Nigeria looks for fresh ideas as economic reforms face headwind
Three months in, Nigeria has effectively halted reforms that appeared to be aimed at ending fuel subsidies and allowing markets to determine the exchange rate. President Bola Tinubu has weighed the costs and has shifted to conserving political capital. However, inadequate planning and coordination had jeopardised the administration’s efforts from the outset.
As the opposition looks to an imminent tribunal ruling on the validity of presidential election results, the newly sworn-in cabinet and a fiscal policy reform committee have to mount a response to headwinds that threaten the government’s economic agenda. Policy cohesion and coherence are critical for putting reforms back on track and mitigating costs to the investment climate.
Significance - Headwinds
Abrupt policy changes in early June widely earned new president Tinubu praise but have had a dramatic inflationary impact here in Nigeria. Fuel prices have more than tripled while the naira has depreciated by nearly 70% at the official rate. A free fall in exchange rates and rumours of another hike in fuel prices this month have now forced a rethink.
The government has pegged fuel prices indefinitely in what appears to be a reinstatement of subsidies that it tried to eliminate overnight. The central bank has also imposed new rules such as stating rates at which currency dealers should exchange the naira. “We do not believe that the changes going on in the parallel market are driven by pure economic demand and supply,” said interim bank governor Folashodun Shonubi after meeting Tinubu on 14 August. “[They] are topped by speculative demand from people.”
Meanwhile on TV, politicians are distributing food to the grassroots to palliate the sharp rise in the cost of living after the federal government shared NGN180 billion to states – equivalent to less than 1% of this year’s national budget. This is in addition to proposals announced by Tinubu in July after “an unavoidable lag between subsidy removal and these plans coming fully online”. The proposals include below-market lending to manufacturers and transport companies, an increase in public sector wages and the establishment of an Infrastructure Support Fund. But the resources for execution are limited.
Last week, cabinet ministers were sworn in just before the National Bureau of Statistics (NBS) reported that GDP growth was 2.51% in Q2 compared to 3.1% last year. New NBS data also says only 7% of people in the labour force have a formal job and that oil output so far this year has been the lowest in over a decade. All these should concern new finance minister Wale Edun and Shonubi at the central bank, which recently published a backlog of annual reports indicating that net foreign reserves were lower than publicly disclosed.
Outlook – Cohesion and coherence
A tribunal will rule in September concerning disputes brought by opposition candidates challenging Tinubu’s presidential election victory, The Supreme Court will then finally decide the matter in November if it is approached by a losing party. The Supreme Court annulling a presidential election victory is unprecedented, but there has been relatively strong media coverage this time and the outlook is uncertain until this timeline is complete.
Further, the following steps would clarify the outlook from an economic perspective.
Appoint a tenured central bank governor and resolve the status of the suspended Godwin Emefiele, who remains in secret police detention (see here). Tinubu needs Senate approval to statutorily remove him (except he resigns). But the president appears reluctant to spend political capital on this approach.
Communicate a clear plan and objectives for exchange rate management. Interim bank governor Shonubi told reporters at the presidential villa last week that he is pursuing strategies “which I am not at liberty to share with you”.
Move from an evasive fiscal policymaking approach to a forthright, proactive one. Reforms, which have veered off track, can be sustained if the new cabinet begins by laying out an action plan that appeases key stakeholders (e.g. labour) and mitigates costs to the investment climate.
Initiate cohesion among decision-makers. Tinubu’s 48 ministers make up the largest cabinet since civilian rule was restored in 1999, and most were appointed to repay local politicians with disparate interests for the successful 2023 campaign (see here). A separate Presidential Committee on Fiscal Policy and Tax Reforms also has around 40 members. The environment for coordinating policymaking remains challenging.
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