President Bola Tinubu embarked on fundamental economic and policy reforms immediately after he assumed office on May 29, 2023. The central pillars of those reforms were his immediate abolishment of the regime of fuel subsidies, which had been in place since the 1970s when Nigeria considered itself oil-rich and decided to offer generous subsidies on petroleum products consumption, and the reversion to a market-determined exchange rate system, which led to the devaluation of the Nigerian currency, the naira. There have also been other major macroeconomic and policy reforms, some of which we will discuss in this article.
It is important, first of all, to remind ourselves of the macroeconomic conditions prevailing as of May 2023, when Tinubu took office. We may recall that the former President Muhammadu Buhari had assented to the Petroleum Industry Act in 2021, which, among other changes, established a deregulated downstream petroleum market and turned the national oil company, NNPC, into a private limited liability company, expected to operate on a commercial basis. While Buhari did the nation the good service of signing that legislation after a two-decade lacuna, he basically stalled its implementation beyond establishing the new regulatory institutions for the upstream and downstream/midstream sectors of the oil industry as mandated by PIA and nominally converted NNPC into a private, commercial oil company in name, but not in substance.
Concerning deregulation of the downstream with the implication of removing subsidies, Buhari, somewhat cynically, signed a budget for 2023, including petroleum subsidies till June 2023, implying that his successor should implement the subsidy removal aspect of the law in the same manner as all his predecessors since the late 1970s and 1980s had deferred a difficult decision to their successors! It had been clear to Nigeria’s leaders since then that fuel subsidies had become unsustainable even before the military handed over to civilians in 1979 and 1999, but our leaders lacked the courage and perhaps popular legitimacy and trust to fully execute the same. Since 1989, leaders, including Babangida, Abacha, civilian Obasanjo, Jonathan and civilian Buhari, confronted the problem to varying degrees and left it to their successors.
It was a similar scenario in relation to our exchange rate management and especially its pricing mechanism. Since the oil glut of the 1980s that followed the oil boom of the 1970s, various governments of Nigeria have struggled to find appropriate ways to make scarce foreign exchange available to Nigerian businesses, households and individuals. Shagari tried import licensing; the military Buhari ignored the issues and tried “counter-trade” (a nicer-sounding term for “trade-by-barter”, which, expectedly, was a colossal failure)—there are reasons economies developed the concept of money as a replacement for barter. Babangida adopted the Structural Adjustment Programme, under which he attempted the first attempt to liberalise the currency, but the system was undermined by corruption both in government and the banks, political gerrymandering and instability; Abacha adopted a fixed, dual exchange rate model that left huge opportunities for corrupt arbitrage, etc. Since the return to civilian rule in 1999, we have had different levels of success at managing our exchange rates, with the best outcomes correlated with successful economic reforms under Obasanjo and Soludo, and the worst outcomes associated with attempts to rigidly control exchange rates while refusing to carry out reforms under Buhari and Soludo. The point is that both fuel subsidies and exchange rate management were long-term problems which, in a failure of leadership, previous leaders had either avoided or made tokenistic attempts to solve. From a policy point of view, Tinubu should be commended for decisively tackling these fundamental and intergenerational challenges.
At the CBN, wasteful subsidies, including subsidies on both fuel and dollars, had led the government and its accomplice governor, Emefiele, into a N23tn (illegal) liability on ‘Ways and Means’. We have already seen that NNPC was saddled with billions of naira of liabilities through unfunded subsidies, thus establishing a system that internal bureaucrats would themselves abuse. The absence of proper corporate governance and transparency would cost the country billions at the corporation, which it turned out was pledging its oil production for loans for good and bad purposes (such as repairing doomed refineries at the cost of billions of dollars!)
As the NNPC was pledging its future oil production, CBN was pledging the country’s foreign currency reserves to fund poorly thought-out and unsustainable ideas, including, as we have seen, fuel subsidies and exchange rate subsidies that were selectively and predictably corruptly applied, and we may add a fake national airline, a train to the Niger Republic, and untransparent cash transfer programmes whose beneficiaries and payment models were unclear. It took JP Morgan Chase Bank of America to let both the government and people of Nigeria know that our net foreign exchange reserves were down to $3bn, rather than the gross reserves of over $30bn that we thought we had! Many of our commentators, and especially (opposition) politicians, assume Nigeria had many policy options in May 2023 and that we might have chosen to continue with a fixed exchange rate and the ruinous fuel subsidies. The evidence suggests otherwise – we were close to bankruptcy, and what the Tinubu administration and the central bank have achieved in terms of macroeconomic stabilisation in just two years is impressive!
Having reminded ourselves of where we were in 2023, we may now examine some of the emerging results of the Tinubu reforms. I would examine the detailed outcomes in my next article, but this week, I have space for a summary- the greatest arena of transformation has been in the petroleum sector, both upstream and downstream. The execution of the PIA and the President’s executive orders has unlocked huge investments in the sector, with more reportedly on the way, notably including Shell’s $5bn Bonga Final Investment Decision as well as the stimulation of new investments and activity of local players – SEPLAT, Oando, Renaissance Africa, etc. In the downstream, we now have a competitive petroleum market with market prices reflective of market fundamentals and (fortunately) the coming on stream of Dangote Refinery unleashing local capacity.
Beyond the oil and gas industry, GDP is rising; FX markets have stabilised for almost eight months; the nation is recording higher levels of portfolio and foreign direct investment; trade surpluses are consistent and rising; capital markets are booming; and food prices are declining, though inflation remains a concern. There are still challenges, including inflation and interest rates, but macroeconomic conditions are certainly better than two years ago.
