Tinubu’s appetite for free market in Nigeria
To say that the country Bola Ahmed Tinubu inherited from his predecessor Muhammadu Buhari is in tartars is to be kind. Nigeria faces multidimensional economic problems — from inflation levels that are in the twenties to a high debt-service-to-revenue ratio that seems to be prevalent among developing countries in this age of high American central bank interest rates. To worsen things, the combined effects of the 2022 flooding that destroyed farmlands in the country and the war in Ukraine — a major food exporter — have put many in Nigeria at risk of starvation because of the high food prices.
Nevertheless, some commentators are optimistic that the African Continental Free Trade Area agreement which Nigeria signed in 2019 would come to the rescue by deepening trade in Africa and spurring the most needed industrialization on the continent by leveraging the regional trade blocs that exist on the continent. The ACFTA stands as the largest free trade area since the WTO. But, this writer is pessimistic — Nigeria’s position on continental trade has so far been protectionist and brutish. Former president Buhari’s administration had imposed border closures which remain today against the trade rules of the regional ECOWAS, Economic Community of West African States. He reasoned that the border closures would prevent the smuggling of illicit and banned goods, but the border closure also affects the trade of legitimate goods with neighbouring countries.
However, there seems to be a glimmer of hope in this new administration’s approach to economic policy. Unlike the previous Buhari administration which took a more socialist, government-involved approach, Tinubu’s government has been deregulating and untangling the government wherever possible. His is a capitalist agenda where the government offloads some of the development burdens on it by creating room for private sector participation. Interestingly, some of the policies that feature in his administration such as the famous petrol subsidy removal were initiated by Buhari.
The reason for the petrol subsidy removal is obvious — it’s unsustainable. In 2022 alone Nigeria spent 10 billion dollars on subsidizing petrol, a gesture that is seen to mostly benefit the rich in the country. The removal of the petrol subsidy in Nigeria has been in the mind of various governments for a decade now, but no government had ever mustered the political will to do so. Whether a legacy project handed to him by Muhammadu Buhari or not, one thing is clear: the removal of the petrol subsidy is now part of Tinubu’s legacy just as he promised on the campaign trail.
The expected effect of the petrol subsidy removal is that the market will regularize as the distortion, the subsidy, is gone. Without the metaphoric hand of the government, a free market will determine its price efficiently through competition which weeds out weak firms. This reorganization as is being experienced now is painful in the short run but seen to be beneficial in the mid to long run. The government’s idea is that it would free up the lump sum that is usually guzzled up by petrol subsidies to invest in other sectors of the economy like job creation, education and health.
Following the same logic, the current administration has taken steps to unify the foreign exchange rates in Nigeria. The old model of foreign exchange in Nigeria was that in which the government through the central bank pegged the dollar by dictating to commercial banks at what rate, usually subsidized, to sell it against the naira, and to whom to sell it. This system, fraught with corruption limited people’s access to the dollar, and this made the black market trade of foreign currencies boom in the country. Nevertheless, now that the dollar is unpegged, its value against the naira will blow wherever the whims of the free market dictate.
Having established that Tinubu has an appetite for the free market through his precedents, it should come as no surprise that he has just weeks into his presidency assented to the Electricity Act — a law breaking the Nigerian government monopoly on electricity production, transmission and distribution. The law does two things: one is that it invites private sector investment into the electricity business; and two it sees the transfer of regulatory powers in the sector from the federal government — which formerly had complete control — to the constituent states.
In Nigeria, the decentralization of power from the federal government to the constituent states has long been in debate. The liberal point of view is that the Soviet-style government-from-afar has been unsuccessful in Nigeria. On the other side of the aisle, the conservatives are satisfied with Nigeria’s highly centralized government which was entrenched by military rule in 1966. I am more with the former. It is my humble submission that a combination of capitalist reforms along with the decentralization of government in Nigeria would put her on a path to quick economic recovery.
It may be too early to applaud the current administration for a job well done, but it is clear that Tinubu has in mere weeks delivered the most liberal reforms since the Structural Adjustment Programme was executed by the Ibrahim Babangida regime in 1986 under the guidance of the International Monetary Fund. If the current administration chooses to go down this road, its work’s only just begun. The earlier mentioned border closure imposed by the Buhari government persists and this negatively affects trade, and the prices of goods within Nigeria. As Okonjo Iweala, the Director-General of the WTO puts it: this is the time for re-globalisation, and Nigeria cannot achieve this if it doesn’t trade with its immediate neighbours in Africa.
Even, the work done on the recently deregulated electricity sector would be incomplete if Nigeria’s electricity regulator, NERC is not stripped of its power to set tariffs payable by electricity consumers to producers. The purpose of doing this is to prevent the introduction of distortions to the electricity market just as the petrol subsidy did in the petrol market. Though done with the best of intentions, setting a price ceiling that producers cannot get past logically disincentivises investors as they know they run the risk of just breaking even, or even worse, making a loss. The regulation of prices goes against the natural principles of the free market. The free market lets the demand and supply of a commodity determine its price. The free market is the reason why electricity producers in Germany pay their consumers to use the excess electricity they make.
However, in Nigeria, a lot of sector regulators possess the power to set the price of a commodity arbitrarily away from its market price. This is the story of the NCC, Nigerian Communication Commission — which dictates prices of voice calls, text messages and mobile data to the telecommunication companies in Nigeria. This has the effect of hurting competition and stalling innovation. These instances are just a few of the market distortions still obtainable in Nigeria, others abound.
