Will shock therapy revive Nigeria’s economy — or sink it further?

Fatai Oluwa, a patternmaker in Lagos, Nigeria’s teeming commercial capital, has started sleeping in the tailor shop where he works, often on his cutting table, so he can save on soaring commuter costs.

Since the snap removal last year of petrol subsidies by Nigeria’s president Bola Tinubu, the 24-year-old says the return bus fare for the 64km journey to his home in Ogun state has doubled to N7,000 ($4.50). That is a ruinous bite out of his monthly pay cheque of roughly $95, which also supports his widowed mother and two younger siblings at a time when he is already skipping meals to bring his daily food costs down to $1.60.

The end of the petrol subsidy, which made Nigerian fuel among the cheapest in the world, has torpedoed Oluwa’s life chances and driven millions of citizens deeper into poverty. The drastic measure is part of the shock therapy implemented by Tinubu — a set of policies that, almost inevitably, has become known as “Tinubunomics”.

Tinubu, a former governor of Lagos and a wealthy wheeler-dealer whose presidency is entering its second year, says that subsidy removal, together with a massive devaluation of the naira, is necessary to inject market discipline into the distorted and flat-on-its-back economy.

Map of Nigeria showing the capital Abuja, the state of Ogun, the cities of Lagos and Kaduna, and the Gulf of Guinea

During the eight years Tinubu’s predecessor Muhammadu Buhari was in office, Nigeria’s GDP shrank, in per capita terms, as he pursued ineffective economic policies with an interventionist theme. Decades before that, Nigeria fell to the so-called resource curse: though oil contributes a relatively small amount to the country’s GDP, it plays an overweening role in state finances, making up 80 per cent of government revenue.

“Our economy has been in desperate need of reform,” Tinubu, 72, said in a television address to the nation in June. “It has been unbalanced because it was built on flawed foundations and over-reliance on revenues from exploitation of oil.” Though he acknowledged his reforms spelt “hardship” for many, he described them as “repairs required to fix the economy over the long term”.

Tinubunomics sharply divides opinion. Critics say it is a return to the shock therapy of the eighties and nineties that will impoverish millions in pursuit of market purity. They add that recent anti-tax protests in Kenya are a warning of what can happen when governments push citizens too far.

Lagos Island
A wholesale market in Lagos, where Tinubu was a former governor. ‘Our economy has been in desperate need of reform,’ he said last month © Manny Jefferson/FT
Fatai Oluwa, a patternmaker in Lagos
Fatai Oluwa, a patternmaker in Lagos. ‘I don’t think they have any plans for anyone, especially young people,’ he says © Manny Jefferson/FT

But supporters say it is the jolt the economy needs after years of stagnation, corruption and insider dealing.

“These reforms may cause short-term pain but they are essential for long-term economic stability and growth,” says Ademola Adesina, co-founder and president of Sabi, a logistics solutions company.

Whatever the eventual benefits might be, the immediate consequences of economic surgery, administered without the anaesthetic of a functioning social security system, have been dire. A tripling of fuel prices combined with two steep currency devaluations, which have hoicked up the cost of imported goods, has pushed inflation to a three-decade high of nearly 34 per cent.

Food prices are rising faster, putting even basic staples like rice, milk and maize beyond the reach of many and sending malnutrition levels soaring. The Food and Agriculture Organization estimates that 26.5mn of Nigeria’s 220mn people are food insecure with at least 9mn children at risk of wasting, a medical condition that stunts development.

Desperate groups of hungry people have raided warehouses storing food. There have been deadly stampedes for the bags of emergency rations being handed out by some states, largesse that goes by the name of “palliatives”.

Nigeria, which for years took pride in being Africa’s biggest economy, has tumbled to fourth place in dollar terms. Without a strong recovery, the IMF predicts it is likely to slip to fifth by the end of 2024, behind South Africa, Egypt, Algeria and Ethiopia — a huge blow to Nigeria’s self-image as “the giant of Africa”.

It is a desperate situation for a young nation with a median age of 17 and one that, if UN projections are correct, will overtake the US as the world’s third most populous country by 2050.

“You say it is shock therapy,” says Olusegun Obasanjo, a former president, who is scathing about both the logic and execution of Tinubu’s programme. “What is the shock? You want to shock your people to death.”

Obasanjo, who governed both as a military and civilian president, accuses Tinubu of following tired old recipes from the IMF and World Bank, once known as “structural adjustment”. That term is loathed in Nigeria, and much of Africa, where it is associated with foreign-imposed austerity. “What are we adjusting when we have no structure?” asks the former president.

That is precisely the reason the economy needs root-and-branch reform, argue supporters of Tinubunomics.

“We are finally reconciling with our reality,” says Abubakar Suleiman, chief executive of Sterling Bank. “We need to get past the illusion of wealth on account of a few barrels of oil per capita,” he adds, referring to the 2mn barrels of oil a day the country is theoretically capable of producing. Chronic theft, often in collusion with state security forces, means it produces far less — a big reason for dollar shortages.

Yet even those who support Tinubu’s reforms have questioned the manner in which they have been introduced. In what appeared to be unscripted remarks during his May 2023 inauguration speech, the president stated almost offhandedly that the “fuel subsidy is gone”, sending panicked motorists to petrol stations to fill up.

In the same speech, delivered months before he got around to appointing a bloated 45-member cabinet, he triggered a slide in the naira by saying that foreign companies would be able to repatriate profits, something previously stymied by strict rationing of dollars.

Marina, Lagos Island. Tinubu, say observers, is seeking to replicate nationally the ‘Lagos model’ of reduced crime and more street lights, roads and bridges to create a business-friendly environment © Manny Jefferson/FT
Yemi Cardoso, governor of the Central Bank of Nigeria
Yemi Cardoso, governor of the central bank. He was a former Citibank executive who led Tinubu’s commission for economic planning in Lagos © Charlie Bibby/FT

“Policies seem to have been made on the fly,” says Dele Olojede, a prominent Nigerian journalist and winner of the Pulitzer Prize. “They can’t seem to articulate a strategy.”

However lacking the communication and however severe the impact on ordinary Nigerians, many economists welcome the measures. “I still think that those things were absolutely the right steps to take,” says Tope Lawani, managing partner of Helios Investment Partners, an Africa-focused investment firm, who describes Nigeria as suddenly “super interesting” from an investor’s perspective.

“I can’t honestly say there’s an obvious plan that one can decipher. But the hardest bit was to rip that band aid off,” Lawani says.

Serah Makka, executive director at ONE, an advocacy group, agrees that Tinubu had little choice but to embrace radical reform, but she cautions: “The outcome is not going to be felt for years to come.”

If benefits will take time, the negative impacts have been rapidly apparent. Higher fuel prices have inflated transport costs and crippled small businesses that rely on generators. The naira has undergone a pair of devaluations since Tinubu took office, falling initially from N460 to N820 to the dollar, before resuming its slide again in January and eventually settling at around N1,500.

Line chart of GDP ($bn) showing Nigeria has lost its place as Africa’s  largest economy

The changes to monetary policy have been no less startling. Godwin Emefiele, the former central bank governor who oversaw an opaque policy regime, has been put on trial for corruption. Under Emefiele, hard currency was distributed to favoured industries and individuals at artificially low rates. That starved other sectors of dollars or forced them to the parallel market, where rates diverged wildly from the official rate — an invitation to corruption. Under the new regime, described as “willing buyer, willing seller”, the gap has narrowed to virtually zero.

Ralph Mupita, chief executive of MTN, a South African mobile phone company heavily invested in Nigeria, says the foreign exchange market is improving but is still not fully transparent. He cites lack of clarity over the level of net foreign reserves at the central bank after JPMorgan estimated that they were closer to $4bn than the $34bn previously claimed.

“We’re going to have several quarters where it’s gonna be painful,” he adds. “But these changes in the medium to long term are what Nigeria needs.”

To execute his reforms, Tinubu has turned to old collaborators who helped him during what was considered his mostly successful tenure as governor of Lagos between 1999 and 2007.

The former accountant — once named by the US government as a probable beneficiary of proceeds of drug trafficking, which he denies — reduced crime, erected street lights and built roads and bridges. He is credited with creating an environment more conducive to business and cementing Lagos’s status as Nigeria’s most dynamic city.

Tinubu, say observers, is now seeking to replicate the “Lagos model” nationally. His workaround for a weak and corrupt state, says one foreign observer with knowledge of his thinking, is to offer macroeconomic stability plus a bare minimum of public services and infrastructure. The hope is that Nigeria’s legendarily entrepreneurial private sector can do the rest. “It’s very much an American dream model,” he says.

But Olojede, the Pulitzer Prize winner, says Tinubu has appointed a “wholly unprepared” team incapable of delivering an economic reset. “I just don’t have confidence in this extraordinarily weak, slapdash cabinet that seems to be based principally on political favours,” he says.

Yet even he acknowledges that two key positions — finance minister Wale Edun and governor of the central bank Yemi Cardoso — have been filled by technocrats with a reputation that has reassured foreign investors.

Edun, a banker who was a key member of Tinubu’s team in Lagos, says fiscal and monetary policy are working in combination to bring macroeconomic stability. “This government has not gone to the central bank to borrow or to pay any of its bills,” he says, referring to previous massive borrowing.

Despite suggestions of backsliding by the IMF, the government remains committed to eradicating a fuel subsidy that was costing $10bn of a $34bn federal budget and encouraging illegal activity, says Edun. “The president is determined to remove the most expensive, wasteful and corruption-inducing fuel subsidy that supported antisocial behaviour like smuggling,” he adds, referring to the arbitrage created by buying subsidised petrol in Nigeria and selling it in other west African countries.

Since the arrival last year of Cardoso, a former Citibank executive who led Tinubu’s commission for economic planning in Lagos, his priority has been to re-establish “orthodoxy”. This involves returning the naira to a market rate, ending money-printing to finance deficits and raising interest rates aggressively to combat inflation and attract portfolio inflows.

“The money supply was out of control,” Cardoso tells the Financial Times. “We needed to hike rates and mop up liquidity. We had no choice.”

Cardoso acknowledges that the mechanism through which monetary policy influences prices is imperfect because of supply constraints and the amount of naira in the system. But the bank says it detects signs that inflation is peaking and is confident that crippling interest rates — now at 26.25 per cent — will start to come down “in due course”.

The central bank has also had to deal with a $7bn backlog of foreign exchange requests. Inability to access dollars, both for working capital and to repatriate profits, has contributed to a flurry of multinationals, including Guinness, ShopRite and GSK, scaling down their investments or even ending them altogether.

Oyingbo market traders converse at a shop
Nigeria’s central bank says it detects signs that inflation is peaking © Manny Jefferson/FT
The immediate consequences of economic surgery, administered without the anaesthetic of a functioning social security system, have been dire © Manny Jefferson/FT

“There’s a scarcity of dollars in Nigeria in general and it’s really painful for businesses,” says Mira Mehta, chief executive of Tomato Jos, a tomato processing company near Kaduna in northern Nigeria. Although she understands the general thrust of policy, she says sharp fluctuations in the exchange rate since Cardoso took over have made strategic planning harder.

But Lawani, of Helios, says consumer businesses are exiting at a time when the foreign exchange market is finally being normalised. Cardoso argues that once portfolio investors, multinationals and Nigerians in the diaspora become convinced they can access dollars freely, they will more readily invest. “Our biggest challenge is to rebuild trust and repair the loss of confidence.”

Not everyone is convinced that the return to monetary and fiscal orthodoxy, even if it can be maintained, will be enough. Obasanjo, the former president, questions the benefit of devaluation given how many manufacturers need to import the bulk of their inputs, negating the positive impact of a weak naira.

“What is the purpose of devaluing your currency?” he asks. “Is it to sell more of the oil that we have?”

Olu Fasan, a visiting fellow at the London School of Economics, describes Tinubu’s reforms as “half-cooked”. A proper policy to drive growth, he says, would give more weight to reviving production.

Fasan also criticises the administration for excess at a time when ordinary Nigerians are suffering, saying it has approved lavish civil-servant pay rises, bought fleets of expensive cars for ministers and debated the merits of presidential planes and yachts. “You cannot say the economy is bad and spend money like a drunken sailor.”

It does not help that corruption still appears to be rife. In January, Betta Edu, the humanitarian and poverty alleviation minister, who denies any wrongdoing, was suspended after a corruption probe discovered $640,000 of missing funds, an amount government critics say is a drop in the bucket.

But what is causing pain to ordinary Nigerians is “delighting” economists, says Charles Robertson, head of macro strategy at FIM partners. He estimates that over a one- or two-year period, the naira will strengthen and inflation and interest rates will fall, justifying today’s difficulties.

For the moment, few Nigerians see a reason to be optimistic. Mbaise Ekpe, a housewife who does odd jobs in Lagos, is adapting her menus to make her money stretch further. “I no longer cook rice because it’s too expensive,” she says. The mother of two adds that she regularly goes without food to ensure her children are able to eat three meals a day.

If the administration’s shock therapy is predicated on the idea that short-term pain will eventually bear fruit, Oluwa, the tailor, is unconvinced. “I don’t think they have any plans for anyone, especially young people,” he says. “It looks like this government is only there for themselves.”

Data visualisation by Keith Fray

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