ECONOMY - 01 OCT 2021

At 61, how free is Nigeria’s economy?

At 61, how free is Nigeria’s economy?
Limits to economic freedom. Source: Stears Business

It's Nigeria's 61st Independence Day.

That's 61 years of celebrating our liberation from colonial rule.

But what exactly does freedom mean? How does it feel? Is it permanent?

The recent experiences of Nigeria and its young people show how important it is to ask these questions. Just last year in October—a few days after our 60th independence—young Nigerians held hands and fought together for a chance to live. To stop being killed, profiled, extorted, and unjustly jailed by the same people that have sworn to protect them.

It was liberating to be on the physical and online streets of Nigeria canvassing for what is needed—which are well within the limits of the law. The world saw. The world heard. The world even joined in the liberty chants to #EndSarsNow.

The experience was physical. It was spiritual too. And for a moment, we believed we had won—this must be what it means to be free, we thought. But the events that followed showed how far away we remain from the freedom we seek—as a nation, as a united force or even as one voice.

So, gaining freedom from colonial masters is one of history's most extraordinary, or should I say overrated, stories of success against the odds. How successful is Nigeria's story if Nigerians are migrating in droves to the same country that choked us off freedom sixty-one good years after independence?

Nigeria is not free. This year, there should be so much more growth, economically, socially and politically, to celebrate if truly free. But today, I'll focus on three things that affect our economic freedom. Before we dive into these factors, let's start with understanding the concept of economic freedom and its importance.

 

A liberal economy

Adam Smith was one of the founding fathers of economics who encouraged governments to adopt a free-market approach to production and commerce. In essence, he was on one side of the divide, arguing for a free economy enabled by the government as a better way to grow.

In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. And governments allow labour, capital, and goods to move freely and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.

Many thriving economies worldwide, from Singapore to the United Arab Emirates, find economic freedom as they rely more on their strength and how they can share it with the world. Economic freedom is important because it brings greater prosperity. And many of the world's leading economic organisations such as Freedom House, the Heritage Foundation, and the Fraser Institute, as well as individual scholars, publish "economic freedom indexes" attempting to quantify economic freedom.

For this article, I'll speak to three major areas that are common metrics across these institutions. First up is a subject much discussed lately in the daily media, the National Assembly, and in homes and businesses across the country—debt.

 

The national debt

One of the prerequisites to economic freedom is fiscal health, which basically measures how a government earns and spends money. And when it comes to spending and earning money in Nigeria, two things stand out—oil and debt. The country spent all but 2% of our revenue (most of which was from oil) last year, servicing debts. Meaning that for every naira the country earned, 98 kobo went into debt servicing.

Let's look at our debt to see how. Our official debt as of March 31 stands at more than ₦33 trillion. It can be broken down into two parts: Domestic (62%) and External (38%). Although external debt makes up the lower chunk of the money we owe, they are rising fast, taking up a lot of financial resources and raising concerns about the nation's solvency.

Exactly one week ago, we watched Muhammadu Buhari, Nigeria's president, call for debt relief at the United Nations general assembly. But this was antithetical considering that just a few days before his plea, Nigeria issued $4 billion in Eurobonds.

Eurobonds are like private credit obtained from investors in foreign countries. And they make up a significant part of our external obligations. 54% of all the debt service payments we made in 2020 went into Eurobonds alone. This is compared to 30% and 15% that went into multilateral and bilateral creditors, respectively.

Interestingly, the country intends to take more loans. The Eurobond raised last week was the first tranche of private credit in three years—in February 2018 Nigeria sold a $2.5 billion Eurobond to refinance local currency bonds at a lower cost. But a look at the trend of our private foreign credit shows it has multiplied 22 times or risen by 2,133% from $500 million to over $11 billion between 2011 and 2019. Compared to the 16% and 50% jump in our multilateral and bilateral debt (those who can grant debt reliefs) within the same period.

It is important to note that high national debt is not always detrimental to a country's economic freedom. For instance, some of our Chinese loans have aided the construction of infrastructure, such as railways which should free up opportunities for economic prosperity.

Zainab Ahmed, Nigeria's finance minister, mentioned how the latest Eurobond issuance would finance projects in the 2021 budget. However, widening budget deficits and a growing debt burden, both of which are direct consequences of poor government budget management, lead to the erosion of a country's overall fiscal health and freedom. So, while this piling debt already shows signs of fiscal unhealthiness, one other thing Ahmed did mention the debt would be used for, is to shore up foreign reserves.

This means that a portion of the dollar-denominated debt will go to the Central Bank of Nigeria (CBN). The CBN uses these funds to manage the country's exchange rate and influence monetary policy. One of the ways the apex bank does this is to provide foreign exchange to help industries and the manufacturing sector import materials. Last year, 70% ($7 billion) of the CBN's total dollar supply for imports went to manufactured and industrial goods.

Now, trade is necessary to facilitate growth. In July of this year alone, China exported $283 billion worth of goods and services (about half of Nigeria's GDP) to the rest of the world. But Nigeria's consumption of foreign goods and services without a commensurate supply to the world brings us to the next point confining the Nigerian economy—uneven trade.

Before we delve deeper, you can find some of Stears Business' takes on debt herehere and here.

 

Wedded to foreign goods, services and money

Another parameter for measuring how free an economy can be is international trade. In this regard, people should be able to engage in trade with any person of their choosing. If the government taxes or otherwise prevents (read: bans) people from buying or selling with people in other countries, it reduces their freedom.

What I'm saying here is that policies that foster trade should not limit economic growth. However, our trade strategies have led to more of a dependence on foreign goods than better economic outcomes. The closure of Nigeria's borders between August 2019 and December 2020 is an example of how a country could limit its economic freedom. While the act was intended to protect local producers and prevent food importation, it backfired. What the shut borders succeeded in doing instead was raise the prices of goods, especially food. Essentially, local producers were not prepared to meet the demand of Nigerian citizens, which led to shortages and subsequently increased prices. Food inflation was at 13.5% in July 2020 but jumped to 19.7% by December 2020.

Looking at the economy more holistically will show our trade patterns depend more on what we can get abroad than what we can give the world. In 2012, the country's exports were ₦16 trillion larger than imports. This suggests that we sold much more to the rest of the world than we needed from them. But fast forward to the end of 2021, and imports could become ₦16 trillion larger than exports—an inverse of 2012. How? Our trade deficit was already as high as ₦4 trillion in the first quarter of this year. Nigeria spent over $200 million (₦90 billion) importing raw sugar alone in Q1'2021—that's almost half of what was spent in the whole of 2019 importing the same product. Whereas, cane sugar can be cultivated in all states of this country and commercially produced in at least seven of these states.

But why is uneven trade happening in the first place? The simple answer is oil. Between 2008 and 2020, oil sales accounted for 77% of all Nigeria's physical exports. So with oil production declining and prices falling in recent years (not 2021), our exports have crashed along with it.

The not so simple answer is that other sectors are now redundant.

Back in the 1960s, Nigerian regions had commodity boards that connected farmers to the global supply chain. But since we discovered oil, we disconnected a large population from supplying goods to the global economy. Last year, in an interview, Aliko Dangote, Africa's richest man, mentioned how the world depended on our crops. "Post-1960, Nigeria was first in the export of palm oil and ahead of both the United States and Argentina in exporting groundnuts. The country provided 95% of its own food needs despite relying on subsistence farming methods", Dangote explained.

And he was right. Agriculture exports were 17% and 18% of total exports in 1962 and 1963, compared to only 1% and 3% in 2019 and 2020.

But even if we were to get local production right it's important to also state how difficult exports can be because of trade restrictions from more developed countries. However, Singapore, which at its independence, faced the same choices as Nigeria did in the 1960s opted for export-led economic growth and integration and is reaping the benefits. The country's manufacturers exports have grown from the 1962 number of 26% of total merchandise exports to 74% in 2019. In fact, the country is ranked as the world's freest economy. In contrast, Nigeria's manufactured export hovers around 11% in 2019, from 5%, 60 years ago. Same time, different countries and very, very different outcomes.

So what makes the difference? Industries do. They've proven to bring growth to our economy in the past and other countries' economies currently. To access more of Stears Business insights regarding the export crisis, see herehere and here.

Now, to the industries. 

 

Our processes

Many of our industries' past and present growth are driven by foreign and multinational companies. This shows a level of dependence, but it is also key to the country's economic freedom. From Dunlop to Michelin, we also had milling and textile plants run by the British and the Germans—most of which have now packed up.

But how free and open has Nigeria been to recent investment, which provides maximum entrepreneurial opportunities and incentives to expand economic activity, greater productivity, and job creation?

I guess you already know the answer. Not very open. In recent times, we've seen how the government alienates foreign companies. The unfriendly business policies like enacting bans on business operations led US-based Twitter to launch its African office in Ghana. Then South African MTN and Multichoice that have been slapped with fines and heavy taxes recently, partly explaining why investments are quickly drying up. Over the last seven years, our average Q2 investment figure (across all types of investment (FDI, portfolio investment, and other investments) has been $3.4 billion. That's four times higher than what we got in Q2 this year. So far, in the first and second quarters of this year, only $2.8 billion worth of foreign investment has come. For context, by this time last year, we had already received $7.1 billion. And in 2019—before the pandemic—$15.3 billion had come in.

The demerit of a restrictive business environment is that it impacts the individual companies that take the entrepreneurial risk in expectation of greater return and the society as a whole. A practical investment framework is characterised by transparency and equity, supporting all types of firms and encourages rather than discourages innovation and competition. The more restrictions a country imposes on its investors, the lower its entrepreneurial activity, opportunities, and prosperity. This is especially for Nigeria, where we have only a few people willing to set up industries that can employ people in their droves.

In a nutshell, gaining economic freedom means being more strategic with our internal and foreign relations. For instance, piling up debts to fund budget items like a ₦900 billion petrol subsidy will not help us grow if we are not increasing our revenue. If we need loans to provide economic opportunities, are we taking those loans to build industries that will lead to prosperity? Are we siphoning or using them as a piggy bank for big men's businesses? 

Either way, there is little we can do as individuals to influence the size of our national debt. However, the country's fiscal managers must know that high or unmanageable debt is almost always detrimental to one's economic freedom. It limits choices and constricts the ability to grow and accumulate wealth or plan for the future.

So while we celebrate our country's freedom this October 1—albeit mutedly, it's important to also reflect and take a retrospective look at solutions that can help us be the free giants we need to be. And then hopefully soon, with hands clasped tightly and in one voice, be genuinely ecstatic to wish one another a Happy Independence Day!

Adesola Afolabi

Adesola Afolabi

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