Danne Institute for Research

Insecurity is high in Nigeria. An estimated 40% of the population lives below the poverty line of N137,430 per annum and unemployment stood at 33.3% as at the fourth quarter of December, 2020. Crude oil prices have been low and government revenues consequently way below expectation. Total debt obligations for all levels of government, as at December 31, 2020, was about 33 trillion Naira. Inflation as at April, 2021 was 18.12%. The current Naira to Dollar exchange rate as at 28 May 2021 was N410 for $1.

How can Nigeria overcome her challenges?

In this article we look at a period of reform in our history: the challenges, some of the reforms carried out, the outcomes and why they were successful. The Okonjo-Iweala led reforms may hold lessons for our current situation.

The hardship of the 1970s and 1980s in Nigeria were a result of its overreliance on a commodity whose price was volatile. A lifestyle based on lottery winnings without judicious management is unsustainable. The problems foisted on the country by her crude oil bounty, which rose from 57.5% of exports in 1970 to 93.3% in 1977, was soon self-evident when oil prices dropped in the 1980s.

Oil export revenues dropped from $26 billion in 1980 to $10 billion in 1982. By early 1986, it had plummeted still further to $6 billion. The immediate reaction of the government when oil price dropped, and with it the external windfall, was to resort to deficits financed by borrowing.

For many years, State expenditure varied with oil revenues. When oil prices were high, the governments spent a lot and when prices dropped, they went borrowing to make up for the shortfall instead of cutting costs and reducing expenditure. Borrowing did not have a positive impact on the economy. In fact, during the oil price slump in the 1970s, Nigeria’s external debt ballooned from $1 billion in 1977 to $18.5 billion in 1983.

When Okonjo-Iweala became finance minister in 2003, the economy was, as she put it, faltering. The GDP growth rate was 0.23% in 1998 and 1.49% in 1999. It jumped to 5.64% in 2000 and then dropped for two consecutive years: 3.31% in 2001 and 1.42% in 2002. As at December 31, 2004, Nigeria’s total debt stock was $36 billion.

President Olusegun Obasanjo appointed Ngozi Okonjo-Iweala as Minister of Finance and head of his Economic Team. The key members of that team were experts brought into government to use their expertise to fix the economy and put Nigeria on an upward trajectory. They developed an overarching strategy for the reform which they called the National Economic Empowerment & Development Strategy (NEEDS).

The Economic Team established the Oil Price-based Fiscal Rule (later enacted into law as the Fiscal Responsibility Act). This rule delinked the volatility in current oil prices from government expenditure. Even though oil prices were high during most of 2003 to 2007, the Team pegged the oil price to be used in its budget well below the current price.

An excess crude oil account was created with the Central Bank to accumulate the difference between the current price and the benchmark price. According to Okonjo Iweala, by the end of 2006, “Nigeria had accumulated gross reserves of US$46 billion of which US$8 billion was in the excess crude oil account.” They essentially limited runaway government expenditure and increased savings.

Another major achievement of the Economic Team was the negotiation of debt relief with the Paris Club, London Club creditors, etc. According to Catherine Duggan, “It was one of the largest debt write-offs in history, the first time a developing country had ever arranged a debt buy-back, and the first major debt deal which was not based on a restructuring program supervised by the International Monetary Fund—a step that would have been unpopular in Nigeria.” In total, $18 billion was written off.

Attempts were made to tackle corruption in public sector through the introduction of the Due Process mechanism in public procurement, commitment to the Extractive Industries Transparency Initiative (EITI) and the creation of institutions like the Independent Corrupt Practices Commission (ICPC) and the Economic and Financial Crimes Commission (EFCC).

The reforms included further liberalization of the telecommunications sector, downstream oil and gas sectors as well as power. Over 100 parastatals were privatized during the second term of President Obasanjo reducing the subsidy obligation of the government. Liberalization of the telecoms sector brought over US$1billion per annum in foreign direct investment. The number of subscribers ballooned and the industry became the fastest growing on the continent. Other reforms included civil service reforms which involved the elimination of ghost workers (as many as 8000 from the federal civil Service). The total savings from civil-service reforms was estimated at N26 billion.

In 2004, the President hired another technocrat (Ifueko Omoigui), as the new Executive Chairman of the Federal Internal Revenue Service. The mandate was clear: increase revenue collections and grow non-oil revenues. The results showed not only growth in revenues but most especially in non-oil revenues. Tax collections grew from N1.2 trillion in 2004 to N2.9 trillion in 2008. Non-oil revenue collections grew from N265 billion in 2003 to N1.74 trillion in 2010.

Charles Soludo, the Central Bank Governor, also a member of the Economic Team, aided by the passage of the CBN/BOFI Amendment act which increased the institution’s independence, carried out monetary reforms. The exchange rate was liberalized in 2004 and a Wholesale Dutch Auction system adopted. By the next year a convergence of foreign exchange rates was achieved. The Central Bank also strengthened the banking sector by increasing the minimum capital base of banks and, among other things, improving banking supervision.

The results

Real per capita income leapt, bounding along between 2001 and 2006 at 4.2 per cent annually. The improved macroeconomic performance shows the effects of reforms aimed at the country’s structural economic deficiencies and poor oil revenue management. In 2006 the country had an inflation rate of ten per cent. External debt dropped from $35.9 billion in 2004 to $5 billion in 2006. Foreign direct investments leapt from $1.18 billion in 2001 to $4.4 billion in 2006. Foreign exchange reserves, $7billion in 2002 were approximately $45 billion in 2006.

With a healthy banking industry and ample foreign reserves, Nigeria weathered the global financial crisis.

Why were the reformers successful?

The Economic Team was made up of experts, technocrats who focused on the job at hand and were interested in leaving a legacy. Finding the right people for the job is key to the success of any reform effort. President Olusegun Obasanjo selected and supported an expert team.

The reformers themselves say that these changes would not have been possible without his unwavering support. The President allowed the professionals to do their job and shielded them, to some extent, from the politics. Dr Okonjo-Iweala had this to say: “there is little point to embarking on reform unless there is a demand for it by the top leadership. … Reformers must continually search whether the political will is still evident.”

President Obasanjo supported his team of reformers. They knew he had their back and could focus on their task. He demonstrated the necessary political will.

Interestingly, those reforms were carried out when oil prices were high: a time most Nigerian governments would have gone on a jamboree. Catherine Dunggan explained: “…unlike the early 1980s, Obasanjo and his team developed disciplined policies and were largely faithful to them. Inflation declined even as oil prices rose, government spending and waste were held down, and there were successful efforts to diversify the economy.”

A number of questions come to mind: do we have the right people managing the economy? Does the top leadership want and demand reform? Does the necessary support from the President exist to push through needed reforms? Nigeria can survive and thrive. The times that we are in call for bold reforms, at all levels. But where are the reformers? Fortune, they say, favours the bold.