The International Financial System is now at a major turning point in history. This development is not the outcome of agreement by major powers in the international economic system; rather, it is the product of new institutions, new technologies, the demise of strict ideological distinctions, and the emergence of a new type of scholarship in international economic relationship in Nigeria and other African countries which downplay dependence and emphasize interdependence. It is, therefore, expected that this emerging perspective will inevitably include new exciting proposals of principles that will govern relations between individual African countries and the Bretton Woods Institutions in the future.

Changing World Order

The end of the 30-year war in Europe, marked by the Treaty of Westphalia in 1648, introduced the concept of the Nation State and its associated sovereignty. The emerging nations in Europe, two centuries later, demarcated Africa into dependent colonies and protectorates. As a result, the principle of dependence defined the relationship of artificial African countries with metropolitan Europe. The attainment of flag independence by several African countries in the 1960s gave the impression that they were to relate to the rest of the world on the basis of independence. Far from it; the nations remained dependent on the former colonial powers with regard to access to markets for their exports, imports of capital goods, budget support, and technical economic advice.

Even supranational organizations such as the Economic Community of West African States (ECOWAS) and the African Union (AU) depend significantly on assistance from the West and East in one way or the other. Moreover, globalization and rapid development in digital technology in the closing years of the 20th century and the first two decades of the 21st century accentuated the state of dependence of Africa due to failure to prepare to take advantage of opportunities opened up and stubborn retention of out-of-date curricula in the educational system.

In contrast, countries that considered new agreements arising from the last GATT Agreement to liberalize trade in textiles, services, and grant easy access to foreign companies (culminating in the establishment of the World Trade Organization), benefited from these changes and moved from a status of dependence to interdependence. On the other hand, countries like Nigeria that failed to incorporate these far-reaching changes in their economic planning and policy formulation sank more deeply into economic dependence. Nigeria, which in the colonial period was a major producer and exporter of textiles, agricultural and consumer manufactures, lost competitive edge in these products, and started importing them.

It may be argued that the massive revenue from oil and gas was a major contributory factor to this development but this sector, through incompetent management, intensified the level of dependence on foreign supplies of petroleum products as the country failed to rehabilitate its refineries, preferring to favour oligarchs who were granted licenses to import petroleum products. As far as the petroleum and gas sector is concerned, it can be deduced that the increased load of dependence is not only on foreign supplies but also on Nigeria’s private sector oligarchs.

On dependence of the Nigerian economy, it can be concluded as follows; Private sector profitability promotes privatization of former parastatals and increases the country’s dependence on the private sector; Influence over its policy-making is a critical consideration in public foreign aid; Control of global markets and promotion of free enterprise economy are key considerations in the investment of multinationals in the economy; Control over key economic policies and promotion of a large-scale private sector are the major considerations in the relationship between developing countries and multilateral financial institutions like the Bretton Woods twins – the World Bank and the International Monetary Fund (IMF).

Bretton Woods Institutions and Nigeria

After the Second World War, the Bretton Woods Institutions were introduced by the then dominant and victorious powers to help reconstruct the economies of war-ravaged Europe and emerging former colonies in Africa and Asia. The World Bank’s role was to provide long-term loans for infrastructural, agricultural, and industrial development. The IMF was to provide short-term financial assistance, to meet countries’ liquidity needs in temporary balance-of-payments deficit in pursuit of its objective of preventing disorderly competitive devaluation by countries in temporary balance-of-payments deficit, and to provide appropriate economic advice.

A third proposed institution – the International Trade Organization (ITO), which was to promote international trade liberalization, was not ratified by member countries, and had its roles taken over by the General Agreement on Tariffs and Trade (GATT). The function of GATT was the organization of periodic rounds of tariff reductions. The last round, the Uruguay Round, created the World Trade Organization (WTO) whose role was expanded to include trade in textiles, services and increased freedom of multinationals to establish business in foreign countries. It also provides a dispute resolution platform for trading nations.

Discussing the activities and economic policy advice of the World Bank and the IMF, one notices a curious mix-up in their nomenclature. Banks are supposed to lend short-term but the World Bank lends long-term. Similarly, funds are supposed to lend long-term but the IMF extends its facilities called tranches on a short-term basis. In an unstable international economic system where countries demand “palliatives” to deal with unexpected crises, strict adherence to which institutions should provide short-term loans may not be feasible. It is possible that World Bank “palliative” loans granted and poorly administered by Governments and World Bank officials may leave the servicing of large loans to future generations. This is not fair and just.

Let us consider the role played by the World Bank and the IMF in the formulation and implementation of the Structural Adjustment Programme (SAP) in the 1980s. At that time, many sub-Saharan African countries were experiencing significant problems in many sectors. Budgets and the balance of payments were in deficit, unemployment rates were rising and countries were not producing enough goods and services to record enough growth in national income leading to improvement in the standard of living of citizens. Initially, the response of the Nigerian Government was the introduction of austerity measures without tampering with exchange rates. However, the origin of the problem was economic indiscipline by the political and its allied business class.

During the Second Republic, in the spirit of individual and class enrichment, an orientation which has survived till 2024, political leaders and private sector oligarchs enrich themselves by over invoicing government expenditure, under invoicing revenue and granting fiscal favours through tax holidays to selected businessmen. Another conduit of revenue loss is illegal mining of high-value minerals by powerful non-state agents. Thus, Nigeria, which should be enjoying budget surpluses and balance-of-payments surpluses due to natural and human resource endowment, is reduced to recording budget and external deficit. Instead of taking appropriate action, the country prefers to approach the World Bank and IMF for policy advice and assistance to finance external deficits.

The Structural Adjustment Programme, the most significant example of Bretton Woods Institutions’ involvement in Nigeria’s economic policy, was largely influenced by the conservative Governments of the West at this period (Mrs. Thatcher and Ronald Reagan) and supported by Nigeria against the advice of its economists. This market-oriented programme was designed to restore both external and internal balance by promoting production, reducing expenditure, removing subsidies, reducing the size of the public sector, promoting efficiency through privatization and commercialization, and introducing a flexible exchange rate system. Additional provisions were deregulation and liberalization of some key sectors.

The programme was then subjected to a lot of study and critical analysis by the Nigerian Institute of Social and Economic Research (NISER) and the National Institute for Policy and Strategic Studies (NIPSS). The findings showed that instead of restoring the health of the Nigerian economy, the SAP would compound the problems and expose the economy to inevitable collapse. From the examination of the policies introduced by the new Federal Government in 2023, the Bretton Woods Institutions still have the upper hand in the nation’s economic policy system. An assessment of a few World Bank-IMF policies below:

One-Size-Fit-All Policies

So far as the Bretton Woods Institutions are concerned, economic policies which have the hallmark of free market capitalism are preferred to those providing for some discretionary action by governments but this attitude disregards the necessity to provide alternative policies for countries with peculiar economic structures and psychological attitudes. Policies that work for developed countries with well-developed money and capital markets may not and, indeed, cannot work in Nigeria with an oil and gas sector which is the dominant source of revenue and foreign exchange earnings. These facts are not seriously taken into consideration in the policy advice of the World Bank and IMF.

Trade Liberalization

The uncompromising commitment of these institutions to trade liberalization, now strengthened by WTO activities, predisposes them to tolerate a situation where a country like Nigeria with abundant natural and manpower resources chooses to import goods that can be easily produced with appropriate re-organization and capacity-building. Import of food items, pharmaceuticals, and a wide variety of luxury items to satisfy the insatiable taste of elites are major sources of balance-of-payments deficits which can be avoided by appropriate policy action. The WTO can provide a ray of hope by encouraging the development of production capacity not only in goods but also in services which is now the fastest fastest-growing segment of global trade.

Inflation–Targeting Monetary Policy

Inflation-targeting monetary policy is now fashionable in many developed countries like the US, UK, and Australia. This approach assumes that inflation is demand-pull, and to control it, aggregate demand should be reduced by raising short-term interest rates. It also assumes that inflation is unanticipated by economic actors. This approach to inflation control is now being challenged by financial experts in developed and developing countries. They argue, I think correctly, that the inflation now being experienced worldwide is not the demand-pull type but the cost-push type arising from devaluation of domestic currencies, supply-chain disruptions arising from wars, global epidemics, and domestic insurgencies.

Within this context, increase in short-term interest rates encourages the movement of money balances from commercial banks to money markets, dampening the ability of private sector debtors to service bank loans, and discourages new investments designed to increase domestic production. There is another impact which is bound to have a greater effect on the monetary system in the near future. This is the attraction of crypto currencies for asset holders that seek to protect the real value of their monetary assets by moving their fiat money balance into crypto currencies. The long-term effect is to reduce confidence in the domestic currency even when the Government plans to minimize this by creating digital money.

Exchange Rate Policy

Exchange rate policy is presumably the most important area of disagreement between Nigerian experts and the Bretton Woods Institutions. In this regard, it can be said to be the “elephant in the room”, the most decisive and contentious economic policy in Nigeria today. In the early days of the IMF (1945 – 1970), this was a mere theoretical matter as the international monetary system was a Par-Value system with the dollar value fixed in gold (1 ounce of gold = $35) and exchange rate of other currencies fixed in dollars. It was a system of fixed exchange rates to prevent countries from engaging in competitive devaluation of their currencies to gain competitive advantage in foreign markets.

In fact, countries were expected to obtain permission from the IMF before devaluing their currencies by more than ten percent. This system emerged as what has been called “accidental evolution” as the United States emerged from the Second World War as the strongest and most productive country. However, starting from the 1970s, many developing countries were experiencing internal and external imbalances (inflation, unemployment, balance-of-payments deficits) which had to be either adjusted or financed. For the system to operate optimally, America had to stand ready to run external deficits to provide adequate liquidity for the system. This was sustainable if the US continued to run external deficits.

President Richard Nixon took a major step in the direction of reform by discontinuing the convertibility of dollars into gold. The stage was then set for the diversion of attention from financing external deficits to adjustment policies. In the 1980s, the IMF reversed its policy on devaluation. A flexible system of exchange rates was encouraged and formed a critical part of Structural Adjustment Programmes. The Principle of Conditionality was then introduced to ensure that devaluation formed an important part of adjustment policies.

Before the 1980s, the idea of adjustment of external balance by exchange rate changes was a matter for theoretical debates. Mainline economists raised the idea that it would increase the level of uncertainty and risk in international financial transactions. As was expected, conservative economists who promoted the idea contended that it would adjust external deficits and surpluses automatically; they downplayed the idea that automaticity only works in a world of perfect competition.

Nigeria’s experience with suggestions of devaluation forms an important part of the country’s economic history. When the IMF suggested that Nigeria should devalue the naira by 10 percent in 1980, the then Economic Adviser to the Federal Government, the late Professor Emma Edozien, invited some of us, his colleagues, to Lagos to advise the Government. It was unanimously agreed that Nigeria did not satisfy the stability condition for such policy action. Consequently, both the Shehu Shagari administration and the Muhammadu Buhari military regime rejected the policy advice.

The matter came up again during the Ibrahim Babangida regime. After a somewhat farcical national debate on the IMF loan and naira devaluation, the Government introduced the SAP which included devaluation. It is on record that NISER and NIPSS opposed naira devaluation because: There were better options for adjusting external deficits which did not disrupt the cost/price structure; Automaticity of adjustment by devaluation succeeds under conditions of perfect competition which was, and still is, absent in Nigeria; The technical Marshall-Lerner condition is not satisfied in Nigeria; There was preference for foreign goods and currencies. General Sani Abacha actually rejected a $500 million IMF loan (if Nigeria devalued the naira) after the advice of Prof Samuel Aluko and his team of economists.

In a policy paper to the incoming government in 1999, the NIPSS advised that the exchange rate of about N85 to the dollar then heavily undervalued the naira and estimated that a rate of N50 was realistic. This advice was apparently turned down by the Government which seemed to have confidence in the IMF. The depreciation of the naira continued to about N150 to the dollar; President Jonathan managed to keep the rate below N200. The collapse of the naira since 2015 is due to the dominance of the Bretton Woods Institutions in exchange rate matters, the emasculation of the Central Bank in exchange rate and monetary policy issues, and the growing importance of the illegal parallel foreign exchange market.

Emerging Alternative Institutions

I remember a discussion at a seminar on SAP at NISER in 1987 where one of the more rascally participants remarked that the economic problems being experienced at that time would be reduced if the Government multiplied its policies by minus one, meaning completely reversed its major economic policies. Participants agreed with this conclusion and I think the Director-General must have included this perception in his policy-paper advice to the Government. It is important to note that this advice, as well as that from the NIPSS, was rejected by the Government which preferred adjustment policy from the Bretton Woods Institutions and the conservative Nigerian Economic Summit Group (NESG).

Up until 2024, this orientation to economic policy formulation has continued to be decisive in Nigeria. Despite the acceptance of these policies, the Nigerian economy has been experiencing a downward spiral. Youth unemployment is unacceptably high; the rate of inflation continues to rise (28.98 percent in 2024); the reliance on food imports exposes the country to the spectre of food insecurity, and the exchange rate which was stable before the introduction of floating rates in 1986 has continued to decline from parity to more than N1,000 to one dollar in 2024.

In these circumstances, Nigeria may be tempted to take a precipitate action to blame its economic failures on the Bretton Woods Institutions and take emotional and undiplomatic action regarding continued membership, while seeking alternative international financial relationships. Political leaders should seek advice from Nigerian experts in the area of international economic relations on the way forward. In the search for the alternatives, one may assume that the AU and ECOWAS can easily fill the gap; but a careful appraisal of the performance of these organizations indicates that they are heavily dependent on extra-Africa sources of funds and policy suggestions from donor countries.

In the case of the AU, the objective of continental political and economic unity was frustrated by adherence of member Heads of State to maintain territorial boundaries established by the Berlin Conference in 1885. In West Africa, ECOWAS failed to increase the proportion of intra-community trade to global trade due to failure to convince members to dismantle customs and immigration barriers. It appears that the area ECOWAS considers most important is regime elongation for Presidents achieved by the deployment of ECOMOG military force financed by Nigeria. In view of the failure of regional and sub-regional organizations to promote intra-Africa trade and integration, it is necessary to identify other institutions that can realize desired objectives.

African Development Bank (AfDB)

The AFDB has an important role to play as Africa moves from a state of fragmentation to economic integration. The Bank can remove the missing link between African countries in sectors such as communication, rail, and coastal transportation, as well as stimulating increased production and processing in agriculture, manufacturing, and refining of minerals. In addition, it can facilitate the establishment of production linkages between industries in different countries. This would increase the volume of trade between African countries. This enhances interdependence between African countries and stimulates rapid economic growth, employment, and incomes.

African Export-Import Bank (Afreximbank)

This Bank, and other national Export-Import Banks, facilitates external trade transactions in Africa. It is expected that in its operations, it would pay particular attention to promoting trade among countries in Africa without necessarily reducing transactions with other nations. It is also expected that in the era of cryptocurrencies, it will promote understanding and use of these new forms of money to create new ecosystems on the continent. The Afreximbank can play a leading role in popularizing the use of cryptocurrencies in African external trade transactions which will eventually reduce the importance of reserve currencies and the IMF in international financial transactions.

African Continental Free Trade Area (AfCFTA)

This new supranational organization is designed to promote intra-Africa trade, limit the power of domestic monopolies, and move the continent in the direction of economic integration. It is expected to succeed where AU and ECOWAS have failed. It is expected that depending on support from interest groups like farmers, miners, youths, women, and academics, AfCFTA will be able to convince presidents, who prefer to defend national sovereignty against the more beneficial concept of African sovereignty, that promotion of Free Trade Area objectives is more beneficial to Africa than sovereignty to about 55 so-called independent African countries that are treated as pawns during international trade negotiation.

With cooperation from member countries, the AfCFTA will progress to higher levels of economic integration such as customs union, common market, and eventually an economic union. This is an area where African diplomatic, economic, and political resources should be directed in a spirit of interdependence. The ultimate goal is the establishment of confederations in sub-Sahara sub-regions – West Africa, Central Africa, Eastern Africa, and Southern Africa. At the end of the process, all colonially imposed boundaries will be abolished after ascertaining the views of ethnic nationalities through plebiscites.

World Trade Organization (WTO)

If the International Trade Organizations (ITO) had been ratified by member countries, it would have been considered a full-bodied part of the Bretton Woods Institutions. Its late arrival provides an opportunity to operate in a way that protects it from the temptation of adopting in full the doctrine of trade liberalization. It is, accordingly, the duty of the WTO to understand that trade liberalization cannot produce its benefits in countries where production in general and production of importables are dominated by oligarchs

Trade liberalization is constrained so long as trade among African countries is constrained by import tariffs. Africans are limited to exporting raw materials to the more developed countries, and as long as Africans do not develop supply linkages with other African countries in such areas as refining of mineral products, developing intermediate inputs domestically among contiguous countries, and allowing infant industry tariffs for short periods are necessary for new industries to take root.

Realizing that trade in services is destined to become the most significant segment of foreign trade, the WTO would do well to intensify its capacity building assistance to Africa in such digital technology activities as blockchain technology, artificial intelligence (AI), machine learning, robotics, and expertise in digital financial transactions. Tertiary education educational institutes and tech-savvy youths are ready conduits for such transfers. To check the alarming flow of adulterated and fake exports to Africa, the WTO should readily promote “escape clauses” to block the export of such products to Africa.

BRICS

A grouping of countries made up of Brazil, Russia, India, China and South Africa was formed as a reaction to the dominance of the West over the global financial system and control of the International Financial Institutions. It is surmised in some quarters that Nigeria was not invited to be a founding member because of glaring inadequacies in economic management. It is noteworthy that though two other African countries were admitted to the emerging grouping, Nigeria continues to be sidelined. Though Nigeria was rumored to have applied to join, it is expected that in the near future, the question of the country joining BRICS will take center stage. Below are some guidelines for Nigeria’s decision:

– The only common factor of BRICS is opposition to the West’s dominance of the International Financial Institutions. The long-standing rift between India and China, the support of some countries for territorial incursions into the Sahel and sub-Saharan Africa, and the readiness of some to invade other countries richly endowed with natural resources, will ring a bell for caution in African countries.

– The new grouping may lack commitment to a common ideological preference to survive. Even early in its life, countries like Argentina and Saudi Arabia are likely to opt out. Also, Brazil, which is the dominant economy in South America, is unlikely to remain a member if it finds another grouping in the South which is likely to become the new Centre (Africa).

– The domination of international economic and financial systems will emerge in BRICS. While the US established some stability by financing continuous balance-of-payments deficits via capital inflows from the other countries, leading BRICS country, China, which is in long-term surplus balance of payments, can finance by accumulating reserves and/or spending them to acquire physical assets and infrastructure in member countries. This way, dependence and control of policy formulation are replaced by the takeover of infrastructural and productive assets by China.

– A more exciting alternative is sub-Saharan economic and political integration along paths canvassed earlier in this paper. Success in this enterprise is the emergence of at most four African Confederations with strong economies for them to be taken seriously and respected in the comity of nations. This grouping will stand for justice, fair play, rapid economic development, and international peace and security. This is the grouping to which Nigeria should belong.

In conclusion, although the International Financial Institutions have some shortcomings, Nigeria should not leave them to avoid unnecessary destabilization. Rather, alternative institutions should be identified to help the country solve its long-standing problems. Furthermore, these institutions should encourage increased production of goods and services as well as rapid promotion of trade among Nigeria and other African countries. Finally, the envisaged realization of African political union makes any plan to join BRICS or any such organization unnecessary.

Prof. Eghosa Osagie is former Director of Research, NIPSS, and ex-Vice-Chancellor, Benson Idahosa University
Email: Eghosaosagie@yahoo.com