Boldness welcomed as step towards ‘fiscal sanity’ in Nigeria

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In early June, Wale Edun, a close economic adviser of Nigeria’s new president, indicated that market participants would not have long to wait before the country’s exchange rates were unified. But even he may have been surprised at the speed of events.

On June 15, just a few days after former central bank governor Godwin Emefiele was suspended and subsequently arrested, banks were informed that they could bid for dollars at whatever exchange rate they wanted.

The impact was immediate. The naira recorded its biggest fall in history. By the end of the day, the official rate had dropped to N600 to the dollar, a 23 per cent fall. Traders said the currency was changing hands at N750, roughly the same as the parallel market rate — the unification that Edun had promised.

It is too early to say what the new policy will be, or whether a gap will reopen between rates. “There is still significant uncertainty about how the forex market will operate,” says Razia Khan, chief economist at Standard Chartered Bank. “Today’s price action may point to a free float, even though Nigeria has historically had a managed exchange rate.”

She predicts the naira will be trading at N695 to the dollar by the end of the year, before appreciating slightly.

Nor is it certain what the impact will be on foreign reserves or inflation, which is already running at 22 per cent. If dollars are freely available there could be, at least initially, a huge rush of trapped hard currency leaving the country. It is less than a year, for example, since Emirates suspended flights to Nigeria because the airline could not repatriate funds.

But, coupled with the scrapping of the fuel subsidy, the measures undertaken in the first few weeks of Bola Tinubu’s presidency amount to the biggest reform package in decades, according to Dipo Salimonu, chief executive of oil and gas company Moteriba.

“This restoration of fiscal sanity — the boldness is unprecedented,” Salimonu says, adding that it brought an end to the “analysis paralysis” of previous governments that knew they had to remove distortions in the economy but lacked the courage to do it.

However, Chidi Odinkalu of the Fletcher School of Law and Diplomacy at Tufts University warns that investors should not get overly excited by the quick-fire changes of Tinubu’s first weeks in office. The previous administration had made no budget provision for fuel subsidy, he says, and rather forced Tinubu’s hand.

“The reason why Tinubu cannot play along is that the country is insolvent,” Odinkalu says. He would be more impressed, he adds, if Tinubu — who has already got clearance to appoint 20 advisers — stops the notorious excesses of government and devotes his efforts to tackling the problems of a country where an estimated 90mn people live on less than $1.90 a day. “That means not funding the lifestyle of politicians but addressing the social needs of ordinary Nigerians,” Odinkalu says.

The reason why Tinubu cannot play along is that the country is insolvent

After eight years in which per capita income has stood still at best, the problems are deep indeed. On the social side, about a third of Nigerians, according to official figures, are unemployed, while government data classifies 133mn people as “multidimensionally poor”.

Years of neglect of the hospital and school systems mean Nigeria’s social indices are lower than expected for a middle-income oil producer. Unicef estimates that 18.5mn Nigerian children are out of school. Life expectancy is just 53 years, according to the World Bank, nine years lower than Niger, its much poorer neighbour.

The macroeconomic picture has been no less bleak. Tax revenue has been about 6 per cent of gross domestic product, according to the OECD, one of the lowest levels in the world, though it may have nudged up slightly in recent years. Virtually all federal revenue goes on paying for government and servicing debt, leaving almost nothing to invest in Nigeria’s future.

Oil theft has been rampant, though there have been signs of recent improvement, with the massive Bonny oil terminal reporting virtually no losses in May. Oil revenue that has come in has mostly gone on paying for the subsidy, which rises with the oil price, thus depriving the treasury of the benefit.

The twin “shock therapy” as Salimonu calls it — of removing the subsidy and freeing up the exchange rate — could help deal with these structural issues in the medium term.

The big hope is that the government can repair its finances. As well as saving $10bn on subsidy, a weaker naira means that every dollar earned from oil translates into more naira revenue.

Exports, which have been battered by an overvalued naira, should benefit as Nigerian goods become more competitive. Foreign investment, which stalled under the previous currency regime, could recover. Because of the artificially high naira, investors say they were reluctant to commit funds for fear of overpaying and nervous that rationing of dollars might hinder their ability to repatriate profits and dividends. Confidence could now build and investment with it, say economists.

“Nigeria has such huge potential for growth but has been held back by bad policies,” says Abubakar Suleiman, chief executive of Sterling Bank. He adds that a combination of decent government and a favourable environment could lead to a period of “hockey stick” growth — namely, having been flat, suddenly surging up.

For now, such a return to fast growth, and to the policies needed to improve the lives of ordinary Nigerians, is a chimera. But, for the first time in years, people are actually talking about it.