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Growth Oriented Economic Restructuring For Nigeria

The Former US President Ronald Reagan Had A Constant Refrain In Those Days, Which Were “Deregulation” And “The Repeal Of The So-Called Behemoth Bills”. Behemoth Bills In His Words, Were Those Very Large And Intricate Pieces Of Legislation That Became Too Unwieldy To Enforce, Because They Tried To Ensure That All Possible Outcomes By Way Of Loopholes, Were Anticipated And Captured

Mohammadu BuhariThere is a convergence of opinion that the Nigerian economic structure is in urgent need of structural reworking. I hesitate to use the term “structural reforms”, knowing fully well, that the term “reform” has been a constant and often abused part of Nigerian economic lexicon since 1986. There is therefore understandable fatigue about the word “reform” within the Nigeria context. To the trained economist however, the terms “structural reworking”, “structural reforms” and “diversification” can be used interchangeably without losing substance. The absence of a sustainable and strong real sector response after repeated bouts of economic reforms, to my mind, is actually the core problem of the Nigerian economy and not the absence of reforms. This absence of sustainable growth is what has baffled Nigerian policy makers, often leading to policy thrusts and reversals, as perplexed policy makers, scramble for solutions. Perhaps there is no better evidence of this, than the reintroduction of exchange controls and import prohibition as a tool of economic management in fiscal year 2015, part of which continues in fiscal year 2016 after they went out of favor globally in the late 1980s. The icing on the cake was the action of the central bank in restricting access to foreign exchange for the importation of a long list of 41 items, aside from the hundreds of items on the prior existing import prohibition list. Top on the list are consumer durable and non-durable goods such as confectioneries, a host of textile and garment products, cement (understandable), plywood, wire mesh, glass and glass ware etc. Curiously, the list also included intermediate goods such as steel for which the availability of adequate production capacity is at best, very doubtful. The policy was clearly an attempt to protect local industries and conserve foreign exchange.


Laudable as the policy of import prohibition may seem, the policy risks failure to achieve the desired result, for a number of reasons. First, the policy assumes that there is idle capacity in local producing firms. Secondly it assumes that the produce of local manufacturers such as the textile mills, which are all structured to produce printed wax and other tribal costumes, is what the consumer really wants. Thirdly it assumes that investment is an overnight process and that investable funds are available within the current policy regime. Fourth and lastly, the policy does not take into account the difficulty of enforcing import prohibition. In spite of the laudable goals of the policy, for it to succeed, it will need to be backed by other supplementary programs which shall be addressed later in this presentation.


Regulation vs deregulation:

The former US President Ronald Reagan had a constant refrain in those days, which were “deregulation” and “the repeal of the so-called behemoth bills”. Behemoth bills in his words, were those very large and intricate pieces of legislation that became too unwieldy to enforce, because they tried to ensure that all possible outcomes by way of loopholes, were anticipated and captured. Reagan believed that those intricate laws regulating production in the US economy, tended to criminalize everyone, in a vain belief that laws made human beings, instead of the other way round. In Reagan’s view, those laws and regulations contributed in no small measure in making American industries and businesses uncompetitive, leading often to frequent recessions and the attendant severe beating to the American ego.


Reagan found a key ally in Margaret Thatcher, then Prime Minister of the UK and both launched an unprecedented war on economic regulation. Between them, they dismantled the highly intrusive business unfriendly regulatory frameworks and created a new economy that was lighter and friendlier to innovation and businesses. Principal among the regulations dismantled, were price controls, exchange controls, wage indexing, stringent hire and fire rules at the collective bargaining table, and other administrative bottlenecks that constrained efficient allocation of resources. They also dismantled the benevolent dole system, which entrapped poor people including most of our black brothers and sisters in the US and UK into dependence and despondency. In sum, they reinstated the price as king in the market place.


Even though the jury is still out on Reagan’s overall policy legacy, especially the role of his controversial tax cuts program in the face of high defense spending, which to many is the root cause of the current intractable US public debt of over $19.3 trillion dollars, there is no doubt that deregulation unleashed the current period of sustained American innovation and general economic expansion. The US economy broke loose under President Bill Clinton and launched the information age which transformed the world economy. To date, the US economy is still innovatively creating new ICT jobs and products at a record pace, all thanks to deregulation. A similar but smaller scale transformation also took place in the UK economy, starting from the late 1990s. It is thus partially to the credit of Reagan and Margaret Thatcher that both the US and British economies witnessed unprecedented growth in the aftermath of their administrations.


Nigeria’s new policy of import prohibition is in a way bringing back the era of import substitution which has been thoroughly discredited as an economic policy. The key problems have to do with the small size of the domestic economy which is the overriding focus of import substitution program, the small size of the average import substituting plant, an inward looking mentality and the high economic cost of administering the regulations. Apart from the fruit juice and perhaps the grain milling subsectors, the policy will not succeeded in stimulating any appreciable growth response without a deliberate concomitant effort to create a strong supply side response. The reasons are as follows:

  • There is considerable availability of existing domestic investment and idle industrial production capacity in the fruit juice and flour milling subsectors. So these subsectors will likely respond quickly to import prohibition.
  • The same cannot however be said of the other items on the import prohibition list such as textiles, garmenting, footwear, and other consumer non-durables, as there is literally no idle capacity to quickly put into production, in response to the demand gap created by import prohibition. The textile sector in particular, needs to retool for the production of modern across the spectrum fabrics like denim (jeans), light shirt fabric, woolen fabric, hosiery and other fabrics that are tradable across borders, instead of being solely tooled for the production of printed wax and tribal costumes as they currently are. Printed wax has a severely constrained (domestic) market size whose absorptive capacity is also limited because the demand end is populated by the poor. No millennial locally or overseas is likely to be found wearing printed wax but somehow, the textile mills have all failed to see this trend. That is why the textile sector in Nigeria has not responded positively to repeated bouts of government bailouts.
  • The existing market for consumer non-durables had been developed by the brands which were hitherto imported, so new entrants will need time to set up plant, assuming there exists, the means to put the fixed investments in plant and machinery together, which at this point is very doubtful.
  • The case of steel featuring in the prohibition list is also very dubious as the sub-sector is still operating with a huge domestic demand gap. If the items must be prohibited, have we put in place or facilitated financing options for the expansion of existing steel mills and the creation of new plants?


The result of this policy predictably, will be structural problems which will undoubtedly deliver hefty doses of price inflation in the short term, in addition to a smuggling boom which only enriches the border security personnel as well as the few merchants who are bold enough to take the risk. Nigeria, true to prediction, has already witnessed a tremendous spike in inflation in the first half of 2016 with a ramping up of inflation by 16.2 percent year on year, at the end of June, 2016 all in the face of excruciating poverty in the land.


Restructuring the Nigerian Economy:

In the face of the above dislocations, a deep restructuring is therefore critically imperative, if Nigeria is to seize the opportunities presented by the present difficulties, with a view to establishing sustainable growth in the years ahead. The necessary critical inputs in the restructuring program are highlighted below.


Restoring the incentive structure:

Setting the incentive structure right, requires a reinstatement of the price system of which a key plank is setting the exchange rate right. It can be taken as given, that there is no need to begin an argument all over here again, why the price system is better at pointing the way for economic agents within an economy. Not only is the price system more efficient at allocating the resources in an economy, the alternative which in this case is a command and control system, is quite costly to implement and even at that, it does not do the job as neatly and with less stress as the price system will do.


With respect to Nigeria, it can be said, though with some reservations, that an ample amount of down payment had been made, with the recent relaxation of crippling exchange control measures and the restoration of the market in foreign exchange administration. It must be emphasized here, no matter how unpalatable it may sound, that a developing country like Nigeria with a huge appetite for imported goods and weak incentives to produce locally, does not really need a strong domestic currency against the rest of the world if it aspires to transit from a consuming economy to a producing economy. The Table 1 below shows the key macroeconomic data, including historical exchange rates, of major upper and middle income economies which are all trade biased vis-à-vis the Nigerian economy.



Table 1

Comparative Macroeconomic Data for select countries between 2010 and 2015


Country Foreign Reserves US$ Billion 2015 Exchange Rate 2010 USD/domestic currency Exchange Rate 2014

USD/domestic currency

Percent Depreciation/

Appreciation (2010 – 2014)

GDP US$ Billion


China 4,055.81 0.10 0.16 7.718 8,229.00
Japan 1,264.40 0.012 0.008 -28.07 5,937.00
Rep of Korea    364.40 0.00088 0.00091 2.196 1,304.00
Rep of China (Taiwan)    425.75 0.031 0.032 -0.881 524.00
Singapore    266.14 0.7 0.8 -0.892 297.00
Thailand    161.57 0.027 0.029 -7.367 387.00
Malaysia    127.27 0.290 0.300 -17.17 312.00
Indonesia    111.16 0.00010 0.00008 -31.82 868.00
Nigeria      39.32 0.0067 0.0060 -10.44 522.00
Vietnam      32.49 0.00006 0.00004 -11.54 171.00
India    313.84 0.024 0.016 -28.78 1,876.00
Turkey    133.02 0.6642 0.3687 -44.48 718.00

Source: Trading Economics.com


The table above clearly shows, that with the only marginally notable exceptions of China and the Republic of Korea, all the other emerging market economies with strong manufacturing base and strong export sectors, have in the period between 2010 and 2014 managed to ensure that their currencies weakened against the US dollar. These two exceptions, are heavy weight industrial powers by their own rights, with very robust foreign reserves respectively of US$4.05 trillion and US$364.40 billion and GDP levels of US$8.22 trillion and US$1.30 trillion. Even at that, the two countries most probably, must have succumbed to strong US pressure, for them to have allowed their currencies to appreciate. Comparatively, Nigeria underperformed all the listed economies with regard to external reserve level, with the only notable exception being Vietnam which posted a lower foreign reserve level of US$32.49 billion. If account is taken of the fact that ten out of the 11 listed economies are not primary commodity exporters, then the very weak position of Nigeria with regard to domestic productivity needs no further explanation.


If strong economies like Japan, China, Indonesia, India, Turkey, Singapore and a host of others shown above, are actively managing their exchange rate downwards to stimulate domestic productivity growth, it is very worrisome that supposedly knowledgeable  people in the Nigerian government still refused to see this as clearly as they should. The ill-advised policy of freezing the Nigerian exchange rate at the unsustainable rate =N=197/US dollar in the face of a severe foreign exchange constraint, for more than one and half years from December 2015 to June 2016, did incalculable harm to the Nigerian economy. The cost of this wrong policy included:

  1. A very steep depreciation in the parallel market exchange rate, far beyond the wildest projections by both the World Bank and the IMF to almost =N=400/US$1.00 due to expectations of future sustained foreign exchange shortages.
  2. Huge fiscal imbalances at federal, state and local government levels, leading to the federal government’s inability to fund the capital budget and state and local governments to accumulate several months of salary arrears to workers. To put things in proper perspective, let us consider that the Federation Accounts and Allocations Committee (FAAC) where all three tiers of government share the federally collected revenues, disbursed only =N=296 billion in April 2016. By July 2016 when the June allocation was done, (after the reinstatement of the market in the foreign exchange rate policy), the FAAC allocation jumped to =N=559 billion and is further projected to hit over =N=700 billion in August when July 2016 accruals are allocated. Though precipitous and sustained currency depreciation can itself become self-defeatist and thus a wrong economic signal which is highly inflationary, holding the rate at an unsustainable rate for so long against sound advice, is clearly to blame for the depth of the depreciation witnessed since June 2016 when the market was unchained.
  3. Renewed accumulation of trade arrears estimated at over US$3.0 billion on account of matured letters of credit and sundry current account short term payment debts. Trade arrears had been banished in Nigeria since the 1986 managed floatation of the domestic currency. It returned with a vengeance, thirty odd years later when the market was stifled.
  4. An avoidable recession. The Nigerian economy had not witnessed a recession in more than 26 years, the last one being in 1993 in the aftermath of the political crisis that followed the voided presidential poll that year and;
  5. Avoidable hyperinflation. Nigeria had not witnessed this level of persistent and sustained price inflation in almost twenty years.


Exchange rate regimes and implications for domestic productivity:

The key aim of exchange rate action in stimulating domestic production is founded in the Effective Exchange Rate (EER) effect of exchange rate policy. There are three possible scenarios in this regard. Before the consideration of the three possible scenarios, it is important to explain very preliminary exchange rate terminology.  Effective Exchange Rate “EER” is the combined effect of all trade policies including the exchange rate policy, the tariff structure, monetary policy, industrial and agricultural policies on domestic production. “EERm” means Effective Exchange Rate for imports, while “EERx” is the Effective Exchange Rate for exports. Effective exchange rate could either be trade neutral or trade biased.



Trade neutral Exchange rate regime:

Under a trade neutral exchange rate regime, the EERm=EERx. In this situation, effective exchange rate of imports is equal to effective exchange rate of exports. It means government is pursuing all trade related policy initiatives in a trade neutral mode. This is the mode under which mature economies like the United States, the EU, the United Kingdom, Canada and Australia operate. They are not really worried about slanting other policies to be biased in favor of import or export trade. They also do this for one other key reason. They know that their mature economies cannot be competitive in labor intensive industries. So, they concentrate their energies in R&D intensive innovative industries such as hi-tech, aerospace, renewable energy, and services, in which they hold higher comparative advantage, where they do not require the protection of tariffs and other non-market policies.


Ultra-Export promotion:

The second scenario is the ultra-export promotion scenario where EERm>EERx. Here the combination of the various policies has the net effect of making imports more expensive for the domestic economy while making exports cheaper to the rest of the world. This is the situation where the exchange rate among other policy initiatives, helps to make exports extremely cheap to the rest of the world, so much so that domestic producers find it more rewarding to produce for the rest of the world than produce for the domestic economy.


A higher import price relative to exports, creates expenditure switching forces that serve as price inducements to investors to further invest to replace highly expensive intermediate and final goods imports, while export industries are humming. In the process, the economy generates higher levels of employment and sustained business expansion without the government having to employ an army of bureaucrats to police the economy. This was the situation that Japan was in the early 1980s where Japanese cars were cheaper in Nigeria than they were in Japan. In those days the Japanese yen was almost always weak because the Bank of Japan engaged in the hoarding of foreign exchange by massive foreign reserve buildup. All the other economies in our eleven nation sample above, operate under this band.


Import Substitution:

The third scenario is the import substituting condition where EERm<EERx. Here the combination of policies make it cheaper to import than to export, meaning that imports are actually being subsidized by the rest of the economy. This situation is generally found in nations where there is a preference for a strong domestic currency vis-à-vis the rest of the world. This situation, which almost always is accompanied by high tariffs, import quotas and import prohibition (all part of the protectionist argument for so called infant industries) always resulted in excessive demand for imports due to the creation of supply rigidities for both finished goods and intermediate goods. Under import substitution, the foreign exchange constraint that policy was designed to address actually got worsened by the very policy. An extreme case in point which is waiting to explode or implode, is Venezuela, where everything of value is scarce, no thanks to irresponsible policies in the President Hugo Chavez era which were inherited and currently being defended by the present government.


Overall, trade neutral regimes still manage to confer balance of payment equilibrium as is the case with the advanced economies notably the US, the EU, the UK, Canada, and Australia. On the other hand ultra-export promotion as a trade strategy, hinges heavily on exchange rate action in combination with sound industrial, agricultural fiscal, monetary and infrastructure policies, to produce superlative GDP and export growth results that we see being replicated in every country of South East Asia. Lastly, import substitution as a strategy has been the lot of African and South American countries who have been too lazy to study and adopt the strategies of the South East Asian economies correctly. They are always susceptible to periodic bouts of inflation, chronic balance of payments problems and low domestic productivity because the policy makers are too lazy to shed the mindset formed in the 1970s.


Sectoral policies for sound economic restructuring:

To further the restructuring of the Nigerian economy against the background of the right price incentive structure, there is need for several simultaneous policy initiatives which are basically sectoral in nature, all aimed at awakening the real sector. These shall be categorized into short term and medium term initiatives.


Short term initiatives:

These are the low hanging fruits, which in the short term are designed to both increase employment generation and boost the supply of foreign exchange which will help in reducing the current account imbalance.

  1. An agricultural crash program to boost the production of short gestation commodity exports such as groundnuts, sesame seeds, soybeans, cotton, ginger, cocoa, rubber and palm kernels, hides & skins and spices. A strong case can be made for the introduction of silk worm and the mulberry trees for the production of silk fiber for the textile mills and to give an additional source of income to farmers. The President can summon a council of State meeting to fashion out the modalities for this agricultural crash program in a realistic manner. This can only be done by a very concerted effort by all tiers of government on a bi-partisan basis, encompassing the federal, state and local government tiers.
  2. The re-introduction of well managed Commodity Boards for the core commodity groups such as the grains, spices, fibers, and solid minerals. These Commodity Boards can initially be seeded by government and subsequently sold to the private sector but with strong regulatory oversight, to ensure sustainability. Leaving commodity growers and farmers to uncertain market vagaries especially post-harvest, is a disincentive to production. Besides, the commodity buying companies that will be spawned in the process will create jobs.
  • Retention of current export incentives including unchaining of the domiciliary accounts.



  1. Using the Development Finance Institutions (DFIs) to stimulate growth promoting industrial sectors:

To drive the sectoral growth program, Nigeria needs to first unbundle and then structurally re-align the Development Finance Institutions (DFIs) to enable them key appropriately into the various sectoral initiatives. The two currently inefficient and unwieldy entities called Bank of Industry (BOI) and Bank of Agriculture (BOA) should be dis-aggregated into their former sub-components of respectively of NIDB, NBCI and NERFUND; and Nigeria Agricultural and Cooperative Bank (NACB), Peoples Bank and the Family Economic Advancement Program (FEAP).


Their forced amalgamation in year 2000 by the Obasanjo government was wrong policy guided by self-interest of the old Ministry of Industry and the NIDB. With an economy the size of Nigeria, there is need to reach the micro enterprises, the small and medium enterprises (SMEs), and the large scale enterprises simultaneously through separate DFIs. The niches are so different that it amounted to malpractice, to lump all the classes of enterprises under one umbrella. There is therefore a very strong case to be made for more DFIs rather than fewer DFIs. The DFIs are the visible arms, showing the right way for the rest of the economy to key into sectoral growth programs. Without strong DFIs, all the talk about restructuring the Nigerian economy will amount to nothing but lip service.

  1. Funding the DFIs:

To fund the DFIs, government should aggressively arrange, raise and guarantee bilateral/multilateral lines of credit for the DFIs provided they are reorganized and put under strong management and have a structure that will enable them recover loans given to the private sector. The foreign lines of credit serve to enable the acquisition of plant and machinery for production, instead of delving into the foreign reserves to fund the DFIs. Additionally, the obligatory responsibility to render fund utilization reports to the multilateral lender, has a way of conferring discipline on the DFIs, as against when the seed money is coming from the government. Without adequate funding of the DFIs as outlined above, there can never be enough fixed capital formation on a scale needed to grow the Nigerian economy and reduce unemployment.


Debunking the unfounded case often made against the DFIs:

The commercial banks being privately owned banks, cannot be expected to do the heavy lifting needed to catalyze the growth of the economy. The commercial banks due to prudential requirements can and do finance existing firms with track record and cash flow. Unfortunately, most of the industries funded by the DFIs are likely to be green or new projects. With benefit of firsthand knowledge, I can attest without any fear of contradiction that the successful Dangote group partly owes its success to the loans taken from the NERFUND scheme by three or four of their subsidiaries in the early 1990s. Even if all other NERFUND beneficiaries failed, which cannot be true, Dangote industries alone as a shiny example, is a strong enough case to be made for the sustenance of the DFIs. The entire NERFUND scheme was based on a US$144 million loan from the AfDB which created about 160 traceable industrial projects. Dangote industries alone, generates much more than US$144 million annually by way of value added and employment generation to the Nigerian economy, not to mention the contribution of the other surviving projects.

  1. Financing the Oil and Gas Sector Joint Ventures:

Nigeria needs to boost crude oil exports in the short term, just as Russia is doing even if it means bursting Nigeria’s OPEC quota. This will require adjustments to the current fiscal regimes for the joint venture partners in the oil and gas sector, to allow the IOCs raise approved amounts for CAPEX locally or abroad. The raised amounts will be amortized over an agreed period of time, thereby short circuiting the perennial problem of lack of funding from government to meet its equity share of JV funding. There is absolutely no need for the current regime, where NAPIMS makes joint venture commitments which in practice, NNPC (the JV partner) is not in a position to ever meet. Such practice, only hamstrings the IOCs and is what is responsible for Nigeria being unable to meet her production capacity of 2.5 million barrels per day and losing ground to Angola as Africa’s top oil producer.


Medium Term Initiatives:

In the medium term, policy should aim at the following combination of initiatives:

  1. Incentivize the production of consumer goods such as garments, leather goods including footwear, bags, belts etc and light machinery by enabling enterprises in these sub-sectors preferred access for DFI lending. This will result in the production of more tradable goods or goods that enter export trade. These items listed above, transformed the economy of Italy into the seventh largest economy in the world. They are all labor intensive foundation industries which can catalyze other industries if properly harnessed.
  2. Deliberate incentives such as preferred access to DFI financing, lower tax regimes and tax holidays for industrial sectors compatible with factor endowments to produce intermediate goods such as chemicals, petrochemicals and boat building.
  • Incentivize the production of consumer durable goods such as electronic goods including television sets, computers, calculators, watches, mobile phones etc. These are tradable goods with high income elasticity of demand. The demand goes up as income grows whereas the consumption of primary commodities drops as incomes increase. These are also labor intensive products. There is no reason why branded phones and television sets cannot be made in Nigeria if there are incentives to lure in the manufacturers directly or through franchising.


In summary, the path to restructuring the Nigerian economy for accelerated growth involves the adoption of production friendly policy planks that involve all the key organs of government such as the Central Bank, the Ministries of Finance, Agriculture, Industry, Trade and the respective Development Finance Institutions acting in concert. Over the years, there appears to have been an unfocussed approach to growing the Nigerian economy. Now is the time to seize the opportunities presented by the current external sector crisis to good end.




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Osa Felix Asemota holds a degree in economics and an MBA both from the Obafemi Awolowo University Ife. He trained at the International Monetary Fund Institute in 1991 as a Balance of payments specialist. He is also an alumnus of Euromoney Training and the National Institute of Rural Indistrialization in Hyderabad, India. He had extensive work experience as an economist at the Central Bank of Nigeria (CBN) including covering the Oil and Gas sector, Money and Banking Division, the stock market doing stock market indices, and finally an extensive stint in the Balance of Payments section in the External Sector Division. He went on secondment to the National Economic Reconstruction Fund where he distinguished himself managing the reporting system to the African Development Bank on the utilization of the 100 Units of Account (US$144.0 million) line of credit and more.....
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