Nigeria’s economy is at a crossroads

While in Abuja last week, I attended the World Bank’s launch event for its Country Economic Memorandum, a report it produces every few years which assesses Nigeria’s longer-term economic growth.

The good news is that the launch was well attended, by high-level technocrats, diplomats and politicians of all stripes. The even bigger news was that the political leaders from all the major political parties were united in agreeing with the World Bank punchline: that Nigeria’s very economic survival was at stake, and not to take action would see, in all likelihood, Nigeria’s economic collapse.

One doesn’t need the World Bank to point out the obvious. Nigeria’s economy has been in the red for a while, and things have consistently gotten worse over the last decade. On the macroeconomic side, more than 90 percent of revenues come from the oil sector, despite (half-hearted) efforts to expand beyond current over-dependence on petroleum exports. The costs of debt repayments, petroleum subsidies and the dual exchange rate are now so large that the only way Nigeria can continue on the current path is to borrow more, at ever more usurious interest rates.

Simply put, Nigeria is broke, we are spending other people’s money that we have no way of paying back, except to borrow from Peter to pay Paul, as the expression goes. Nigeria’s growth over the last decade has barely been able to keep up with population growth, and real income per capita in 2021 was at the same level as 1992.

Nor, indeed, was the news especially good on the microeconomic side, even if the World Bank chose not to draw as much attention to it (the World Bank typically focuses on the big picture). Unemployment has risen considerably over the pandemic period, and productivity of Nigeria’s workers in almost all sectors has stagnated, and even declined. The private sector – whether foreign or domestically owned – lack the confidence in the economy to make significant job-creating investments.

The large firms are all in a holding pattern, because of the uncertainty the election outcome, as well as the possible reforms that may happen (CEOs of large firms have the resources to seek professional forecasts, and rarely make risky decisions. There is a reason why large companies are resilient!). Nigeria is abundant in entrepreneurs and small firms, but neither group can really drive the economy, because they often do not have the resources – financial, technical, or human – needed to be efficient, and the bureaucratic nature of the state does nothing to help them upgrade.

Most entrepreneurs and small firms are barely able to survive, given the costs of basic inputs. Much of their energy is consumed simply manoeuvring around the labyrinthine obstacles placed by quasi-formal, federal and state agencies, directly and indirectly (a majority of these actors are in the informal economy, which means they are unsupported by the state, but does not deter the government agencies from giving them a hard time).

The room, full of the great and the good, also offered their own corroboratory evidence to further drive the World Bank’s message home, and all agreed that the incoming government, regardless of political party, had no choice but to act before ‘things fall apart’ (the World Bank’s Country Representative is clearly a literate man).

When both the patient and the doctor agree on the diagnosis, and are also fully aware of the cure, the future looks bright. However, to take the original analogy further, when the patient has been unwell for long, the doctor almost always stresses that the medicines and surgery are insufficient: Lifestyle changes are also necessary. You must stop the unhealthy habits that endangered your life in the first place.

And this is where the World Bank is naively optimistic. Past experiences suggest that Nigerian leaders are more than likely to take the medicine, but they do not have the discipline to curb the excesses that got the country into trouble in the first place, nor indeed the willingness to accept the costs associated with making Nigeria a healthy and self-sustaining economy. Without these investments, the country will simply be postponing another trip back to the World Bank to seek help.

This fear of making major macroeconomic adjustments is not irrational. Memories of the Structural Adjustment programmes in the mid-1980s still linger in the minds of our decision makers and general public. To be fair to the IMF and the World Bank, the bitter medicine they prescribed at the time was necessary, but for a variety of reasons, the intended outcome of a healthy and diversified economy was not achieved.

Combined with mismanagement by successive military governments at the time, the common man perceived that the structural adjustment programmes caused only a worsening of their situations, with rising inflation, shrinking real incomes and fewer jobs. The economy did not see a rise in productivity and investment by local entrepreneurs, nor a growth in agricultural exports or local manufacturing.

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This time around, fears of a repeat event linger: Will the bitter medicine take the situation from bad to worse? Is it better to maintain the status quo (which may be bad, but we all know where we stand) or take the risk of trying to change, and finding out that – like in the 1980s – things do not get better, but worse? Is the devil you know better than the devil you don’t?

Burying our head in the sand and clinging to the hope that the current situation will resolve itself without drastic action is unfortunately a fantasy, and it is time that the politicians take the time to accept this, and have the courage to tell the public about the realities of the economy. The immediate result of the macroeconomic adjustments will certainly cause a shock to the economic system, and the sudden rise in costs from removing the petroleum subsidy and unifying the exchange rates is likely to cause considerable pain, with rising prices that will affect the majority of Nigeria’s population, 90 percent of which is already in precarious and informal employment.

Nigeria’s economy is overly dependent on imports, and with the least diversified economy in the world (outside Angola) it is not entirely clear whether Nigeria will successfully diversify its revenue sources to overcome these shocks. Certainly, it will require the active participation of the government, and considerable spending discipline (not a strong point of Nigeria’s leaders).

There is no question that these macroeconomic adjustments need to be made, and just delaying the pain till after the elections is already reckless. Action is needed, and drastic action for that matter. The only question is an unpalatable one, that Nigeria’s political and economic elites do not want to hear, much less answer: How long will the pain last, and does the country have the plans and the resources to help mitigate the pain?

Do not blame the messenger, as no doubt, some will do in the coming months: The World Bank is not the bogeyman, they have not mismanaged the economy.

There is no doubt that Nigeria is a land of unlimited potential. Despite all that has happened, there are considerable grounds to believe that things can be turned around, but the longer the delay in implementing the necessary changes, the more difficult will be the recovery. The most obvious way forward is a genuine partnership: Leaders need to see the people as their partners in achieving change, and what may seem impossible will becomes possible, and indeed, probable.

Nigeria is indeed at a cross-roads, and we can only hope that the incoming political leaders will take the high road, the one less travelled by past leaders.

Professor Rajneesh Narula is the John Dunning Chair of international business regulation at the Henley Business School, University of Reading, UK, and Director of the Dunning Africa Centre in South Africa