the street on May 22, leaving a 61.7 percent spread, a gulf that has been a key driver of inflation.
“No investor’s going to want to buy into a market where you can’t sell stock and get your money out,” Steve Pollicino of US brokerage Auerbach Grayson told Reuters.
Pollicino believes overhauling the Nigerian foreign exchange market is the foremost worry of international investors.
“One big ramification of the crunch is the ordeal it creates for manufacturers wanting to import raw materials but can’t access the greenback at the I&E Forex Window,” Pollicino said.
In his 80-page campaign manifesto, amidst economic plans to address fiscal, monetary, and trade reforms, Tinubu promised to “carefully review and better optimise” the naira system.
However, a recent report from Absa Group Ltd., a Johannesburg-based financial services firm, stated that following Tinubu’s inauguration, the Nigerian currency will be devalued by 15 percent to alleviate severe trade imbalances and dollar shortages.
“The devaluation would be on the official exchange rate which nobody has access to in the first place,” Marvin Fisher, a foreign investor exposed to the Nigerian market, said.
“Devaluation seeks to close that artificial gap and bring more certainty to economic planning. You can’t plan if you have to buy $1 at 740 or 488; devaluation closes the gap a bit, less swings, makes the exchange less volatile, and even encourages remittances,” Fisher said at the Nigerian-Indonesia Chamber of Commerce and Industry’s breakfast meeting.
The Central Bank of Nigeria is in charge of foreign exchange management and should be independent but the governor is appointed by the President.
The current governor’s tenure ends in 2024, and Tinubu will get a chance to appoint a new governor.
Emefiele is famed for unorthodox policies that have been criticised for being interventionist.
Another litmus test facing the incoming government is the prospect of having true fiscal federalism in Africa’s biggest economy.
Fiscal federalism demands that each level of government adequately finances its operations without recourse to the central government. But this is not the case in Nigeria.
Ayodele Shittu, a lecturer at the Department of Economics, University of Lagos, said Nigeria will practise true federalism when every state exploits and harnesses its resources and then remit back to the federal government.
“We have a situation where states are fiscally constrained not because they don’t have resources but because they are standing aloof believing that resources will trickle down from the purse of the federal government,” said Shittu.
“But unfortunately, most of these resources are wasted on recurrent expenses, not even on capital expenditure that will facilitate the production of goods and services or lead to more fiscal resources for the states itself,” he added.
Other experts say proper allocation of revenue should achieve rapid economic growth but the country’s current sharing revenue formula which has been in use since 1992 has not achieved that but rather led to weak and fragile economic growth.
Nigeria uses the vertical revenue allocation formula which shows the percentage allocated to the three tiers of government. Under this current sharing arrangement, the federal government gets 52.68 percent; states get 26.72 percent while local governments get 20.60 percent.
Oil-producing states further get 13 percent derivation revenue. But this formula benefits the Federal Government at the expense of the other tiers of government
“If states are given the power to collect their own VAT that might give them the incentive to fashion out innovative ways to stimulate job creation, make the business environment more conducive to stimulate consumption, and enhance job security,” Ola Alokolaro, partner at Advocaat Law Practice, said.
Some of the benefits of fiscal federalism include lower planning and administrative costs, competition among local governments’ favors organisational and political innovations, and more efficient politics as citizens have more influence.
Nigeria’s industrial policy approach
Another key reform ahead for Tinubu is Nigeria’s industrial policies which BusinessDay’s analysis and expert opinions show have often been beautifully formulated but poorly executed.
For instance, the Nigerian Industrial Revolution Plan (NIRP) remains one of the most comprehensive industrial policies in Nigeria’s history, but experts said the same cannot be said about its execution.
“Nigeria has never been short of industrial policies but has lacked the political will to implement them,” Alokolaro said.
The NIRP aimed to increase the level of Nigeria’s industrial output to double digits of GDP, a development expected to create wealth, create jobs, improve the country’s trade balance, and increase the government’s tax revenues.
“One of the biggest cogs in Nigeria’s wheel of development is the energy crisis,” FDC said.
Read also: World’s toughest job awaits Tinubu
Perhaps, one of the central planks upon which the campaign of Tinubu rested was his impressive revenue credential he earned when he was governor of Lagos State between 1999 and 2007. He has continued to boast of growing Lagos’ internally generated revenue from “a paltry N600 million monthly, which has now grown to N51 billion.”
Analysts said having secured victory at the poll, the onus is on him to unveil his plans to redeem Nigeria from its current revenue challenges.
Tinubu is expected to give marching orders to revenue agencies like the Federal Inland Revenue Service, Nigerian Customs Service, and Nigerian Ports Authority, among others.
Revenue generation is a major constraint of the federal government, negatively impacting the country’s debt situation. Analysts believe the systemic resource mobilisation has been compounded by recent economic recessions, adding that the most viable solution to the country’s challenge remained to grow revenues and plug all leakages, as cutting expenditure was not a viable option.
Today, Nigeria’s non-oil sector accounts for about 93.67 per cent of the GDP, while the oil sector accounts for 6.63 per cent. Still, according to National Bureau of Statistics data, the oil sector accounts for over 95 percent of export earnings.