By Babajide Fowowe | Nigeria is currently struggling with a severe crunch in the supply of foreign exchange (forex), which negatively impacts the value of the Naira, its national currency. Both the official and the unofficial forex markets are afflicted by what is basically a liquidity and flow challenge. A number of initiatives and ideas have been mooted which largely relate to borrowing or finding ways to incentivise portfolio flows. Despite supportive oil prices, there is limited discussion around boosting organic forex flows from Nigeria’s oil exports.

Beyond improving security in the Niger Delta to curtail oil theft and re-engaging with capable partners to raise investments in oil production in the country, a short-term and sustainable fix for oil revenue and ultimately for increased forex flows will be for the Nigerian government to immediately cancel the policy of earmarking for domestic consumption a portion (and increasingly all) of its own share of oil output.

Of all the options being implemented or considered for boosting forex inflow into Nigeria, cancelling what is termed Domestic Crude Allocation (DCA) is Nigeria’s surest bet. This will yield immediate result and provide a steady (not one-off) flow of foreign exchange—and thereby address the cashflow challenge in the official segment of the forex markets. Additionally, it will end the dodgy deductions and accounting associated with the domestic crude allocation policy that has been aptly described as an active crime scene.

The DCA has acquired an outsized profile of recent. Any serious attempt at understanding and reforming how Nigeria’s share of oil is accounted and paid for must, for a number of reasons, zero in on the management of and the recent prominence of the DCA.

With the drastic reduction in oil production in Nigeria and the shift in production arrangements away from Joint Ventures (JVs) to Production Sharing Contracts (PSCs), most of the Federation’s share of crude oil produced in Nigeria is channelled to DCA, which has dramatically risen from below 10% of Federation’s share of oil in the early 2000s to almost 100% by 2023. This is not just a suboptimal allocation issue. In relation to forex flows, it is a key challenge because the revenue from DCA sales is received in Naira, meaning that the Central Bank of Nigeria (CBN) is starved of steady and healthy flow of foreign exchange from what used to be its dominant source: crude oil sales. As at 2010, flows from oil and gas accounted for 94% of forex to the CBN but plummeted to 24% by June 2022, and is conceivably much lower now (CBN, like NNPCL, has stopped disclosing some critical data).

Crude oil exports still account for over 70% of Nigeria’s total exports but since 2016 an increasingly disproportionate percentage of the country’s share of crude oil exports is earmarked for domestic consumption. The earmarked barrels of crude oil return first as petrol, then, in terms of monetary flow, as Naira, not dollars. This is because the resultant petrol from DCA is paid for in Naira, not dollars. It is worth highlighting that there is no guarantee that the Naira payment from DCA would translate to commensurate, or even any, revenue to the Federation Account. This is because the national oil company has always been in the habit of making upfront deductions for sundry reasons from revenue accruing from the DCA. The DCA is the site where NNPC performs its dark magic.

Crucially, the DCA policy not only provides an insight into why the national oil company failed to make remittances to the Federation Account for a long spell but also explains why forex inflows from sales of Federation’s crude oil dwindled and the country’s external reserves stagnated at a period of historically high oil prices.

Countries with low forex supply against demand can adopt a number of measures to increase foreign exchange inflows. Such measures include external loans, deposits by deep-pocket investors and countries, foreign direct investment (FDI) and foreign portfolio investment (FPI) and increasing other sources of exports (non-oil exports in Nigeria’s case). However, loans are likely to be one-off and have to be repaid and with interests (even if concessional). Investors are known to take their time and they can be fickle. Unlocking other sources of exports requires time too.

While the country needs to pursue all these options as both stop-gap and long-term measures, it should urgently embrace the one option that is largely under its control and can ensure a steady and sustainable flow of foreign exchange: earning dollars from the sale of its crude oil wherever it is sold. For this to be possible, the DCA policy needs to go immediately. Cancelling the DCA is the easiest and most predictable way to boost forex flows into Nigeria and the most realistic way to reduce pressure on and provide relief for the Naira.

DCA as the Missing Part of the Forex Puzzle

On23 September 2023, the exchange rate of the Naira to the U.S. dollar on the parallel market reached N1,004/$1, thus crossing the N1000/$ psychological mark¹. This marked a significant milestone in the foreign exchange markets in Nigeria. The exchange rate of the Naira has been under pressure for some years, andit has been particularly unstable in the past three years. On 2 January 2020, the Naira exchanged for the dollar at N306.5/$ and N360.5/$at the official and parallel markets respectively (Figure 1).On 29 December 2023, the exchange rates of the Naira to the dollar jumped toN899.9/$ (official) and N1,215/$ (parallel) (Figure 1). Compared to the 2 January 2020 rates, this represents a depreciation of 66% for the official rate and 70% for the parallel rate.

Sources: Central Bank of Nigeria; Analysts Data Services and Resources

While many analysts and commentators have provided different explanations (including conspiracy theories) about factors responsible for the depreciation of the Naira, the primary cause is the simple economics law of demand and supply: the supply of foreign exchange in the country has not been sufficient to meet the demand. The country has a backlog of foreign exchange obligations estimated at between $4 billion and $7 billion by the new Governor of the Central Bank of Nigeria (CBN)during his Senate confirmation screening^2,3. The backlog has been occasioned because there was simply not enough foreign currency in the country to meet demand. While the restrictive policies of the CBN had been able to suppress the effects of the pent-up demand on the exchange rate, the recent liberalisation has shown the full extent of the excess demand.

Following the removal of foreign exchange controls on 14 June 2023⁴, the Naira was effectively floated, and the workings of market forces saw an immediate depreciation of 29% at the Investors and Exporters (I & E) window, with the exchange rate moving from N471.67/$1 to N664.04/$1. Further liberalisation came on 12 October 2023 with the removal of foreign exchange restrictions on imports of 43 items⁵.While the removal of these foreign currency restrictions has on one hand limited subsidisation in the foreign exchange markets, on the other hand, it has resulted in increased prices for imported goods (including petrol), and higher costs for foreign transactions (such as school fees and medical costs). This, coupled with seemingly constantly rising prices, has meant that the exchange rate of the Naira has been a dominant topic of discussion in the polity for the past six months.

Despite the reforms, a lingering issue for Nigeria and the value of the Naira is that the supply of forex continues to track below demand. At the heart of the reduced supply of foreign exchange is the decline in USD inflows into Nigeria’s external reserves arising from lower oil receipts. A key explanation for this is the drastic reduction in oil production, and consequently oil exports. Oil exports have typically accounted for over 70% of total exports (Figure 2), and have, since the commencement of commercial oil exploration, provided the bulk of foreign exchange earnings for the country. However, oil production started falling drastically in the second half of 2020, and remained largely below 1.4 million barrels per day (Figure 3). Production dropped further in 2022 and was below one million barrels per day in August and September. Although it subsequently increased, production has not risen above 1.4 million barrels per day since then. The country has not been able to meet up with OPEC production allocations since July 2020 (Figure 3). Between March 2022 and August 2023, the shortfalls were so acute that they were above 450,000 barrels per day.

Source: Central Bank of Nigeria Quarterly Statistical Bulletin, 2023 Q2
Notes: 1. Crude oil exports as % of Total Exports are measured in percentages on the right-hand vertical axis
   2. Crude oil exports and Total Exports are measured in millions of dollars on left-hand vertical axis

Sources: Nigerian Upstream Petroleum Regulatory Commission and OPEC Statistical Bulletin

Though a lot of attention has rightly focused on declining oil production with government officials and the media putting the blame on oil theft, this is only a part of the story as oil prices after declining over the 2014-16 period and during the COVID-19 pandemic have been broadly supportive of oil export receipts. Ordinarily, the decline in oil production should have been compensated for by significant rise in oil prices following the war in Ukraine. However, there has been a secular decline in the ratio of oil inflows into Nigeria’s external reserves and oil export receipts. We posit in this paper that the reduced forex flows reflect increased allocation of Federation’s crude to DCA at the expense of direct Federation oil exports which normally translated to dollar flows.

DCA involves ‘domestic’⁶ sales of crude oil, thereby bringing revenues in Naira, the domestic currency. Depending on the terms of the different production arrangements, crude oil produced in Nigeria is shared between the oil companies and the Federation. NNPC is responsible for selling the Federation’s share of the total oil produced. NNPC in turn allocates the Federation share either for exports or for domestic utilisation⁷. It is the component for domestic utilisation that is referred to as domestic crude allocation (DCA). The critical point to note is that the different allocations are paid for in different currencies: revenue from Federation exports is received in dollars and revenue from DCA is received in Naira.

With the dwindling oil production, a larger proportion of the Federation’s quota has increasingly been channelled to DCA. This has led to the situation where most of the oil revenue inflows have been in Naira, as opposed to dollars. It is our considered position that switching crude oil allocations from the DCA to exports will provide steady revenue in foreign exchange, and thus boost foreign exchange supply in Nigeria. Ultimately, an increased and steady supply of foreign exchange will ease demand pressures and help to stabilise the Naira.

Good Intention Gone Sour 

The current outsized role of the DCA started around 2005 with the arrangement that about 445,000 barrels of crude oil per day (the nameplate capacity of the Nigeria’s four government-owned refineries) be set aside from Federation’s share of oil, and be channelled for domestic refining through sales to the then Pipelines and Product Marketing Company Ltd. (PPMC).The allocation would be paid for in Naira and PPMC would recoup proceeds via distribution and sale of the resulting refined products within Nigeria. The rationale was that such exclusive domestic allocation of crude oil would guarantee energy security, de-link refined petroleum product prices from volatility in exchange rates and international crude oil prices, and ensure adequate supplies of refined petroleum products in the country.

On the surface, the DCA seemed to be a reasonable idea, and a number of benefits of such an arrangement can be easily gleaned. It would help to insulate the country from price volatilities in the global oil markets. Such volatilities would be manifested in higher or unstable prices of petroleum products, scarcity of petroleum products, and uncertainty or unstable supply of petroleum products. Effectively, domestic crude allocation would ensure that Nigerians reap considerable benefits from being citizens of a major oil-producing

country. However, the policy had one notable weakness: a flawed pricing framework. On the one hand, the crude from the DCA was sold to the PPMC at an implied discount in dollar terms, when adjusted for the exchange rate, in comparison to the international market. On the other hand, the Naira sales price for refined products was delinked from Naira cost price to PPMC implying a subsidy whose bill was to be covered in annual budgetary allocations. In essence, the DCA created two layers of potential losses: first to the Federation in terms of potential export revenues and second to external reserves in the form of forex inflows. In addition, in de-linking domestic petrol prices from the underlying cost drives of refined petroleum products, the DCA pretty much created an incentive for the expansion of Nigeria’s petrol subsidy programme.   The failure to incorporate the opportunity cost concept in economics would have dire implications further down the line for fiscal revenues and dollar proceeds while creating perverse incentives for malfeasance.

In what follows, we highlight some of the critical problems of the DCA⁸.Firstly, the losses borne by the PPMC provided little legroom to make the required investments in Nigeria’s domestic refineries which gradually fell into disrepair. Nigeria’s domestic refining capacity fell to low digits with zero allocation to the refineries from the DCA in 2020. While the loss in domestic refining capacity should have resulted in a termination of the DCA policy, successive Nigerian governments, desirous of ensuring low domestic fuel prices, responded by using the DCA barrels to enter into different arrangements (such as swap, offshore processing arrangements and direct sale and direct purchase) with international refineries and commodity traders to basically barter crude for refined petroleum products.

For much of the earlier period, the actual DCA arrangements amounted to sacrificing an insignificant share of Nigeria’s oil production for refined petroleum products. Given relatively tepid international oil prices for the much of the 1990s and early 2000s, the arrangement was not burdensome from a fiscal and FX perspective. Importantly, DCA usage was below 10% of the total Federation share of oil. However, by 2005, the decision to allocate about 445,000 barrels per day to DCA bumped up significantly the share of the Federation oil allocated for domestic consumption.

In 2004, for instance, only 39 million barrels or 8.57% of the 455 million barrels of the Federation share was allocated to domestic consumption, with the remaining 91.43% allocated to Federation exports. Following the policy mentioned earlier, the picture changed dramatically in 2005, with 160.9 million barrels or 35.25% of Federation’s share of 456 million barrels set aside for domestic consumption. The percentage devoted to DCA has steadily increased since then. In the early stages, NNPC refined some of the allocation locally, swapped some for refined products abroad, and exported the rest, which it paid for in dollars. Before long, things went downhill. The refineries basically collapsed, the crude for domestic consumption was all refined abroad or bartered, upfront deductions by NNPC from DCA increased, and the petrol subsidy programme soared.

Since 2016, DCA crude has been increasingly sold through the Direct-Sale Direct-Purchase (DSDP) arrangement (Figure 4). While the refineries no longer receive crude oil, the DSDP arrangement ensures that crude oil receipts are still in Naira, as opposed to dollars.

Sources: NNPC Monthly Financial and Operations Reports

Second, the larger proportion of revenuefrom DCA was largely retained by the NNPC, meaning that the Federation progressively received less and less. Revenue from the DCA has been used by the NNPC for many years to finance its operations. Payments for subsidies, pipeline repairs and maintenance, product losses and lately JV cost recoveryare financed with DCA receipts. In January 2020, total deductions as a percentage of domestic crude oil revenue were 75% (Figure 5). This fell and reached 24% in August 2020. However, it started rising and reached 100% in March 2022. With the exception of July 2022 when it fell to 89%, it remained at 100% until October 2022.

This implies that all revenues from DCA were retained until October 2022, which also coincided with when NNPCL stopped making remittances to the Federation Account. The implementation of the Petroleum Industry Act (PIA) resulted in changes to the composition of deductions, leading to its percentage as a share of domestic crude oil and gas revenue falling to 15% in March 2023, before rising to 46% in May 2023 (see Box 1 for a more detailed description of deductions). Reporting of deductions ended in June 2023. The implementation of the PIA, coupled with removal of petrol subsidies, likely reduced the burden of deductions.

Sources: NNPC Presentations to the Federation Account Allocation Committee (FAAC) Meeting
Notes: 1. Between January 2020 and October 2022, total deductions consisted of JV Cost Recovery + Total Pipeline Repairs and Management Cost + Total Under-Recovery + Crude Oil & Products Losses + Value shortfall
2.The author was unable to obtain data for November 2022
3. Between December 2022 and May 2023, official deductions consisted of JV Cost Recovery + PSC(FEF) + PSC (Mgt Fee).
4, From June 2023, NNPC stopped reporting deductions as previously constituted.
5.  See Box 1

Box 1: Composition of Total deductions from DCA (January 2020 to November 2023

1) Between January 2020 and July 2022, total deductions consisted of three components: a. JV Cost Recovery (T1/T2) This has both USD and Naira components b. Total Pipeline Repairs and Management Cost This only has Naira components Consists of i. strategic holding cost ii. pipeline management cost [January to April 2020, June 2020] iii. pipeline operations, repairs and management cost c. Total Under-Recovery + Crude Oil & Products Losses + Value shortfall This only has Naira components Consists of i. crude oil & product losses [reversal of product loss in May 2022 ii. PMS Under-recovery (Current + arrears) [January 2020 to April 2020] iii. Value loss due to deregulation [July 2020] iv. NNPC value shortfall (recovery on the importation of PMS/ arising from the difference between the landing cost and ex-coastal price of PMS) [March 2021 to October 2022] 2. For some months, the only deductions were for JV cost recovery [October 2020, January 2021, February 2021] 3. For August 2022, the only deductions were for NNPC value shortfall 4. From September 2022, there were changes in NNPC’s deductions, attributed to the PIA: a. Dollar deductions for NNPC value shortfall: 40% of PSC profit due to Federation (in addition to naira deductions: 100% of DCA revenue); b. No deductions for JV cost recovery and total pipeline repairs and management cost. Deductions for JV cost recovery resumed in December 2022; 5. From December 2022 (unclear if this change happened in November or December, as we were unable to obtain data for November), the composition of deductions changed and consisted of: a. JV cost recovery (naira and dollars) b. PSC Frontier Exploration Funds (FEF) (dollars, naira deductions started in February 2023) c. PSC (Management Fee) (dollars, naira deductions started in February 2023) 6 From December 2022, statutory payments to NUPRC (royalty) and FIRS (taxes) which had stopped in July 2021, commenced again (payments were made in September 2022) 7. From December 2022, payments started for NUIMS for profits 8. From February 2023, Payments for Federation PSC Profit Share in naira started (in addition to payments in dollars which started in December 2022) [40% of gross oil and gas revenue] 9. From December 2022 to May 2023, the addition of the official deductions (JV + PSC(FEF) + PSC (Mgt Fee), statutory payments (NUPRC + FIRS), NUIMS profits, and PSC profit share (from Feb 2023) are equal to DCA revenue. 10. From June 2023, NNPC stopped reporting deductions on the template. Rather, there was a section called Transfers, comprising 2 components: a. Transfer from PSC profits, comprising: i. PSC (FEF) ii. PSC (Mgt Fee) iii. Federation PSC profit share b. NNPC Ltd. calendarized Interim dividend to Federation Account c. The addition of the components under Transfer from PSC Profits was equal to total revenue from domestic crude oil and gas sales

In recent years, Nigeria’s oil production (including condensates) has declined from the standard 2m barrels per day (mbpd) to a low of 1.1mbpd though this has recently stabilised around 1.4-1.6mbpd. As a result,crude oil production has not been able to meet budgetary targets or OPEC production allocation quotas as shown in charts above. This failure has been attributed to reflect a mixture of theft, outages from downtime during repairs and declines in underlying production as Nigerian oil fields mature in the face of reduced investments.

Since the 2010s, international oil majors have scaled back investment in Nigeria in the face of regulatory uncertainty following the delayed passage of the Petroleum Industry Bill, rising operating costs due to increased security and environmental clean-up, and growing pressures from climate change activists to cut emissions from oil projects with high greenhouse gas emissions. These factors have pushed oil majors to shift investments away from the high-cost onshore fields with less attractive fiscal terms to deep offshore projects with more favourable fiscal terms and greater stability. The preference for offshore assets has seen a wave of asset disposals of onshore fields to domestic producers who have struggled to increase production given their weaker access to global capital markets to raise financing for exploration and production.

The derivative of the reduced oil production is that the Federation’s share of oil production has fallen dramatically. The daily average of the Federation’s share of crude oil was 414,463 barrels in 2020, 292,198 barrels in 2021, 290,649 barrels in 2022, and 205,184 barrels in 2023 (Figure 6). These are far below the daily average of one million barrels per day that accrued to the Federation between 2004 and 2014⁹.Another important dynamic of import is that Nigeria’s oil production is now largely concentrated in Production Sharing Contracts (PSCs), where, by their design, oil companies get a larger share of production.

Sources: NNPC Presentations to the Federation Account Allocation Committee (FAAC) Meeting
Notes: 1. The author was unable to obtain data for November 2022

The net effect of the lower Federation share of crude oil is that domestic crude has assumed a larger portion of the Federation’s share of crude oil (Figure 7). As total Federation crude has fallen continuously in the past four years, an increasingly larger share has been allocated for domestic sales (Figure 8). Domestic crude allocation reached 99% of total Federation allocation in May 2021. Since then, it has not fallen below 95% (exceptions were in June 2021, March 2022, February - March 2023, June – August 2023, October 2023).

The dominance of domestic crude allocation has important implications for the foreign exchange market. Because sales of domestic crude are received in Naira, the fact that virtually all Federation sales of crude oil since May 2021 have been of domestic crude means that the bulk of crude oil revenue has been received (when it is received) in Naira, rather than in dollars. The fact that crude oil revenue is no longer being received in dollars has important negative implications for the supply of dollars in the economy, and the nation’s external reserves.

Sources: NEITI Oil and Gas Audit Reports

Sources: NNPC Presentations to the Federation Account Allocation Committee (FAAC) Meeting
Notes: 1. The author was unable to obtain data for November 2022

The oil and gas sector has traditionally accounted for the largest part of foreign exchange inflows to the Central Bank of Nigeria (CBN) (Figure 9). In 2010, foreign exchange inflows through the oil sector accounted for 94% of total inflows through the CBN. However, this started falling and had dropped to 24% in June 2022 (January to June).Foreign exchange inflows through the oil sector which were above 80% between 2010 and 2014, fell and remained below30% from 2017 to 2022 (Figure 9).

Source: CBN Quarterly Statistical Bulletin, volume 11, no. 2, June 2022
Notes: 1. The data ends in June 2022, because the CBN no longer provides disaggregated data on foreign exchange inflows

In January 2010, the oil sector brought in $1.99 billion through the CBN. This increased and reached $4.79 billion in March 2014 (Figure 10). Following this, it started falling and dropped to $922 million in January 2016. It rose and remained largely above $1 billion between July 2017 and April 2020. Then, it started falling and remained below $1 billion until June 2022 (with the exception of April 2022). Optically, the secular downtrend in oil inflows coincided with the start of the DSDP programme which used DCA crude allocation at a period of low oil prices. Following the recovery in prices over 2017 and in the 2021-2022 period, oil inflows have failed to recover mainly because most of Federation’s share of oil is being allocated for domestic consumption which does not translate to forex earnings. At an average price of $100/bbl and $84/bbl over 2022 and 2023, the nameplate DCA crude of 445kbpd would have translated into monthly inflows of $1billion to external reserves. However, as these sums were likely received in Naira, the opportunity cost is the reduced supply of FX by the CBN and the resulting demand pressures on the Naira.

Source: CBN Quarterly Statistical Bulletin, volume 11, no. 2, June 2022
Notes: 1. The data ends in June 2022, because the CBN no longer provides disaggregated data on foreign exchange inflows

While quick fixes cannot be implemented for returning steady foreign exchange inflows from oil to the levels experienced 10 years ago, ending the DCA and exporting the Federation’s share of crude oil can provide a steady supply of foreign exchange inflows. This would boost oil sector foreign exchange inflows through the CBN above the average of 24.2% experienced between 2017 and 2022. Assuming an average oil price of $70/bbl, the cessation of DCA could, before deductions, net $900million monthly which should bolster USD liquidity flows within the FX market. Critically, this will not be a temporary measure, but will be a steady supply of foreign exchange as long as crude oil is sold. Such steady supply will help in bringing some stability to the foreign exchange markets.

Fundamentally, with the removal of petrol subsidiesand the implementation of the PIA, there are virtually no more reasons for continuing with the DCA. Furthermore, the onset of the Dangote Refinery with a nameplate capacity of 650kbpd alongside recent announcements regarding a mechanical completion of repair work at the Port Harcourt Refinery (150-210kbpd) would imply a DCA that will further dim the prospects of forex from Federation’s share of oil if receipts are in Naira. Beyond legal realities, the DCA is impractical given the evolving dramatic changes in domestic refining capacity.

A caveat about the removal of petrol subsidies and implementation of the PIA is needed.

First, on subsidies, there have been reports that petrol subsidies are back in some form. The Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) has stated that the government has restored subsidies¹⁰. The World Bank indicated the reemergence of an implicit petrol subsidy¹¹.The Independent Petroleum Marketers Association of Nigeria (IPMAN) has also said subsidies have only been reduced, but not removed¹². Careful consideration and strategic planning are needed on the issue of subsidies. The oft-touted palliative measures to alleviate the increase in cost of living of the hike in petrol prices have yet to fully materialise. This, perhaps, has been responsible for the reluctance of the government to allow the prices of petrol to fully reflect market prices. There needs to be a well-thought out and clear policy direction on the issue of petrol subsidies and the need to pursue full deregulation and extricate the country from the awkward and perverse incentives-ridden situation where NNPCL becomes the sole importer of petrol.

Second, on the PIA, recent guidelines by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) have addressed the argument that local refineries need to be supplied with crude oil¹³. However, it is hoped that the new guidelines will stipulate that such domestic sales of Federation crude, if applicable, will be quoted in international prices and the payment will be made and received in foreign exchange. Failure to do this and properly manage and administer these new guidelines could present DCA version 2.0. Also, strict payment schedules must be stipulated and adhered to, so that there will be no backlog of payments. If properly administered, this new policy should not adversely affect foreign exchange inflows.

Conclusion

We have conducted an analysis of the rapid depreciation of the Naira in recent years. The central theme is that the supply of foreign exchange has not been able to meet up with its demand, leading to a backlog of foreign exchange obligations estimated at between $4 billion and $7 billion. With oil exports acting as a major enabler of foreign exchange inflows, the nation’s dwindling oil production was identified as an important contributor to lower supply of foreign exchange.

With lower oil production, higher proportions of the Federation’s share of crude oil have been allocated to domestic crude sales. Revenue from domestic sales is received in Naira, as opposed to dollars, thereby heightening scarcity of foreign exchange. We submit that the DCA has outlived its usefulness, and its continued use has proved costly to the country, especially for inflows of foreign exchange, thereby hurting the Naira. We recommend ending the DCA and selling Federation’s crude oil for exports, or if sold domestically to private refineries, to be sold in dollars. If this is done, steady inflows of foreign exchange will boost supply of foreign exchange, provide some quick wins to address foreign exchange scarcity, and help to maintain some level of stability for the Naira.

In October, the Federal Government announced plans for the injection of $10 billion of foreign exchange inflows¹⁴. These are expected to materialise from a variety of sources. Two executive orders were signed by the president in October: the first one will enable dollar-denominated instruments to be issued for purchase within the country; while the second is for issuance of dollar-denominated bonds for purchase by investors outside Nigeria¹⁵. Also, foreign exchange inflows are expected to receive a boost from the NNPCL through increased production, transactions such as forward sales, and investments from sovereign wealth funds¹⁶. In addition, NNPCL in August announced a $3 billion emergency crude oil repayment loan from the African Export Import Bank (Afrexim bank) “to support the Naira and stabilise the foreign exchange market”¹⁷.

Our central argument in this intervention is that while these measures can offer some succour and ease the pressure on the Naira, they do little to ensure a steady inflow of foreign exchange. They only provide emergency and temporary relief for foreign exchange stability.

In some instances, these measures have costs that, when fully considered, seem to outweigh the benefits. For example, the arrangement between NNPCL and Afrexim bank is a ‘pre-export finance facility’ (PxF) where the country has pledged 90,000 barrels per day for five years (2024 – 2028)¹⁸. This facility attracts an interest rate of 11.85%, which does not compare favourably with lower interest rates charged by international institutions for a longer period¹⁹. It is difficult to contextualise how the net effect of this facility will be of benefit, rather than loss to the country. It is more productive for NNPCL to concentrate on its core mandate and for the government to focus on how Nigeria can start earning foreign exchange again from the sale of the Federation’s share of oil. The DCA needs to go immediately.

 

*Professor Fowowe is an energy economist.

** Wale Thompson and Ifetayo Idowu contributed to this paper.

Footnotes

[1]The rate rose to N1,099.05/$1 on 8 December 2023 at the I & E window, but dropped back below N1,000/$1

[2] https://punchng.com/cardoso-to-clear-dollar-debts-suspend-intervention-loans/

[3] https://www.reuters.com/business/finance/nigerias-central-bank-governor-cardoso-pledges-clear-7-billion-forex-backlog-2023-09-26/

[4] https://www.cbn.gov.ng/Out/2023/CCD/CBN%20Press%20Release%20%20FX%20Market%20121023.pdf

[5]In reality, for many years, the crude oil has neither been utilized nor sold domestically, hence, the term ‘domestic’ has become a contradiction.

[6]NEITI 2021 Oil and Gas Audit Report

[7] Sayne, A., Gillies, A. and Katsouris, C. (2015) Inside NNPC Oil Sales: A Case for Reform in Nigeria, Natural Resource Governance Institute.

[8]https://www.premiumtimesng.com/news/top-news/631482-nigerian-govt-still-pays-subsidy-on-petrol-pengassan.html

[9]https://documents1.worldbank.org/curated/en/099121223114542074/pdf/P5029890fb199e0180a1730ee81c4687c3d.pdf

[10]https://punchng.com/nnpcl-marketers-clash-over-subsidy-operators-peg-petrol-at-n1200-litre/

[11]https://www.nuprc.gov.ng/wp-content/uploads/2023/12/DOMESTIC-CRUDE-SUPPLY-OBLIGATIONS.pdf

[12]https://www.premiumtimesng.com/news/top-news/636428-nigeria-expects-10-billion-forex-inflows-in-weeks-minister.html

[13]https://www.bnnbloomberg.ca/nigeria-plans-new-fx-rules-in-hopes-of-naira-reaching-fair-price-by-end-of-2023-1.1991306#:~:text=Nigeria%20expects%20to%20receive%20%2410,summit%20in%20Abuja%20last%20week.

[14https://www.premiumtimesng.com/news/top-news/636428-nigeria-expects-10-billion-forex-inflows-in-weeks-minister.html

[15]https://www.thecable.ng/report-afreximbank-approaches-oil-traders-to-finance-3bn-loan-to-nnpc

[16]https://www.thecable.ng/exclusive-nigeria-to-pay-11-85-interest-on-3-3bn-afriexim-nnpc-loan-pledges-164m-barrels-as-security#google_vignette

[17]Ibid.

By Adebayo Ahmed | There is hunger in the land and you don’t need to go too far to see it. On almost every lip in the country today is a statement on how food prices are rising so fast that it is becoming increasingly difficult to survive. The data backs up this claim. According to the National Bureau of Statistics (NBS), food inflation, at 30.64% in September 2023, is higher than is has ever been since the NBS started reporting more formally on it in 2009. According data from the Central Bank of Nigeria (CBN), food inflation was never persistently so high in the last few decades as it is currently. This situation has worsened in 2023 where monthly changes have never been so consistently high, at least since 2009. As is clear in Figure 2, this trend was present even before the removal of fuel subsidies which added to the pressure.

Fig 1: Food inflation chart. Source: National Bureau of Statistics. Central Bank of Nigeria.

The consequences for Nigerians and Nigeria are dire. Substantial segments of the population are struggling to feed themselves and their families, a situation which poses a threat to social and political stability in the country and worsens the country’s food insecurity profile. Though official figures are hard to come by, food insecurity has been on a steady increase in Nigeria for most of the last decade.

Fig 2: Monthly Change in Food Prices since 2009. Source: National Bureau of Statistics.

According to a recent publication by the IMF, more than 40% of Nigerians as at 2019 could be described as food insecure based on the average income and the amount of money required to consume the recommended number of calories¹. This was before the COVID-19 pandemic and the following years of high food inflation. The Food and Agriculture Organization (FAO) estimates that 69.7% of the people in Nigeria were moderately or severely food insecure as at 2019². The Cadre Harmonisie, a unified and consensual tool that measures acute food and nutrition insecurity in the Sahel and West African region, estimated that at least 25 million people in 27 states of Nigeria were at risk of facing hunger in 2023. The other nine states were not analysed so the overall number is likely higher.

Whichever way you slice it, there is hunger in Nigeria. It appears to be getting worse, and people are struggling to cope. Layering consistent spike in food prices with lingering and widespread food insecurity does not bode well for Nigeria. This combination should keep policy and development experts and officials awake at night, as there is something smoldering beneath the surface that could, with a mere spark, compound Nigeria’s unflattering development challenges.

Fig 3 Graph of index of nominal GDP per capita versus food inflation. Source: National Bureau of Statistics.

Importantly, this struggle is not just for people employed in agriculture. According to the 2023 Cadre Harmonise, the state with the largest number of people at risk of food insecurity is actually Lagos, where very few people are engaged in agriculture. Yes, there are apparently more people at risk of food insecurity in 2023 in Lagos that in Borno or Katsina or any of the agriculture-heavy states plagued by violence which disrupts food production and distribution. The reality is that food prices have likely been rising faster than incomes, squeezing households in the process. Although data on this is few and far between, a comparison of average growth in nominal per capita GDP and food inflation, as shown in Figure 3, makes this very clear. This does not mean that even those engaged in agriculture are also not feeling the pressure. As is clear in Figure 4, the hunger is spread almost across the entire country. Ironically, our neighbours, especially those who are not mired in some conflict are mostly fine, even if they are not significantly richer than Nigeria.

Figure 4: Food insecurity across West Africa. Source: Cadre Harmonisie.

Drivers of Food Inflation

What has caused this consistent spike in food inflation? We can think of this from a standard supply and demand framework. Things that disrupt supply tend to push prices up while factors that boost demand also tend to push prices up, and vice versa. Importantly, these factors in principle need to be “new” factors for them to matter, especially on the supply side. For example, if we have always had logistical challenges that hinder food distribution resulting in a mark-up on food prices then that does not really impact food inflation because it has always been there. However, if it gets better or worse, then it impacts food inflation for the better or worse.

The same can be said for our low levels of productivity, which are recognized as low even compared to our peers. For example, maize yields in Nigeria, at about 21,000 grams per hectare are lower than Ghana’s and even the African average, half as much as South Africa’s and Brazil’s and only a tenth of the United States’³. Low yields are bad especially for those employed in agriculture whose low yields imply they remain in poverty. But Nigeria has always had low yields and previously did not have such high food inflation.

What then, on the domestic supply-side could have worsened significantly enough to really impact food inflation? The escalation in violence, especially in key agriculture-intensive states in the North West and North Central is likely one culprit. The floods in 2022 which occurred during the peak harvest season also likely resulted in harvest losses and affected food supply. The COVID-19 pandemic and the disruptions to the fertilizer market as well as the markets for other inputs also likely negatively impacted food supply, at least for 2023.

However, in many countries the direct impacts of domestic supply shocks on food prices are actually pretty limited. This is because domestic shocks are mostly localised and don’t affect all food production everywhere. A drought might reduce production of maize in Zimbabwe but as long as the drought is not global, maize will be produced somewhere else and be traded in other places. International supply is vulnerable to shocks of course, such as is the case with the Russia and Ukraine crisis. Regardless, in the presence of international trade, the ability for domestic shocks to severely impact food prices should be limited.

 

Fig 5: Food inflation in select African countries. Source: Food and Agriculture Organisation – FAOStat.

In the last few years, global food prices have increased due to a variety of factors. That increase has however not been enough to explain most of Nigeria’s food inflation. As is clear in Figure 5, except those who are involved in some conflict, and whose livelihoods would be directly affected, food inflation is significantly lower in other African countries, and there is little food insecurity even in the face of similar global food shocks.

Indeed, it is more likely that Nigeria’s increasing restrictions to international food trade have contributed more to domestic food inflation. The anti-trade policies such as the border closure and the banning of foreign exchange for some food products have restricted international supply of food and put upward pressure on food prices. The exchange rate problem has probably also contributed to food inflation although it is likely not the major driver. A look at food inflation in Figure 1 shows two distinct patterns. The long-term trend which keeps inching upwards, and the more temporary bumps which can be attributed to the episodes of foreign exchange crises. The bumps are important of course but they are usually temporary. The longer-term upward should be of more concern.

The Role of Demand Pressures

What explains the more longer-term trend? On the other side of the price equation is demand. As basic economics suggests, prices can go up because of supply or demand. On the demand side we have a population that is growing by about 2.6% a year on average. This means actual food supply has to be growing by at least 2.6% in real terms just to keep up with population growth. In the presence of international food trade this will likely not be a challenge. But given that we have moved to limit food trade, then it becomes important. Unfortunately, in the past half a decade agriculture growth has slowed. In the 2^nd quarter of 2023 agriculture GDP had slowed to 1.5% in real terms. It was negative in the first quarter. This means the agricultural sector wasn’t even growing fast enough to meet the demand pressures from a larger population.

Fig 6 Select Food price inflation with Maize, Rice, and Yams highlighted. Source: National Bureau of Statistics

But perhaps a larger source of demand has been the growth in money supply. More money chasing fewer goods, including food, typically means higher inflation. Money supply has been growing at over 20% a year in the past few years⁴. This has likely contributed to the growth of inflation. In general, if you observe an increase in prices of a few goods then you can typically pin it down to supply side shocks. However, if you observe an increase in the price of all goods then it is likely a demand problem. As is clear from Figure 6, all food prices have been on the increase, including those produced locally and imported and those eaten by a few and those eating by many. In such a situation, the likely driver is too much demand driven by money supply that is growing too fast.

The Path Forward for Reducing Food Inflation

Given the likely causes of high food inflation identified above, the path to reducing it is clear. Simply, it involves tackling the challenges on both the demand and supply sides. Some things will be easier to implement and will result in quicker impacts while others will be more long term.

On the quick demand side, the obvious policy measure is to slow the growth of money supply. Regardless of what happens to the supply side, if money supply growth continues to be too fast then inflation, and food inflation, will continue trending upwards as well. If people’s incomes cannot keep up, then that additional means more affordability problems and even worse food insecurity.

On the quick supply side, the obvious policy measure is to ease the restrictions on international food supply. The borders may now be open and the restrictions on foreign exchange access for food and fertilizer may have been removed but there are still other significant restrictions, chief of which is the relatively high tariffs on food imports. The argument may be that reducing tariffs on food will negatively affect local producers of the food items. But there is a case to be made for the consumers as well. Consumer surplus matters and in principle more people eat food than grow food hence the consumer should matter at least as much as the producers. The best practice is not necessarily to have high tariffs on food but to re-channel some of the revenue from the lower tariffs to directly support food producers.

The more longer-term supply-side actions will include fixing some of the more structural issues that affect food supply: resolving the violence and issues in rural areas; resolving logistical challenges in food transportation; improving the productivity of farmers; building resilience to climate change; and so on. These are prescriptions that will be beneficial for food prices and food security in the long-term.

Right now though, quick wins are needed to halt the consistent price spikes that put food out of the reach of many citizens and potentially put the country at larger risks.

Footnotes

[1]      Food Insecurity in Nigeria: Food Supply Matters. Thomas and Turk. IMF Selected Issues Paper No. 2023/018

[2]      Food and Agriculture Organization - FAOStat

[3]      Food and Agriculture Organization - FAOStat

[4]      According to data from the Central Bank of Nigeria.

PHOTO CREDIT: Mansur Ibrahim

By Wale Thompson | In a surprise move on 14 June 2023, the Central Bank of Nigeria (CBN) announced the removal of all restrictions on foreign exchange rates and signalled a willingness to tolerate greater flexibility in exchange rate determination as against the previous practice of a hard peg. In simple terms, the CBN ‘floated’ the Naira. This announcement was accompanied by directives which unified the multiple FX tiers invented by Mr. Godwin Emefiele, the suspended CBN governor, and specified the re-introduction of a “willing buyer, willing seller” arrangement for Nigerian foreign exchange markets.

This policy shift was consistent with the expressed desire of President Bola Tinubu for a unified exchange rate in his inauguration address of 29^th May 2023, as well as the yearnings of private businesses, analysts and financial market investors, who had been frustrated at the arcane rules and lack of liquidity associated with the previous era. In its aftermath, the Naira has lost around 40% of its value within the official window to close at NGN770/$ on the first day of trading, a development that has elicited a mix of cautious optimism and pessimism. While praises have poured in from international financial organisations, business elites and financial market investors and western countries, the fledging reform has also attracted an avalanche of knocks from segments of the media, labour unions and a growing number of citizens struggling with continued depreciation of the Naira and its adverse inflationary effects.

After the initial optimism surrounding the unification of the Naira, with the disappearance of the gap between the official and parallel market exchange rates, sentiments have turned pessimistic as trading activity in the Investors & Exporters (IE) window has remained stagnant, and parallel market premiums have widened to 20% with the value gap at N170/$. Alongside a steady decline in gross external reserves to $33.9 billion, concerns have heightened about the outlook for the currency and its knock-on effect on domestic prices and citizen welfare. Granted that FX unification was not an end to itself, but rather a means towards restoring improved forex liquidity flows and restoring capital flows, the initial signs have not inspired confidence that a resolution to the lingering FX crisis is at hand.

Given the speed within which the Naira floatation was executed without any concrete arrangements on bolstering dollar supply, focus has shifted to this unresolved item given thin dollar liquidity within the official segment (daily trading has averaged $106 million versus $110 million prior to unification) amid signs of fresh weakness at the parallel market. Without direct attempts to stem the tide, the temptation to return to the old ways of managing things might look attractive which might blow away the current opportunity.

What further steps are required to stabilise the emerging situation over the near term and what concrete policy adjustments should follow for Nigeria to have a more sustainable approach to exchange rate management? In what follows, we briefly review the Naira float policy, provide some historical context to exchange rate regimes—highlighting the expected benefits and potential pitfalls of fixed and floating systems—and provide some recommendations on how Nigerian policymakers should look to approach FX management in the near and medium term.

Naira Floatation: Shock Therapy in the Face of Fundamental Deterioration

For the fifth time in Nigeria’s post-independence history (after similar moves 1986, 1995, 1999-2000, 2017), Nigeria’s policymakers have elected to abandon a hard nominal exchange rate peg (with the most recent one set at N461/$) in the face of depleting external reserves. Interestingly, the CBN announcement on the seismic shift in policy did not provide any justification for the decision nor an admission that the old peg arrangement had failed.

This would suggest it was not an innate desire or willingness to change but rather a loss of ability amid growing political pressure following the suspension of the CBN governor. Indeed, only as recent as May 2023, the CBN organised a conference where many participants (including the present top brass at the apex bank) ‘celebrated’ one of the many confusing policies (RT200) of the old FX regime which has now been scrapped. Thus, it is more likely that a shift in political leadership catalysed an opportunity for the CBN insiders to save face by quickly returning to fundamentals as the basis for FX rate management.

A look at the fundamental data reveals the existence of large imbalances in Nigeria’s external accounts occasioned by a mix of structural shifts and policy missteps by the CBN as the bane of the present FX woes. Between 2005-2013, Nigeria enjoyed a ‘structural surplus’ in the export and imports of goods and services (see Figure 1) primarily on account of higher oil export revenues due to stronger oil prices as oil production remained roughly static around2-2.2mbpd. This surplus exceeded $20 billion annually in the early part of the period (2004-2008) which allowed substantial external reserve accretion (peak $62 billion in September 2008) before moderating to $10-15 billion in 2010-2013 period.

Figure 1: Nigeria’s export import balance 2005-2022 (USD’billion)

Source: CBN

By design, the CBN has a fiat ownership of export petrodollars (a flaw at the heart of Nigeria’s FX architecture which we shall see later), which allows the apex bank to situate itself at the heart of FX management during boom times with the ability to determine to a large extent the price (exchange rate that most people get dollars) and quantities (USD allocation or who can get dollars). The latter being a derivative of the former as the readily available ‘stronger’ CBN rate ensured that its price set the tone for other FX segments. As a result, the official USD market was large enough relative to the non-official USD market so much so that the CBN began supplying dollars to retail end-users via Bureau-De-Change operators.

The large crude oil flows resulted in the adoption of a ‘defacto’ policy of exchange rate stability as the basis for monetary policy even though several CBN governors would publicly declare inflation targeting as the ‘dejure’ basis for monetary policy¹. This commitment to nominal exchange rate stability also underpinned real exchange rate appreciation over the period. For context, while the nominal exchange rate weakened 16% (-1.8% per annum) over the 2005-2013 period, the Naira appreciated 55% (+6% per annum) in real terms which as we shall see had profound implications for non-oil exports and service imports.

Figure 2: Nominal USDNGN and annual change in the real effective exchange rate

Source: CBN, Bruegel *May 2023

But first we turn our attention to dollar supply trends within the Nigerian economy. As noted earlier, at the height of the oil boom in the mid-2000s, the scale of the oil inflows and Nigeria’s shallow and less integrated financial markets (Nigeria had no bond market until 2007) implied that the CBN dominated the FX market accounting for between 60-70% of the total market. However, this dominance in terms of USD inflows declined to under the 50% in 2007 when CBN flows totalled $36 billion relative to non-CBN inflows of $38 billion implying that there was more USD coming into the Nigerian economy via autonomous sources than through the CBN channel.

This gap would widen in the coming years and at one point was more than double CBN inflows in 2010 ($63 billion vs $27 billion) before peaking at over $103 billion in 2013 (when CBN flows came to $41 billion). Essentially, the CBN dominance of the official market was an illusion helped by the commitment to exchange rate stability via a combination of tight Naira interest rates and relaxed FX controls. This allowed the CBN maintain the illusion of control that it determined prices within the official segments and could control the market.

However, in 2009, despite fairly robust firepower with record reserves, the onset of the global financial crisis and the Nigerian banking crisis triggered a crisis of confidence in the Naira. This manifested in the form of widened spreads between the official and parallel market exchange rate which averaged 18% between March 2009 and June 2009 despite heavy CBN intervention so much that the apex bank briefly suspended the interbank FX market and eventually surrendered by devaluing the official peg to the level obtainable in the parallel market.

Though most literature have linked this divergence to the 2008-09 global financial crisis, in hindsight this was the first show of force by autonomous flows that CBN control of Naira determination was tenuous. It is within this context that we should interpret latter episodes of wider parallel market premiums (2014-17) and (2020-2023). In essence, given their size, autonomous flows would only equilibrate on CBN’s perception of Naira pricing when it was perceived to be ‘fair’ and not on CBN’s dictated terms.

Figure 3: USD Inflows to the Nigerian Economy

Source: CBN

Figure 4: Parallel Market Premiums

Source: CBN, Author’s Calculation *H1 2023

Nevertheless, CBN’s illusion of control allowed it to remain in charge of the official segment by offering a stronger exchange rate than the weaker rate available within the non-official segment, alongside the threat of sanctions, the CBN was able to finance over 60% of USD import demand between 2005-2013. Thus, to a large extent the CBN could dictate the FX rate that mattered for importers of goods and services and could supply liquidity within this segment.

However, the tectonic plates were shifting in Nigeria’s external accounts, a function of an artificially strong exchange rate. In particular, the share of non-tradables or services within the import basket had expanded greatly as Nigeria increasingly integrated into the global economy. Services share of imports rose to 30-40% levels from 20% driven by increased Nigerian consumption of foreign transportation (given the absence of a Nigerian flag carrier on international routes), education, health and financial assets.

The other big shift in dollar demand composition was in oil imports which rose from 10-15% in 2005 to 20-22% of total imports at end of 2022. In all, non-tradable service imports and oil imports, by-products of real exchange rate appreciation and an unrealistic fuel price subsidy regime would become the fatal flaws in Nigeria’s FX market architecture that would provide to be its Achilles heel.

But rather than directly address the unrealistic petrol subsidy regime or look to curb the growth in non-tradable service imports, Nigerian policymakers chose to periodically embark on import suppression on good imports which disproportionately target the poor. While the CBN would routinely institute FX bans on good imports, it would strive to provide FX for Nigerians looking to school abroad.

The More Things Change, the More They Stay the Same…

Following the collapse of oil prices from an average of $100/barrel to under $50/barrel in the 2014-2017 era exacerbated by a drop in oil production in 2016, the fundamental situation changed. As in 2009, when the CBN held the line on the FX rate and suspended the interbank, the policy response was broadly similar in 2015: the apex bank froze the FX rate at N200/$, ended the Dutch auction system of weekly auctions and terminated the trading in the currency alongside liquidity restrictions within the official market.

As in 2009, the non-CBN flow market would respond by refusing to unite with the CBN dictated rate leading to an expansion in the gap between the official and parallel market exchange rates. Unlike the 2009 episode, the CBN however no longer had the fundamental picture of excess USD liquidity. But the CBN refused to recognise or accept the change in reality. In another replay of 2009, the apex bank resorted to tolerating excess Naira liquidity while imposing multiple restrictions, creating several FX layers and fighting an imaginary war on currency speculation.

It is important to highlight that the CBN actions was consistent with the expressed desires of former President Muhammadu Buhari even though the apex bank knew the truth of the underlying reality: that within the grand picture of FX flows, it no longer had the ability to underwrite a level of Naira exchange rate, especially after it had lost the faith of autonomous flows. While the CBN still held the line of regulating official transactions, this was an empty title: Naira’s rate determination would now take place away from official windows.

The difficult 2015-17 episode did have one major implication: unlike in the past when a desire for a stronger exchange rate overran the desire for USD liquidity, long taken for granted, the CBN response forced Nigerian corporates and citizens to realise that USD liquidity was of prime importance with pricing less so. Thus, began a game of chicken wherein the parallel market rate assumed prime importance while the CBN owned the title of master of no nation with its totemic official window.

It is against this backdrop that we should understand the present policy response: the adjustment to reality enforced by another cycle of deficits in the current account which authorities could not finance via reserve drawdowns or foreign portfolio inflows. The former is largely because the  petrol subsidies financed via refined petrol for crude oil swaps curtailed inflows to external reserves while the latter is brought about by the pursuit of negative real interest rates and restrictions on FX access.

The second point bears some examination. As led by its now suspended governor, the CBN embarked on an experiment with unorthodox monetary policy which included large monetisation of fiscal deficits by ways and means, financial repression brought about by negative real rates, the imposition of a hard peg on the Naira exchange rate and direct balance sheet lending by the CBN to the real sector.

These unorthodox arrangements were initially sustained by a brief period of high oil prices in the external sector following Russia’s invasion of Ukraine, which helped mask weak oil production and the burdensome costs associated with a petrol subsidy regime. However, over the second half of 2022, the deterioration in oil production and out-of-control subsidy bill financed via crude-for-refined petrol swaps shrank inflows into the CBN’s reserves. As in Figure 5, declines in these flows tend to correspond with periods when Nigerian policymakers adjust their currency pegs to reality.

Figure 5: Reserve Inflows and Dollar Demand

Source: CBN, Author’s computation

A Brief History of Exchange Rate Systems

Flexible exchange rate regimes and their variants are now considered ideal for most economies, but this has not always been the case. Historically, the gold standard was the dominant exchange rate system, wherein currencies were equivalent to pre-defined weights of gold. This regime was in force till the end of World War II in 1945. Thereafter, countries shifted to pegging their currency values against the US Dollar as the dominant power while only the US Dollar maintained a fixed convertibility to gold.

However, as economies recovered from World War II and global trade expanded, along with significant growth in cross-border financial flows, pressure mounted on the US Dollar, leading the US Government to abandon the gold-USD convertibility in 1971. The inherent problem with fixed arrangements is that it required that countries with trade surpluses needed to strengthen their currencies, while those with trade deficits needed to weaken theirs, in order to achieve a balance in global trade which, in itself, is essentially a zero-sum game of winners and losers.

However, the pegged arrangement hindered this balance and countries with trade surpluses were reluctant to tolerate stronger currencies due to the effect on their export competitiveness. A similar explanation worked for losers in the global trade game as countries with trade deficits, often import-dependent economies were unwilling to tolerate widespread depreciation due to welfare implications. Thrown into the dynamic was the rise of financial assets which allowed investors to speculate on interest rates and currency adjustments, further intensifying pressure on the US Dollar and prompting the need for changes.

Numerous attempts to reform fixed exchange rate systems worldwide proved unsuccessful, prompting most countries to transition to some form of floating exchange rate system during the late 1980s and 1990s. With the collapse of the Soviet Union in the 1990s, more economies with pegged exchange rate regimes in the global south had to face this reality and experienced disorderly transitions from fixed to flexible exchange rate regimes. The dominance of the US Dollar in global trade between non-US countries, owing to its large liquidity and the non-convertibility of other major currencies, played a central role in this shift.

After the 1990s, countries adopted either fully flexible exchange rate regimes or some variant of flexibility, such as managed float. In the latter scenario, the level of central bank commitment to a peg determines the degree of flexibility in the exchange rate regime. The harder the commitment, the less flexible the regime, while a softer commitment results in a more flexible regime.

In Nigeria, from 1960 to 1985, the exchange rate was fixed at a 1-1 peg against the US Dollar in nominal terms, similar to much of the global economy. However, in real terms, the Naira became overvalued relative to the dollar following the collapse of oil prices in the early 1980s. Nigeria's over-reliance on a single commodity proved to be a major vulnerability for the wider economy during subsequent foreign exchange crises. Unfortunately, resistance from political and economic leaders to face reality created the perfect conditions for spectacular collapses once the ability (external reserves) to pretend about the exchange rate dissipated.

Flexible exchange rate regimes are preferable to fixed peg arrangements for several reasons. Firstly, flexible exchange rates provide an automatic framework for adjusting to external shocks and changes in economic conditions such as fluctuations in commodity prices or global economic downturns. A flexible system allows for countries to adjust their currencies in a manner that enables limited disruptions to trade and capital flows.

Secondly, flexible exchange rates grant more autonomy to monetary policy, enabling central banks to respond effectively to domestic economic challenges. In contrast, fixed peg arrangements can greatly constrain a country's ability to implement independent monetary policies, potentially exacerbating inflation as seen in Nigeria over the last eight years. Additionally, flexible exchange rates can foster competitiveness in export industries and prevent the build-up of unsustainable imbalances on the import side, supporting economic diversification and reducing reliance on a single commodity.

However, there are several variants of flexible exchange rate arrangements and there is no off-the-shelf variant for emerging markets like Nigeria. Rather, each country develops a commitment to ensuring that its exchange rate trends broadly mirror developments in the external accounts. To avoid the political golf ball that comes with currency adjustments wherein opposition politicians and others deploy exchange rate trends as part of political campaigns, there is need for transparency and clear communication around central bank’s actions and FX markets in general and commitment to a credible basis, usually inflation-targeting, for monetary policy.

Getting Nigeria’s Forex Reform on Track

Following several failed attempts at transitioning to a flexible exchange, Nigeria has embraced another attempt which needs to be situated within the context of wider discussions about macroeconomic strategy with the appropriate time frames. Mere FX adjustments to adapt to reality may lead to short-lived gains, followed by a return to previous practices. To avoid this cycle, forex and monetary policies should be part of a comprehensive economic plan where the exchange rate serves as a tool for export diversification and for attracting capital flows to foster overall development. Successful fixed to floating transitions are characterized by certain key features. Outlined below, these features should be taken on board by Nigeria’s policy makers in the medium to long terms:

1. A clear role for exchange rates within the context of broader economic strategy: The exchange rate is a key input variable within the context of an economy: as it serves as a measure of relative prices between a country and its trading partners. The long-stated objective of Nigeria’s policymakers is to diversify its export base which given Nigeria’s labour abundance distils to ensuring that industrial activity is geared towards the production of exportable goods that use a lot of low-skilled labour that is abundant in Nigeria. To ensure export competitiveness of these non-oil exports, exchange rates policies must look to deliver an extra layer of competitiveness to export prices in a form that favours domestic industries. To this end, the goal of policymakers on FX is not nominal exchange rate stability but real exchange rate stability with an undervaluation bias. To this end, Nigeria’s FX policy must look to ensure a balance between real exchange rate stability that ensures non-oil export competitiveness and keeps inflation at a level supportive of domestic welfare. Nigeria’s economic managers must explicitly seek to achieve this balance and must demonstrate annually how their policy measures or adjustments deliver on these goals. The best example here is Singapore, where the central bank is required to publish annually how it goes about delivering balancing FX policy within the twin objectives of trade competitiveness and low inflation. Nigerian authorities must change the CBN Act with explicit references for the CBN to demonstrate how via its policy actions it ensures real exchange rate competitiveness and stable prices via reports published bi-annually.
2. A deep and liquid FX markets: By definition, a laissez-faire market is one with many buyers and many sellers such that no one party is large enough to influence the actions of others. In creating a workable FX market architecture, Nigerian policymakers must envision a distinct set of supply forces i.e. multiple FX sources which can be attained by removing all forced sale rights on oil exports presently held by the CBN. Rather, the CBN should purchase its USD like every market participant to manage Naira liquidity at a level consistent with its own money supply objectives. Essentially, a credible FX reform will end the forced petro-dollar to Naira conversions financed via the printing of new money. The goal is to create an FX market with diverse players especially on the supply side: CBN, oil exporters, non-oil exporters, remittances, foreign portfolio investors etc.
3. Consistent focus on price stability: In lieu of nominal exchange rate targeting, Nigeria’s central bank must have an explicit inflation targeting framework with clear annual and inter-mediate inflation target that are publicly known and must annually demonstrate how its policies achieve this objective. The CBN can have several inflation measures (consumer price index, producer price index, wage inflation etc) to prevent undue reliance on one metric and importantly it should demonstrate how its adjustment of policy instruments (interest rates and money supply) are enabling it move inflation within targets. Nigeria’s fiscal and legislative arms should be on hand to deploy censure to CBN governors unable to deliver within target inflation. To avoid the egregious abuses over the last five years, Nigeria should look to divorce CBN control over development finance banks and capitalise these entities to fund underserved sectors of the credit market.
4. Curtailing information asymmetry through increased transparency and clear communication: To help proper FX pricing, Nigeria’s central bank must work to deliver increased information about demand and supply trends and end the dark ages on critical data on trends across FX markets. As in some markets like Singapore, the CBN legislation must include requirements for publication of period data and analysis of trends in FX markets to the public. This requirement must impose penalties for non-compliance. Under the suspended CBN governor, the CBN commenced data censorship with the withdrawal of more in-depth data which created no transparency on FX markets.
5. Institutional mechanisms for hedging volatility: Beyond developing deep and liquid spot markets, concerted efforts must be on including avenues for hedging without any arcane restrictions that look to curb speculation. The CBN should work with exporters and financial institutions to develop the means for importers to hedge against FX volatility risk to prevent demand front-loading. Nigeria should work actively to ensure that the large USD flows (including remittance flows) equilibrate within the official segments.
6. A clear framework for FX interventions: Market failure is a feature of still forming markets and Nigerian policymakers must be clear-eyed to have a system for dealing with periods when markets become volatile. Thus, there must be a clear operational framework for dealing with periods of external shocks which should include providing temporary US liquidity, interest rate adjustments, communication and FX adjustments.

Beyond these broad medium to long term objectives, policymakers must not ignore the near term. To stabilise the present spiral, Nigeria needs a big stash of dollars and fast! Policymakers must look to strike the iron while it is hot to avoid reform fatigue by seeking out sources of large USD liquidity on concessional terms by exploring the option of a standby arrangement from multilateral agencies of significant scale ($5-10billion) with the objective of acquiring credibility.

Having front-loaded fiscal consolidation and external sector adjustments, Nigeria has the credibility to embark on key partnerships to catalyse increased capital flows. While this is politically tricky, desperate times call for bold and desperate measures. The global geopolitical environment means Nigeria has a window to obtain this funding if it is ready to push the envelope. These dollar flows are necessary to give the market ‘time to breathe’ as left unsolved, the Naira could come under fresh speculative pressures which might drive a return in policymakers towards the very pegged arrangement they recently jettisoned.

The CBN must look to be flexible in thinking: there are several variants of flexible FX regimes and we should be pragmatic to not rule out any options. The goal is to ensure that FX adjustments reflect the trends in balance of payments in a credible manner over the near and medium term.

Footnote

[1] In its 2021 Article IV, the IMF noted that Nigeria’s monetary policy was inflation blind (see IMF Article IV 2021)

Photo Credit: Mansur Ibrahim/TheCable

 

By Bolaji Abdullahi | Section 4 of the National Policy on Education (in the 4^th amended version) of 2004 states that the goals of primary education in Nigeria are to:

1. inculcate permanent literacy and numeracy, and ability to communicate effectively…
2. provide the child with basic tools for further educational advancement, including preparation for the trades and crafts of the locality¹

In a nutshell, it is expected that at a specified age, every Nigerian child would have acquired the foundational cognitive skills that they could build on in a latter life of vocation or further learning. It is clearly recognised that without these foundational skills, the ability to read and write and perform basic mathematical functions, a human being cannot fully function as a productive political or economic citizen. Therefore, to deny a child the opportunity for basic education is to devalue the child’s citizenship and undermine the basis on which all future capabilities are built.

Apart from education being a part of the general constitutional right², it is not surprising that the right to basic education is specifically guaranteed under the Child’s Rights Act (CRA), which states that: 

“Every child has the right to free, compulsory, and universal basic education, and it shall be the duty of the government in Nigeria to provide such education³. 

The Universal Basic Education (UBE) was launched in 1999. Its enabling Act, the UBE Act of 2004, reinforces the CRA and makes it a responsibility for every government in Nigeria to “provide free, compulsory, and universal basic education for every child of primary and junior secondary school age. More than two decades after the UBE was launched, it is important to examine the extent to which the programme has delivered on its key objectives of getting every child into school and equipping them with basic cognitive skills as stated by the national policy.

It would appear that some progress has been made in terms of enrollment as there are more children attending school today than at any other time in our history⁴. But we still have more children out of school than any other country in the world. Therefore, Nigeria’s enrollment figures, in or out school, may only be relative to its population size. In absolute terms, however, Nigeria has between 13 and 20 million children out of school⁵.

In terms of learning achievements, it has also been widely reported that Nigerian children are seriously falling behind. In its January 25, 2023 edition, The Guardian cited a UNICEF report that 75% of 14-year-old Nigerians cannot read a simple sentence or solve basic mathematical problems⁶. This confirms an earlier report in 2018 that only 20% percent of those completing primary school in

Nigeria can read⁷. Therefore, even when more kids are going to school, they have not been doing much of learning.

Indeed, the reality would suggest that Nigerians who are parents today got better education from public primary schools than their children are getting now, even twenty-four years after the UBE. In the past it could be taken for granted that any child completing basic education in Nigeria would have attained the appropriate levels of proficiency in reading, writing and arithmetic. Not anymore. Quite ironically, the chances that a child would acquire these competencies now lies outside the public schools and depend on the ability of the parents to pay.

Having lost faith in the public education system, parents who could afford to pay have opted out of UBEC-funded primary schools, leaving only those who are too poor to afford even the cheapest of fee-paying private schools or those who reside in places where such option is not available. The failure of children to learn from public schools, would, in fact, suggest that the more children we have attending those schools, the more children we have who are in danger of acquiring no education for a future life of further learning or employment. In only a few decades, Nigeria’s prosperity and progress will be determined by these children. Their inability to learn the skills to solve even the basic problems they will encounter clearly has serious implications for Nigeria’s social cohesion as well as future economic and human capital development objectives.

The issue of out-of-school children remains pertinent to any conversation about universal basic education. So much has been written about this in the past, and different factors have been identified as responsible for slow enrollment in different parts of the country or disparity in enrollments along gender lines within the same region of the country. However, the main focus of this paper is on improving the quality of basic education in the country.

We will start with a brief review the Universal Primary Education (UPE), launched in 1976 as the first national initiative on primary education and show how the challenges encountered with its implementation conditioned the design of its successor programme, the Universal Basic Education (UBE). We will then highlight the key problems with the implementation of the UBE since inception. We will argue for institutional and policy reforms and practices that will seek to enhance effectiveness in funding, greater efficiency in governance, as well as improved quality of teaching and teachers as pathways to achieving better learning outcomes in the schools.

Our considered conclusion is that any effort aimed at reforming basic education in the country must focus on how to make the schools better at teaching children. Therefore, we need to invest more on the factors that determine learning outcomes and bring all of them into play to give children a real shot at learning.

Lessons from the Past: The Universal Primary Education (UPE)

The Universal Primary Education (UPE) was launched by the Federal Military Government in September 1976 as a first step in a general plan to provide equal opportunities for all citizens to acquire education at all levels. UPE was intended to address the imbalance in educational opportunities between the north and the south of the country as well as between rural and urban areas. Fundamentally, the planners believed that education could be used to promote national unity and understanding in the aftermath of the civil war.

The plan was to bring all six-year-olds in the country to school starting from 1976 and to ensure that by 1981, all children of primary school age are enrolled. Based on this plan, it was projected that 6.4 million children would enroll in the first year. However, to everyone’s shock, over 8.2 million children turned up, and by the following year, this figure had reached 9.5 million. Some states actually recorded over 200% increase from the immediate pre-UPE year, while some states received on resumption date, more children than they had registered. Thus, the government was confronted with “a tidal wave of swiftly swelling pupil enrollment.”⁸  As a result, classrooms, furniture, books, teachers etc., became grossly inadequate. Some states resorted to running two school shifts—morning and afternoon. Some had to improvise make-shift classrooms, under trees, with palm fronds and zinc. Teachers had to be recruited who themselves were barely literate, with majority having only two years of UPE teacher’s college training. In some states, up to 40% of teachers had only primary VII education⁹. Emergency contracts for classrooms and supplies were awarded which were never delivered or were not delivered to specifications. It was a mess.

At the time the UPE was being planned, Nigeria had just happened on unprecedented oil wealth. In 1974, crude oil output was 2.3 million barrels per day (bpd). However, by 1976, within two months of the launch of the UPE, output dropped to 1.5 million bpd, which fell further in the following year, along with the price¹⁰. It soon became clear that the hope that the Federal Government would fund the entire UPE plan had been misplaced. Curiously, even in the face of dwindling revenue and the emerging financial and implementation challenges on the UPE, the Federal Government announced that secondary, technical and post-secondary would also be free from 1977.¹¹ However, by 1978/79, the Federal Government had begun to transfer some responsibilities to the states and the local governments. The 1979 Blueprint on Educational Policy recommended that the three tiers of government should share the responsibility for primary education as shown in the table below¹²:

Table 1: Distribution of Responsibility on UPE, 197

Federal Government	Provide grants to states for payment of salaries of primary school teachers
State Governments	Capital costs: buildings, furniture, fittings, books, registers diaries, State Allowances and other entitlements, including pensions
Local Governments	Salaries of non-teaching staff, first aid, staff quarters and toilets.

At this time however, the cost had become so high that education was the single largest budget item in most states¹³. This led to increase in taxation. Even then, the promise of free universal primary education had become such a financial burden; so much that one state governor remarked that the reference to the UPE as free was a “misnomer”¹⁴ and as a result, people had to pay more tax or parents had to be willing to take some of the responsibilities. It was becoming clear at this point that the degree of commitment by each level of government to the free UPE programme had considerably dwindled¹⁵” Not unexpectedly, some states started to reintroduce some fees. Apart from being designed to be free at inception, UPE was expected to be compulsory by 1979. However, overwhelmed by the financial burden and other crises of implementation, no one was talking about this anymore.  Instead, Professor Sanya Onabamiro, Chairman of the Implementation Committee of the education policy said the scheme should have been delayed until 1979 to allow more time to recruit teachers and build the required classrooms.

When the UPE was launched in 1976, one writer described it as “a rapid campaign on a massive scale – an ambitious drive for modernity.”¹⁶ But only three years later, UPE had become known to many as  “Unfulfilled Promise Education” or “Useless Primary Education”¹⁷.

Universal Basic Education (UBE)

Quite incidentally, it was the same man who launched the UPE as military Head of State that returned 23 years after as an elected president to launch the Universal Basic Education (UBE) in 1999.  Although the UBE fell within the global development agenda at the turn of the millennium, it is difficult not to imagine that President Olusegun Obasanjo saw the UPE as an unfinished business and his return to power as an opportunity to correct some of the mistakes that made the scheme to fall short of expectations. Thus, the UBE differed from its predecessor in two significant ways. Whereas, UPE was only universal and free, the UBE is universal, free and compulsory, prescribing specific penalties for parents who fail to enroll their school-age children. But more importantly, unlike the previous scheme which suffered from difficulty in funding and lack of clarity about who pays for what, the UBE had a ring-fenced funding source with a built-in mechanism that guarantees contribution from states in form of counterpart funding.

Section 11(2) of the Universal Basic Education Commission (UBE) Act, 2004 and Section 12(2) of the Education Reform Act, 2007 outline the funding mechanism of the UBE in the country. They establish counterpart funding between the Federal Government and the state governments as the basis for funding basic education in the country. In this wise, “the state shall contribute half (50%) of the total cost of projects to be executed in the State [in order to] ensure commitment in the execution of the projects.”

The UBE Act of 2004 also established the Universal Basic Education Commission (UBEC) to coordinate, alongside the states and the local governments, the delivery of basic education in the country and to monitor the implementation. Although, the UBE Act recognizes that the funding of basic education remains the responsibilities of the states and the local governments, it gives UBEC the responsibility for managing the 2% of the Consolidated Revenue Accounts allocation to basic education as intervention fund to “assist” the states and the local governments in the implementation of the UBE.

UBEC: A Funding Agency or an Education Agency?

Perhaps, the planners of the UBE must have persuaded themselves that the major reason the UPE failed was the chaos that attended its funding. The issue of money therefore loomed larger than any other consideration in their planning for this latter initiative. Although the Act also assigns the responsibilities for policy formulation, prescription of minimum standards, among others to UBEC, it is clear that its governance structures were designed primarily to manage funds and ensure “judicious utilisation” of funds in line with the approved action plans submitted by the states.

Although one of the main goals of basic education is to “inculcate permanent literacy and numeracy, and ability to communicate effectively” in the children, there is no evidence that the Commission considers the progress by states in meeting this fundamental objective in awarding its grants.  Rather, its preoccupation with funds utilisation would suggest that the Commission understands its role as primarily that of funds management.

In support of this view is the fact that the department responsible for conducting annual monitoring exercise is the Finance & Accounts Department of the Commission, which then prepares “progress report on the implementation of the UBE programme for presentation to Mr. President as required by Section 9(h) of the UBE Act, 2004¹⁸.” Needless to say, UBEC report of “progress” to the president is based on funds being “judiciously utilised” rather than actual progress in pre-determined learning objectives. The fact that UBEC did not find it necessary to withhold funds to any of the states between 2005 and 2019 would mean also that the Commission was satisfied that the states actually utilised the funds for the purposes that were approved in their action plans regardless of whether actual learning was taking place in the schools or not¹⁹.

More often than not, public conversations about education invariably comes to how much government is spending on education, with the famous UNESCO prescription of 26% of national budget as the benchmark. However, while Nigeria may be spending less on education proportionate to its budget size, the country has spent more in absolute terms since the advent of the UBE than at any other time in its history. Available reports indicate that between a 15-year period (2005-2019) the sum of N342 billion has been released in grants alone to all the states and the FCT. Adding states’ matching contributions will bring this amount to N684 billion.²⁰ If other interventions by UBEC, staff salaries and other recurrent expenditure by the states, as well as donor support funds are added, this amount gets much bigger. However, it has been widely noted that for most developing countries, there is a “fairly weak” correlation between increased resource allocation to the education sector and improved learning outcomes21. This appears to be the case for Nigeria. The problem seems to be that of allocative efficiency than the amount being allocated itself. Even as a funding agency, UBEC funding has failed to target those factors that are likely to improve learning.

Fund Allocation and Learning Outcomes

The UBEC disbursement takes place quarterly, provided that on each occasion the state is able to provide the exact sum to match the UBEC disbursement based on the action plan that it must have submitted to the Commission. Upon receiving the grants, states are required to expend 5% on pre-primary/nursery, and 60%, 35% on junior secondary. For each level of basic education, 70% of the allocation received is to be apportioned for infrastructure, 15% for manpower development (which includes non-teaching staff) and 15% on instructional materials.

However, at best, this spending guidelines appear to be based more on assumptions than hard evidence in terms of what needs to be done to educate children. There may not be universal agreement on what factors actually determine learning in different countries or regions of the world, and even between rural and urban areas within the same country. However, there is a strong consensus that inputs such as textbooks and learning materials, effectiveness of school inspection, teacher and teaching quality, quality of curriculum and instructional time, rank much higher in determining whether children learn or not than “hard inputs” like school buildings and furniture.²²

Table 2: UBEC Funding Formula

Pre-Primary	5%
Primary	60%
Junior Secondary	35%

However, it is possible yet again, that the planners of UBE have favoured classroom construction above everything else, based on their UPE mindset. The Act itself betrays this project mindset when its states categorically that the 50% contribution by the states is towards project execution: “the State shall contribute half (50%) of the total cost of projects to be executed in the State [in order to] ensure commitment in the execution of the projects. It is also possible that allocating the bulk of the resources to construction of classrooms provides perverse incentives for everyone involved, as some have argued. However, another possible explanation is that in designing the spending formula, it was not considered necessary to establish first what inputs contribute most to learning outcome and distribute the resources accordingly. In fact, where classroom has featured as a factor in learning, it is usually in relation to how many children should be in a class to make for effective teaching. Even then, there is no consensus on whether smaller class size actually helps children to learn better²³.  A beautiful classroom may also attract children to come to school, but it does not in itself guarantee that they would learn.

This is not an argument against classroom and beautiful schools. But if after 24 years of UBE and billions of Naira spent, most of the students still cannot read or do simple arithmetic after completing basic education, it means our approach has not worked, and we cannot persist on doing the same thing that we have done from the start. We must therefore, reset our spending priorities and allocate more resources to those factors that can actually help us out of this learning crisis.

Whose Priority Counts: the Federal or the Local?

There is yet another problem with the UBEC prescriptive approach, which has turned out to be an encumbrance to the states and the commission as well. As at May 2023, UBEC reported that several states have failed to access funds allocated to them for basic education and up to N46 billion that should have gone the states was still in the Commission’s account.²⁴ It is easy to understand why this is so.

The UBE Act made it clear that the “Federal Government’s intervention under the Act shall only be an assistance to the states and the local governments for the purpose of uniform and qualitative basic education throughout Nigeria.”²⁵ In essence, the Act recognises that the primary responsibilities for basic education belong to the states and the local governments, and the Federal Government is only assisting for the purpose of maintaining quality and uniformity. Therefore, by asking each state to contribute 50% as matching grants, it ensures that all the states in the country are uniformly committed, and that the same amount of money is guaranteed to each state from the federal pot.  Herein lies the problem. A framework that guarantees uniformity may not be helpful in achieving quality. Since the baseline standards are not the same for all the states, priorities are therefore bound to be different in terms of what is required to achieve quality of education in each state.

While the Act states that the Federal Government is “only assisting” the state, it seems to have no qualms prescribing to the states what its spending priority should be. Once the state pays the counterpart fund and draws down, the entire funds must be utilised within the guidelines specified by UBEC, regardless of what the state may consider as its priority. For example, the decision to disarticulate Junior Secondary from the Senior Secondary has left many states requiring more resources for junior secondary in recent years. But they still have to stay within the 35% prescribed in the funding framework. With stories of dilapidated classrooms and generally decrepit learning environments still widespread across the country, it is difficult to argue against allocating 70% of the grant to infrastructure. However, situations do vary from state to state. Nevertheless a state that considers teacher training or instructional materials as its priority is still constrained to spend 70% of the grant on infrastructure. For states like this, the UBEC grant then become a constraint. Such states would therefore rather not take the grant. That way, they can freely decide how to expend whatever they should have paid as counter-part fund.

Search for Appropriate Governance Structure

It is a trite principle in governance that funds should be allocated closest to the point of implementation or where results are most expected; in this case, the schools. This has not been the case with the UBE. The constitutional responsibility for basic education is that of the Local Governments. But this is true only in nominal terms. In majority of the states, the involvement of local governments in the administration of basic education does not exceed payment of staff salaries.

Figure 1: Current structure:  centralised, top-to-bottom.

Since inception, the management of basic education has been a two-way business between the states and the Federal Government, leaving out two critical stakeholders, the local governments and the schools, which essentially play no role in deciding how resources are allocated or expended.

Although the basic education system is represented at the federal level by the UBEC and at the state level by the SUBEB, the local governments are still stuck with the Local Government Education Authority (LGEA), system, effectively excluding that tier of government from the UBE framework, in terms of policy making and implementation. The “action plans” prepared by the states are about what should happen in the schools. Unfortunately, the schools do not have any inputs into these. Although attempts have been made in recent years to mobilise communities to play a lead role in the management of their schools through the School-Based Management Committee (SBMC), this has not met with much success.

In 1996, the National Council on Education directed each state to set up a School-Based Management Committee (SBMC) for each school. The committee, which brings together heads of school, parents, teachers, pupils and local leaders, including religious and community leaders, is to serve as the governing board for each school. Where they have been trained, the SBMC are to prepare the annual School Development Plan, including infrastructure and operational needs. Various reports observe that most schools did not set up this committee, or where they exist, they have not functioned well enough. However, SBMC has been shown to have positive effect on school performance and even pupils’ learning achievements in places where they have been effective²⁶. If nothing else, they serve as the first-line monitoring body in ensuring that children come to school and teachers turn up to teach.

The current system that rigidly prescribes spending formula to states needs to be abolished. Apart from the misalignment between inputs and what is required to get the desired outcomes, it also constrains the states and overlooks their priorities. In creating a more derived system, Local Universal Basic Education Board should be set up to replace the current LGEA. This immediately integrates the local government into the UBE framework. Establishment of the SBMC needs to be elevated above policy prescription and be made a legal requirement as an integral part of the UBE management system. The action plan that would be submitted to UBEC, especially those that have to do with physical infrastructure and teaching materials, should be based on each school’s development plan, through the LUBEB, and the SUBEB. Once the grants are released, it would follow the same route back to the school to implement the development plan. Different accountability measures can be devised to ensure effective utilisation by the schools, but the key principle is decentralisation which supports the community to take primary responsibility for the schools, while government enforces accountability to ensure “judicious utilisation” of funds released to the SBMCs.

Figure 2: Decentralised: Bottom-to-top

A decentralised approach ensures that all schools receive equal attention. In a centralised system where the decisions on construction or renovation of classrooms, for example, are taken at the SUBEB level, it is difficult not to overlook some schools or to ensure that resources are equitably distributed among schools. This partly explains why even in states where education has received strong attention, there are still schools in terrible conditions. The SBMC approach will ensure that every school has opportunity to make its case and to receive fund for its infrastructure requirement.

Bringing Private Schools into the Public Education Mix

Nothing has made a mockery of government’s promise of free education like the explosion of private schools across the country. It is difficult to establish how many private primary schools there are in the country. It would however be safe to assume that there are more private schools in the country today than there were before the UBE was launched in 1999. It is perhaps, one of the biggest ironies of modern education in Nigeria that the more money government spends to provide free education, the more parents are willing to pay for private school for their children.  In fact, anywhere a private school exists, it would be difficult to find parents who would rather send their children to a public school, unless they are too poor to afford even the cheapest private school or they really don’t care about education at all.  Why is this so?

In almost all cases that have sought to compare performance between public and private schools in terms of students learning achievements, the private schools have been shown to perform better. More often than not, they operate with no government support or supervision, yet there is overwhelming evidence that private schools tend to deliver better learning outcomes²⁷.

In 2011, researchers were able to identify 12, 098 of such private schools in Lagos, with total enrollment of 1, 385, 190 pupils, representing about 61% of total enrollment in the state²⁸. Even in Makoko, arguably one of the world’s poorest urban slums, 87% of parents preferred private schools for their children. Most parents interviewed said they prefer private schools because they can see that teachers are present and are teaching. They can also see that their children are able to master basic skills that other children attending government schools are not able to²⁹. Another explanation for why parents have preferred private schools is its “short-route” accountability system. The client/service provider relationship between parents and the schools tends to put the schools on their toes. Although it has been found that teachers in private schools are generally less qualified and less paid than their counterparts in government schools, they tend to work harder because one dissatisfied parent—customer—could lead to loss of job by the teacher and loss of revenue to the school owner. The reasons given by parents in Lagos have been found to be generally consistent with other parts of the country.³⁰ It is also interesting to see how these reasons align with some of the factors identified earlier as contributing most to learning outcomes:

Table 3:

Like Härmä noted, “Due to wide-ranging failures, parents are having to buy educational services and are missing out on their rights to free primary education³¹.”  But this situation is not peculiar to Nigeria. Several other countries have also experienced sudden explosion in private schools in recent years in a situation not too dissimilar to that of Nigeria. However, countries have responded differently. In 1981, Chile introduced its now world-famous educational voucher system that allows children in elementary and secondary schools to use government-issued vouchers to either pay for a year of education at a public school or to contribute to tuition charged in a fee-paying private school.  In India, the Rights to Education Bill, an equivalent of our UBE, mandates all private schools to reserve 25% of their seats for “poor and marginalised children” at cost to government.³²

In both cases, but especially in the case of India, government appears ready to penalise itself for failing to deliver on its promise of quality education in public schools. It also acknowledges that private schools are performing better and is willing to help children from poor homes to also have access to better education, thereby closing the gap on social inequality. It is important to note that in both cases of Chile and India, these interventions are without prejudice to efforts to make public schools better. But governments in both countries realise that if they must wait for their reforms to bear fruits, children would outgrow schooling opportunities. Private schools on the other hand tend to offer lower hanging fruits that governments could tap into if they must deliver on their promise of quality education for all.

Governments at the state and federal levels in Nigeria have to see the need to engage the private schools better.  This has to start with the government acknowledging that its failure to deliver on the promise of education that is driving parents to the private schools. At the moment, government at all levels, is either indifferent or antagonistic to private schools. This needs to change. Government must recognize the role they play in educating Nigerian children and support them accordingly. After all, every single child that is able to achieve the specified learning objectives moves the government closer to fulfilling its plan to get every child educated, regardless of whether this was done in public or private schools.

Improving Teaching and Teachers

If there is one point on which everyone agrees, it is the most important factor that determines whether children will learn or not is the quality of teaching and teachers. It seems natural, therefore, that the most important reform that needs to take place in our schools is that which focuses on improving the quality of teaching and instructions. As is widely acknowledged, the quality of any

education system cannot rise above the quality of its teachers. Our main concerns therefore should be:

• How do we get the right people to become teachers?
• How do we develop them into effective teachers?
• How do we target support to keep them on the job and ensure children learn from them?

To answer these questions, we must prioritise reform of the teacher education and recruitment system as well as in-service training system. According to the Teacher Registration Council of Nigeria (TRCN), a qualified teacher is one who holds the minimum teaching requirement of the Nigeria Certificate of Education (NCE) and is also registered with the TRCN as a teacher. In May 2023, the Council reported that 83% of teachers in Nigeria’s public schools are qualified, while only about 30% of those who teach in private schools are qualified³³. TRCN’s assessment of “qualified” teachers may be true, but it hides the grim reality of the crisis of teacher quality and competence across the country. Qualification does not necessarily mean quality. This would explain why many private schools are getting results with “less qualified” teachers than the public schools.

In states where Teacher Development Needs Assessment (TDNA) has been successfully carried out; the results show that majority of teachers who are in service are not able to pass basic literacy, numeracy and pedagogical tests although they are mostly qualified³⁴.

One thing that is consistent with all countries that have witnessed remarkable and sustained improvements in teaching over the years is that they ensure that only the best candidates get to become teachers and entry is strictly controlled. This is the direct opposite of what obtains in Nigeria where standards are lowered for those who want to become teachers and entry appears to be free-for-all. This has to change.

Pre-service Training

The National Policy on Education specifies that the minimum requirement for becoming a teacher in Nigeria is the Nigeria Certificate of Education (NCE). Reform of the Colleges of Education therefore has to be a core component of any efforts to improve the quality of teaching at the primary school level. The starting point for the reform of teacher education must be the National Commission for Colleges of Education (NCCE), which sets standards and regulates the Colleges of Education in Nigeria. The good news here is that the NCCE itself appears to be aware of the

challenges to teacher education in the country and has actually demonstrated a strong appetite for reform. What is required is to provide the right political leadership that will drive the reform in a coherent manner. Some key issues that must be focused on include, but not limited to:

• Review of colleges of education entry requirement to ensure that only top-quality candidates are admitted at any level.
• Review of curriculum and training methods to align with primary education curriculum.
• Incentives to attract the best and the brightest to the colleges, and to keep them in teaching.
• Inter-agency collaboration to match teacher supply with demand.
• Governance of the reform to ensure effectiveness and sustainability³⁵.

In-service Training

The biggest threat to improving learning achievements in public schools is that majority of the teachers lack the knowledge and skills required to teach effectively. These teachers also potentially pose the most serious obstacles to any efforts to improve the quality of teaching in the schools. Many have found themselves in teaching as a last resort, they are therefore usually demotivated and more interested in keeping their jobs because of the salaries rather than in helping the students to learn. This makes intervention politically contentious and delicate. Experience has however shown that the most successful teacher improvement programmes in the country are those that are able to guarantee job-security while creatively and continuously improving capacity in classroom contexts. This is consistent with the author’s experience in Kwara State.

Table 4: The Case of Kwara State

From Zeros to Heroes. In 2008, Kwara State decided to administer an assessment test to teachers in the state’s public schools as part of it teacher development programme. The test was based on the Primary 4 curriculum for English, Mathematics and Civics, as well as some pedagogical questions. After weeks of negotiation with the union of teachers, an agreement was signed, witnessed by the state’s Parents-Teachers Association (PTA), that no teacher would be sacked or penalised regardless of his or her performance in the test. With the help of the DFID’s Education Sector Support Project in Nigeria (ESSPIN), testing experts were brought in from Oxford University to design the tests. After a dry run in Lagos and Jigawa states, the test was administered with the minimum pass threshold set at 80% for each of the subjects. About 19,000 teachers sat for the test, but less than 100 were able to meet the minimum threshold. This sent shockwaves across the state. But having committed to not penalising any teacher for failing the assessment, we were now faced with a serious problem, worse than anyone could have imagined before the test was conducted. With the help of our partners, the ESSPIN, we developed a Teaching Manual (TM) for every topic in the curriculum from Primary 1-6 for literacy and numeracy. The TM was like a cookery book, which did not really require the teacher to have any prior subject or teaching knowledge. The teacher only needed to be able to read and follow the clearly-stated instructions on how to teach each topic on the curriculum. We then called for volunteers from the three Colleges of Education in the state and organised them into the State’s Schools Improvement Team (SSIT). We also set up another group made up of senior teachers, especially those who were able to achieve the minimum threshold in the tests and organised them into the Schools’ Support Officers (SSOs). After undergoing their own training, the SSITs then trained the SSOs who would then train the teachers on how to use the TMs. All the schools in the state were now organised into clusters of not more than five school per cluster under one SSO. Each cluster met every weekend for training on the use of the TM by their assigned SSOs. Thereafter, the SSO visited each school at least once during the week to observe the teachers in action. These observations were then discussed at the cluster meeting at the end of the week. The SSOs routinely report to the SSITs, who advise them on a continuous basis. The State Government took notice of the teachers’ commitments and rewarded them by paying the 27.5% Teachers Special Allowance that they had demanded before the exercise. More importantly, the parents were quick to take note of the transformations in the schools, and many began to return their children to the public schools.

What the experience from Kwara State as well as other similar donor-supported interventions on Teacher Development Programme (TDP) in some states suggest is that even the complex problem of teachers’ development can be tackled with little or no political risk. These approaches have to be studied more and scaled up across the country. Ideally, each state should take responsibility for the training of its own teachers. However, the Federal Government still shares in the responsibility to ensure that children are able to learn. Therefore, federal level agencies need to get involved as well.

At the moment, it is not clear which federal agency has the primary responsibility for teacher development in the country. The TRCN says its mandates include “accreditation, monitoring and supervision of the courses and programmes of teacher training institutions in Nigeria to ensure that they meet national and international standards. The institutions include the Colleges of Education, Faculties and Institutes of Education in Nigerian universities, Schools of Education in the Polytechnics, and the National Teachers Institute.”³⁶ However, this statement appears merely aspirational. In reality, it is the NCCE that accredits and monitors courses for the colleges of education, while the National Universities Commission (NUC) does the same for the universities. Even regarding registration of teachers, the TRCN hardly has anything more than exhortatory power. By its own account, more than 70% of teachers in private schools are still able to teach without the required qualifications³⁷.  Therefore, reform of key institutions charged with the responsibility for professional development and certification of teachers such as the National Teachers Institute (NTI) and the TRCN must also be listed as priorities to streamline their activities and align them with the new approach to teacher development.

Attracting the Best and Motivating Teachers to Teach Better

More brilliant students have multiple career options and, more often than not, teaching is not one of them. Apart from the low salaries, limited opportunity for career advancement and general perception of teaching as a ‘lowly’ profession are major barriers to attracting the right quality of candidates into the classroom. Our teaching reform programme must therefore include a deliberate strategy to attract the right calibre of people into the classrooms. Strategies to consider must include those with potentials to raise the profile of the profession, give financial reward and broaden opportunity for career advancement.

To raise the profile of the teaching profession, we must start with raising the prestige of the teacher training institutions. One way to achieve this is to develop effective mechanism for deliberately selecting applicants into the teacher training colleges and giving incentives, including scholarships, bursaries and guaranteed employment to candidates.

Another important area where Nigeria has been left behind is in the career pathways for teachers. In seeking to attract the best and keeping them on the job, we need to define different pathways for

career progression of teachers that is both financially and professionally rewarding, outside the traditional civil service cadre. Government has announced a plan to implement a different framework for paying teachers, the Teacher Salary Scale (TSS). However, a package of incentive that merely seeks to increase teachers’ salaries and grants some allowances is not sustainable in the long run, unless such remunerations are also tied to clearly-defined career framework that entrenches professionalisation. Moreso, there is no evidence in the literatures that higher salaries necessarily make teachers better.³⁸

A donor-led initiative seeking to introduce this new career path for teachers has been on for a couple of years. It is not clear how much progress has been made on it, but it is worth revisiting. Generally, what the proposed career path for teachers seeks to do is to offer a formal and sustained recognition for teachers throughout their career, which reflects and rewards their experience and competence. Below is an illustration of possible five-stage career pathways that may be adopted; performance criteria as well as advancement process for each level will be specified accordingly:

Table 5: Career pathway for teachers

In addition to raising the prestige of teachers, career advancement will also come with significant financial compensation, while offering opportunities for continuing professional development. This will open the way for real professionalism in teaching. It is also important to note that the kind of resistance that has been witnessed in some states over the Teacher Development Needs Assessment (TDNA) would have been bypassed since passing such test would then be incentives-driven and would become a necessary process in career progression.

Monitoring Learning Achievements

Despite the general view that Nigerian education system over-examines children, in reality there is very little evidence of national assessment and no evidence of participation in international learning assessments. National assessments help a country to know if the curriculum’s intentions are being attained at various levels. Most countries that routinely carry out these assessments usually administer them in the transition years: end of Primary 3 and end of Primary 6. The key question is what do we expect a child to be able to do at the end of each of year of contact with the school curriculum, especially in literacy and numeracy? Assessment at the end of Primary 3 does not only help us to know how much progress children have made before they transit to upper primary, it also gives enough room for remedial interventions. Without such assessments, it would be impossible to know and address the issues of quality generally, or to identify imbalance in learning achievements along gender, regional other demographic classifications.

International assessments on the other hand, help a country to compare the learning achievements of its students with students of other countries on the same grade level in order to obtain a “comparative framework” to evaluate their curriculum and address deficiencies. One of such international learning assessment programme carried out at the primary school level is the Trends in International Mathematics and Science Study (TIMSS), organised by the International Association for the Evaluation of Educational Achievements (IEA), which also runs the Progress in International Reading and Literacy Study (PIRLS). TIMSS tests the proficiency of students across the world at various grade levels “to provide important background information that can be used to improve teaching and learning in mathematics and science³⁹.” Since it started in 1995, five Asian countries have consistently dominated the performance league by a distance: Singapore, Chinese Taipei, Korea, Japan and Hong Kong. So far, only six African countries have participated: South Africa, Morocco, Tunisia, Botwana, Egypt, and Ghana. South Africa, which has participated longer than other African countries says the assessment would allow South Africa to compare it curricula and achievement in mathematics and science with those in industrial countries⁴⁰. South Africa also participates in the Southern and Eastern Africa Consortium for Monitoring Educational Quality (SACMEQ) programme, established in 1995 by 15 countries in the region.

Performance in TIMSS have triggered parliamentary debates in some countries about their educational systems.⁴¹ National and international assessments can indeed form the basis on which policy makers and education planners can take informed decisions on how to improve the quality of education in the country.

Summary of Recommendations

1. For 24 years of its existence, the Universal Basic Education Commission (UBEC) has functioned more as a funding agency. The Commission needs to undergo a deep structural review to enable it to take on more responsibilities for improving quality in public schools.
2. The UBE Act, 2004, needs to be reviewed to take into account the experience of the last two decades regarding its implementation, and the identified challenges. For example, the provision on counterpart funding and expenditure prescription needs to be reviewed. Spending priorities need to be shifted towards factors that impact most on learning outcomes like textbooks, inspections, teacher recruitment and training.
3. The governance of basic education needs to be decentralised to enable schools and local governments to play more active roles in decision-making, especially in resource allocation. Therefore, the Local Universal Basic Education Board (LUBEB) needs to be established. In addition, the School-Based Management Committee (SBMC) should be made a legal requirement for each school so as to mobilise community leaders to play a more active role in the management of their schools.
4. Government needs to engage more with the private education providers and actively support them. The cases of Chile and India are indicative of what government could do. One option is for government to undertake to supply textbooks to all registered private schools. This will take away from the cost that parents have had to bear in sending their children to these schools.
5. Reform of the colleges of education, and teacher training institutions should be integral to any effort to improve the quality of teaching and teachers in schools. This reform must raise entry standards and provide incentives, including scholarships, bursaries and guaranteed employment that would attract the right talents into the schools.
6. A new career path for teachers needs to be established that will provide the framework for the planned Teachers’ Salaries Scale (TSS) and ensure greater professionalisation as well as career progression.
7. Agencies and institutions that have responsibility for teachers’ training and certification need to be better coordinated to achieve greater efficiency. Colleges of education should provide teacher training up to degree level, while universities should offer post-graduate trainings only. The roles of NTI and the TRCN also need to be streamlined. One of them is surplus to requirement.
8. A National Assessment on Progress in Basic Education needs to be insitutionalised to carry out learning outcome assessments in literacy, numeracy and reading at various grade levels across the country, but especially in Primary 3 and Primary 6. This needs to be an independent body that reports to the President.
9. Nigeria must ensure participation in international assessments of learning progress. This will not only help to monitor progress towards achieving the SDG 4 and national objectives for UBE, it will also help the country to benchmark its educational systems against those of other countries at the global, regional and sub-regional levels.

Bolaji Abdullahi is a policy practitioner and education reform enthusiast. He is former Commissioner for Education in Kwara State and former Minister of Youth Development and Sports in Nigeria.

 Footnotes

[1] The 4^th amended version; The portion in italics is author’s emphasis.

[2]Section 18 (3) of the Constitution of Federal Republic of Nigeria, 1999.

[3]Section 15 (1) of the Child’s Rgihts Act, 2003.

[4] Akinwunmi F.S. Trends in School Enrolment of Primary School Education in Nigeria between 1984 and 2002. https://www.academia.edu/43755361/ and UBEC website: https://ubec.gov.ng/

[5] https://guardian.ng/news/nigeria-now-has-20-million-out-of-school-children-says-unesco/

[6] https://guardian.ng/news/75-of-nigerian-children-cant-read-simple-sentence-says-unicef/.

[7] Akinwunmi F.S. Trends in School Enrolment of Primary School Education in Nigeria between 1984 and 2002. https://www.academia.edu/43755361/ and UBEC website: https://ubec.gov.ng/

[8] Marg Craspo (1983). Universal Primary Education in Nigeria: Its Problems and Implications. African Studies Review, Vol. 26, No. 1 (March 1983), pp. 91-106, Cambridge University Press.

[9] Marg C (1983). Op. cit.

[10] Marg C (1983). Op. cit.

[11]Uchendu, V. (1979) Education and Politics in Tropical Ltd.

[12] Blueprint: Implementation Committee for the National Policy on Education, 1977-1979, Government Printer, Lagos 1979, pp 55-59 Cited in Dennis A. Africa Spectrum, 1986, Vol. 21, No.2 (1986, pp. 163-174

[13] Marg Craspo, 1983 Opp. Cit.

[14] West Africa, January 16, 1978.

[15] Dennis A (1986). The Deepening Crisis in Nigerian Education: A Contribution to the debate on the demise of Universal Primary Education (UPE) Africa Spectrum, Op.cit.

[16] Bray, M. (1981) Universal Primary Education in Nigeria.: A Study of Kano State. London: Routledge and Kegan Paul.

[17] Marg Craspo, 1983 Opp. Cit.

[18] UBEC Annual Report 2018. (Abuja, 2018), p.45

[19] The closest thing to monitoring learning standards in the Commission is done by its 14-member Quality Assurance department whose reports, according to the department itself, no one really cares about: “The challenges that the department encountered is, among other things: 1. Non-implementation of recommendations contained in quality assurance reports by stakeholders (UBEC, SUBEB, LGEA, Schools and stakeholders).” See UBEC Annual Report, 2018, Ibid, page 63.

[20] See also http://yourbudgit.com/wp-content/uploads/2018/11/education-financing .pdf

[21] Pritchett, L (2013). Rebirth of Education: Schooling Ain’t Learning. Centre for Global Development, Washington DC, 20036.

[22] See for example: Muvawala J. (2012) Determinants of Learning Outcomes for Primary Education: A Case of Uganda; Journal statistique africain, numéro 15, août 2012. World Bank, 1990, Primary Education Policy Paper, Washington DC and Pritchett L. (2013). Op. Cit.

[23] Muvawala J. (2012) Determinants of Learning Outcomes for Primary Education: A Case of Uganda; Journal statistique africain, numéro 15, août 2012

[24] https://punchng.com/basic-education-suffers-as-governors-fail-to-access-n46-2bn-ubec-fund/

[25]The Compulsory Free, Universal, Basic Education Act, 2004

[26] https://riseprogramme.org/publications/importance-functioning-school-based-management-committees-sbmcs-evidence-nigeria

[27] Gruijters, R. J., Alcott, B. and Rose, P. (2020) The Effect of Private Schooling on Learning Outcomes in South Asia and East Africa: A Within-Family Approach. Working Paper No. 20/7., REAL Centre, University of Cambridge. 10.5281/zenodo.3686733

[28] Härmä Joanna, (2011), Private responses to state failure: the growth in private education (and why) in Lagos, Nigeria Dr. https://ncspe.tc.columbia.edu/working-papers/files/OP215.pdf

[29]. Härmä, J. (2011). Op.cit.

[30] Umar, A. 2008. "Nigeria". In Low-cost Private Education, ed. B. Phillipson. London: Commonwealth Secretariat.

[31] Härmä J. (2011). Op.cit.

[32] Chudgar A and Quin E., (2012) Relationship between private schooling and achievement: Results from rural and urban India. Economics of Education Review, Volume 31, Issue 4, August 2012, Pages 376-390

[33] https://saharareporters.com/2023/05/24/more-half-private-school-teachers-south-west-nigeria-not-qualified-registration-

[34] https://dailytrust.com/paradox-teachers-failing-while-their-students-pass-exams-4/

[35] A 2011 National Teacher Education Policy (NTEP) outlines similar objectives but no serious action appears to have been taken towards implementing the recommendations.

[36] http://trcn.gov.ng/file/Introducing%20TRCN.pdf

[37] https://www.thecable.ng/trcn-says-70-of-private-school-teachers-in-southwest-are-unqualified

[38] Pritchett, L (2013). Op. Cit

[39] https://timssandpirls.bc.edu/home/pdf/T2015_TIMSS.pdf

[40] Vincent G. and Thomas K. (2008). Op. cit.

[41] Vincent G. and Thomas K. (2008) Assessing National Achievement Levels in Education. The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington, DC 20433

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