The fortunes of Africa’s most populous nation and leading oil producer have long ebbed and flowed with the price of oil, on which Nigeria depends for more than 90 per cent of hard currency earnings. But economists list several factors that make the current downturn markedly more worrying.
Observers are increasingly concerned about the potential for an economic meltdown similar to what currently obtains in Venezuela, the south american country blighted by fears of a debt default, growing street protests and deterioration of its oil sector.
ABOVE: President Buhari in the middle with Parliamentarians at State house dinner, 29 May 2016
The structural change in the global oil industry since shale reserves were opened up by the development of new fracking techniques in the US makes it unlikely that major oil producers like Nigeria will see a significant price recovery any time soon, says Financial Times.
In 2008, the last time crude prices crashed, Nigeria had savings to fall back on. This time it doesn’t: the administration of former president Goodluck Jonathan squandered the proceeds of the boom years in a bonanza of profligacy and corruption before he was voted out of office.
Chart: Nigeria data
Nigerian President Muhammadu Buhari’s Sunday speech has left foreign-exchange traders with little clue as to the fate of the naira.
Far from clarifying the government’s approach on the currency, following central bank governor Godwin Emefiele’s pledge last week to adopt a more flexible exchange-rate policy, Buhari’s words have left the market as confused as ever. While some, including Standard Chartered, said a looming recession had forced Buhari to change tack, others said the president — who once likened letting the currency weaken to “murder” — had signalled continued resistance to reducing the naira’s value.
Critics described Buhari’s current dilemma as the “self-inflicted” wounds — the currency policies and associated import controls set up to conserve hard currency by prioritising strategic imports when Mr Buhari took power 12 months ago. These have starved existing businesses of inputs, leading to a collapse in supplies of everything from medicines to spare parts, while incidents of price gouging have risen. The policies are also blamed for encouraging capital flight while forestalling fresh investment. Inflows dropped by nearly 75 per cent to $711m in the first four months of 2016.
“No one, even investors like us with a long-term view, is going to put money into Nigeria in the expectation of losing a third of the value of that investment,” says a senior partner in a UK-based private equity fund. He and other investors say that despite the president’s visceral opposition to devaluation, it appears inevitable.
The impact has been chilling. Nigeria’s economy, which grew annually at an average rate of 7 per cent in the decade to 2014, contracted by 0.36 per cent in the first quarter. According to most forecasts it is heading into recession.
The import controls and restrictions on foreign exchange have hit the manufacturing sector hard, eroding the credibility of the Buhari administration’s ambition to diversify the economy.
“Growing non-oil income is a key economic strategy of this government,” says Keith Richards, a veteran of Nigeria’s consumer goods industry who used to run a subsidiary in the country of Guinness, the brewer. “Blocking manufacturers manufacturing will have the opposite effect.”
More than half a million workers lost their jobs in the first four months of this year, according to official statistics. The livelihoods of tens of millions more people employed in the informal sector have been hit by inflation of nearly 14 per cent, spurred by escalating shortages of basic goods and the rapid devaluation of the naira on the parallel market, where most traders are now compelled to source their foreign exchange.
And while a new wave of militancy in the oil-producing Niger Delta has triggered a rally in the global price — it hit $50 per barrel last week for the first time in seven months — the violence is making matters worse at home, with any gains offset by production losses. In recent weeks, pipeline attacks have cut production to 1.45m barrels a day — far short of the 2.2m assumed in this year’s expansionary budget.
Oil revenues typically account for more than two-thirds of government income. Collapsing prices and falling production mean the government is now operating on about one-quarter of the $5bn in monthly revenues it had before the price fall began in mid-2014. Many state governments are now unable to pay salaries while power generation levels are at their lowest in years.
“Investors fear Nigeria is on a stagflationary road to Venezuelan-style multiple exchange rates and eventual meltdown,” says Charlie Robertson, chief economist at Renaissance Capital. “[But] we think reformists will help Nigeria swerve in time and avoid that car crash,” he said, after a government decision earlier this month to raise the price of fuel by 67 per cent in response to months of crippling shortages.
The central bank last week admitted that the exchange rate cap — defended by Mr Emefiele as a way of protecting strategic imports from the low oil price and shielding the poor from inflation — is failing and should be abandoned. The comments fuelled speculation of a policy switch. Mr Buhari, on Sunday, appeared defensive about the approach taken so far but acknowledged that he had been forced to listen to advice to change course. He said he supported the central bank’s new strategy “to ensure alignment between monetary policy and fiscal strategy”.
The president also hinted in a briefing with local media that he was open to considering his options. “The … economists come and talk things to me, and when I raise issues they talk over my head instead of inside my head,” he was quoted as saying in Nigeria’s ThisDay newspaper. “On the value of the naira, I’m still agonising over it … I need to be educated on this … I am under pressure and we’ll see how we can accommodate the economists.”
“It’s a monumental waste of money to be trying to stimulate the economy on the one hand and slowing it down on the other,” says Oyin Anubi, an Africa economist at Bank of America in London.
The UK based influential FT says the damage is not just economic. The country’s travails have overshadowed progress the president has made on the problems he most wanted to tackle: the Islamist insurgency of Boko Haram and pervasive corruption in government.
Most damaging though is the political impact that is beginning to cost Mr Buhari allies. His decision-making style appears, even to senior members of the administration, overly secretive. Some criticise him for failing to consult with his cabinet and view his refusal to listen to alternative points of view.
Obiageli Ezekwesili, who served as a minister in two previous administrations and once led the World Bank’s Africa division, recently criticised Mr Buhari’s economic policies as “opaque” and “archaic”, saying that something that “did not work in 1984 cannot possibly be a solution in a global economy that’s much more integrated”.
Advisers to the president say his original priority was to lift people out of poverty. It was not to please the wealthy business community and skittish foreign portfolio investors. But those close to the administration claim there are signs of a shift in ideology within government: from the unbridled crony capitalism of the past to a more state-driven vision for promoting industry and jobs.
The government’s ability to control the capital account — the deficit doubled to 3.7 per cent of GDP in 2015 — and restrict imports in a country rife with smuggling is questionable.
A Venezuela-style meltdown — once dismissed out of hand — now no longer seems such an outlandish prospect. Some observers argue that this doomsday scenario is forcing officials, including the president, to accept the need for a course correction.
‘The bunker mentality should changed to a more open-to-discussion one’