Is Nigeria going through a particularly unique challenge that requires unique solutions? Not at all. Every country that relies on oil for the majority of its revenues is going through plenty of pain right now. So what is everyone else doing and how does it compare with the response that Nigeria has chosen?

In one way, Nigeria is going against the convention among oil producing nations at the moment. From Kazakhstan to Saudi Arabia, everyone is cutting government spending in light of the new reality of $30 oil. When oil prices were high, people in Saudi Arabia were known to travel out of the country while leaving their air-conditioning running. Electricity was heavily subsidised by the government. That is all ending now as the Saudi Arabian government has cut subsidies on electricity, water and petrol substantially.

Iraq, which is at war with the Islamic State, has also announced spending cuts of 12%. The Kurdistan Regional Government has also announced a hiring freeze as well as cuts to its recurrent budget of up to 70%. Over in Kazakhstan, the government has cut spending by almost $4bn or 10% of the total budget “until things get better”. The Russian government has decreed 10% cuts to its budget this year. It is likely to make further cuts given that its budget was based on oil at $50/barrel.

Even Algeria with $150bn in foreign reserves and very little government debt is cutting spending by 9% this year. Prime Minister Sellai said “we need courageous decisions for 2016’. How about stupendously wealthy Qatar with its huge foreign reserves and gas riches? This year, the Qatari government is cutting its spending by just under 8%. The cuts have affected things like Al Jazeera which has had to shut its operations in America as a result. Water and electricity rates have also been increased steeply and fines for wasting water or leaving lights on during the day have been doubled.

Among the oil producing nations of the Caspian Sea, Azerbaijan is perhaps in the worst shape. The government there is cutting spending this year by 10% and that is only because it is dipping into its sovereign wealth fund to make up some of the budget this year. Over in Dubai, the government moved to quickly remove petrol subsidies in August 2015, when oil prices were still above $40/barrel. Indonesia, also an oil producer, moved to cut petrol subsidies more than a year ago shortly after President Joko Widodo was sworn in.

The Nigerian Alternative?

Given what is happening to other oil producing countries, Nigeria is swimming against the tide with a budget that significantly ramps up spending in 2016. It’s a gamble and gambles are risky.

On the face of it, it might appear like the government has cut spending on salaries from N1.8trn to N1.7trn. But this is mostly the effect of not hiring new people as planned in 2015. In reality, life goes on as normal with government spending the usual billions on buying computers (N7bn), travel (N20bn) and purchase of vehicles (N25bn).

The stated logic behind ramping up spending at a time when oil revenues have collapsed is that the economy needs investment and not austerity at this time. Perhaps. But when oil prices were high, Nigeria spent massively, as evidenced by the doubling of spending on government salaries from N800bn to N1.8trn in just under four years.

Now that oil prices are a third of what they were in those heady days, government spending is even higher. It is difficult to understand how a country can have it both ways. The ideological argument is that Keynesian theory says you should spend your way out of a slump. But the very same Keynes did say that “the boom, not the slump, is the correct time for austerity at the treasury”.

There is no evidence that Nigeria was prepared for this inevitable day of low oil prices. If the cost of paying salaries and allowances of government workers more than doubled when oil prices were high, what is the justification for maintaining such expenses with low prices?

Throwing Good Money Away

All of this brings us to the curious monetary policy Nigeria has chosen alongside its decision to spend its way out of the current slump. Is it possible to maintain a ‘strong’ value for the naira while the main source of dollar revenues for the government has crashed and the same government is increasing spending? It will be difficult, if not impossible, to eat all these cakes and still have them.

The debate around devaluing the naira is usually framed around how much people will have to pay, in naira, to buy one dollar. But people who earn money in dollars have a totally different perspective on the matter as they would get more naira for their dollars. And who is the biggest dollar earner in Nigeria today? None other than the Federal Government. This has important implications given that the government spends in naira. If the plan is to spend more, then it needs more naira.

Every time the government earns dollars, the CBN converts this at the official rate and gives the government the naira equivalent to spend. We know that the current official rate is N200 to $1 while the black market rate is now over N300 to $1. For every $1bn, there is a difference of N100bn between those two different rates.

This year, the government expects N820bn from oil revenues. At the official exchange rate, this means the government expects to earn $4.1bn or 50% of what it earned in 2015. But we all know that apart from government, no one else who earns dollars will be crazy enough to convert it to naira at the official rate except they are forced to do so. In other words, the real cost of ‘refusing to devalue’ is that the government is giving up nearly half a trillion naira this year.

This is made worse by the fact that the increased spending in the 2016 budget will be made up by massive borrowing. The finance minister has also strongly hinted that some of the borrowing planned for this year will be foreign loans. If the government borrows $3.5bn from the World Bank and AfDB as planned, it will get N700bn for it. Compared to the black market rate, that is at least N350bn the government will lose out on. If it costs N4m to build a housing unit, that N350bn opportunity cost of the official rate can build 87,500 housing units across the country, which can alleviate the very suffering the government claims it is trying to avoid by refusing to devalue the naira.

To compound matters, the CBN will then sell those dollars to people who need to make payments abroad at official rates. That is, not only is the government losing out on revenues, it is also subsidising people who are mostly already rich to the tune of N350bn. After all, you can get dollars at the official rate to pay for things like school fees abroad. Surely it is not poor people who send their children abroad to study?

We know this is a subsidy because the naira is not worth N200 to $1. If it was, then everyone who wants to buy a dollar at N200 will be able to get it. But barely 30% of people who want to buy dollars at official rates can get it to buy these days. And that is after the CBN has banned various groups of people from even demanding dollars at all.

Choices, Choices

Nigeria’s history with oil revenues has always been a pro-cyclical one. When prices are high, we spend like there’s no tomorrow (remember Udoji Awards in the 1970s?). But when prices are low and we are faced with the opportunity to take difficult decisions that will put the economy on a more sustainable path, we dodge them and wait for oil prices to rise again.

We are at such a moment again and it is time to make our choices. Can Nigeria really afford to continue spending the vast majority of its earnings on consumption as it currently does? The 2016 budget, in theory, tries to rectify this but it is nowhere near enough. Depending on how badly oil prices do this year, it is not inconceivable that Nigeria will end up borrowing half of the size of the budget with only about 30% of that borrowing qualifying as investment. This is not only unsustainable, it is morally wrong. The idea that we can continue spending on consumption like we did when oil prices were high is a fantasy. Things have to change.

The first step is to dispense with the fiction of an ‘official rate’ so that the government can get full value for every dollar it earns at this critical time. The current resistance to the reality of devaluation gives the impression that Nigeria is simply marking time and waiting for its luck to change.

But it is only the first step. The next, and most important step, is to ensure that every naira spent is invested and does not just disappear down the rabbit hole of consumption. The budget proposal is rich with all sorts of wasteful expenditure that can be cut without regret or fear. Things that were bought last year and the year before the last do not really need to be bought again this year.

Government must begin to spend its money in such a way that will unleash the animal spirits of the private sector. Should this extra naira be spent on consumption? Or should it be spent on things like research and infrastructure that gives the private sector a bigger playing field to grow? This is the question the government must ask itself each day.

Less than 10% of Nigeria’s broadband capacity is currently in use.

















Aand affordable across the country. These are the kinds of things that are difficult for the private sector to do. Government ought to step in and invest in getting that fibre across the country by sweeping away the myriad rules and obstacles currently making it impossible to do. There are countless examples like this.

It will be a terrible tragedy if Nigeria wastes this crisis. Because we all know what will happen once oil prices start go up again…


Feyi Fawehinmi is a qualified accountant and has worked in the UK’s financial services industry for the last decade in banking, asset management and insurance. He holds an MBA from the Manchester Business School and blogs at and He also tweets at @doubleeph.




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