By Podium Reporters
Zimbabwe is a country that is now commonly associated with hyperinflation due to its long years of economic struggles arising from an unprecedented galloping inflation. It all started in the early 2000s when then President Robert Mugabe of Zimbabwe launched the Fast Track Land Reform Programme (FTLRP), which redistributed agricultural lands formerly owned by white minority farmers that settled in Zimbabwe during the British colonial era to black Zimbabwean peasants and the working class.
Zimbabwe’s land redistribution programme elicited a strong response from the West, including the United States and the United Kingdom who strongly opposed Zimbabwe’s FTLRP describing the program as a violation of property rights. As a result of Mugabe’s refusal to reverse the program, the West imposed a range of sanctions on Zimbabwe, including travel bans, freezing of assets and trade restrictions. The World Bank and the International Monetary Fund (IMF) also suspended lending to Zimbabwe, while the country was suspended from the Commonwealth of Nations.
Ultimately, these sanctions exacerbated the country’s economic crisis and foreign exchange became scarce. Hyperinflation set in, which caused the value of the Zimbabwean dollar to plummet. This led to a decline in the purchasing power of many people and made it difficult for businesses to operate. The Reserve Bank of Zimbabwe (RBZ), however played a key role in the country’s economic crisis. The RBZ printed large amounts of Zimbabwean dollars in an effort to finance government spending and support the struggling Zimbabwean economy. This led to a rapid devaluation of the Zimbabwean dollar and made it difficult for the central bank to control inflation.
Today in Nigeria, rising inflation is the biggest headache facing both the government and the citizens as well as businesses. The rate of increase in prices of commodities and services has drastically reduced the purchasing power of many in Nigeria due to no commensurate increase in income. The value of the Naira to the dollar has been on a downward spiral in the past couple of months. This has led many to conclude that Nigeria is on the road to Zimbabwe.
Even though Nigeria’s inflation is not going in the direction of the Zimbabwean levels, there are similarities in the root causes.
CENTRAL BANK OF NIGERIA VS RESERVE BANK OF ZIMBABWE
During the peak of Zimbabwe’s economic crisis, the RBZ printed trillions of Zimbabwean dollars in order to finance government spending amidst high volume of debts and low export earnings. By 2008, the country’s annual inflation rate had reached 231 million percent, and the Zimbabwean dollar had become effectively worthless. In the case of Nigeria, the economic slide was not as dramatic.
Following years of mismanagement of Nigeria’s oil export earnings, the country could not diversify its revenue sources away from crude oil earnings neither did we invest the proceeds of the oil windfall to improve infrastructure needed to drive economic growth such as power, roads, rail etc. Investment in agriculture to increase output was equally not carried out. Education and healthcare equally remained underdeveloped. Local refining of petroleum products gave way for total reliance on imported fuel, which had to be subsidised.
The 2008 global recession came and Nigeria largely escaped without much visible bruises thanks to a significant foreign reserve buffer and dollars in the Excess Crude Account. However, beneath the surface, cracks in the economic structure of the country were apparent. Subsidy payments became outrageous, gulping funds that should have been used to provide infrastructure, social services and carrying out the diversification of the economy.
As crude oil price ballooned, subsidy payments for questionable volumes of imported petroleum products also increased. Coupled with unbridled corruption in the management of public finances, we got to a point where despite selling millions of barrels of crude oil at record prices, the nation’s foreign reserve was dwindling, and foreign and domestic debts were increasing with little tangible evidence of infrastructure or other visible investments to show for it.
Eventually, crude oil earnings started dwindling and we got to a point in 2014 where the federal government had to borrow to pay worker’s salaries. States owed salaries too due to dwindling revenue inflows. The dollars in the excess crude account had disappeared literally, meaning there was no buffers to fall back on. GDP growth went into negative territories and we slipped into a full recession. The federal government needed to spend its way out of recession. It called the CBN and the apex bank answered.
In spite of our very poor revenues due to low crude oil prices and low production volumes (thanks to Avengers and increasing brazen crude oil theft), the Federal Government under the leadership of President Muhammadu Buhari was able to carry out the most ambitious investment in infrastructure Nigeria has seen in decades. Agriculture also received massive funding from the federal government (with CBN being a major source of the funds). The military equally saw the biggest investment in decades. The biggest social investment in subsaharan Africa was also undertaken by the federal government.
States, within this period equally got bailouts from the FG (courtesy of the CBN) to clear salary arrears. All manner of historical refunds were also made to the States ranging from Paris Club over deductions to refunds for federal road projects undertaken by states. Gratuities and pension arrears were not left out. All these required huge sums of money, plenty of these money came from debt. A lot of the debt came from the CBN.
This debt from the CBN was mostly through the controversial ways and means. In May 2023, the 9th National Assembly voted to securitise over N23 trillion ways and means advances made by the CBN to the federal government. In essence, the CBN behaved like the Reserve Bank of Zimbabwe by printing trillions to finance government spending in a bid to stimulate growth in the face of poor public revenues. One of the consequences of this intervention is excess Naira liquidity in the economy.
With a lot of Naira circulating in the economy coupled with foreign exchange sparingly flowing into Nigeria’s foreign reserve, the value of the Naira came under immense strain as demand for foreign exchange increased. The CBN tried to maintain a rigid exchange rate. But without adequate supply of dollars to meet the demands for dollar, the CBN was fighting a lost battle by trying to ‘defend’ the Naira. Also by creating multiple forex windows/segments in the official market it simply opened the door for round tripping.
The health of Nigeria’s economy plummeted significantly after the covid-19 disruption/lock downs. Inflation started increasing, cost of living started rising sharply forcing the government to distribute palliatives and low interest household loans through NIRSAL (a CBN subsidiary). This further increased Naira liquidity in the economy. Revenue was not improving either, relative to debt. According to DMO, Nigeria’s debt service-to-revenue ratio in 2022 was a whooping 80.6%. Our debt-to-GDP ratio was nearing 40% as at Q2 of 2023.
The above scenarios meant that the space for borrowing has drastically shrinked. Amidst dwindling revenue, fuel subsidy still gulped N4.39 trillion in 2022, most of which were revenues NNPCL could have remitted to the federation account to serve as revenue for government spending. The federal government still owed NNPCL a balance of N2.8 trillion. It was therefore obvious that the fuel subsidy was not sustainable any longer. Leading economic experts in Nigeria, opposition political party candidates such as Atiku Abubakar, Peter Obi etc repeatedly called for an end to the fuel subsidy regime.
President Bola Ahmed Tinubu, who also campaigned to remove fuel subsidy, on his first day in office affirmed the removal of fuel subsidy and a reform in the foreign exchange market. The economic shock hitherto held back by the FG through trillions of Naira in subsidy payments was unleashed unto the economy. Inflation increased sharply as prices of goods and services adjusted to the new market realities. A new CBN management came on board in September led by Dr. Yemi Cardoso and decided to turn back from fiscal interventionism and stopped further ways and means advances to the federal government.
The CBN equally announced policy changes that effectively saw a liberalisation in the foreign exchange market with the aim of increasing foreign exchange liquidity from various sources. The move by the CBN has yielded some impacts with a temporary convergence in rates at the official and parallel markets coupled with a massive jump in liquidity at the foreign exchange market ($1.8 billion traded in a week). In the process, the Naira experienced further devaluation, which led to additional increases in the prices of goods and services.
HOW DOES NIGERIA AVOID THE ZIMBABWEAN ROUTE
The current inflationary trends in Nigeria are hurting the people. Their purchasing power is dwindling. In some places, people have marched to protest against the ‘hunger in the land’ or rather their inability to buy enough food due to the high prices of commodities in the market. If prices of basic consumer goods and food commodities keep increasing on a daily basis, we may get to a point where the income of many poor Nigerians cannot buy them a square meal a day.
It is therefore imperative that a combination of steps aimed at stabilising prices and shoring up the value of the Naira be taken. Some of these steps have already been taken by the monetary authority aimed at moderating activities at the foreign exchange market. Further announcements are expected at the February monetary policy committee meeting. However, most of the required steps are fiscal in nature and would require concerted efforts by the federal, state and local governments.
1. Massive Investment in Agriculture
The federal, state and local governments must make deliberate efforts to boost agricultural productivity through various interventions. Areas of intervention must go beyond cultivation of grains to include livestock (poultry, fishery, cattle rearing etc) and production inputs such as feeds, fertilisers etc.
The states and LGAs must not fold their arms and look up to only the federal government to intervene in agriculture. They have a major responsibility to stimulate agricultural productivity in their domains. Investment in food storage and processing is equally necessary to increase supply. Once there is increased availability of agricultural products, prices will come down as hoarding to drive up prices becomes unprofitable.
2. De-dollarisation of the economy
The government must begin to de-dollarise Nigeria’s economy. The practice of pricing local commodities and services in dollars places undue pressure on the Naira as a result of increased demand for dollars. This would require a collaboration between the CBN, Ministry of Finance and its parastatals as well as law enforcement agencies.
3. Increase crude oil production by combating crude oil theft
Part of the reason for our forex crisis is inadequate inflow of foreign exchange from export earnings. Apart from the recent move by the CBN to domicile crude oil export earnings of the NNPCL in the apex bank, serious efforts needs to be carried out to drastically reduce crude oil theft. Increased oil production means more forex for Nigeria.
Once supply of foreign exchange outstrips demand, there would be stability in the exchange rate and possible appreciation of the Naira, which has direct impact on the cost of imported commodities and even the price of locally produced commodities as we have seen in Nigeria.
If these outlined steps and few other monetary policy steps are quickly taken simultaneously by all government and non-government actors, the country will definitely avoid the harrowing road to Zimbabwe. Most importantly, Nigeria would have turned this weaning phase of our economic development into a springboard for a major economic miracle.