Given the abbreviated nature of our own reforms, it is only natural that one questions the sources of the positive numbers on the economy. Over the past two years, the Nigerian economy has been no more parsimonious than it has always been. It has not become more efficient at allocating scarce resources. It is, indeed, arguably less productive.
When the World Bank recently described Nigeria as the poster economy for reform globally it came across as condescending. Responding to my concerns, a friend asked, “In which other economy has inflation been driven down as far and as quickly as it has since the Tinubu government came to power?” In truth, the annual rate of increases in domestic prices stood at 15.2 per cent in December last year, down from more than 34 per cent in the same month in 2024. But in Argentina, the economy’s response to the Milei government’s reforms was even more salutary. Annual inflation came in at 1.5 per cent in June last year, from 254.2 per cent in the first month of Milei’s term.
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Both governments deregulated prices. Enough, in Nigeria’s case, to push external reserves above US$50 billion – a seven-year high, and for the IMF to forecast growth of 4.4 per cent this year. But while elimination of the costly fuel subsidy and the floating of the naira have borne the burden of the domestic reform effort, in Argentina, the reforms have been more comprehensive. By downsizing government and reducing spending the Milei government pushed the national budget into surplus in its first few months in office. By year end, government spending was down 30 per cent. The initial shock from the austerity programme was severe, however. The poverty rate nudged 52.9 per cent by the beginning of 2024. But by January last year it had dropped to 33.5 per cent. It stood at 41.7 per cent at Milei’s inauguration.
Given the abbreviated nature of our own reforms, it is only natural that one questions the sources of the positive numbers on the economy. Over the past two years, the Nigerian economy has been no more parsimonious than it has always been. It has not become more efficient at allocating scarce resources. It is, indeed, arguably less productive. It would seem, instead, that, according to an advisory note that I read last week, “firmer oil prices, rising reserves and reform-driven inflows continue to support currency stability despite lingering geopolitical risks”. Even in this reading, there are a few complications. Average oil price in the global market was way below the federal government’s budget benchmark last year. Reserves are rising, but on the back of a fickle carry-trade by portfolio investors. Evidently, the puzzle at the heart of the Nigerian economy today is too deep to be resolved by blasé interpretations.
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What is character of this puzzle? Let us take an average investor operating out of Nigeria. Her goal is to make sure that no single asset category skews the overall performance of her portmanteau of investments. For her, therefore, on top of the split in her portfolio into holdings of equities (60 per cent of it) and fixed income securities (40 per cent), is a split into dollar-denominated-assets (60 per cent) and naira-denominated-assets (40 per cent).
Up until the Tinubu government’s reforms, this portfolio had worked, with depreciation of the naira-denominated component compensated for by a strengthening dollar – and vice versa. Up until recently, in fact, this portfolio gained on the back of the naira’s precipitous loss of value after the freeing of the domestic market for foreign exchange. Since then, though, the dollar has continued to lose value against a newly resurgent naira. The naira, too (and this is at the heart of the conundrum) has continued to lose value against the official basket of goods by which domestic inflation is measured. The problem is that internal price of the naira is wearing away, even as its external price strengthens. Yet the fortunes of the Nigerian and U.S. economy have not recently become positively correlated.
A strong suite of reforms that brought down government spending relative to GDP, improved the efficacy of government’s intervention in the economy, drove foreign direct investment inflows, and boosted domestic productivity would have strengthened the naira against the dollar differently. It would have reduced the domestic poverty rate, boosted employment, and increased both domestic purchasing power and final demand.
The Tinubu reforms have done none of these. Instead, the downward pressure on the dollar seems to be coming from doubt over the long-term health of the US economy because of the zany policies of the Trump administration. Across the world, this has seen investors search for new safe havens away from the dollar. This exogenous shock partly explains the recent uncoupling of the naira from its traditional relationship with the greenback.
Domestic inflation explains much of the rest. Inflation in Nigeria is still rising, and at 15 per cent, it is still considered above the level at which domestic growth and investment surges without the risk of inflation or recession heightening. Portfolio investors are the large, ungainly animals in this room. This group of investors borrow dollars at the low lending rates obtaining in the West to invest in naira-denominated assets with higher coupons. The investors are as flighty as their monies are hot. The recent mop up of dollars by the Central Bank of Nigeria designed to weaken the naira in order not to spook portfolio investors into a rush for the door shows the full extent of the Tinubu government’s reforms.
Uddin Ifeanyi, a journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
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