People & Money

BIG READ: The Subsidy Traps and Nigeria’s Destiny: Will Buhari Set Nigeria Free?

Nigeria’s earnings from oil exports rose astronomically from $300 million in 1970 to $6.3 billion in 1976. By 1978, the FGN had more than tripled its spending. Nigeria had accumulated over $3.3 billion in external loans by the end of 1978. The Shagari administration inherited an external reserve of about $5.1 billion in 1979 but by the time it was deposed in the 1983 coup, it had incurred an external debt of $20 billion.

Nigeria discovered oil in commercial quantity in 1956, commencing production in 1957 and exports the following year. By 1970, earnings from oil exports had reached $300 million, rising astronomically to $6.3 billion by 1976 as a result of the 1973 Israeli-Arab Yom Kippur war. Arab states had declared an oil supply embargo against the United States of America and other Western nations for taking sides with Israel, triggering a sharp rise in oil prices and creating a massive windfall for Nigeria.

It also led to a decision to subsidize petroleum for Nigerian users, a seemingly wise decision. Why inflict the pain of galloping oil prices on Nigerians who did not take sides in the Arab-Israeli war? But this proved to be the beginning of one of the greatest policy tragedies in economic history.

Nigeria’s oil industry and indeed the Nigerian economy have been trapped ever since in this decision to protect Nigerians from the rise in the global oil price since 1973. Many governments have tried to remove the subsidy but none has succeeded in completely eliminating it. In the first of such efforts, the Murtala-Obasanjo Government in 1976 increased fuel prices by 76.3% to reduce the fuel subsidy.

While some governments saved their Arab-Israeli War oil windfall, Nigeria rapidly increased government expenditure, doubling the capital budget in some years, far beyond the capacity to plan or manage projects. The result was massive corruption, mindless waste and soon enough, crippling debts.

As oil revenue flowed in, Nigeria doubled expenditure in 1974 and again in 1975. The Federal Government had spent 18% less than it earned between 1971 and 1973. In 1974 the FGN saved 46% of its revenue which had increased by 183 %. But between 1975 and 1978, the FGN spent 24% more than it earned i.e. its expenditure in these four years was more than 3 times what it spent in 1973 before the Yom Kippur oil boom. Reserves were depleted and the expenditure splurge was supplemented by foreign loans; by 1978, Nigeria had accumulated over $3.3 billion in external loans.

In 1979, the Shagari administration inherited an external reserve of about $5.1 billion but by the time it was deposed in a coup, it had incurred an external debt of $20 billion. While it is popular to blame the corruption of the politicians for this outcome, it is ultimately explained by the set of economic ideas that allocated a central role to the state in improving social welfare and achieving economic development and bestowed on it vast tools to play this role. By their very nature, the policy set encouraged waste and corruption.

Emblematic Fraud – The Cement Armada

The principal objective of public procurement quickly seemed to have become spending as much money as possible, as quickly as possible, so that as much as possible of it could be stolen. Perhaps, nothing symbolizes this objective better than the so-called “cement armada” scandal. Nigeria in 1975 ordered 20 million tons of cement, with 16 million tons requested by the Ministry of Defense, i.e. the military guys in power.

The quantity of cement ordered was twice more than the off-loading capacity of all Nigerian ports put together. The result was a long line of ships, as many as 420 were counted in September 1976, stretching into the Atlantic Ocean as far as the eye could see, waiting to deliver their cargo. Some waited for more than a year, with each ship collecting $54,100 per day as demurrage.

The cement, purchased at inflated prices as a government enquiry found out, mostly became unusable while waiting to be off-loaded. The government tribunal however said it was unable to untangle the “web of kickbacks and bribes involving Government officials, foreign shipowners, corrupt purchasing agents, unscrupulous middlemen, phony corporations, dubious letters of credit and Swiss bank accounts” that produced the cement armada as the public had not cooperated in volunteering information.

Also Read: BIG READ – Why Asian-Nigerian Businesses Are So Successful

Countries usually finance future development from the proceeds of past or current development i.e. they invest in roads, urban planning, ports, schools, agriculture extension services, a competitively recruited and well-renumerated civil service etc. from taxes on a range of productive economic activities. States and societies almost automatically develop planning capacities-to stimulate further growth in many sectors, often starting with agriculture, and to spend productively on public services that further expand economic activities and diversify the structure of production.

Nigeria rapidly stopped nurturing the growth of the economic activities, especially agriculture, that countries normally rely on to finance growth at the initial stages of economic modernisation.

By the middle of the 1970s, oil provided 77% of the FGN’s revenue; this rose to 80% after a decade. Nigeria also depended on oil dollars to pay for around 80% of exports. While Nigeria produced a wide range of industrial goods, the high exchange rate that oil dollars made possible-in 1976, $1 could buy only 0.62 kobo- made Nigeria products too expensive abroad. Soon enough, as Nigeria could not afford to maintain or replace infrastructure, the cost of producing and transporting goods within the country made Nigerian products even more expensive.

Even developed countries with long-established bureaucracies and political systems would have found it impossible to plan and spend efficiently if they doubled expenditure every year. The expenditure binge established three features of Nigerian political economy – a deeply entrenched profligate culture, the Nigerian belief that their country is very rich and should provide many things for free or at huge subsidies for everyone and a political culture that revolve around capturing state functions and expenditure for personal benefit that gradually permeated the state and society. These features fed each other.

As Nigerians witnessed vast waste and corruption, their belief that their country is rich and should hence provide free or subsidized goods and services was reinforced. Providing subsidies created even more opportunity for corruption for politicians and bureaucrats.

Also Read: What Nigeria Needs is Transformational Corruption – David Hundeyin

The Evil Twins

The Nigerian economy and indeed the destiny of the country has been trapped in twin subsidies since the mid 1970s. The first one, the perennial attempt by the Central Bank of Nigeria to supply foreign currency at an “affordable” rate even when oil prices, Nigeria’s primary source of foreign exchange, fall and limits supply.

The naira exchange rate has no relationship with the capability of the Nigerian economy to produce goods, apart from oil, which can be sold abroad to pay for imports. The CBN chooses to maintain this “economic distancing” even when the price of oil falls and offers an opportunity to adjust i.e. make the price of foreign exchange (the most important price in the economy) less dependent on the international oil price which is inherently volatile.

The second subsidy is the policy of selling petroleum first, at a cost below global prices and later, at a cost below the cost of supplying the product.

Nigeria has become the world’s poverty capital, having more poor people living in extreme poverty than even India, a nation of 1.3 billion people. Many Nigerians do not understand how the nation’s poverty is produced by the twin traps of fuel and foreign currency subsidies. Because Nigerians and their Government have decided that the country has fabulous oil riches, oil is almost the primary means of financing development, investing in roads, education, publicly funded industrial or agriculture research etc.

Nigeria’s Omnipotent Oil Exports Revenue

The disappointing reality is that Nigeria’s oil income is far from adequate to finance the country’s needs even if the income is honestly invested. In 2018, Saudi Arabia produced 129 barrels of oil for each citizen, Malaysia 7, Kuwait 260 and Norway 101 while Nigeria produced only 3 barrels for each Nigerian.

Successful oil exporters like Malaysia treated oil as additional income they could use to finance development rather than a substitute of the need to nurture the growth of other sectors. The policies Nigerians and their governments have preferred suggest that they think having oil relieves them of the need to use economic resources prudently and invest in things that enable them to compete with other countries.

Nigerian’s insistence on the fuel subsidy has prevented investment that could create domestic jobs and earn foreign exchange and has shifted the country’s wealth massively from productive investment towards unsustainable consumption.

In a 2019 study, the budget tracking NGO, BudgIT disclosed that the FGN spent about N10.78 trillion on the fuel subsidy in 14 years. The N1.5 trillion subsidy expenditure in 2011 was 118% more than the expenditure on infrastructure and more than triple the combined spending on education, healthcare and roads.

In 2019, according to Bloomberg, Nigeria spent four times on the fuel subsidy than it spent on “building schools, health centers, and science labs” i.e. a year after Nigeria was declared the “the poverty capital of the world”.

Nigeria has more than 10 million children out of school (the highest in the world) and about 80% of primary school leavers in Nigeria cannot read, compared to only 20% in Tanzania. The problems of access and quality are funding issues but Nigeria explicitly has chosen to neglect its human capital while pouring billions into the fraud-ridden petroleum subsidy regime.

Malaysia not only collects the full price of petroleum from most of its citizens, it also avidly collects money for them for using the 31 toll roads built by private investors. Malaysia has the best expressway network in Asia, after Japan and China but the majority of its majority of expressways and highways are tolled. According to rhinocarhire.com, a global car rental company, it is difficult not to encounter a toll road travelling within Malaysia.

Even very rich Nigerians, like residents of Lekki, led by a Senior Advocate of Nigeria, Ebunolu Adegboruwa, argue against toll roads on the grounds that Nigerians already pay taxes. But like virtually all the claims of Nigerians, rich as well as poor, on their economy, this is a baseless argument. Malaysia’s tax-to-GDP ratio in 2017 was 12.5% while Nigeria’s only 5.7%; the average for 26 African countries was 17.5%

Nigerians’ insistence to fund everything with oil income and the resulting fiscal priorities are well reflected in the country’s productive capacity. In 2018, total Nigerian agriculture exports was N302.3 billion, less than a billion dollars while Malaysia exported agricultural produce worth $27.5 billion in 2016.

In 2017, Malaysian export of palm oil (along with processed derivatives), was worth $966,000 . Nigeria used to export more palm oil than Malaysia in the 1950s and early 1960s but is now a net importer.  With a population of 195.9 million and land covering 923,768 square kilometres, compared to Malaysia’s 31.53 million people and a landmass covering only 329,847 square kilometres, Nigeria ought to be producing much more agricultural goods.

Permanent Boom and Burst

The decision to fix Nigeria’s foreign exchange based on oil export revenue has created a permanent boom and burst economic cycle. When oil prices are high, Nigeria can manufacture products and create employment because it can afford to pay for imported inputs. Once the oil prices fall, production and employment take a hit.

So as we have “abandoned projects” i.e. public construction projects started when oil prices are high but left uncompleted when they fall, Nigeria is also replete with “abandoned businesses” i.e. entreprises destroyed by a fall in oil prices and the consequent foreign exchange scarcity which suddenly makes inputs unaffordable  and/or makes products too expensive.

Seeing how this boom and burst cycle, characterized by the devaluation of the naira after periods of unsustainable high exchange rates based on high oil prices, destroys investment, many manufacturers have chosen to export goods to Nigeria rather establish plants to produce in the country. The zig-zag pattern of consumption power in Nigeria, based on the fluctuation of the international oil price, is a major reason why a host of manufacturers such as Leyland motors, Dunlop, Michelin, Exide Batteries, Procter and Gamble etc. have exited Nigeria.

In the early late 1980s, a Spanish maker of building materials seriously considered setting up a Nigerian plant. Ultimately, it decided to keep exporting to Nigeria rather than invest in manufacturing in the country. One of the key reasons for the decision was Nigeria’s foreign exchange policy. The manufacturer concluded that its products would not be protected from imports because, as was the practice, Nigeria would be able to supply dollars at a high exchange rate for imports once oil prices recovered.

What Nigeria’s attempt to channel cheap foreign exchange to sectors the government deems important, especially manufacturing, has achieved in reality is to fund a wide range of imported goods, get Nigerian manufacturing hooked on imported inputs and deliver huge profits to individuals engaged in “roundtripping” or “arrangee” as the practice of selling CBN-subsidized dollars on the black market was known in the 1970s. It achieved exactly the opposite of what the policy intended – it crippled the expansion of the manufacturing base and discouraged investment in manufacturing.

The management of the country’s petrodollars has ended up making Nigeria poorer by creating a very unstable microeconomic environment. Nigeria clearly would have been better off without the oil – investors would have been able to plan based on far more stable trends of the country’s consumption.

Free at last?

There has been amazing continuity in Nigerian political economy. Politicians continue to promise and citizens continue demand free or subsidized goods and services. Politicians and bureaucrats make fortunes from delivering the freebies and the stringent economic controls required to deliver them block billions of dollars in private sector investment from Nigeria while the circle of poverty draws in more and more Nigerians. Fuel subsidy not only delivers billions of naira to well-connected smugglers who take Nigerian fuel to sell in neighboring countries where energy is sold at market prices or to businessmen who are paid for phony imports, it blocks investment in domestic refineries.

The American political economist Peter Lewis once noted that in the 1970s and 1980s, possession of an “import permit”, i.e. the piece of paper that allowed lucky bearers to buy cheap dollars from the Central Bank of Nigeria to buy “approved imports”, was the document through which the privileged made fortunes.

When banking was liberalized in late 1980s, the official document that granted access to sudden fortunes became a banking license. New bank owners, along with a few privileged staff, in Nigeria speak have “cornered” billions of dollars. The old game continues; the FGN/CBN pretends it is supplying  subsidised foreign currency to manufacturers while insiders  manufacture papers to enable them buy and resell the dollars on the black on market.

Liberalisation of banking and telecommunications have encouraged genuine enterprise and the emergence of many Nigerians who have made huge fortunes largely through their own vision and energy. They have created jobs for hundreds of thousands. But subsidies and economic controls continue to make access to government a source of substantial fortune while greatly constricting the space for wealth-creating entreprise and investment.

The Buhari government has eradicated fuel subsidies for electricity and fuel, not because it was convinced of the tragic poverty economic controls have foisted on Nigeria but because Nigeria has become too broke to fund the subsidies.

But bitter enders, the government has held on to one of the policies that have done the greatest damage to the Nigerian economy and facilitated massive corruption – selective allocation of subsidised foreign exchange.

A gap of N7 now exists between the dollar bought at the official CBN rate and what obtains in the parallel market. As usual, this provides an opportunity to make massive illicit gains and deters investment.

More importantly, it is a sign that despite everything, Nigeria is not ready to spring from the trap it set for itself in the 1970s. Without the courage to wean its economy from volatile oil prices, the country will remain stuck in the circle of boom and burst.

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2 Comments

  1. Will Buhari set Nigeria free?
    How is that ever going to be possible? This is an endeavour that should ordinarily stretch brilliant minds to the limit. Pray, where would ordinary Buhari begin?
    Any mumu can seek loans and spend the proceeds.
    Haba!

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