Not even a month after Nigerian President Bola Ahmed Tinubu’s inauguration on 29 May, he’d carried out major economic reforms advocated for by public analysts and international financial institutions.

There are however deep structural issues to be addressed before Nigeria’s economy can deliver prosperity for Nigerians. The reforms also mustn’t come at the cost of citizens’ wellbeing or the rule of law.

Tinubu inherited a sputtering Nigerian economy, with gross domestic product (GDP) growth rates for 2022 at 3.1% and for the first quarter of 2023 at 2.31%. Nigeria’s recovery from Covid-19-induced trade deficits has also been slow. The 2022 trade surplus at only $2.85-billion pales in comparison to 2014’s $54.1-billion.

Foreign direct investment into Nigeria’s economy fell from $2.2-billion in 2014 to $0.47-million in 2022. The budget deficit has risen by 370.54% from 2016 to 2023, and the cost of debt servicing has exceeded public revenues as public debt has grown tenfold in a decade. Total public debt as of June 2013 was N7.93-trillion. It’s now at around N77-trillion.

During this period, external debt grew by 473% and domestic debt by 7 029%. The Central Bank of Nigeria’s (CBN) undisciplined lending to the federal government is argued to have contributed to high inflation rates – 22.41% this May.

These pressures, as well as insecurity, have contributed to higher food prices, while 63% of the country live in multidimensional poverty. The unemployment rate was 33.3% in 2020 and KPMG estimates this to climb to 40.6% this year.

During a public engagement held by Tinubu during his campaign, he promised to ‘hit the ground running’ if elected president. He has – announcing two major economic reforms in his inaugural speech. These include ending the debilitating petrol subsidies and the unification of the naira’s multiple exchange rates.

The petrol subsidies strained Nigeria’s public accounts, contributing to a situation where higher global oil prices hurt rather than help the economy. Removing them should free up public resources for allocation to growth and recovery. But it has raised the petrol price by 200%. According to the World Bank, subsidy reforms could push seven million more Nigerians into poverty.

Tinubu is also keeping his promise to ‘float’ the naira. Under former CBN governor Godwin Emefiele, the official exchange rate from naira to dollars was mostly fixed, rather than determined by market forces. The CBN however couldn’t meet the demand for dollars at this rate, contributing to a thriving forex black market and dampening investor confidence.

The CBN governor has since been dismissed and banks have been instructed to ‘trade the naira freely’ at rates determined by demand and supply. This should free up the resources the CBN used to ‘defend’ the naira, reduce the budget deficit, and attract more foreign investment.

But the reform has implications. Recalculations based on the new rates will increase Nigeria’s external debt, import duties and electricity tariffs, raising transport, energy and consumer goods costs. Rule-of-law concerns have also been raised around Emefiele’s suspension.

Despite these challenges, Tinubu’s reforms have been well-received by the international financial community. However, deeper structural challenges must be prioritised to consolidate reforms and direct Nigeria towards prosperity.

Public finances remain a top challenge, and there’s an ongoing debate about whether Nigeria has a spending or earning problem. Nigeria’s public expenditure to GDP was 12% in 2021, making it one of the world’s lowest. Rather than reducing spending, the government must improve and reallocate spending while growing revenue. Revenue-to-GDP was also one of the lowest in the world at 7% in 2021.

Taxes make up the bulk of public revenues for many governments worldwide, but Nigeria’s tax-to-GDP ratio is now estimated at 10.21% despite the recent improvements in collection. This is still below Africa’s average of 16%. Increasing public revenue is crucial to improving public investment in healthcare, education, and business-enabling infrastructure.

Tinubu and his team say they’ll pay attention to growing tax revenue. Observers have discussed the possibility of him applying the ‘Lagos model’ to Nigeria’s finances, in reference to the increase in the state’s internally generated revenue through taxation under his tenure as state governor.

Linked to this is the risk of sacrificing the spending power of Nigerians on the altar of pro-market tax reforms. Nigerians’ cost of living has risen steadily, and household disposable incomes have shrunk. An aggressive revenue-generation campaign seeking to extract more taxes from Nigerians without paying equal attention to widening the tax base could contribute to political instability.

Welfare considerations aren’t the only reason to exercise caution in implementing these reforms. Consumption has typically accounted for over 70% of Nigeria’s GDP and reduced consumer power can affect economic growth.

Beyond the need to mobilise more resources, Tinubu’s government must figure out the most efficient spending pathways to provide short-term social protection while ensuring mid- to long-term economic returns. This is something several African governments face.

There are also the enormous tasks of boosting Nigeria’s productivity, productive capacity and growing and diversifying its exports away from crude oil. Persistent insecurity exacerbates an already difficult situation. These challenges require many reforms and measures pushed through with strong and sustained political will over time.

Such reforms will contribute to addressing business environment issues, helping to create jobs. They’ll also put Nigeria in a better position to leverage opportunities such as the African Continental Free Trade Area agreement.

So far, Tinubu’s reforms seem to be sending a positive signal to local financial markets and foreign investors. Nigeria’s stock market jumped to its highest level in 15 years in anticipation of the exchange rate unification, after Emefiele’s suspension. The reforms have also made it onto global credit rating agencies’ radars.

The new administration’s pro-market stance has its benefits, but the ultimate focus should be on improving Nigerians’ welfare and prosperity. The impact of ongoing reforms will become even more apparent in the coming weeks and months, and there have been predictions of a tough adjustment period for Nigerians.

Tinubu’s government must show how these reforms will benefit Nigerians in the longer term and explain how they’ll be supported during the transition period. And it must apply similar austerity measures on itself, cutting down or declining salaries and benefits. This will be key to maintaining public support for the reforms. This administration should also apply a similar zeal to the country's more complex structural issues.

And finally, in pursuing reforms, the rule of law must always be upheld.

Written by Teniola Tayo, Consultant, ISS and Principal Advisor, Aloinett Advisors