Reform is Not Enough

Why the usual rhetoric, agenda, and process of economic reforms in Nigeria will never deliver progress

The good folks at Agora Policy published a series of policy memos on Nigeria's economic reform since 2023, and I encourage everyone to read the entire series. My good friend and economist, Adedayo Bakare, wrote a fantastic entry on Trade and Investment in the series, which particularly drew my attention. The opening bit provides a good background:

All reforms are painful and inconvenient but macroeconomic reforms can be particularly devastating. Since the inauguration of President Bola Tinubu in May 2023, Nigeria has moved from reluctance to urgency in macroeconomic reforms.

These reforms, implemented through the removal of fuel subsidies and the devaluation of the Naira, have helped to ease fiscal and external stress which accumulated following the COVID-19 crisis.

For many years, the Federal Government (FG) spent money it did not earn, supported by excess borrowing of over N23 trillion from the Central Bank of Nigeria (CBN). The FG’s fiscal deficit averaged 3.9% of GDP between 2020 and 2023, beyond the 3% limit set by the Fiscal Responsibility Act of 2007. Like the FG, the entire country spent money it did not earn as the CBN financed imports by borrowing in dollars from private investors.

With the country having nothing to show for this spending, as it did not boost growth or exports, it was clear that this behaviour was unsustainable by 2021. The FG used all its revenues to service existing debt in 2021 and the CBN soon defaulted on its obligations to commercial banks, corporates and some international airlines, such as Emirates.

When governments want to resolve a fiscal and external crisis, they crush households and businesses to make it happen. The government increases its revenue by raising taxes, or in the Nigerian case, removing subsidies and devaluing the currency.

This destroys the purchasing power of anyone who earns, invests and owns assets in the local currency. Rather than creating wealth, the adjustment process destroys wealth. The government benefits the most given that most of its debt is in Naira and it earns part of its revenue in dollars.

Today, these reforms have partly eased the fiscal and external burden of the public sector. The consolidated fiscal deficit of the FG, states and Local Government Areas (LGAs) narrowed to 3% in 2024, the lowest in five years. However, the FG continues to struggle with high fiscal deficits prior to GDP rebasing mostly due to refunds to states.

Nigeria's economic reforms since 2023 have attracted domestic criticism, mainly because of the cost-of-living crisis it spawned. Despite the merited criticism of how the government implemented some of these reform policies, it should also be uncontroversial to say that these reforms were necessary and overdue. Developing countries are regularly plagued by four maladies: inflation, excessive public debt, mismanaged exchange rates, and persistent unemployment. Each has clear origins, and each works through a chain of effects that damages real economic activity. For eight years leading up to 2023, the Nigerian government pretended this was not the reality and kept kicking the can down the road. With the resumption of a new government in May 2023, the complete collapse of foreign investment in the country, the illiquid state of the foreign exchange market, and the state of public finances effectively left the new government without a choice but to confront these problems - hence the now infamous line in the lore of inauguration speeches, "subsidy is gone".

While the reforms have bought the government some time and breathing room, to paraphrase another infamous quote from the president, the poor have barely been able to breathe. Adedayo succinctly framed it:

The life of the ordinary Nigerian is not better because the FG and CBN have eased their debt burden. Only the availability of high-quality jobs and a significant income growth will help households to fully recover.

The macroeconomic reforms have partly corrected years of financial recklessness and sanitised public finances, but this should not be the end goal. The reform process must endeavour to return the average Nigerian back to the peak per capita income level of $3,265 [currently at $1,295] in 2014.

This is one of my frustrations with the policymaking process and its communication. Nigeria was definitely in a bad state in 2023, and yes, this government has made some right moves to undo years of terrible policies. Still, policymakers, government spokespeople, and their apologists have an annoying habit of speaking as if these reforms by themselves are the goal. I do not think this attitude is an accident; I think it reveals two problems with policymaking with far-reaching implications.

The first one is a general ignorance about what economic development is, which leads to incompetence deciphering what policies are a good fit. Macroeconomic reforms are stabilisation policies. They are the equivalent of doctors trying to stop the bleeding after a patient has been fatally shot. After the bleeding has been stopped, critical organ damage will still need to be assessed and treated before the patient can be said to be in recovery. To extend the metaphor further, development policy is not even nursing the patient back to survival without critical organ damage. It is more like performing a reconstructive surgery after recovery, so the patient can start living a whole new life. Necessary stabilisation is not the same thing as successful development. So it is to my constant annoyance that getting back to GDP growth is treated as the destination. Not even getting back to the 2014 level of growth and average income levels will suffice. Development is not just about growth, but also about the structure of growth. As Robert Kappel wrote in a recent paper:

….economic growth does not necessarily lead to structural transformation—understood here as sustained industrialization, the expansion of tradable services (“industries without smokestacks”), technological upgrading, and broad-based employment creation.

Nigeria and South Africa illustrate the tension between economic scale and limited transformation. Nigeria represents a classic rentseeking regime, characterized by oil-based revenues, rent allocation networks, and limited diversification. Growth episodes have been volatile and weakly employment intensive.

This much was also recognised by Adedayo, and he was pretty clear that Nigeria needs structural transformation of the economy. Drawing on the example of Vietnam, he argued for more Foreign Direct Investment in Industry, making the tradable sector investible, and boosting export competitiveness through domestic value chains. These are all sensible policies, and I fully endorse them. The question then remains why the government has so far not demonstrated any cognisance of this challenge? Other than ignorance about how development works, the other reason is that Nigeria's current elite structure and political leadership cannot imagine an equilibrium that is different from the status quo. They cannot imagine a possible future for the country that is any different from what it is currently. This is why we keep reforming but never truly transform. This is why subsidy removal is not about repairing public finances to enable strategic sectoral investments, but about more fiscal transfers to the governors. This is why tax reform is about raising government revenue, and other complementary reforms to ease business and commerce are never urgent. The reason Nigeria does reforms is always to prevent a collapse of the sources of rent to the various patronage networks, and for political leaders and government functionaries to keep funding their lifestyles. This is why I have soured a bit on all talks of reforms. Economic reforms are always a political project. Taking reforms beyond short-term stabilisation towards structural transformation requires a new kind of political leadership and elite bargain than we currently have. For Nigeria to move from an economy of recurring crises to a solid path to development, nothing short of political and social transformation will suffice.