Nigeria must grow its foreign reserves. – Ogho Okiti

Hello and welcome to my commentary this week. 

For some time now, the government and many Nigerians have been trying to forget the eight disastrous years of President Muhammadu Buhari. But that did not last very long. Last week, the International Monetary Fund (IMF) reminded us again after it projected that the Nigerian economy will be the fourth largest in Africa by the end of this year. 

But that is not President Buhari’s headache, so let’s stick to 2023. At the end of 2023, Nigeria was the third largest economy in Africa after Egypt and South Africa. To contextualise the awful decline in Nigeria’s GDP since 2015, the size of the Nigerian economy then was 492 US billion dollars, while that of Algeria which is now projected to overtake Nigeria this year was 187 US billion dollars. Indeed, in 2015, Nigeria was not just the largest economy in Africa, it was larger than the second, which was Egypt, by 142 US billion dollars. 

However, this commentary is not about mocking President Buhari’s economic policies. It is about pointing out how things can be much more different under President Bola Ahmed Tinubu than it currently is. 

So, here, I share three fiscal policy mistakes of the Buhari years that should not be repeated by President Bola Ahmed Tinubu. 

But before I do that, I want to take a quote from the book by Greg Mills, “Why Africa is Poor.” Greg Mills wrote, and I quote, “The main reason why Africa people are poor is because their leaders have made this choice”. He added, “The record shows that countries can grow their economies and develop faster if leaders take sound decisions in the national interest.”

In the 8 disastrous years of President Buhari, the attitude, rarely publicly mentioned or discussed is that the government elevated Nigeria’s external problems. The government would readily blame the decline in oil prices from 2014 to 2016 for the economic recession of 2016 and 2017, the Covid – 19 shock of 2020 and the Russia / Ukraine war of 2022. Yes, these shocks were significant and were the fault lines, but the awful fiscal policies of the government amplified the problems and impact on the Nigerian economy. 

How? By escalating Nigeria’s deficits and debts, and by failing to carry out a single economic reform, President Buhari’s responses to economic shocks made economic outcomes even worse. Under President Buhari, Nigeria experienced an “Idi Amin” type of fiscal policy. He did not merely escalate Nigeria’s deficits and debts before expanding revenues but continued to expand them on the back of unrealistic and folly revenue expectations. The second mistake was to think that increases in government expenditure automatically translates to increases in investment, growth, and jobs. Nigeria’s experience has shown that not all government expenditures contribute to growth.

Turning now to current contexts. 

The initial evidence is that President Bola Tinubu is different, and he is. In the first month of his administration, he carried out two major economic reforms. First was the removal of fuel subsidy, followed by the aggregation of all formal foreign exchange transactions into the Nigeria Foreign Exchange Market (NFEM). Unfortunately, these reforms have not progressed as intended. Exchange rate volatility invariably means that some element of fuel subsidy has returned, while the volatility of exchange rates negates one of the important reasons for the reforms. 

It is evident that President Tinubu recognizes that the difference he can make on Nigeria’s growth performance is not necessarily by increasing government expenditure. He knows that the greater impact on growth is dependent on the other things that he has started to do, which are the reforms around fuel subsidy, exchange rates, power and taxation. Policy reforms, which are invariably policy investments can shift the gear of the economy for another 25 years because of their impact on private investments. 

However, there is still something missing. 

If anything, the last seven months has buttressed the notion, and some will argue that it has reinforced the notion that the government believes monetary policy tools, elements, and applications will be sufficient to stabilize the Naira and bring inflation expectations down. In the context, the Central Bank of Nigeria has rightly tightened monetary policies, made the foreign exchange market more transparent, and removed many elements of market rigidities. 

However, what is the contributions of fiscal policy?

Historically, every successive government have sought to use foreign savings for investments in Nigeria. That is great, but it is not sufficient. It is the reason why we suffer disproportionately from every shock to the economy. So, fiscal policy must step up. Nigeria needs to improve its level and rates of savings, and the government must lead. Indeed, the only government that followed this principle was also the one that was able to attract significant foreign investments. 

As I close, the point I’m making is that we must grow our reserves. We must seek to replicate the growth in reserves like Nigeria did under President Olusegun Obasanjo. It is the only antidote to frequent economic shocks, to attracting long term foreign investments, and a platform for keeping the value of our collective relative wealth stable in US dollars. The notion behind the role of foreign reserves in modern economic development is simple. It is like the share of equity of a business owner asking others to invest in the business. Foreign reserves is the equivalent of our skin in our development journey. It is the insurance that foreign investors look out for. And it is ridiculous to ask that only monetary policy to bear the brunt. That is not sustainable.

For more of my thoughts, please visit tb.africa.

I thank you.