Why economic reform is the key to solving Nigeria's corruption problem

On April 3, 2016, the Panama Papers release revealed that Nigeria’s Senate President Bukola Sara­ki, ex-Senate President David Mark and former Minister of Defense Theophilus Danjuma, had funneled assets to off­shore tax havens. This revela­tion was the latest in a string of embarrassing setbacks for the anti-corruption campaign launched by Nigeria’s president Muhammadu Buhari after his election victory last March.

On April 9, Nigerian anti-corruption NGO CACOL (Coalition Against Corrupt Leaders), condemned Buhari’s silence on the Panama Papers. These criticisms once again fu­elled speculation that Buhari’s strident anti-corruption rheto­ric is merely a cynical ploy to weaken the opposition People’s Democratic Party (PDP).

While the jury is still out on Buhari’s commitment to com­batting corruption, there is compelling evidence that Bu­hari’s anti-corruption efforts are misdirected in their focus. Buhari has focused on holding corrupt officials and ex-politi­cians accountable by demon­strating that his campaign to improve the rule of law has no “sacred cows.”

However, Buhari is making a grave mistake by focusing pri­marily on the political dimen­sion of corruption and largely neglecting the economic driv­ers of corruption in his reform efforts. Three characteristics of the Nigerian economy are responsible for the frustrat­ingly erratic nature of Buhari’s anti-corruption campaign. These problematic aspects of the Nigerian economy will be outlined below:

1) Buhari’s Naira Peg Has Allowed Some Businesses to Gain Unfair Advantages Over Their Competitors

The first characteristic is Bu­hari’s decision to peg Nigeria’s currency, the naira, to an arti­ficially high level relative to the US dollar. Despite this peg, the prices of many imported goods in Nigeria have doubled, crip­pling many small businesses. The firms that have succeeded in these dire economic con­ditions, exacerbated further by low oil prices, have been those with close connections to Nigerian government offi­cials. Emerging markets expert Walter Lamberson, in a recent op-ed for the New York Times, notes that if business elites can pay a 30 percent surcharge, the Nigerian central bank lends money to their firms and not to their competitors.

Buhari’s monetary policy has also encouraged corruption by strengthening Nigeria’s infor­mal economy. His consumer good import bans have been largely ignored by Nigerian business elites, who have de­fied Buhari’s calls to invest in domestic production by pur­chasing the goods they need at higher prices on the black market. These price increases have created an inflation cri­sis in Nigeria, in spite of the central bank’s insistence on a tight monetary policy. Many firms have concluded that par­ticipation in the black market and the purchase of illegally smuggled goods is the only way to guarantee their sur­vival. Small businesses lacking the means or inclination to en­gage in these corrupt practices have collapsed due to a dearth of capital.

In order to ensure that Abu­ja’s monetary policy does not reward the corrupt, Buhari needs to unpeg the naira. As markets have already factored in the declining value of the Nigerian currency, the infla­tionary effects of this move will be negligible. Unpegging the naira will also play a vital role in decoupling the state from Nigerian businesses, a process that will prevent predatory of­ficials from exploiting an eco­nomic crisis for their own en­richment.

2) Nigeria’s Foreign Debt Dependency Is Enabling Cor­ruption

The second characteristic of the Nigerian economy exac­erbating corruption is Abuja’s dependence on foreign debt. Foreign debt has been used as a vehicle for money launder­ing, as many Nigerian leaders have siphoned oil money for personal gain, while using in­ternational credit to invest in the country’s economy. The linkage between a loose fiscal policy and predatory corrup­tion reached its peak during the Second Republic (1979- 1983). Reckless borrowing caused a debt crisis amelio­rated only by an increase in oil prices after the Iraqi inva­sion of Kuwait in 1990. From 1958-1983, the Nigerian oil in­dustry generated $101 billion, with the vast majority of these profits being transferred to the bank accounts of Nigeria’s po­litical and business establish­ment.

While Nigeria’s debt levels under Goodluck Jonathan re­mained low (just 18% of GDP and a budget deficit consis­tently under 3% a year), rapid economic growth of over 7% a year masks the extent to which foreign debt was used to offset graft. The disappearance of $20 billion from the state oil com­pany under Jonathan’s tenure and profits accrued by politi­cians for incomplete building projects, was facilitated by for­eign debt swelling the public coffers.

Without a drastic change in policy, Buhari’s turn to Chi­nese renmibi yuan-denomi­nated bonds to close an $11 billion budget gap could result in a new wave of corruption. Chinese funds should be bor­rowed to finance specific proj­ects that can be realistically completed (especially in the investment-starved infrastruc­ture sector) rather than as a blank check that allows politi­cal elites to distribute credit in any way they see fit. Making the Nigerian government’s use of foreign debt more transpar­ent will allow Buhari to balance economic growth with aggres­sive anti-corruption measures, a combination that previous presidents failed to achieve.

3) Nigeria’s Reluctance to Diversify Economically Is En­couraging State Graft

The third crucial economic driver for corruption is Ni­geria’s overwhelming depen­dence on oil revenues. A leaked 2012 report on Nigeria’s oil and gas industry revealed that $6 billion is lost annually due to oil theft, with a further $29 bil­lion being lost from 2002-2012 due to a natural gas price fix­ing scam. As the government distributes oil rents with less transparency than revenues derived from other sectors, pe­troleum dependency is a com­pelling predictor of a country’s corruption levels.

A rolonged period of low oil prices and rapidly slowing economic growth gives Buhari a unique opportunity to tran­sition Nigeria away from its oil dependency. Buhari in an April 15 statement correctly noted that the diversification of Nigeria’s economy is a “mat­ter of urgency.” His East Asian trip, which resulted in ex­panded Chinese investment in Nigeria’s mining, agricultural and manufacturing sectors, is a positive step. But Nigeria desperately needs to reduce its dependency on foreign, es­pecially Chinese imports, in these sectors by stimulating domestic productivity. As long as the naira remains pegged, tangible progress towards end­ing corruption through diver­sification is a mere illusion.

Nigeria’s anti-corruption campaign has been under­mined by misplaced priorities and an emphasis on political retribution rather than struc­tural reform. Transforming Nigeria’s business culture is an essential step towards over­coming state predation. Bu­hari’s willingness to undertake risky but vital fiscal and mon­etary policy reforms will go a long way in determining the success or failure of his anti-corruption campaign, and the legacy of his second stint as president.

Samuel Ramani is an MPhil student in Russian and East European Studies at St. Ant­ony’s College, University of Oxford. He is also a journalist who contributes regularly to the Washington Post, Diplo­mat