Nigeria: Challenges and Opportunities to Avoid the Middle-Income Trap

Nigeria’s independence in 1960 heralded an era of a better future under democratic self-rule, but, six decades later, that euphoria appears like a mirage. Decades of mismanagement characterized by inefficient deployment of oil revenues and fiscal policy profligacy have trapped Nigeria in a low growth trajectory and economic morass. The early growth gains generated by oil windfalls have not been sustained as the policy response to periodic oil price shocks has been underpinned by a predominantly procyclical fiscal policy stance and policy reversals. These have been punctuated by the imposition of administrative controls of one form or another and necessary, but short-lived adjustment reforms and uncertainty, which have reinforced the macroeconomic imbalances that have long characterized the Nigerian economy. These weaknesses epitomize the textbook features of a Dutch Disease and resource curse, including poor governance, that has plagued Nigeria since the discovery and commercial exploitation and export of oil and gas. Economic reforms initiated in June 2023 were meant to rescue the economy from an era of dirigiste policies but effects of multiple shocks have undermined the efficacy of these changes. Inflation has rose sharply, surpassing the two-decade average, and as oil revenues remain depressed and exchange rate depreciated following the shift to floating regime, Nigeria’s macroeconomic imbalances have deepened, presenting a real challenge for policymakers. The government’s efforts to engineer high growth and a transition toward lower-middle-income status have therefore been marred by sporadic negative macroeconomic events and policy experiments that have failed to raise and sustain economic growth. Getting the economy out of this situation will require commitment to the reform agenda as well as structural reforms to diversify the economy from dependence on oil revenues. Resisting the temptation to reinstate fuel subsidies offers opportunity to regain fiscal fitness and deploy freed resources towards investment in physical infrastructure and human capital development. To avoid falling into a middle-income trap, Nigeria needs to harness its economies of scale by unleashing the “force of gravity”, which entails overcoming domestic policy and nonpolicy frictions that have held the country back from realizing the economic and social benefits of its immense natural and human resource endowment. The success of a new growth model will require the steely implementation of macroeconomic and structural reforms to break the cycle of oil dependence, diversify the sources of exports and revenues, and improve productivity and competitiveness by strengthening the quantity and quality of physical and human capital.