How Pres. TINUBU Can Kickstart The Economy

• By INDERMIT GILL, Snr VP, World Bank Group

Good afternoon, Vice President Shettima, Minister Bagudu, Chairman and CEO of NESG, distinguished ladies and gentlemen. Thank you NESG and Minister Wale Edun for the invitation to my boss President Ajay Banga to participate in the discussions today. Ajay sincerely regrets that he could not be here, and he sends his regards. I am a poor substitute, but I am very happy to attend in his place. Nigeria is an important country at a critical crossroads. Today, I would rather be here than anywhere else. I was asked to speak about “the most pressing challenges affecting Nigeria and Africa’s economic development and growth”. I am going to focus on Nigeria for a simple reason: Africa goes as Nigeria goes. Given its size and significance, the success of Nigeria’s reforms will give a big boost to countries across the continent. Because the whole world has a stake in Africa’s future, the whole world needs to pay attention to what Nigeria is trying to do. And I think it is. As we gather here, there is suffering in all sections of Nigerian society, but especially among the poor and the young. They want good schools and colleges, affordable healthcare, decent jobs, and safe conditions which allow them to make full use of their potential. High inflation is hurting everyone, but it is hurting the poorest people the most. Oil wealth that ought to be used for the welfare of all Nigerians has for too long been used to benefit the elites. The elites are also being hurt by the reforms that started last year, but they did well in the past and they have buffers.

Ordinary Nigerians are being hurt more by the reforms, they were also hurt by the policies of the past, and they have no buffers. Their welfare should be uppermost in our minds. You are probably thinking: Did you come all the way from Washington to tell us this? Tell us something we don’t know. So, I will talk about things that you can see more clearly from far away. I will remind you that the problems that are being tackled today in the Nigerian economy first surfaced more than 40 years ago, when oil prices began collapsing in the early 1980s after the big boom of the 1970s. I will make a brief detour into history, because it is important to do so. The wise say that those who ignore the lessons of history eventually relearn them—in much more painful ways. To start, remember the three crucial aspects of oil. First, it is an exhaustible asset. Second, it is a fickle asset—its prices are among the most volatile of commodity prices. Third, it is a national asset. This means that—like Nigeria’s forests and rivers and seas—its benefits should be shared across every segment of the society and across all generations.

Over the last forty years, oil has come to dominate in the Nigerian economy. Nigeria’s economic growth, exchange rate and stock market move with the oil price. This was not always the case: it happened because of poor fiscal and exchange-rate policies during the oil boom of the 1970s. Massive increases in oil prices brought massive increases in wealth. Yet Nigeria’s fiscal deficit shot up to 7 to 10 percent of GDP. Current account deficits ballooned, along with external debt. In short, Nigeria’s fiscal policy became highly procyclical, so the government’s policies amplified oil price volatility instead of reducing it. Instead of insulating ordinary Nigerians from the vagaries of oil markets, the government made them even more vulnerable. This was the first mistake. Oil prices began falling in the early 1980s. This meant that the value of the naira fell as well. But, instead of the letting the exchange rate adjust to the new reality, Nigeria decided to prop up the naira. The government tightened foreign-exchange-rate controls and import-licensing requirements. In doing so, it set the stage for a parallel exchange-rate market to emerge—creating a big gap between the official and unofficial exchange rates. This meant that ordinary Nigerians would have to pay many more naira to buy dollars than better connected people. This was the second mistake.

These two mistakes led to two bad outcomes. First, businessmen began chasing import licenses at the official exchange rate because it guaranteed them a profit—at the nation’s expense. Second, agricultural and manufacturing exports were decimated because the difference between the parallel and official exchange rates essentially became a crippling tax on exports. Between 1970 and 1982, the production of Nigeria’s major cash crops—cocoa, rubber, cotton and groundnuts—fell between 30 and 65 percent. By the middle of the 1980s, cocoa was pretty much the only agricultural export left—but its volume had shrunk by 50 percent. Nigeria’s share in world cocoa production fell by half to 8 percent. Nigeria had in short order become both oil-dependent and grossly distorted. It was now an undiversified economy with a rent-seeking society. Nigerians soon realized the dangers this posed to this great nation. Some of you are old enough to remember that Nigeria attempted a serious reform package in 1987; my colleague and friend Brian Pinto was a young economist back then, and he was here at the time. He and Finance Minister Wale joined the World Bank’s prestigious Young Professionals Program at about the same time; they are both in Abuja today. This involved reducing fiscal deficits and trying to return to a market-determined exchange rate via the second-tier foreign exchange market, known by its acronym “SFEM”. But by then, an external debt overhang had developed, and it strangled the economy for the next two decades. The lesson is worth repeating: a very short period of poor oil-wealth management which benefited a handful of rich people had painful consequences for nearly all poor Nigerians which persisted for a generation. Nigeria isn’t the only country to learn this lesson. Venezuela and several other oil-exporting countries have learned the same lesson. Like Nigeria, they have also learned it the hard way. I know I have depressed you so far, so let me tell you a more cheerful story. Let me give you an example of a country that managed its oil wealth well. This country adopted an oil-price fiscal rule that not only insulated the non-oil traded goods sector against oil price volatility but also helped to build a cushion of foreign-exchange reserves. It managed its oil wealth with an eye to the future, helping not just the current generation but also those in the future. I know that many of you are thinking that I am talking about Norway, which is—with good reason—held up as an example of how to manage resource wealth well. Actually, I am referring to Nigeria between the years 2003 and 2007. During those four years, Nigeria implemented fiscal and exchange rate reforms. It introduced unprecedented transparency into the recording and allocation of oil revenues. It renegotiated its Paris Club debt, which had created a debt overhang that was choking the economy. The payoff was immense and immediate: for the first time in its history, Nigeria notched a BB- sovereign credit rating. It started to attract FDI. And everyone started to talk of “Africa Rising” Some years before that, Norway had taken a course very similar to Nigeria’s between 2003 and 2007. Norway was quick to learn from its policy mistakes during the 1970s, when fiscal policy was procyclical, as in Nigeria. Governor Olsen of Norway’s central bank noted in a December 2015 speech: “We learned from our mistakes. The oil fund mechanism in 1990 and the fiscal rule in 2001 were introduced to discipline fiscal policy in such a way that Norway’s petroleum wealth would also benefit future generations.” The main difference between the Nigerian and the Norwegian experience is that Norway stayed the course—for much longer. To be sure, there are other differences between Nigeria and Norway. Nigeria’s population is much bigger relative to its oil wealth. Its demographics are also quite different: almost three-quarters of Nigeria’s population is under the age of 30. Its economic governance institutions have yet to be made credible. But the basic principles that should guide reform are the same, and they are:

* One, learn from your policy mistakes; * Two, let the market determine the exchange rate; * Three, keep public debt sustainable; * Four, adopt oil-price-based fiscal rules; *Five, make accounting and allocation of oil revenues fully-completely-painfully transparent; *Six, devise a public investment program that promotes the diversification of the economy; *Seven, above all, stay the course.

Let me repeat that: Nigeria has to stay the course. It might take another decade to fully reap the dividends. But, if you stay the course, you will begin reaping them soon, as surely as night follows day. That is the end of the history lesson. Let’s talk about today. Nigeria is once again at a crossroads. It has begun to implement a far-reaching, politically difficult reform, with national, regional and even global repercussions. Without solid progress in Nigeria, the sustainable development goals will remain out of reach. Nigeria, after all, is now the country with the largest number of people living in extreme poverty—not just in Africa but in the world. In the 1990s, India took the position of the number one poor country from China. A few years ago, Nigeria took the position of number one poor nation in the world. The difference is that while India and China have more than 1.4 billion people each, Nigeria’s population is about 225 million. That is about the same as just two of China’s largest provinces and just bit more than India’s largest state. A great nation like Nigeria should not let this continue. The song we heard earlier said that Nigeria will survive. Of course it will. But the aim of a great nation should be to thrive. The President’s “signature reforms” are essential to break from the past and chart a more hopeful course for all Nigerians. These reforms include the unification of what used to be multiple exchange rates. They include allowing the unified rate to be determined by the market. And, of course, they include the elimination of the PMS subsidy.