By Amaka Anku*
On August 31, Nigeria’s National Bureau of Statistics (NBS) confirmed widespread suspicions that the nation’s economy had slid into a recession in the second quarter. And immediately, analysts and pundits turned to finger pointing. Many continue to blame the Central Bank’s delayed move to abandon an unrealistic Naira peg at N197 to the US dollar, despite black market rates almost twice that figure. That currency peg, coupled with the government’s decision to continue to restrict dollar access to importers of certain items, these analysts say, effectively prompted an avoidable recession.
But this narrative underestimates the significant dual effects of a global oil-price slump and an almost 30 percent reduction in oil output since 2014. Oil exports historically account for about 80 percent of Nigeria’s foreign exchange earnings, necessary to foot an annual import bill of over 2trillion Naira. To underscore the importance of oil exports to forex earnings, consider that at its height in 2012, net foreign direct investments stood at just $3bn, compared to $52bn earned from oil exports in the same year (current USD). Oil exports also traditionally account for about 70 percent of government revenue.
In light of this, the global oil-price slump hurt Nigerian businesses and manufacturers that have traditionally relied on access to cheap dollars, while simultaneously restricting the government’s ability to alleviate the economic impact through increased spending. This is why the proposition that a quick move to a flexible exchange rate policy would have avoided a recession by attracting or retaining foreign investment is simply unrealistic: a flexible exchange rate does not change the fundamentals of an economy dependent on oil for government revenue and foreign exchange. Smart investors understood that and were bracing for significantly slower growth as early as late 2014.
Nigeria is not alone in reeling from lower oil prices. Many major oil exporters have experienced major shocks to their economies. Several were unable to avoid recession despite flexible exchange rate regimes. Russia ended a euro/dollar peg in 2014, but still slipped into recession the following year. Brazil, which operates a managed currency float, fell into recession last year.
To be sure, the Central Bank and current administration’s policies (or lack thereof) leave much room for criticism. The Naira peg undoubtedly hurt the economy as manufacturers, businesses, and investors focused on chasing “cheap” forex and/or anticipating devaluation rather than on production. An almost 60 percent spread between official and black market dollar rates created remarkable opportunities for arbitrage (though there is scant evidence that arbitrage was actually as prevalent as is widely presumed, given biting dollar scarcity on the black market). President Buhari’s repeated declarations that he would not “murder” the Naira underscored the Central Bank’s lack of independence. And, the government fumbled on the primary tool it has to combat an economic slump: spending. It took the administration the better part of a whole year to present and approve the 2016 budget, exacerbating uncertainty in an already uncertain environment. Perhaps most importantly, the government failed to articulate or stick to a clear plan for dealing with the economic crisis, with the Central Bank reversing itself on nearly every policy, from banning then accepting cash forex deposits to halting then resuming dollar sales to bureau de change operators.
But, neither these significant missteps nor the government’s incredible communication lapses should obscure the fact that there were truly hard and difficult policy trade-offs to be made – none of which were easy or patently favorable. This often gets lost in the finger-pointing narrative. Devaluation carried real risks of hyperinflation, with no obvious tangible benefits given Nigeria’s paltry non-oil export base. And, floating a non-tradable currency in a heavily import-dependent economy is not an easy choice. Indeed, questions remain about the ability to “freely” float a currency that has no actual external demand (bear in mind that 80-90 percent of Nigeria’s exports – crude oil – is priced in US dollars). Market forces generally do not work well without an actual market.
In the wake of the NBS’ release of Q2 figures, analysts were not alone in pointing fingers. Buhari’s advisors have been loud and persistent in blaming the past administration for anything and everything. The former ruling party, too, quickly moved to score political points by demanding President Buhari’s resignation. Yet, it would be far more productive if everyone—officials and pundits alike—focused on offering concrete and nuanced policy options for navigating the recession. The real culprit here—a decades-long neglect of non-oil sectors—cannot be overturned overnight. The administration needs all the ideas it can muster to get the economy back on track.
*Originally published in Ventures Africa. Amaka Anku runs Dilikam Advisors, an Africa-focused research and advisory firm based in Washington, DC. Follow her on Twitter at @AmakaAnku.