By Adebayo Ahmed | The new dispensation combined with quick policy actions on fuel subsidies and foreign exchange, as well as the arrest of the suspended central bank governor, has brought the question of monetary policy to the front burner. With President Bola Tinubu announcing during his inaugural speech the need to “clean” the Central Bank of Nigeria (CBN) as well as the need to reduce interest rates to promote MSME-led growth, the question therefore revolves around what the CBN has been doing wrong, and what is the way forward.

Fig 1: Inflation. Source: National Bureau of Statistics

The backdrop to this question is the uncomfortably high and rising inflation which hit an 18-year high of 22.41% in May. Inflation at over 22% is a big challenge for any economy. It means that prices double in less than four years. It means that salary earners lose 22% of their purchasing power every year. It means that the government would need to generate 22% more revenue just to provide the same public services. It means that the Naira will likely weaken by 22%, less whatever global inflation is, in the next year. Inflation at 22% means that the challenge of moving the Nigerian economy forward and improving the lives of ordinary people forward is significantly harder.

This high inflation is especially worrying for food which, at nearly 25%, means that the poorest who as at 2019 already spent roughly 60% of their incomes on food, are in a very difficult position. When combined with other recent policy efforts, such as the removal of fuel subsidies, the seriousness of the challenge should be apparent as inflation has been projected to surge even higher.

Given that keeping prices “stable” or keeping inflation low is the core monetary policy objective of the CBN, then it is easy to make the case that the central bank has been, and is, failing its core mandate. If you add popular annoyance against exchange rate issues, then the scorecard is likely to be very poor.

In this note, we will argue that the failure is due to the CBN’s misunderstanding of its powers in terms of what it can and cannot do. This misunderstanding has led it down the unconventional policy route which, as expected, has resulted in higher inflation and not much else. That misunderstanding however is a good lesson for the CBN going forward, especially in the context of the new government’s zeal to set a more credible path for monetary policy.

The big trade-off in monetary policy: Taming inflation versus promoting growth

First, a simplification of the big trade-offs when thinking about monetary policy, which is really all about controlling and managing the money supply to ensure that there is just enough money in circulation to incentivize real economic growth in a sustainable way. Of course, money (today) is really just a piece of paper (or a digital record) that has no intrinsic value. That piece of paper does not cause rain, or fight terrorists, or reduce bottlenecks at the ports, or teach young people physics. In economics we like to say that in the long-run money is neutral. If you wanted more water for agriculture, you would need to build irrigation facilities; and if you wanted to fight terrorists disrupting your economy, you would need more policing and intelligence.

This neutrality of money has very important implications for monetary policy. The first is that higher levels of money supply for a given level of economic activity just means higher prices (also known as higher inflation). Imagine a hypothetical yam-eating society in which their central bank decided to double everyone’s income by a cash transfer but the number of yams available, the real yam economy, remained the same. The only outcome will be higher prices for yams or yam inflation.

In practice, economies are a lot more dynamic but the principle is the same. Controlling the amount on money supply is the key factor behind managing inflation. If your money supply grows too fast relative to your real economy then you have higher inflation, and vice versa. Ergo, if we observed that inflation was getting too high then the expected policy response would be to reduce the growth of money supply.

There are many tools for reducing the growth of money supply but the conventional primary tool is through an increase in interest rates. The logic is simple. At the margin, higher interest rates make borrowing more costly which means credit, to the private sector or governments, should reduce, and which means money supply reduces as well. On the flip side, higher interest rates also incentivize banks to park money at the central bank to collect more interest which also tends to reduce money supply. There are various other channels but in general higher interest rates tend to reduce money supply.

But higher interest rates also have other effects. Higher interest rates tend to slow down the economy. If you think of the channel through slowing credit growth then it is pretty straightforward to see how. So, the question then becomes, when faced with higher-than-normal inflation, should policymakers choose to allow higher inflation or raise interest rates to reduce inflation, even if it limits economic growth or employment?

The answer is almost always to opt for lower inflation. The first rationale behind this is because inflation affects everything, even the interest rate itself. Think for instance of our yam economy and imagine inflation was 25% a year. What this would mean is that even if interest rates were as high as 20%, the providers of credit would still be losing value. In that economy, if a person loaned out the equivalent of one yam, at the end of the tenor, the principal plus interest would not be able to buy that same yam. In essence, real interest rates would be negative. So, you would need even higher interest rates just to incentivize people to stand still in real terms.

The same dynamic works with exchange rates in an economy with higher inflation. Imagine inflation in Naira-denominated yam economy was 25% but inflation in our neighbours’ CFA-denominated economy was only 1%. It would mean the Naira would have to depreciate by about 24% relative to the CFA just to stand still. If it didn’t, then yams from our neighbors would be systematically cheaper and everyone would opt for them and our economy would suffer.

The impact of inflation is so ubiquitous, from wages to government spending to interest rates to exchange rates, that when faced with a choice, monetary policy almost always has to opt for lower inflation even if it comes with some costs.

But that is not all. Imagine our yam creditor who has to decide what “real” interest rate to charge to ensure that she doesn’t end up losing value at the end of the term. She has to guess what inflation in the future would be. If she thinks inflation will be high then she has to charge a high interest rate to make up for it. On the other hand, if she thinks inflation will be low, then she can charge a lower interest. In essence, her expectations about inflation in the future affect what she does today, and therefore affects what really happens in this yam economy today. What this means is that, even if nothing happens, if people start to expect that inflation will be high then there are consequences to that.

From the perspective of monetary policy, this means that it is not enough to choose lower inflation, but people need to believe that you will choose lower inflation and do what needs to be done to tame inflation. If people start to believe that inflation will be higher, then people start to act as if inflation is high and that results in all the consequences of high inflation even if nothing significant happens.

Supply shocks and optimal monetary response

An expansion in money supply is not the only thing that can cause inflation. Supply shocks can also have impacts on prices and inflation as well. Think about our yam economy and imagine some goats came and ate up half the yams. Given the same amount of money supply in circulation it will simply mean that prices will go up, otherwise known as higher inflation.

What should monetary policy authorities do about supply shocks? The conventional wisdom is if you think those shocks are temporary then you can try to just ignore them if they aren’t too large. But if you think those are not “shocks” but permanent changes in supply, then you have to manage money supply to reflect those permanent changes. For example, in our yam economy where goats ate half the yams, the ideal monetary response would be to reduce the money supply to fit the new reality of an economy that is only half as large as it used to be.

What monetary policy authorities typically do not do is to try to directly tackle those supply shocks with money. Remember that money is neutral and you typically cannot use money to kill goats, or construct dams, or train teachers, or neutralize COVID. It does not mean that other parties cannot do this to help tackle inflation. Other parties can. The convention is to let the other parties tackle supply shocks because in most cases the shocks are not only about money.

Even where money could be impactful, the conventional wisdom is to let the parties that are best able to find and channel that money, usually the financial sector or the government, to do what they are good at. This is because if those issues are tackled with monetary policy, then you will have to weigh the impact against the costs of higher inflation. In general, higher inflation is always worse.

In essence, even though supply shocks can have an impact on inflation, the monetary policy response to supply shocks ideally would be to be more focused and ruthless in managing money supply.

CBN and the wages of unconventional monetary policy

The recent history of monetary policy in Nigeria can be described simply as the CBN trying to use monetary policy for things that monetary policy could not do, and choosing to focus on other issues while abandoning its inflation mandate. As expected, the outcome from not choosing lower inflation has been higher inflation without any real impact on the many other things it tried to do because, you know, money is neutral.

Many may have forgotten but at his inaugural speech in 2014, the suspended CBN governor, Mr. Godwin Emefiele, wrote that “the Central Bank [could not] afford to sit idly by and concentrate only on price and monetary stability”. He essentially promised to use the CBN for developmental activities such as “credit allocations and direct interventions in key sectors of the economy”.1 To be fair, at the time in 2014, inflation was somewhere around 8% and if inflation is low then there is scope for either monetary expansion or interest rate reductions. The governor chose the latter, and chose to expand money supply not through the financial sector, which is typically the better allocator of credit, but directly through its interventions and eventually lending to government.

Fig 2: Growth in money supply (M2) with trend in red. Source: Central Bank of Nigeria2.

The CBN under his direction, changed from what had been a relatively successful decade of limiting money supply growth which resulted in single digit inflation, to increasing the growth of money supply. As Figure 2 shows, regardless of what else was happening in the economy, what is clear is that there was a change of trajectory and money supply started to increase under his watch. Money supply was of course completely under the control of the CBN. As we remember from our crash course in monetary policy, more money supply in a similar-sized real economy, simply means higher inflation.

Fig 3: Inflation with trend in red. Source: National Bureau of Statistics.

Yes, there have been supply shocks revolving around foreign exchange, COVID, climate change, and other security complications and so on. What is however clear is that the underlying inflation trend has been increasing, in spite of these shocks. Even if you ignore food inflation, which is typically more volatile and in our case dependent to a large extent on the weather, and focus on core inflation, the story is the same. As discussed earlier, supply shocks can and do lead to inflation but the implication is that there was even less room for messing around with monetary policy.

Fig 4: Credit to the government and Money Supply (M2). Source: Central Bank of Nigeria

The first culprit is the expansion of lending to the Federal Government which resulted in a direct increase in money supply, all else being equal. As became clear during the final days of the President Muhammadu Buhari administration, this lending was significant with N22.7tn of this Federal Government outstanding debt securitized in May.

Fig 5: Outstanding Credit to the Government as a percent of total money supply (M2). Source: Central Bank of Nigeria.

For context, this was equivalent to over 40% of the total money supply3 as at April 2023. You can draw a straight line from the CBN’s financing of the Federal Government to the expansion in money supply and then to rising inflation. Previous CBN regimes had worked very hard to reduce the size of lending to the government with the resulting benefits of lower inflation for the economy as is clear in Figure 5. In fact, under the Lamido Sanusi regime the stock of Federal Government debt at the CBN was technically negative. However, that trend reversed with the outstanding debt becoming positive and growing astronomically under Emefiele.

The CBN’s special interventions also contributed their share. Figures are hard to come by on this, but there were reports of about N1.5tn to the anchor borrowers' programme, another N1.5tn on the power sector, N220bn to the textile sector, and so on. All these contributed directly to the growth of money supply and therefore rising inflation. You can argue about the impacts of these interventions but it is unlikely that whatever impacts they had or did not have were large enough to cover the negative impact of higher inflation.

The CBN tried to manage some of this by increasing the Credit Reserve Ratios (CRRs), the fraction of funds that banks have to hold in reserve, but in an arbitrary ad-hoc way with different CRRs for different banks. Although this might have slowed the growth of money supply, it was not enough given the scale of the expansion. There were also questions on the legality of implementing a CRR policy in such an ad-hoc way.

Fig 6: Interest rates. Source: Central Bank of Nigeria

The second culprit in the woe of unconventional policy was trying to force interest rates down even while inflation was going up. If you look at the monetary policy rate in Figure 6, which is supposed to be a signal for CBN’s interest rate policy, you would be forgiven for thinking that it did not change much. But in practice the CBN used administrative action to force rates down. If you look at the actual prime interest rate or the rates on government bonds and treasury bills then the direction of rates is clear. The action on rates started a long time before COVID so it cannot simply be blamed on the pandemic.

Fig 7: Real interest rates. Source: Central Bank of Nigeria and Author Calculations3.

The consequence of the action to reduce interest rates even during a period of higher than ideal inflation was that “real” interest rates became and are still negative. As we learned from our simple crash course in monetary policy, negative interest rates mean people should take their assets elsewhere. This puts even more upward pressure on inflation.

Fig 8: Inflation Perception and Expectations 4

A consequence of the CBN abandoning conventional for the unconventional was that people began to doubt the CBN’s ability to control inflation. As is clear from Figure 8, the public’s expectation of future inflation began to rise. If you recall, even if nothing else happened, once people start to believe that inflation will be higher in the future, then that makes the work to keep inflation in check even harder.

So, what’s the way forward?

The starting point is for the CBN (and given the current circumstances the executive also) to recognise the scale of the inflation challenge and the importance of getting inflation under control. As long as inflation remains high, every other objective, be it the quest for exchange rate stability or the president's agenda for increased cheap lending to MSMEs, will be much more difficult to achieve. The CBN needs to remember that its primary monetary policy objective is to keep inflation in check.

Given that inflation is currently much higher than ideal, the direction of monetary policy has to be to tighten or reducethe growth of money supply. This also means that interest rates will likely have to go up. How far up? At least to the point where “real” interest rates are no longer negative, but maybe even higher.

These actions to reduce the growth of money supply and increase interest rates are likely to be complicated by all the underhand administrative measures which were put in place to force rates down or to limit money supply growth through the back door. For example, the many administrative measures have meant that the monetary policy rate has recently no longer influenced interest rates either for government securities or at the banks, making the monetary policy committee effectively meaningless. The unwinding of the ad-hoc CRR policy, which means money refunded to banks, will also have unintended effects if not managed. The CBN will need to unwind most of these ad-hoc measures.

Given the misdirection by the CBN over the last few years, there may a tendency for the government to want to take closer control of monetary policy. This will likely be counterproductive as it has been demonstrated here in Nigeria and in other countries where governments tend to want to use monetary policy for other non-inflation objectives. Which is the underlying problem that the CBN faces today.

A better way forward would be to strengthen the monetary policy committee and place limits on CBN’s actions that fall beyond the scope of its regular monetary policy actions. One option here would to increase the number of independent members of the committee (currently only four out of 12) and/or reduce the members from the CBN and other government agencies. For instance, there is no real reason why the deputy governor for corporate services, a largely administrative role, should be voting on monetary policy. Increased oversight, to ensure that the CBN actually implements the decisions of the monetary policy committee, would also help strengthen the credibility of the CBN.

Finally, the direct sources of expansion in money supply witnessed over the past decade, specifically the ways and means financing of the government and the myriad of intervention funds will have to stop. Else, it would be equivalent to removing the plug to drain liquidity from the bathtub while at the same time turning on the taps.

As demonstrated above, not everything is within the purview of central banks. For instance, supply shocks, which are beyond the remit of central banks, are also known to drive up inflation. This in essence means that other actors, such as the governments at both the federal and state levels, can take actions to influence supply positively, which should put downward pressure on prices and therefore reduce inflation.

Lessons can be learnt from efforts aimed at tackling rising inflation around the world. Yes, central banks took actions to tighten monetary policy as they were required to but other actors took a variety of actions to put downward pressure on prices as well. For instance, the US govt took measures to ease supply chain logistical challenges that were blamed for rising logistics costs. The UN facilitated the exports of wheat and fertilizer as part of the Black Sea grain initiative to put downward pressure on global food prices as a result of the conflict in Ukraine. In Germany, the government increased investment in public transportation to manage rising transport costs. And so on. The lesson for Nigeria is that even though the CBN has a key role to play in managing inflation, and needs to play its part, the government can also make a significant difference.

For instance, improving security on farms and tackling logistics bottlenecks around moving food across the country will put downward pressure on food prices and reduce food inflation. Promoting regional African food trade, by maybe re-opening the borders and cutting tariffs on imported food will reduce food prices and reduce inflation. From a government finance perspective, improving tax collections and reducing the need for large fiscal deficits which then need to be financed will reduce inflation. We can go on and think of a plethora of actions which governments at the federal, state, and local levels can take to improve the “real” supply-side and therefore reduce inflation. In economics, we call them “structural reforms” which boost supply.

The reality of the last few years is that there is no pain-free way out of Nigeria’s inflation quagmire. But, as with the case of the fuel subsidy and the foreign exchange restrictions, the rationale for early action is clear even if there will be costs to it. From a monetary policy perspective, one of the costs is the necessary higher interest rate environment. But it will be worth it if we get inflation back under control.

Photo Credit: premiumtimesng.com

Footnotes

[1] “My agenda as Nigeria’s Central Bank Governor, By Godwin Emefiele” - https://www.premiumtimesng.com/opinion/162063-my-agenda-as-nigerias-central-bank-governor-by-godwin-emefiele.html?tztc=1

[2] The red line is a standard Loess function to distinguish between the trend in money supply growth and the cyclical component.

[3] Defined as M2 Money Supply. Source: Central Bank of Nigeria

[4] Real interest rates calculated as the difference between the nominal rates and the year-on-year change in inflation.

By Odion Omonfoman | The centrality of adequate and reliable electricity supply to individual welfare, economic growth and overall national development cannot be over-emphasised. This message is not lost on Nigeria. However, various initiatives and reforms aimed at creating an optimal power sector for the country have fallen short. The reforms initiated by the President Olusegun Obasanjo administration, leading to the privatisation of the power sector in 2014, is yet to yield the desired results.

According to the World Bank¹, Nigeria has the largest energy access deficit in the world. 85 million Nigerians, representing 43% of the country’s population, don’t have access to grid electricity. In comparison, 85% of Ghana’s population have access to electricity, while 70% of Senegal’s population have electricity access². The World Bank estimates that the lack of reliable power costs the Nigerian economy over $26.2 billion (N10.1 trillion) which is equivalent to about 2% of Nigeria’s GDP.

This is not to say that Nigeria has not made some progress in the power sector since 1999. For instance, in 1999, Nigeria had nine power generating stations—three hydro and six thermal stations—with a total installed on-grid generation capacity of 5,906 MW, but with available generation below 1,500 MW³. Today, Nigeria has up to 26 on-grid generation stations with a total installed capacity above 13,000 MW. However, available generation capacity hovers around 4,000 MW, with average daily energy output of about 100,000 MWH. Sadly, the little progress that has been made in the power sector since 1999 is neither at par with our population growth nor adequate for the energy needs necessary to achieve our economic potential. For reference purposes, Nigeria’s energy consumption per capita at 140kWh is relatively low and is three times lower than the average for Sub-saharan Africa⁴.

The privatisation of the power sector in 2014 was intended to address Nigeria’s power sector infrastructure and operational challenges, by reducing the direct participation of government in electricity generation and distribution, creating an efficient, contract-driven electricity market, and putting the power sector in the hands of private investors, who would bring capital, operational capacity and efficiency into the sector. Unfortunately, privatisation of the power sector hasn’t really taken government out of direct participation in the sector, nor has it improved operational efficiency in the sector.

As a matter of fact, government’s role and direct participation in the sector has not only expanded, government is currently the largest provider of capital to the sector. Since 2015, government has provided over N4 trillion in capital to the power sector supposedly managed by the private sector. Even worse, the privatisation of the sector has created a huge debt burden for the government, arising from market obligations to private investors. The market obligations were created as liabilities under the balance sheet of the Nigeria Bulk Electricity Trading Plc (NBET), which is a government entity set up to buy wholesale power from electricity generation companies (GenCos) under Power Purchase Agreements (PPAs) and sell same to electricity distribution companies (“DisCos”) under vesting contracts with the DisCos.

The market obligations are mainly debts owed to gas suppliers, shortfall payments to GenCos under the PPAs, and market shortfalls arising from non-review of electricity tariffs by the Nigerian Electricity Regulatory Commission (NERC), the sector regulator. The Federal Government has also gone on a borrowing spree to fund the power sector, particularly the national transmission grid managed by the Transmission Company of Nigeria (TCN), which is still 100% controlled by the government. Some of the loans have been used to fund the improvement of electricity distribution infrastructure of DisCos and also to finance electricity prepayment meters for end-user customers under the National Mass Metering Programme (NMMP).

Policy Recommendations for the Next Administration

Adopt a Paradigm Shift from Installed Capacity to Electricity Consumed

Electricity, however it is generated, is a commodity and has to be consumed (or stored) for electrical energy to be useful. The most meaningful measure of electrical energy in any economy is how much consumption there is. Thus, there is a need for government to stop thinking about electricity in terms of megawatts (MW) that can be generated, and start thinking in in terms of incremental megawatt-hours (MWh) generated and consumed. In other words, government should stop thinking of installed generation capacity and start to think in terms of the amount of electricity delivered, or in layman’s terms, how much electricity is generated and consumed every hour by electricity consumers in Nigeria.

This is an important paradigm shift with positive impact for government, as having such policy mind-set changes the prioritisation and allocation of public and private resources to projects, interventions and initiatives across the electricity value chain that will increase the energy output, availability, reliability and quality of electricity delivered to end-users. By the way, electricity consumers are billed on a kilowatt-hour (kwh) basis (consumption), not on a kilo-watt(capacity) basis.

Under the new paradigm, we expect the incoming administration spokespersons to make statements such as “we will increase the total electricity delivered to Nigerian households and businesses from xyz megawatt-hours (MWh)by 100%within x months”, rather than the usual statement saying “we will increase generation capacity to 20,000 megawatts (MW)”.Increasing generation capacity to 20,000 MW without most of the 20,000 MW being consumed or a corresponding increase in electricity consumption is not only meaningless but also fiscally detrimental to the country.

Increase in megawatt-hours delivered to electricity customers can be achieved if there is a seamless conversion and flow of energy from the natural gas fields to the generation stations, and from the generation stations to the high-voltage lines that transmit the energy to the national grid, and ultimately to medium-voltage and low-voltage lines that distribute the energy to end users. In this regard, the incoming administration needs to prioritise solving the interface issues and challenges across the entire power sector value chain (from natural gas-to-electricity interface, generation-to-transmission interface to transmission-to-distribution interface), building on the current initiatives and projects of the President Muhammadu Buhari government, with a strategic objective to optimise the value-for-money outcomes of a number of these projects, initiatives and interventions.

Continue with Implementation of the Buhari Administration Power Sector Programmes

As stated above, the incoming administration needs to continue the implementation of the power sector programmes, initiatives and interventions carried out by the Buhari Administration. Often times, new administrations are under political pressure to either terminate, suspend, put on hold, or create parallel projects, policies and interventions in the power sector. As an example, the administration of late President Umaru Musa Yar’Adua government suspended indefinitely the implementation of the National Integrated Power Projects (NIPP) and other power sector reform initiatives by the administration of President Obasanjo, with great negative consequences that the power sector is yet to recover from.

The Buhari administration initiated a number of interventions to address the challenges of the power and improve the infrastructure across the sector. The most talked about is the Siemens power projects, being implemented under the Presidential Power Initiative (PPI). The Siemens project is a three-phase infrastructure initiative designed to rehabilitate, upgrade, modernise and expand power transmission and distribution infrastructure across Nigeria. Phase one of the PPI is estimated at 2.3billion euros. 85% of the funding will come from a consortium of German banks and in certain instances, Development Finance Institutions (DFI) at a concessionary rate, and guaranteed by the German Export Credit Agency and other export credit agencies. The Nigerian Government will provide a counterpart funding of 15%. The implementation of the phase has since commenced, with many of the long lead transmission equipment scheduled to arrive before the end of Q2, 2023. The successful implementation of Phase 1 of the PPI will add 2GW of stranded generation capacity to the national grid, and will certainly increase the daily electricity delivered to electricity customers from the present daily average of 100,000 MWH.

Aside from the Siemens projects, the TCN has also secured a number of offshore financing to improve transmission infrastructure across the country. The Central Bank of Nigeria has also been involved in providing long-term capital to the sector for transmission and distribution interface projects.  The World Bank funded DISREP is a $500 million programme to help improve service quality of DisCos in the areas of metering, loss reduction and distribution infrastructure network rehabilitation, improvement and expansion. The National Mass Metering Programme (NMMP) is an initiative aimed at closing the metering gap in the country.

The incoming administration should continue the implementation of these and perhaps other projects and initiatives of the Buhari administration in the electricity sector. While we advocate for the continuation of the Buhari administration interventions, the incoming administration should also review and optimise some of these programmes and initiatives to ensure value-for-money.

Develop a New National Electricity Policy Framework & Amend the EPSRA

Nigeria’s subsisting national electricity policy was developed in 2000. The policy has basically remained unchanged since it was developed under late Dr. Olusegun Agagu as the Minister of Power. The National Electric Power Policy was the policy document that guided the power sector reforms and gave birth to the Electric Power Sector Reform Act passed by the National Assembly in 2004 and signed into law by President Obasanjo in 2005. Since its passage, the EPSRA (2005) has also remained unchanged, despite the urgent need for more reforms in the power sector.

With the recent constitutional alteration of section 14(b) of the concurrent legislative schedule of the 1999 Constitution (as amended), it has become more imperative to develop a new national electricity policy. More so as decarbonisation and energy transition from fossil fuels to clean sources of energy are now very important aspects of any country’s national energy policy. Consequently, the incoming administration must develop a national electricity policy that reflects the electricity aspirations of both the Federal Government and the states in line with the new provisions of the Constitution.

In same vein, the EPSRA (2005) is no longer fit-for-purpose. The 9^th National Assembly had commenced the process of repealing or amending the EPSRA. While the Senate repealed the EPSRA (2005) and passed the Electricity Bill 2022, the House of Representatives just passed the EPSRA amendment bill in April. It is hoped that the 9^th National Assembly can conclude the legislative process of harmonising the two bills, and pass the harmonised bill for presidential assent before May 29^th, 2023. However, there is no certainty that this will happen or that President Buhari will sign the bill into law before leaving office.

In the event that the EPSRA repeal/amendment bill is either not passed by the 9^th National Assembly, or that President Buhari declines assent to the bill, the incoming administration should fast-track the passage of a new electricity act by the 10^th National Assembly to reflect the new electricity frame work as envisaged by the Constitution and give States the unfettered rights to develop the electricity sector, including creating electricity regulatory structures and state electricity markets within their territorial boundaries.

The new electricity law should strengthen the national regulatory framework and the powers of the NERC as the electricity regulator, improve and strengthen existing electricity market structures, incentivise the market to a more efficient, contract-based market, decentralise the operations of the TCN and in general, reduce government’s participation and allow more private investments in the power sector by opening up the sector to greater market competition.

Establish a Standing High-Level Inter-Ministerial Energy Committee

Lack of effective co-ordination of the various segments of the power sector value chain is one of the causes of the dysfunction in the sector. Thus, the incoming government should consider the establishment of a standing inter-ministerial energy committee to be chaired by the Vice President. The inter-ministerial committee members should include the Minister of Power, Minister of Petroleum Resources (or such designate), Minister of Finance, the Permanent Secretaries of the mentioned ministries, the chief executives of NERC, the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the Nigerian Midstream and Downstream Petroleum Regulatory Agency (NMDPRA), the Governor of the Central Bank of Nigeria and heads of other key agencies and departments in the oil and gas sectors and the power sector. The inter-ministerial committee’s role will be to ensure effective coordination of agencies and operators that are part of the gas-to-power value chain.

Empower States to Develop Sub-national Electricity Markets

With the constitutional amendments that grant states’ houses of assembly the power to make laws for electricity generation, transmission and distribution within areas covered by the national grid in their domains, states and other sub-national governments have finally become players in the electricity market. The incoming administration should work with the states to develop the electricity markets within their localities.

State governments should be encouraged to take steps to begin to develop the electricity resources within their areas in collaboration with the Federal Government and under the framework of the new national electricity policy and amended EPSRA. That means the incoming state governments will also need to develop the right electricity policy framework for their states, and develop the right legal and regulatory frameworks that would create efficient and competitive electricity market structures, which can help them to attract needed investments into the electricity market. Also, states should be encouraged to drive rural electrification.

Improve the Energy Mix &Address Energy Transition Issues

Nigeria’s energy mix consists of fossil fuel and renewable energy sources, mainly hydropower generation and increasingly generation from solar energy. However, our energy mix is still dominated by fossil fuel—natural gas and diesel/petrol (largely for self-generation). This is understandable as Nigeria has Africa’s largest crude oil and natural gas resources. However, this presents a problem for Nigeria as the world moves to cut fossil fuel consumption in order to achieve carbon neutrality (net zero CO₂ emission).

At the United Nations Climate Change Conference event in Glasgow (COP 26), Nigeria committed to carbon neutrality by 2060, and to this effect has unveiled its Energy Transition Plan (ETP). An Energy Transition Implementation Working Group (ETWG), situated in the Office of the Vice President, has been established to drive the implementation of the plan. In the ETP, Nigeria puts forward a robust argument for the utilisation of its vast natural gas resources as a transition fuel for its energy requirements. It is reassuring that the World Bank in a recent publication recognises that natural gas can be a transition clean fuel for developing countries like Nigeria with vast natural gas resources and existing natural gas generation plants.

Consequently, the in-coming administration must continue the implementation of the ETP to achieve a faster transition to carbon neutrality by 2060. There needs to be focused investments at targeting new investments in additional power generation into renewable energy power generation sources such as solar and hydropower energy sources. At the moment, there is no solar energy generation into the national grid – and for obvious reasons ranging from grid connection, grid instability, existing stranded generation and payment assurances for the power to be produced.

However, it is high time that a grid-based, solar energy generation plant is established to optimise our power generation resources and reduce the percentage of fossil fuel in our national energy mix. Beyond having an on-grid solar power plant, there needs to be continued and sustainable investments in off-grid renewable energy generation, such as mini-grids, to serve rural communities and underserved communities. However, this should be done with greater collaboration between the Federal Government agencies responsible for rural electrification and the state governments.

Resolve the Privatisation Puzzle

The privatisation of the power sector is one of the most controversial privatisation exercises so far in Nigeria. A lot has been written about the privatisation but suffice to say that the Eldorado promised with the privatisation of the sector has not yet materialised. Many would blame the Federal Government at the time for forcing through a privatisation of the power sector that clearly was not at the stage to be privatised. But this is neither here nor there. The task is to address whatever gap exists.

This is not to say there has not been any progress in the power sector since privatisation. As a matter of fact, the privatisation of the sector increased total available generation capacity since 2014, as core investors in the successor GenCos invested to rehabilitate and restore installed capacities in some GenCo plants. For instance, the core investors in Egbin, Kainji, Ughelli and Jebba power plants have restored the installed generation capacities for these plants.

At the heart of the seeming failure of the power sector privatisation exercise is the inability of the electricity industry to achieve a contract driven, regulated market as envisaged in the power sector reforms. Only recently, it was reported that the partial activation of contracts in the sector spearheaded by the NERC in June 2022 has collapsed. Without activated contracts (PPAs, Vesting Contracts, Gas Supply Agreements, etc) amongst market participants in the NESI value chain, the benefits of privatisation may never be realised.

Consequently, the incoming administration should prioritise the resolution of the privatisation conundrum, particularly with a view to ensuring a “sensible activation” of contracts in the industry. By “sensible activation” of contracts, we mean allowing more bilateral negotiations, rather than an imposition, of market contracts amongst parties in the industry, under the regulatory oversight of the NERC.

The in-coming administration also needs to look at re-privatising some of the DisCos that have been taken over by lenders due to default by core investors in meeting the acquisition loan repayment terms to the lenders, or under some form of administration by the NERC and the CBN. The failed DisCos in administration should be broken into smaller franchise areas preferably along state boundaries, and privatised as new entities. Lastly, there is the “unspoken” issue of the payment of the huge market debts in the sector. For instance, GenCos claim that they are owed over $1 billion by the NBET. It is unclear how the new government would address the payment of these debts.

Reversing the privatisation of the power sector should not be contemplated under any circumstance. The privatisation process has built-in contract provisions to address the failures of any core investor under their performance agreements. What is needed is for the government to activate these contract provisions, provided the government has also met its own obligations too to core investors.

Improve Gas Supply to the Power Sector

As earlier stated, Nigeria’s energy mix is largely driven by natural gas. Consequently, the unimpeded availability and supply of natural gas to thermal power stations is most critical in attaining incremental megawatt-hours of electricity consumption by end-users, transmission and distribution infrastructure permitting. While Nigeria has the largest natural gas reserves in Africa, our power generation plants engage in a daily struggle to get enough natural gas to run their gas turbines.

Thus, improving gas supply to the power sector will require addressing the bottlenecks in the gas–to-power value chain. These bottlenecks include insufficient investments in gas-to-power infrastructure, and gas-to-power pricing and timely payments to gas suppliers for contracted gas delivered to power plants. From its policy document, the incoming administration plans to introduce a “Nigeria First” policy to prioritise the utilisation of Nigeria’s natural gas resources to electricity generation before export. This will be a welcome policy, if developed and implemented.

However, the issues around gas supply to the power sector are also anchored around sustainable investments in natural gas exploration, development and production. Equally important is robust security and protection of oil and gas infrastructure across the country. Thus, any “Nigeria First” natural gas utilisation policy must seek to address these upstream and downstream issues in the oil and gas sector.

Conclusion

There is a temptation to delve into more tactical issues and challenges in the power sector such as resolving the metering gap, estimated billing, resolution of financial distress in the power sector and other operational issues affecting the electricity industry. Putting together the tactical plan to resolve the issues should be left with the power sector team to be assembled by the incoming administration. Some of the recommendations here can serve as guides to the incoming president in thinking about the critical issues in the sector and in setting the terms of reference for his power team.

[1]https://www.worldbank.org/en/news/press-release/2021/02/05/nigeria-to-improve-electricity-access-and-services-to-citizens

[2] https://ourworldindata.org/energy-access

[3] National Electric Power Policy Document, 2001

[4]Nigeria Energy Information | Enerdata

By Fola Aina | The Nigerian state is currently confronted with multiple security threats, most of which emanate from, and are perpetuated by violent non-state actors (VNSAs). In the troubled Northeast region, the predominant threats include the activities of violent extremist organisations such as the Boko Haram driven by a political ideology of establishing an Islamic Caliphate, and its first breakaway faction Ansaru, as well as its second breakaway faction, the Islamic State in West Africa Province (ISWAP). The most affected states include Adamawa, Borno, and Yobe states, popularly referred to as ‘BAY’ states. As of 2021, Boko Haram has been responsible for the deaths of 350,000 people,¹ and the internal displacement of 2.5million people as of January 2023.²

In the country’s Northwest and Northcentral regions, the activities of armed bandits have devasted local communities. Armed bandits numbering over 30,000 were responsible for the deaths of over 2,600 people³, and the displacement of about 1million others.⁴ Driven by economic opportunism rather than political ideology, the activities of armed bandits have been mostly manifested through brigandage, theft, kidnappings for ransom, cattle rustling, and sexual violence mostly perpetuated against women and girls. Armed banditry which remains a very significant threat to Nigeria’s national security has its roots in the country’s persistent farmer-herder crisis.

In the Southeast region, secessionist agitations by the Independent People of Biafra (IPOB) and its paramilitary wing, the Eastern Security Network (ESN), have disrupted peace and continues to threaten the freedoms of citizens through the imposition of sit-at-home orders. Added to these are also issues of piracy and terrorism that have plagued the Niger Delta, thereby resulting in the region’s insecurity. In the Southwest region, the activities of cultists, kidnappers and other organised criminal gangs continue to threaten the peace and security of the region as well. These threats have since evolved overtime and adapted making the quest to addressing them even more challenging. This is particularly pertinent as their existence reflects an afront on the state’s monopoly of the use of force.

The degree of severity across these multiple threats varies, given that they have the potential to continually derail social, political, and economic development across the Nigerian state. Collectively, these threats pose significant challenges to human security in Nigeria. These

challenges are mostly manifested in the effects of these threats to human lives and livelihoods. Furthermore, they constitute a grave threat not only to Nigeria’s national security, but also to those of its immediate neighbours such as Cameroun, Chad, and Niger in the Lake Chad Basin region as well as the Sahel region.

Nigeria’s current security architecture is ill-positioned to address these threats. From issues associated with the lack of adequate equipment to those of manpower shortages and non-professionalism, the challenges confronting the security sector abound. This has also contributed towards the proliferation of private security companies (PSCs) in complementing the security provisioning across the country.

Tackling growing insecurity efficiently and effectively will demand reviewing and changing how the security sector is governed in Nigeria. This is in addition to recalibrating the state’s coercive apparatus and repurposing its preparedness and responsiveness to these threats. The Nigerian state has mostly responded to threats to its national security in a reactionary way, rather than proactively.

Repositioning National Security Through Improved Governance

Currently, Nigeria’s national security architecture can be broadly categorised under two sub-headings. These include internal security and external security. Under internal security the state’s institutions mostly saddled with the responsibility of protecting the state from internal threats include the Office of the National Security Adviser (ONSA), the Nigerian Police Force (NPF), the Nigerian Police Intelligence Response Team (IRT), the Department of State Security (DSS), the Federal Ministry of Interior, the Nigerian Customs Service, the Nigerian Immigration Service, the Nigerian Correctional Services, the Nigerian Drug and Law Enforcement Agency (NDLEA), the Defence Intelligence Agency (DIA), the Economic and Financial Crimes Commission (EFCC), and the Independent Corrupt Practices and Other Related Offences Commission (ICPC), and the Nigerian Counter-Terrorism Centre (NCTC), and the Nigerian Financial Intelligence Unit (NFIU), to mention a few. Others at regional levels include Amotekun in the Southwest region, and Ebube Agu in the Southeast region, in addition to local vigilante groups.

With respect to external security, it is pertinent to note that the Office of the National Security Advisor (ONSA) also plays a fundamental role in this regard. Others also include the Nigerian Customs Service and the Nigerian Immigration Service, the Nigerian Intelligence Agency (NIA), the Nigerian Counter-Terrorism Centre (NCTC), the Nigerian Armed Forces (The Nigerian Army, the Nigerian Navy, and the Nigerian Air Force), the Directorate of Military Intelligence, Army Intelligence, Naval Intelligence, Air Force Intelligence, the Defence Intelligence Agency (DIA), and the Regional Intelligence Fusion Unit (RIFU) amongst others. It is equally significant to note that the military is fundamentally the state’s coercive apparatus deployed with the goal of averting external aggression against the Nigerian state, given the NPF’s incapacity to address the country’s multiple threats, the military has since assumed an active role in internal security management as well. As of November 2018, Nigeria has had only 334,000 police officers.⁵ In addition to being overstretched, as of 2019, Nigeria’s total military forces stood at 223,000 personnel.⁶

The threats to Nigeria’s national security can be broadly categorised into five dimensions. These include the political dimensions, given that some of these threats are triggered by political issues such as actual or perceived political marginalisation.  There is also the socio-economic dimension, which stems from issues such as poverty, inequality, unemployment, and illiteracy amongst others. There is also the environmental dimension which bothers on issues such as climate change resulting in desertification and deforestation, water supply shortages, resulting in conflicts over increasingly scarce natural resources. The fourth dimension is the ethno-religious dimension which reflects tensions resulting in communal clashes. Another very significant dimension is the cyber security related dimension. This dimension is mostly manifested through propaganda, the spread of misinformation, and hacking through malware.

Nigeria’s response to national security threats appears to be overly militaristic. The issue with this is that it has the unintended effect of neglecting “human security” which is required in gaining the support of those affected. This is critical to the exchange of influence between the state and society in the pursuit of mutually-linked security goals and objectives. A viable option towards repositioning Nigeria’s national security architecture would be the adoption of an integrated approach towards national security, one which has “human security” at the centre of it all. This implies a prioritisation of the wellbeing of humans, as members of society, to whom the state is obligated to protect by provisions of the constitution and in accordance with the social contract. The components of this integrated approach to national security entails economic security, social security, food security, housing security, health security, and cultural security. To effectively address national security threats, these components are expected to considered not in isolation, but collectively as a whole.

Recommendations:

To better position Nigeria’s national security architecture to respond more efficiently and effectively to the multiple threats confronting the country, the following are some recommendations:

1. The need for a review of the National Security Strategy (NSS) every five years. Nigeria’s approach to national security is essentially derived from the NSS. Given the nature of the new and emerging threats to the country’s territorial integrity, which has resulted in irregular warfare within its shores, the NSS should reviewed every five years to ascertain what works and what does not.
2. Establishment of the Office of the Director of National Intelligence (ODNI), not as a separate government agency, but under the Presidency. This is to be patterned after a similar institution in the U.S., which was created in 2005 as part of the responses to the 9/11 terrorist attacks, and designed to ensure integration of national intelligence. In the U.S., both the Director of National Intelligence and the National Security Adviser (NSA) report to the president. As it currently stands in Nigeria, the Office of the National Security Adviser (ONSA) plays the role of a coordinating agency on all matters related to national intelligence. This creates room for underperformance on its fundamental role, which is to advise the President on national security matters. The creation of an ODNI would therefore go a long way in ensuring the harmonisation and coordination of all national intelligence thereby fostering the availability of actionable intelligence in a timely manner. This is in line with what exists in the United States of America (USA), which has both the NSA and the ODNI
3. Establishment of two designated portfolios, not as separate agencies, but under the Office of the National Security Adviser (ONSA). The recommended portfolios are: the Deputy National Security Advisor (DNSA) on Africa and Economic Affairs and a Deputy National Security Advisor (DNSA) on Grand Strategy, Counterterrorism, and Intelligence. Both portfolios are needed to deepen and broaden the operations of ONSA.
4. There is a need for manpower increase across the Nigerian Police Force and the Nigerian Military to provide much needed surge against criminal activities across the country. The current deficiencies that exist with manpower, amongst Nigeria’s security forces leaves them mostly stretched to the limit thereby impeding their abilities to effectively tackle insecurity.
5. There is an urgent need to provide state of the art equipment, advanced weaponry, and technology including combat gears, night vision googles, armed drones, surveillance drones and advanced weapon systems across the security forces. The use of state-of-the-art equipment, advanced weaponry and technology offers an edge to Nigeria’s security forces in the increasingly complex and dynamic sphere of asymmetric warfare.
6. Regular trainings for members of the security forces are required to sustain their professionalism, and preparedness to address the issues of insecurity currently confronting the country. This should also be strengthened through foreign security forces assistance with partner countries. Doing so regularly would also help to ensure that Nigeria’s security forces are attuned with the latest doctrines, tactics and operational strategies required to persecute the ongoing multiple internal security operations.
7. Nigeria’s structure of intelligence should be repositioned to provide actionable intelligence that informs counterterrorism (CT) and counterinsurgency (COIN) operations across the country. This can be better optimised by prioritising a locally driven strategy towards winning the hearts and minds of local communities.
8. There is need to prioritise a human security and people-centred approach over the current militarised approach. This should focus on addressing the underlying root causes and triggers of insecurity such as socio-economic grievances, political marginalisation, ethno-religious tensions and environmental degradation.

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*Dr. Aina is an international security expert and an associate fellow of the Royal United Services Institute for Defence and Security Studies (RUSI), London, United Kingdom.  

Footnotes

[1] United Nations Development Programme, “Assessing the Impact of the Conflict on Development in North East Nigeria”. Available at https://www.ng.undp.org/content/nigeria/en/home/library/human_development/assessing-the-impact-of-conflict-on-development-in-north-east-ni.html  (Accessed June 25, 2021).

[2] International Crisis Group, “Rethinking Resettlement and Return in Nigeria’s North East”, Available at https://www.crisisgroup.org/africa/west-africa/nigeria/b184-rethinking-resettlement-and-return-nigerias-north-east, (January 25, 2023)

[3] Ayandele. Olajumoke., and Goos, Curtis., 2021. Mapping Nigeria’s Security Crisis: Players, Targets and Trends”, Available at: https://acleddata.com/2021/05/20/mapping-nigerias-kidnapping-crisis-players-targets-and-trends/ (Accessed 2nd October 2022)

[4] Hassan, Idayat. and Barnett, James, 2022. ‘Northwest Nigeria’s Bandit Problem: Explaining the Conflict Drivers’. In Centre for Democracy and Development. Available at: https://cddwestafrica.org/wp-content/uploads/2022/04/Conflict-Dynamics-and-Actors-in-Nigerias-Northwest.pdf (Accessed 13 July 2022).

[5] Godwin Comrade Ameh, 2018.  “IGP Idris Reveals Number of Police in Nigeria”, Daily Post. Available at: https://dailypost.ng/2018/11/14/igp-idris-reveals-number-police-nigeria/ ( Accessed March 27, 2023).

[6] World Bank, 2023. “Armed Forces personnel, Total”, Available at https://data.worldbank.org/indicator/MS.MIL.TOTL.P1?end=2019&start=2019 (Accessed March 27, 2023).