Economic restart: Is it time to shine?

“Nigeria’s new president, in office for less than a month, is pushing to put Africa’s largest economy on a reform track that investors have eyed for decades, fuelling excitement that money could flow to a nation that many had deemed uninvestible.” – Baba Go – Fast? Nigeria’s Tinubu Stuns Wary Investors with Quick Reforms, Reuters, June 15, 2023.

Over the past 8 years, Nigeria’s economy has been ailing and in need of urgent attention. A multitude of economic indicators, including GDP, investment, international trade, federal budget, balance of payment, employment, stock market index, and interest rates, have all been struggling and requiring significant support.

The primary challenge facing the economy is the staggering debt of over 70 trillion Naira, which has been compounded by low revenue generation and excessive expenditure due to the high cost of governance.

Economists have long recognized the need to jumpstart Nigeria’s economy in order to spur growth. In just two weeks since taking office as the 16th President of the Federal Republic of Nigeria, Bola Ahmed Tinubu has already garnered praise from investors and corporate leaders for his decisive actions.

He has dismantled some of the key drivers of economic hardship in the country, including suspending the controversial Central Bank of Nigeria Governor Emefiele, removing costly fuel subsidies, uprooting the high-handed EFCC Chairman Bawa, signing the Students’ Loans Bill, and collapsing multiple foreign exchange windows.

However, the question remains whether he can maintain this momentum and steer the country towards sustained economic growth throughout his tenure. Only time will tell.

President Tinubu’s recent decisions to eliminate the fuel subsidy and overhaul the forex rate policy have garnered support from some prominent figures in the business and economic communities. While there was some initial concern about the method of harmonizing the exchange rate, it seems that those worries have been put to rest. The focus now is on the future and how these changes will impact the economy moving forward.

There are valid concerns about the ability of the CBN to effectively intervene in the market and stabilize it within a short period of time. In order to do so, the CBN must have sufficient forex reserves to meet both real and artificial demands. One proposed solution is for the CBN to clear its forex arrears, which would alleviate some of the pressure on the available forex in the market.

While we remain optimistic about the future, some experts in behavioural economics have pointed out that the success of the Tinubu Administration’s policy decisions will depend on how well they align with human behaviour. One suggestion is for the CBN to establish a specific range within which the currency should trade, and to intervene if anyone trades outside of that range in order to maintain stability and certainty in the market.

The year 1998 saw Thailand take the bold step of floating its currency, the Baht, despite its precarious economic situation. However, Nobel Prize winner and Hoover fellow Gary S Becker warns that developing countries should steer clear of free-floating exchange rates if they wish to avoid economic turbulence. Becker argues that under such a system, nations may resort to printing money to fund government spending, leading to currency devaluation and inflation.

Some experts have suggested that floating a nation’s currency during a fragile economy may not be the best course of action. However, President Tinubu’s administration must take decisive action to address Nigeria’s economic crisis, while also closely monitoring the impact of their policies on human behavior and the overall economy. It will be important for the government to remain vigilant and adaptable throughout their time in office.

Some economists have suggested that floating currencies in a fragile economy can actually incentivize productivity and exports. However, the recent removal of the fuel subsidy by the Tinubu Administration has had a ripple effect on the cost of living, with prices of other commodities skyrocketing. This has led to concerns that the government may resort to increasing taxes and levies, which could further burden citizens already struggling with economic hardship.

In modern times, many cities are facing a multitude of challenges such as overpopulation, poverty, food and power shortages, insufficient housing, and inadequate infrastructure. Additionally, access to healthcare facilities is limited and a significant number of children are not receiving an education due to ill-equipped and understaffed schools.

It is undeniable that Nigeria’s economy is in dire need of a reboot. The increasing rates of unemployment and underemployment have had a negative impact on the disposable income of families, leading to a decline in purchasing power and employee morale. This, in turn, has resulted in a reduction in the overall output of the economy. Furthermore, the decrease in oil production, which is the backbone of the nation’s economy, has led to a shortfall in revenue. It is worth noting that the government allocated a significant portion of its revenue last year to servicing debt, and experts predict that this figure could exceed 100 percent this year.

However, the road ahead is fraught with challenges. Many government institutions are plagued by dysfunction, corruption is rampant, and security remains a persistent issue. Armed groups such as bandits, kidnappers, and religious extremists have unchecked control over vast areas of the country. In order to address these issues, security reforms are necessary and the transformation of revenue-generating institutions is imperative.

Tinubu’s Administration’s Policy Advisory Council has developed a comprehensive plan to boost Nigeria’s economy to a staggering $1 trillion within the next 8 years. The council’s initiatives aim to achieve a consistent average annual GDP growth rate of 7 percent, which will lead to sustainable economic expansion. However, to achieve this growth rate, the power sector must function effectively to improve employment opportunities. Additionally, the government must address rising inflation, policy uncertainties, supply chain disruptions, and persistent labor market challenges.

Although the federal government has implemented rapid reforms to revitalize the economy, the National Bureau of Statistics recently reported an inflation rate of 22.41 percent for May 2023. It is crucial for the economic team to maintain their focus on enhancing production capacity to achieve their objective of reducing inflation.

Over the years, raising interest rates has not proven effective in reducing inflation. This raises the question of whether monetary policy alone can address the various economic challenges facing the country. It is important to remember that both fiscal and monetary policies must be reformed in order to achieve positive economic outcomes. Only then can Nigeria truly thrive once again. Thank you.