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Vol 64 No 12

Published 8th June 2023


Tinubu tries shock therapy on sluggish economy

Ending subsidies, selling oil assets and devaluing the naira are on the agenda as the new government goes for growth

Copyright © Africa Confidential 2023

Proclaiming the end of fuel subsidies at his inauguration on 29 May and his intention to merge the multiple exchange rates for the beleaguered naira, President Bola Tinubu signalled that he would take on two of the most politically charged economic policies.

This may presage other radical economic moves, Africa Confidential hears. Constrained by low revenues, policy advisors in Abuja are mulling the option of selling at least a percentage of state assets in the oil and gas industry.

Stakes in those transactions may be held out as compensation to those wealthy fuel traders who lost out from the ending of the subsidy regime.

That would chime with the lifting of subsidies, the commercialisation of the Nigerian National Petroleum Corporation (NNPC) under the Petroleum Industry Act 2021, and the relaunching of the downstream oil sector with the start-up of the Dangote Group's 650,000-barrel-a-day refinery, petrochemicals unit and fertiliser plant in Lagos.

Successive governments used the lack of transparency in both policies for political patronage, and few expected Tinubu to clamp down on such politically useful vehicles, but it seems the country's diminishing foreign exchange reserves and weak export revenues forced his hand.

Defending the naira had consumed 10% of the country's foreign reserves in the last year alone, and the misallocation of foreign exchange was favouring political clients and short-changing productive users. The calculus on the fuel subsidy was simpler still: the treasury had run out of money (Dispatches 1/06/23, New President Tinubu ends fuel subsidy and lambasts central bank in inaugural speech).

The first test for Tinubu's ending the fuel subsidy was the planned national strike by the National Labour Congress (NLC) set for 7 June. The new government obtained an injunction at the National Industrial Court against the strike, then late on 5 June, it emerged that it had set up a joint committee with leaders of the NLC and the Trade Union Congress (TUC) to work out a response to the economic hardship the policy will cause to their members. The discussions on funding for education and infrastructure, compensatory wage rises, and a World Bank-backed cash transfer scheme make for a more plausible strategy by the government after its false start: announcing the end of subsidies without any socio-economic plan to deal with the fallout.

This deal-making political style is also reminiscent of the Tinubu method when he was governor of Lagos State. When he took over the state, it was generating some $4 million a month in taxes. A decade later, it was earning over $100m a month, due mainly to his sub-contracting an outfit called Alpha Beta (in which Tinubu's opponents insist he has a hidden financial stake). Alpha Beta handled the calculations, tracking and reconciliation of state taxes in Lagos in return for a substantial commission.

That worked in the country's commercial capital with a population of over 15m and whose annual GDP exceeds that of a dozen African countries, but it won't transfer easily to the federal government, which has to raise revenues to fund services for 220m people. Nigeria's tax as a percentage of gross domestic product was 6.5% in 2020, according to the IMF, and one of the lowest in the world; the average in Africa is about 14%; and over 20% in Asia.

Boosting revenues will be an even bigger challenge for Tinubu than ending the fuel subsidy and merging the exchange rates (AC Vol 64 No 8, Asiwaju Tinubu the taxman cometh). His former chief of staff in Lagos and outgoing communications minister Lai Mohammed told Africa Confidential that Tinubu's government would collect tax more efficiently rather than raise it. But to fund the new government's  ambitious public investment programmes he will need to do both.

Nigeria's budgeted spending per head is far lower than its peer economies such as South Africa, Egypt and Kenya. And they are looking at ways to sell state assets and raise taxes. The IMF has been advising Nigeria to double the rate of value-added tax (VAT) to 15%. That's a sure way to boost revenue but it would also drive inflation, on top of the effects of the naira devaluation and ending of the fuel subsidy. Much of the national economy lies outside the tax net, based on smallholder farming and informal trading, despite the government's push for all citizens to open online bank accounts.

Recession fear
Tinubu's advisors have been debating how to balance the revenue and the growth imperatives. Many fear that an early revenue push, at a time of low-growth and slow job creation, could tip the economy back into recession. Yet, without much higher revenues, the treasury would have to borrow more or print more money, which would fuel the already high inflation rate.

The policy options have narrowed sharply. On almost every index, Nigeria's economy is weaker today than when Buhari took over in 2015: slower growth; much higher fiscal deficit; a doubling of inflation; more (especially youth) unemployment; a devalued naira; oil production running at around 500,000 barrels a day lower; and spiralling public debt and repayments.

Most dangerous in the short term is the judgement due later this year on the 2017 arbitration award to Process & Industrial Development (P&ID) in a London court over a 2010 gas supply and processing deal that went sour (AC Vol 61 No 15, Fight in the last chance saloon). Should the federal government lose its case, it would be liable to pay the P&ID claimants US$11 billion including interest. That would wipe out almost a third of its current foreign exchange reserves. Given the astronomical claims of malfeasance that both sides in the case are accused of, some sort of out-of-court settlement may be possible.

Rocketing youth unemployment is another political threat for Tinubu's government. The official jobless figure of 33% – youth unemployment is estimated at over 50% – could well be revised when the National Bureau of Statistics (NBS), working with the World Bank, revises its methodology and labour market surveys.  

Those dangerous figures are reflected in wider data on the sluggish economy. The NBS data for the first quarter of 2023, shows that growth slowed to 2.31% – zero in per capita terms – and almost 1% less than a year ago. Of particular concern is the almost 1% contraction in the labour-intensive agriculture sector crucial for domestic food production and the livelihoods of poor farmers. Livestock farmers were hit worse than crop farmers; that might be linked to widening security problems. Manufacturing growth has also slowed. 

To counter this economic gloom, much could be done to boost oil and gas production. That means political deals to boost security in oil-producing areas and raising investment levels. Oil contributes only 6.2% to GDP, according to the NBS, but the industry retains its outsized role in generating exports and revenues.

Under Buhari's presidency, Nigeria lost out in the search by European economies for alternatives to Russian oil and gas. But a more coordinated and strategic approach from Abuja could change that. Nigeria still has Africa's biggest gas reserves and is the sixth biggest exporter of liquefied natural gas (AC Vol 64 No 10, Will you be my strategic partner?). 

Should some of the pro-market advisors around Tinubu win the argument and move towards wide-ranging sales of state-owned oil and gas assets, that might give the industry the financial boost it needs to draw in some of the capital that has been flowing to new producers in Mozambique, Senegal and Tanzania.


The International Monetary Fund (IMF) forecasts that growing deficits will drive up public debt over the next four years – unless the government raises revenue and cuts subsidies.

When downgrading Nigeria's sovereign ratings this year, Moody's warned of a worsening 'negative feedback loop' between increased borrowing and increased interest rates, and its fiscal implications.

That argues for caution on Nigeria's debt strategy. The US$103.1 billion total is less problematic than the servicing costs. Reading the 2023 budget in January, outgoing Finance Minister Zainab Ahmed told the National Assembly that the government had spent 80% of its revenues on debt service in the first 11 months of last year.

That didn't mean the government was planning to restructure its debt, she insisted. The securitisation last month of the 22.7 trillion naira ($49bn) Ways and Means Advances, or overdraft, extended by the Central Bank to the federal government pushes up public debt to $152.1bn (AC Vol 64 No 3, Economic woes test voter loyalties).

That's higher than any other African economy except Egypt, but well below the government's Debt Management Office (DMO) limit of 40% of GDP (Dispatches 11/2/23, Bank governor Emefiele stays at centre of election politics – despite dropping his presidential bid). Securitisation of this massive Central Bank overdraft will cut the servicing costs and increase transparency, as the DMO points out. As principal repayments are postponed for three years, and the interest rate has been cut, it will be a lesser fiscal burden on Tinubu's first presidential term.

Such overdrafts are set to be normalised as part of Tinubu's fiscal expansionary strategy and the National Assembly has loosened the rules on them. Days before Tinubu took office, yields on Nigeria's Eurobonds maturing in 2027 and beyond were between 3-5% higher than when they were issued. The markets have cautiously welcomed the new government, raising the question about how quickly Abuja will seek to issue another Eurobond.

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