Despite its oil wealth, Nigeria is an economic basket case

Americans are outraged. Gas prices have risen by more than 30 percent in four years, electricity prices have risen by more than 30 percent in the past four years and groceries have increased by more than 20 percent. This is infuriating and Americans are right to be disgusted by it. Now imagine that you live in a country where gas prices have increased 350 percent– yes, 350 percent! – electricity prices have risen in the past year doubled in one year, and egg prices doubled in the past year.

That is the reality for the 200 million people living in Nigeria, and similar stories are the reality in many African countries (e.g. Ghana). As you can imagine, this has led to an increase in crime, substandard products, depression, mental health problems and unemployment; the list is endless.

One important thing that Americans and the Western world need to understand is that Americans, especially working class Americans, are bearing the consequences of these events in one form or another as many Nigerians have been forced to emigrate to Western countries and, out of sheer desperation, willing to do the same work in those countries at much lower wages. This could quickly result in a global downward spiral towards serfdom. Just as Americans are outraged at their government over inflation, Nigerians are also outraged at their government. Unfortunately, many people are unaware of how the government is actually making their lives miserable, while many are offering even more government-backed “solutions” that would make things even worse. How did Nigeria get here?

The first thing you need to understand about government is the different tools it has to influence the economy and people’s lives in general. There are three main instruments: 1) money or government spending (taxes, debt and money printing); 2) legislation or regulations; and 3) coercive enforcement (weapons). How has the Nigerian government used these tools in this case?

Government expenditure

There is a wonderful quote about government that removes any ambiguity about government spending: “The government has no money to give to anyone; the government must first take over from someone else.” In Nigeria, government spending has continued to rise, with deficits rising steadily since 2012 graphic below shows the government deficit as a percentage of GDP since 2012:

Now many people – especially from the Keynesian school of thought – would agree to such deficits, on the assumption that the deficits are used to finance infrastructure that will later lead to growth. However, most of the budget is already available used to finance debt repayment (45 percent) and other recurring expenses (43 percent), of which 60 percent of the recurring costs are for salaries of government employees. For context, there are fifteen federal departments in the US and prominent people like Elon Musk are calling for a reduction. In Nigeria, there are 25 federal ministries; in Ghana, 21. Not to mention the thousands of ministries and agencies. Very little of the spending goes to actual infrastructure and security. A large part of the expenditure goes on frivolous purchases such as cars, planes, new government buildings, phantom projects, etc. How does the government in Nigeria finance its expenditure?

Taxes

You would think that in a time of economic turmoil – when people are shouting that there is ‘no money’ – the first thing the government would do is reduce the tax burden on the people. Oh no! Just as the biblical Rehoboam did, so has the government increased taxes for the past year. The government has continuously increased the US dollar-naira (USDNGN) exchange rate used in determining import duties and other customs taxes, causing an astronomical increase in essential imports and raw materials for food production such as the poultry sector. The government even brags on the increased revenue from customs taxes,

“The NCS was able to generate revenue to the tune of N4.28 trillion from January to September 2024, while in the corresponding year, 2023, the agency was able to generate a revenue amount of N3.21 trillion, also compared to the year 2022. when the service could generate the sum of N2.60tn,” the document said.

In the document, the agency said that the year-on-year improvements in import duty collections show marked improvement due to measures taken by the Central Bank of Nigeria and commercial banks in the adoption of digital infrastructure.

The government has also continued to introduce new taxes. It has introduced a new ‘cyber security levy’, paid by people making bank transfers. It doesn’t matter that such a transfer is not even a profit from doing business, if the money is transferred, you will be charged a fee. This is in addition to another surcharge, the so-called ‘electronic money levy’, which is charged on all banking transactions. Some people decided to flee traditional banks and move to financial technology (Fintechs) and other neobanks because of this levy. In response, the government has past a directive to also charge the fee on those platforms. It is more and more taxes, putting pressure on already stressed people.

It’s not just the federal government, state and local governments are piling up the taxes too. In Lagos State (in commercial terms the ‘New York’ of Nigeria), some local governments charge TV viewing fees. In Britain, TV viewing fees are charged to pay for the BBC television network, but those local authorities do not have a television network. And they still charge TV licenses? How are companies supposed to create wealth and jobs with such taxes?

Debt

Debt is another important tool that the government has used to finance its expenditure. Government borrowings are up 117 percent over last year – a huge increase to NGN 20 trillion– almost 10 percent of nominal GDP. This is a lot for a less developed country. As readers of this site know, those closest to the government benefit the most from this debt cash flow, followed by those who receive interest on the debt. For example, Nigeria’s top banks have roughly 30 percent of their assets in government debt and receive 80 percent interest income, some even more than 100 percent. However, those who are further from the injection points and do not own government bonds (the vast majority of the population) receive very little from the debt and are heavily taxed to finance the government’s ability to service the debt.

Print money

Herein lies the main cause of price inflation. The previous government – ​​before the current one (although they are from the same political party) – printed money at the rate of NGN 3 trillion per year. The current government, which has been in power for a year now, has continued at a faster pace, printing NGN7 ​​trillion in one year. The graphs below show the growth of base money (directly caused by the central bank alone and M2). The basic money supply has increased by 38 percent in one year:

Source: Central Bank of Nigeria

Source: Central Bank of Nigeria

Is it surprising that price inflation has skyrocketed?

Regulation

Finally, there are the regulations. The regulations in Nigeria (and most African countries) are stifling. A friend who registered a company 30 years agowhich he snooped if and when he had the time to work on it. Recently he wanted to use the company to start a new industry, create jobs and produce goods and services. The federal government made headlines and mandated that companies cannot use a company name unless they have filed all their annual reports since the company name was registered. In addition, an annual fee of NGN Naira 20,000 (approximately $12) per year was required. Now my friend has to pay about N600,000 ($360) to get the company registered to even think about starting his business. In a country where the minimum wage has just been increased to $50 (yes, $50 or NGN 70,000) in a month. Consider the opportunity cost of that regulation. Now that money should go to government bureaucrats and politicians.

These regulations also involve blatant disregard and disrespect for private property rights. Businesses that produce food and poultry products can be demolished with little to no notice for being on land without the “proper permit.” Here is the Minister of the Nigerian Capital (aka ‘the Mayor of Washington DC’) who brags about how he took away one of the land properties of the largest construction company in Nigeria without even informing them, and handed it over to be used to build houses for the members of the country’s judiciary.

If the largest construction company in Nigeria can have its properties seized without warning, who would bring its capital to Nigeria? Does the average citizen or businessman even have a chance that his investments are safe? And if you want to seek legal justice for property seized by the government, you will be asked to “go to court” – likely a court full of judges who are direct beneficiaries of the property seizure.

This is Nigeria’s economic problem in a nutshell. Unfortunately, nothing has changed and the situation is likely to continue.