A Month of Two Key National Milestones (2)

Postscript by Waziri Adio

In 17 days from today, Nigeria will be confronted with a dual anniversary: 25 years of unbroken civil rule and one year of the President Bola Tinubu administration. Both are significant landmarks, but more deserving of a critical interrogation than an outright celebration. Last week, I looked at how Nigeria’s longest democratic experiment should have led to a better standing for the country on global measures of democracy, governance and development and how 25 years of civil rule should have delivered more tangible dividends to the greatest number of Nigerians. Today, I turn to President Tinubu’s one year in the saddle. 

To be sure, one year is not long enough for a full and final assessment of a president’s term in office. But one year is also a quarter of a four-year tenure. That is enough time to gather insights into the president’s mindset and style and his possible trajectory for the remaining 75% of his mandate. One year is also enough time for the president to lay a proper foundation for his administration, to settle fully into the job, and to figure out where he needs to make urgent course correction to ensure that he maximises the time left.

Tinubu came out of Eagle Square on his inauguration day with clear pronouncements on petrol subsidy removal and exchange rate unification. “Subsidy can no longer justify its ever-increasing costs in the wake of drying resources,” Tinubu intoned, then added off-script “Fuel subsidy is gone.” He also directed, this time on-script: “the Central Bank must work towards a unified exchange rate. This will direct funds away from arbitrage into meaningful investment in the plant, equipment and jobs that power the real economy.”

Within two weeks of Tinubu’s assumption of office, petrol subsidy was terminated and the Naira was floated. Either by default or by design, these two have become the core of Tinubu’s reform agenda, have had consequential effects on the populace and the economy, and have necessarily become the key metrics through which his time in office so far must be assessed.

Both reforms, without a doubt, were necessitated by the state of the economy that Tinubu inherited. Nigeria was spending the money it didn’t earn and was dancing on the edge of bankruptcy. Government revenue was underperforming exuberant projections, with the balance being bridged with unbudgeted borrowings, steering us into steeper debts and higher debt service. At some point, debt service alone was gulping more than 80% of government revenue, meaning that personnel, overhead and capital expenditure had to be funded with more debts. It’s a vicious circle, one that must be broken.

Apart from being suboptimal and unsustainable, petrol subsidy (which alone swallowed $10 billion in 2022) was also implicated in the limited accretion to Nigeria’s external reserves at a time of historically high oil prices. Crude oil, about the only thing that Nigeria sells to the world, was returning to the country not as dollars but as bartered petrol sold locally below landing cost. This double whammy was compounded by a third: the rationing of the limited and shrinking foreign exchange at a subsidised rate and in a manner that encouraged arbitrage and constrained investment flows.

The dire economic situation had thus ripened the case for both reforms to the extent that the three leading candidates during the hotly contested 2023 presidential election promised to take off the two massive millstones around Nigeria’s neck. Having a consensus on key reforms is not a common occurrence in Nigerian politics. This was good to see.

Removing petrol and forex subsidies is thus the right thing to do, and Tinubu rightly got a lot of applause for having the guts to move quickly in dismantling both. But the right things can be done the wrong way, and/or in the wrong order. This is what has transpired with Tinubu’s signature reforms. Where adequate thought and painstaking plans were needed, the president and his team opted for an impulsive, shock-and-awe approach. And where adequate provisioning would have been an irreducible minimum and should possibly be frontloaded, they put faith in muddling through.

Part of the consensus that had emerged on petrol subsidy removal was the need to cushion the negative effects of the expected spikes in energy and related prices on those that would be most impacted, especially the poor who spend a disproportionate portion of their incomes on food and transportation. Under the last administration, some development partners had worked with the presidency and the governors’ forum to map out different scenarios and to develop a plan for removing petrol subsidy and repurposing the savings. This was one of the reasons why the subsidy budget for 2023 was for six months. It will be a big surprise if this plan was not handed over to the then president-elect and his transition team/policy advisory committees.

When Tinubu issued a verbal executive order on the eventual end of petrol subsidy at Eagle Square on May 29th, the valid expectation was that he had a well-thought-out plan in case he didn’t fancy the inherited plan. This has turned out a vain expectation. If there was a prior Tinubu plan on the different components and the sequential steps for full deregulation of the downstream sector of the petroleum industry, it wasn’t apparent or, at best, it was being made up along the way. In fact, only subsidy removal was on the card, not full deregulation.

As well foretold, the impact of petrol subsidy removal was swift and unsparing. Immediately the pump price of petrol more than tripled, the prices of food, commuting, medication and other basic necessities moved in tandem. Precious time was dissipated on the best way to provide succour to the needy, while the poor and the marginalised continued to wallow in unmitigated pains. Almost a year after, most of promised items remain as promises.

Petrol subsidy by itself can be likened to a seismic shock. Citizens need some reasonable time to fully absorb the impact and make necessary adjustments. To introduce forex reform in short order amounts to introducing two shocks almost simultaneously to a frail body. It also reveals a limited or defective analytical lens. Currency depreciation will not only trigger higher prices across the board (since most final and intermediate goods are imported) but it will also fuel increases in the price of petrol anytime the value of the Naira falls.

The price of petrol leapt from N185 per to litre to N537, then to N615 and above, not necessarily because of a surge in the price of crude oil but because of the incessant depreciation of the Naira. This is not difficult to fathom. We still import most of the petrol we consume, which puts us at the mercy of the volatility in the forex market. At some point, the government had no option but to freeze the price of petrol, even as Naira continued a downward gyration. There is no official acknowledgement yet, but it is obvious even to the acutely unlettered that petrol subsidy is back. Something doesn’t add up if the price of petrol remains the same whether the official exchange rate is $1/N800 or $1/N1400.

Some wild figures are being touted about the current subsidy bill, with some suggesting it is higher now than before the president’s Eagle Square declaration. It is very probable. Worse, we are back to all the things that we should have put behind us if the president had paced his reforms better: NNPCL has returned to its preferred sweet spot as the sole importer of petrol (because no sane marketer will import and sell petrol below costs), opacity in the management of the petrol subsidy has resurfaced as well as the likely smuggling to neighbouring countries where petrol is now sold for at least twice the price it goes for in Nigeria. It is amazing how a much-lauded reform can swiftly unravel. But it is a not a big surprise. This is the kind of harm that goes with lack of clarity and planning.

There is a school of thought that advocates for taking all the tough decisions quickly and early. Tinubu is obviously a fan and clearly took this to heart. He deserves some credit for having the mind for tough decisions. But thoughtful planning and careful sequencing are prized items in reformers’ toolbox. Maybe those cheering on the president as Baba Go Fast forgot to show him the memo about the need to sometimes make haste slowly.

Possibly to retain their jobs, the interim team at the Central Bank Nigeria (CBN) evidently took a wild gamble in floating the Naira on 14th June 2023. No country floats their currency without having secured adequate forex supply, except they are ready for a currency free-fall and the attendant pains. Floating the national currency in a country that imports a lot and where most prices are indexed against the US dollar amounts to a gratuitous invitation to price volatility and anguish.

On the first day of the “free buyer, free seller” regime, the Naira depreciated by 37% in the official market. The parallel and the official rates briefly flirted towards convergence. Not long after, Naira continued a precipitous slide in both official and parallel markets, first crossing the $1/N1000 barrier, then leaping to $1/N1500 and higher. The wild gyrations, especially in the first quarter of 2024, resulted in disturbingly rising prices, especially of food items, and led to demonstrations in a few cities and desperate assaults on warehouses and food trucks.  

The new team at CBN came on board in September 2023 and has been battling to stabilise the Naira, with a flurry of circulars and rate hikes. Forex inflow increased and Naira rallied for a few weeks, but only to starting plunging again. There are projections that things will normalise down the line with more forex inflows from credits and investments, but the original sin is the disorderly and hasty nature of the decision to float the Naira without a proper roadmap and an adequate firepower. A more considered approach would have favoured a gradual devaluation of the Naira and the elimination of the arbitrage-enabling multiple official exchange rates. The extreme case would have been to go for a managed float or even for a full float but after securing adequate forex liquidity, as Egypt did in early March when it floated the Egyptian Pound. 

On the positive side, the three tiers of government now receive more money from the federation pool. For example, FAAC disbursement was N2.07 trillion in February 2024, compared to N1.03 trillion in February 2023, a year-on-year increase of 100.97%. Ordinarily, this should translate to more spending in areas that should directly boost citizens’ living standards. But this is yet to be seen, possibly because government’s priorities are different or because of time lag issues.

However, what is felt immediately and unceasingly are the negative impacts of Tinubu’s twin reforms. Nigerians are shuffling through the worst cost of living crisis in decades. Most people are struggling to feed their families, buy medications and pay other important bills. This is largely on account of two related factors: the continuous spike in energy costs (even though the price petrol is frozen at around N650/litre, the prices of diesel and aviation fuel are not); and the constant weakening of the Naira.

On 29th May 2023, the US dollar exchanged for N460.72 and N780 at the official and parallel markets respectively. On Friday, the rate was $1/1,466 at the official market and $1/N1,470 at the parallel market. The rates are converging, as the president ordered in his inaugural speech. But the cost of convergence is steep. Naira has, within a year, suffered a massive depreciation of 68.57% in the official market and 46.94% in the parallel market. Most analysts agree that the Naira is now grossly undervalued. But we activated the free-fall. It will take some magic to haul Naira to its fair value.

Meanwhile, Nigerians continue to take the hit. Headline inflation, which was 22.41% in May 2023, jumped to 33.2% by March 2024. Food inflation soared from 24.81% in May 2023 to 40.01% in March 2024. It is important to say that again: food inflation is 40% in a country where households spend 59% of their earnings on food. The inflation rates are composite figures and thus mask the fact of daily price increases in some instances and the doubling or tripling of the prices of most basic items within a short period. (By the way, a major driver of soaring prices of food and other items is the haphazard manner the forex reform was introduced, and not the ‘saboteurs’ and other ‘bad people’ that some in the government like to blame.)

To tame inflation, the CBN recently increased the benchmark interest rate by 600 basis points over two months to 24.75%. This should reduce money supply and encourage saving and investment flows. But interest rate hike is neither neutral or painless. It will increase the cost of credit and dampen economic activities, increasing the pinch for the vulnerable. Poverty and other socio-economic indicators have probably worsened on account of the reforms, as more Nigerians will clearly live below the poverty line of $2.15 a day when the exchange rate is $1/N1,400 than when it was $1/N463.

There is enough for President Tinubu to chew on as he gets ready to mark his one year in office. Though a high cost has been incurred, it is not too late in the day to salvage his two signature reforms. The reforms need solid strategies and reasonable circuit breakers. He should also be wary of advice from those who have little or no skin in the game about piling more pains on the people. The human capacity to bear pain is not infinite. There is a pervasive unease in the land. It is bubbling beneath the surface. This should not be allowed to lead to a national blowout. The president needs to shake up his big band cabinet, stay more grounded, and address his administration’s embarrassing propensity for schoolboy errors. Time is not his friend, nor that of Nigerians.

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