POLICY STATEMENT 018 ISSUED BY THE INDEPENDENT MEDIA AND POLICY INITIATIVE (IMPI)
TINUBU’S REFORMS ESCHEW POPULISM, SALVAGING ECONOMY FROM VENEZUELA-LIKE DISASTER
*TINUBU’S REFORMS: SALVAGING ECONOMY FROM VENEZUELA-LIKE DISASTER.
We have observed with interest the criticisms that continue to trail the reforms implemented by President Bola Ahmed Tinubu’s administration. Of particular interest are two opinions that gained some traction.
One of the critics finds the reforms to be a: “wreckage of the past 15 months, from which the country is reeling.” The other viewpoint, an editorial, brands the “government as insensitive and strategy-deficient. It also sees the government as “incompetent to perform its primary duty of delivering welfare and security to the people.”
These attacks on the ongoing reforms are natural if viewed from the relatively narrow and subjective context of the steep change in the country’s cost of living. Yet, the reality of the nation’s macroeconomic situation is that where we are on the economic curve is a consequence of where we came from. When the premise and predicates of the nation’s economic trajectory are reviewed and aggregated, the apparent conclusion will be that we are where we are because this affliction of economic malaise at this point is predetermined.
Though the mainstream media and thought leaders unconsciously felt that the country’s economic management has always had a problematic stigma, they refused to give critical attention to the possible consequences of the national economic peregrination since we first struck oil in commercial quantity in the 1960s. Where we have found ourselves is a function of where we came from.
Since 1972, the Nigerian economy has been characterised by an unpredictable circle of bust and boom. In layperson’s terms, it means that one moment, we are deemed rich and able to buy whatever catches our fancy, and everybody, including the media, is happy. The next, we are flat broke. We lament the difficulties encountered in sating our basic needs, whining and criticising the government in power as the source of our decimated existence.
But the truth be told, the situation report is that we have arrived at the junction of our economic comeuppance where we must pay for decades of abuse and wrongdoing. It’s that simple.
Typically coming from an underdevelopment mindset, Nigeria heavily borrowed from the preferred economic practices of the then-emerging economies of South America. Among countries in this region, Nigeria shares many similarities with Venezuela, particularly in the nature and character of their adopted economic model, which economists describe as “macroeconomic populism.”
Macroeconomic populism is a term coined by Rudi Dornbusch and Sebastian Edwards in a 1990 paper referring to the policies of many Latin American administrations by which government spending and real wage increases were non-sustainable. This leads to inflation, then stagflation and ultimately an economic collapse that drops real wages to lower than before the populist period began.
Understanding Venezuela’s economic trajectory will enable an appreciation of Nigeria’s current situation. While Venezuela is home to the world’s largest oil reserves, Nigeria boasts of the largest oil reserves in Africa. Because of this shared resource-dominant economy, the two countries are case studies on the peril of becoming a petro-state and running petro-cratic regimes. Petro-state is an informal term that describes a country with several interrelated attributes: government income is deeply reliant on oil and natural gas exports, economic and political power is highly concentrated in an elite minority, and political institutions are weak and unaccountable. Therein, corruption is widespread. Petro-states are considered vulnerable to what economists call “Dutch disease,” a term coined during the 1970s after the Netherlands discovered natural gas in the North Sea.
As experienced in various boom and bust cycles in Nigeria, a resource boom attracts large inflows of foreign capital, which leads to an appreciation of the local currency and a boost for imports that are now comparatively cheaper. This sucks labour and capital away from other sectors of the economy, such as agriculture and manufacturing, which economists say are more important for growth and competitiveness. As these labour-intensive export industries are abandoned, unemployment will rise, as it has risen in Nigeria since the 1980s crude oil bust. The country could develop an unhealthy dependence on the export of natural resources, much like Nigeria, which depends on crude oil export revenue for 90 per cent of its foreign exchange and 80 per cent of budgetary revenue.
The so-called resource curse also takes a toll on governance. Since petro-states depend more on export income and less on taxes, there are often weak ties between the government and its citizens. Like Venezuela, oil has taken Nigeria on an exhilarating but dangerous boom-and-bust ride. Again, like Nigeria, decades of poor governance have driven what was once one of Latin America’s most prosperous countries to economic and political ruin. In 2008, crude oil production in Venezuela was the tenth-highest in the world at 2,394,020 barrels per day, and the country was also the eighth-largest net oil exporter in the world. Venezuela is a founding member of the Organization of the Petroleum Exporting Countries (OPEC). Nigeria joined the oil cartel in 1971 and, at one point, was the fifth-largest oil producer among the cartel members.
We also find a similarity in the leadership style prevailing in Nigeria between 1999 and 2015, as well as in Presidents Hugo Chavez (1999-2013) and Nicolas Maduro (2013- present) of Venezuela. The Venezuelan leaders implemented the wrong macroeconomic policy during the 2000s and early 2010s when Venezuela’s economy, like that of Nigeria, was booming due to the global commodity ‘supercycle’ – a prolonged period of high and rising grain, metal, oil and gas prices.
Between 2000 and 2015, government spending in Nigeria, like Venezuela, was deeply pro-cyclical. Instead of saving at least some money for bad times during the good times—as Norway, Saudi Arabia, and virtually all other oil exporters have done—Nigeria established the Excess Crude Account (ECA) by fiat in 2004 without legislative backing.
In May 2007, the ECA had up to $20 billion. Still, like the Venezuelan government, which ran double-digit fiscal deficits as the economy boomed, spending far outpaced income from taxes and other revenues. Both countries were on record for raising their external debts sixfold to finance these unnecessary shortfalls.
While Venezuela saddled the state-owned oil company with over $100 billion in obligations, the Nigerian government depleted the ECA by more than 80 per cent, from $20 billion to $2.4 billion. It had ratcheted foreign debt by over 200 per cent to $10 billion in 2015. By 2015, the Nigerian economy was effectively underwater.
At the time, a snapshot of fiscal activities provides a context. The general government deficit widened significantly in 2009-2010. Because of an increase in crude oil price, the overall government budget in Nigeria was in surplus by an estimated 4.7 per cent of GDP for the year 2008 but then moved into a deficit of 6.6% in 2009 following the decline in oil prices. This general government deficit in 2009 was financed primarily by the ECA (5.7% of GDP or $12.6 billion).
In 2010, the General Government deficit remained high at 5.7% of GDP despite the recovery in oil prices. This was due almost entirely to strong increases in federal expenditures financed by a higher federal deficit (borrowing) and a further drawdown of the ECA that almost completely depleted its balance by the end of the year.
In the same period, Venezuela became increasingly reliant on its Central Bank printing money after gutting its independence, a dangerous monetary policy. A Central Bank printing money to finance government deficits is highly inflationary. It works as a tax on savings and wages via higher consumer prices, disproportionately affecting low-income people. In the face of scarce fiscal resources starting in 2015 and the COVID pandemic later in 2020, the Nigerian government resorted to the Central Bank of Nigeria (CBN) print money to a high of N24 trillion. Government spending during the oil boom could have been more efficiently managed to provide for the lean period in the boom and bust cycle.
Like Nigeria, whose petroleum price per litre was perhaps the cheapest in Sub-Saharan Africa, Venezuela’s petrol was not just the most affordable globally but often virtually free. This led to an estimated 100,000 barrels of petrol worth over $10 billion per year being smuggled across the border to Brazil and Colombia each day, where it could be resold at a profit, a close resemblance of what obtains on Nigeria’s borders with its West African neighbours.
Like Nigeria, electricity subsidies were also vast, leading to losses and underinvestment. In total, subsidies are estimated to have cost over 10% of GDP in some years, accounting for over half of Venezuela’s fiscal deficits.
At the same time, the all-important oil industry was starved of investment funds and badly mismanaged as technical experts were replaced with political allies. Oil production in fields with high-quality crudes operated by the national oil company, Petróleos de Venezuela, S.A. (PDVSA), fell rapidly. In Nigeria, the federal government had accumulated a backlog of $6.5 billion in joint venture cash calls, which constrained investment in the oil and gas sector and would later haunt the nation in vastly reduced crude oil production capacity.
Just as Nigeria had historically preferred capital control in addition to operating multiple foreign exchange windows in 2003, Venezuela also imposed capital controls and a byzantine system for foreign currency purchases. For the two countries, there were one or more official exchange rates where the governments subsidised dollar purchases and demand vastly outstripped supply, as well as a black market with its free-floating exchange rate determined by market forces.
The system for the two countries needed to be more coherent. An entire industry of non-productive ghost companies cropped up to the lobby for subsidised dollars (to resell them on the black market for an immediate profit). At the same time, legitimate value-adding businesses needed more reliable access to the foreign currency required to operate. Many genuine businesses also specialised away from productive activities towards securing cheap dollars.
According to the World Bank, like Venezuela, which lost $300 billion to corruption through its foreign currency system, Nigeria incurred a significant loss of N13.2 trillion in forgone revenue as a direct consequence of implementing its foreign exchange subsidy policy between 2021 and 2023 alone. This could have been saved for periods of lower oil prices.
Again, like it obtained in Nigeria, increasing oil prices in the early 2000s led to levels of funds not seen in Venezuela since the 1980s. At the same time, in Latin America, Chávez established Bolivarian missions to provide public services to improve the economy and cultural and social conditions. Aid was disbursed to some people experiencing poverty and, more gravely, in a way that ended up helping the president and his allies and cronies more than anyone else.
In Nigeria, the emphasis was on boosting electric power generation and supply. To accomplish this, $8.2 billion was expended on independent power generation entities, but there was no megawatt of power to justify the expenditure under Gen. Olusegun Obasanjo’s 1999 – 2007 oil boom-aided administration.
With the conflation of more than 50 years of petrol subsidy and the same years of subsidising foreign exchange through multiple exchange windows, the Nigerian economy became a true reflection of the damages inherent in populism; this captures the unravelling of the first phase of populism, which includes a high increase in public spending and an increase in real wages and employment, gross domestic product increases. There is a low impact on inflation, imports alleviate shortages, and there is a reduction in reserves or debt default. Nigeria, like Venezuela, had passed through this phase.
In the second phase, the economy records an increase in inflation; although wages keep up with the rise, bottlenecks lead to price and exchange controls. The budget deficit dramatically increases as a result of subsidies. The economy runs into stagflation. This describes the Nigerian economy from 2014. Starting from the third quarter of 2014, the global oil price slide started reflecting on Nigeria’s GDP from the fourth quarter of 2014, when it declined to 5.94 per cent from 6.23 per cent recorded in the third quarter of 2014. A further GDP decline was recorded in the first quarter of 2015 at 3.96 per cent, a clear indicator of an economy on the downward slide due to the global oil price crisis.
GDP figures for the second quarter of 2015 show that the national economy was heading to an inevitable recession. Thus, the economy was effectively in the second phase of the degenerative threshold of macroeconomic populism. This is characterised by an economy that witnesses increased inflation, a budget deficit rise due to subsidies, and the economy running into stagflation. This was the state of the national economy by mid-2015. By the beginning of 2016, the characterisation of the third phase of macroeconomic populism had set in, showing shortages, extreme acceleration of inflation, and capital flight. A decline in tax revenue combined with high inflation leads to an increased budget deficit.
At this point, attempts would be made to salvage the declining economy by reducing subsidies and resorting to currency devaluation, which leads to a drop in real wages, as recorded during the President Muhammadu Buhari Administration, 2015 – 2023.
Naturally, because of the downturn of the economy starting in the last six months of the Goodluck Jonathan administration but manifesting fully during the early years of the Buhari administration, the inheritor of the state of economic crises became the object of the bitter criticisms of the opposition and, of course, impacted Nigerians. Yet, it is inevitable that the populism-driven macroeconomy will evolve into the phase of administrative correction, where the incumbent government will be required to address the deficiencies in the economy, or everything will be lost.
However, the elite and the working class resistance to change is inherent in the populism model, this manifested in Venezuela in 1989 when the removal of fuel subsidies precipitated a deadly riot in Caracas, the capital city. Nigeria also recorded the same resistance during the Obasanjo, Jonathan, and Buhari years. These acts led to the government meeting protesters’ demands midway, leaving the economy to fester. The more it is papered over, the more it festers and eventually erupts into a full-blown economic crisis with depleted foreign exchange reserves, hopelessly increasing inflation rate, food and other consumables shortages, and wage insufficiencies.
This signals the make-or-mar phase, the fourth phase of macroeconomic populism. It is either the government reforms by adopting a more market-driven economy or sustaining the status quo, which inevitably snowballs into an economic meltdown as experienced in Venezuela until now. The country was in the third phase of macroeconomic populism degeneration when Nicolas Maduro succeeded Hugo Chavez as president. Rather than reforming the economy as required in the fourth phase, in which a new government is expected to implement orthodox policies to stabilise the economy, he opted to sustain the failed system.
The crisis intensified under the Maduro government, growing more severe as a result of low oil prices in early 2015 and a drop in Venezuela’s oil production from lack of maintenance and investment. By 2014, Venezuela had entered an economic recession, and by 2016, the country had an inflation rate of 800%, the highest in its history. Over the next four years, as inflation torched what was left of domestic industry, an untold number of businesses were forced to close, and millions of Venezuelans left the country. Most emigrants went on foot to Chile, Colombia, Peru, and the United States. Estimates suggest that over 7.7 million people have left the country since the start of the crisis.
By the decade’s end, the Venezuelan economy had contracted 61% per capita. This was already the 15th most significant economic crisis in modern history and the largest outside war, revolution, or state collapse.
To continue paying the $100 billion-plus in debt incurred during the boom, the government cut foreign exchange allocations for imports more aggressively than the fall in export revenues. It was all for nothing, as the country defaulted on its debt a few years later. As oil prices sagged, Maduro ignored calls to repeal currency, price, and profit controls. Instead, he doubled down on intervention. The government continued to assign dollars at subsidised exchange rates to cronies and political allies, even though the country barely had any dollars and could not afford the vastly inefficient system.
Venezuela had become highly dependent on imports, so when they collapsed from over $80 billion in 2012 to around $10 billion in 2017, the recession became a depression.
Instead of cutting spending, the government began to finance an ever-greater budget share by printing money from the Central Bank. The money supply was regularly expanded by 20-30% per month, pushing Venezuela into a hyperinflationary spiral. To maintain inflation-adjusted spending as inflation surged, the government decided to print more and more local currency to pay for it. As it did so, inflation accelerated even faster in a vicious cycle. Prices rose 50% per month by November 2017, marking the formal start of hyperinflation and have risen to 59 per cent in 2024.
The Venezuelan economic crisis scenario remains a possible reality for Nigeria if the Tinubu administration adopts the Maduro option in 2023. Our estimation of his decision to scrap the populism macroeconomic template is that the President has salvaged Nigeria’s national economy from a whirlwind of economic turbulence and total collapse. As expected, the trailing effects of the stoppage of fuel subsidy and harmonisation of the multiple foreign exchange windows, being the principal reforms orchestrated by the administration, are upending the ways of life and threatening the basis of the sustenance of Nigerians. However, as the World Bank notes, though fiscal reforms are painful, they are needed to save the country from imminent collapse. Given the comparative analysis we have conducted in this Policy Statement, we fully adopt the World Bank submission and subscribe to the fact that the Tinubu reforms have started yielding results.
However, what we consider bewildering is the accusation against President Tinubu from critics, suggesting that he was not prepared for the regime of macroeconomic reforms he engendered right from the day he assumed office. With the plethora of referenceable evidence in the public space, this submission is curious and intentionally dismissive of the policy concepts and deployments as principal and auxiliary to reform undertakings of the Tinubu administration.
Indeed, we acknowledge the sense of balance and progression the president has brought to the nation’s economic reforms. For the withdrawal of subsidy on premium motor spirit (PMS), otherwise known as petrol, the President announced the cheaper and environmentally friendly Compressed Natural Gas (CNG) alternative shortly after declaring the withdrawal of subsidy on PMS. To make this option work, he ordered the distribution of one million CNG conversion kits. In addition, NNPCL has trained 1,000 technicians in CNG conversion. The government has also invested about $175 million in CNG projects across Nigeria. This is killing two birds with a stone.
If Nigerians, as the Dangote Cement Plc had done, adopted the CNG alternative wholesale, with a subsequent investment of $280 million, the economic effect of the subsidy withdrawal on PMS would be of little consequence to industries and individuals. For us, the substantial rationale is that the CNG policy initiative is the work of a mind motivated by a reforming zeal.
There are other reforms related to policy interventions, like the CNG. In this regard, we commend the appointment of a Central Bank of Nigeria Governor who is committed to orthodoxy in monetary policy outlook and foreign exchange transaction management. Indeed, the appointment of Mr Oluyemi Cardoso as Governor of the CBN could not have been incidental. It was a decision based on the desired attributes of a CBN governor in an economy undergoing reforms. By the time Cardoso was appointed, the CBN had lost N13.2 trillion between 2021 and 2023 over three years and had ratcheted more than N24 trillion in Ways and Means, a backlog of $7 billion uncleared foreign exchange commitments, an increasing monthly inflation rate, and a massive profile of currency outside the banking system and such other monetary enervations.
The President, in head-hunting Cardoso, had a task list and was determined to secure the service of an individual with the knowledge and capacity to undertake the orthodoxy required to address the injuries that had been afflicted on the nation’s monetary, pricing, and foreign exchange policies. This, for us, could not have been consummated by an unprepared president.
The student loan scheme is also a clear indication of a policy intervention conceived to alleviate possible side effects of the economic reforms. To show the level of preparedness of the then-new Tinubu administration, on 12th June 2023, the Student Loan (Access to Higher Education) Act 2023 was signed into law. Still, problems with some provisions of the Act hampered the implementation. On the 14th of March, 2024, however, the President proposed an amendment to the Act and subsequently enacted the Nigerian Education Loan Fund. There is also the innovative Consumer Credit Scheme, which has since taken off. Again, these are indications of a well-prepared reformer.
Fact must be told, it does not serve good public conscience to accuse the president of being unprepared to reform the Nigerian economy. The concern should not be about the president’s preparedness but whether we are witnessing possible positive outlooks for the nation’s economic outturns as the reforms are underway. Again, we assert a yes to this. We are, indeed, seeing how the structure of the Nigerian economy is changing and conforming to targeted reforms, as the case may be.
Even now, the federal government’s revenue from Value Added Tax (VAT) and Company Income Tax (CIT) is rising in leaps and bounds, notwithstanding the increased cost environment. Both CIT and VAT rose by 85 per cent year-on-year to N6.44 trillion in the first half of 2024 compared to N3.48 trillion in the same period of 2023. Coming on the back of this impressive performance, the Institute of Taxation of Nigeria in Abuja noted that tax revenue is currently the highest income source for the country; this signals a significant shift in the nation’s revenue generation template.
Besides, there has also been a resurgence in foreign exchange inflows through International Money Transfer Operators (IMTOs). This grew by 47 per cent to $2.33 billion in the first six months of 2024 from $1.58 billion in 2023. We also observed that manufacturing companies are adapting to the high-interest environment by reducing their debt burden by N1.62 trillion between February and June 2024. This drop, representing a 14.85% decline in manufacturing loans, comes amid rising interest rates that have increased borrowing costs across the economy. It indicates resilience and the ability to adjust for growth operationally. This adjustment for growth is reflected in companies’ financial performances in the period under review. Transcorp Hotels, for instance, grew its profit before tax in the first nine months of 2024 by up to 191.1 per cent from N5.63 billion in the same period of 2023 to N16.43 billion in the current year. In addition, in a show of faith in the economy, Flour Mills of Nigeria Plc, the nation’s largest miller, has announced its plans to spend as much as $1 billion over the next four years to expand its facilities and restructure after its majority shareholder offered to take it private. This is an extention of the N427billion new investments manufacturing companies have committed to invest in the economy, a reflection of their confidence in the economy.
Overall, the response of macroeconomic indices to the ongoing reforms indicates the propensity of an economy on an upward trajectory and the imminence of an expanding economy with the capacity to produce jobs and concomitant wealth creation. This is our position!
Omoniyi M. Akinsiju, PhD
Chairman
Independent Media and Policy Initiative (IMPI)
October 30, 2024
