Cheta Nwanze, Head of Research, SBM Intelligence
Follow Cheta Nwanze
Subjects of Interest
- Fiscal Policy
- Geopolitical Analysis
Buharinomics ushers a bleak Nigeria outlook 06 Feb 2017
The Muhammadu Buhari administration came into power on May 29, 2015, with renewed hope among many Nigerians that his All Progressives Congress’s electoral agenda of tackling corruption and providing targeted social welfare for the poorest Nigerians would be substantially implemented. It was also expected he would leverage his party’s legislative majority to implement his programmes. But contrary to expectations, the reality is that monetary and fiscal policies have since become more reactive than proactive.
Dwindling oil prices, coupled with Nigeria’s heavy reliance on imported goods, have created wide disparities between the exchange rates of the naira and major global currencies. This has precipitated inflationary pressures, whereby products and services sourced from outside the country and those produced locally have become considerably more expensive.
In a bid to reduce the downward spiral of the naira’s value, the Central Bank of Nigeria (CBN) churned out many policies, one of which entailed the exclusion of 41 items from accessing foreign exchange in the official FX window, in a bid to protect the country’s foreign reserves. This policy has had the unintended consequence of forcing importers to source forex from the black market. The situation has created arbitrage opportunities for racketeers; the currency black marketers are earning significant mark-ups – and sometimes they artificially increase the values of these foreign currencies.
Since June 2016, when CBN Governor, Godwin Emefiele, appeared to give up trying to prop up the local currency, the naira has plunged more than 40 percent against the US dollar in the official market. S&P Global Ratings downgraded Nigeria five levels into junk territory in September of last year.
On the fiscal side, Buhari took almost six months to form a cabinet and the administration's first budget was mired in a legislative morass. It was eventually signed in May, five months into the 2016 fiscal year. It is still unclear what urgency the National Assembly would apply with regard to passing the budget for the 2017 fiscal year already underway, although it passed second reading on January 27, and has been sent to the various committees for their input.
As a result of muted political will and the unremitting economic headwinds, Nigeria is experiencing its first recession in three decades, following average 6 percent GDP growth rate annually in the decade before 2015. Inflation soared to an 11-year high of 18.55 percent in December as businesses struggled to pay foreign suppliers for the machinery and raw materials that are not available locally.
There has also been a lack of synchronisation in fiscal and monetary policy between the government and the CBN. For instance, there has been a situation where Emefiele simply ignores calls by Finance Minister, Kemi Adeosun. One such incident happened in November, when Ms. Adeosun called on the CBN’s Monetary Policy Committee to cut borrowing costs and loosen monetary policy. The CBN instead elected to keep the benchmark interest rate unchanged at 14 percent, the position it has been at since July 2016. On his part, Emefiele has called out the government for its inadequate efforts to boost growth, saying monetary policy alone cannot get the economy out of stagflation and that “complementary fiscal policies” are needed to resuscitate output and consumption. So afar, a 15-month currency peg subsequently replaced by a managed float, rising energy costs and consumer prices, frequent fuel and power shortages, and underwhelming oil prices and production levels continue to weigh on output.
Despite its theoretical independence, the CBN faces interferences in carrying out its core mandates of monetary, price and financial system stability. For instance, President Buhari’s well-known opposition to any devaluation of the naira cannot be ignored as a problem. Other observers, including former central bank governor, Sanusi Lamido Sanusi, now Emir of Kano, believe that lowering the monetary policy rate “will further fuel inflation and you will reduce the yield on fixed income at a time you want to attract foreign exchange.” Sanusi said in a speech on September 21, 2016 that, “the immediate oxygen that this economy needs is foreign exchange coming into the economy and foreign investors are responsible for that.”
However, Sanusi’s polemic begs the question about how that oxygen can be pumped into the economy. The government plans to spend its way out of the recession by funding big ticket infrastructure projects and expanding social welfare. What has become a yearly, huge deficit financing through domestic and foreign loans is supposed to support the fiscal expansion. This plan will give rise to another problem. Funding a yawning budget deficit with an aggressive debt-issuing policy could push Nigeria’s debt service-to-revenue ratio (or debt-servicing costs) above the projected 35 percent.
The bleak outlook is not helped by the fact that Nigeria’s 36 states (with the exception of Lagos and a handful of other states, often the largest employers in their domains) are so cash-strapped that many teachers, pensioners and civil servants are owed several months in salary arrears. In one of the more controversial examples, the Imo State Governor, Rochas Okorocha, who governs about 4 million people in the country's south-east, announced a three-day working week, telling state employees to farm on the other two. Capital projects are stalled in the states because contractors are not being paid.
Furthermore, policy flip flops, uncertainty about implementation of the budget, and overbearing regulation have continued to spook foreign investors and have squeezed domestic economic participants. Some of the harsh regulatory actions include the imposition of huge fines on major multinationals, threats of legal showdown with international oil companies over back taxes; and conducting night-time raids on senior judges. Such actions – controversial as they are – will unlikely provide the certainty and stability that the Nigerian economy needs at a critical time.
Adding to the climate of uncertainty is also the lack of political will to deal with wasteful policies like the petrol subsidy. There is also an anti-corruption campaign, which many see as a witch-hunt of political adversaries. Others, even among the ruling party, are questioning the integrity of the anti-corruption given new revelations of potential graft within Buhari’s cabinet.
Of course, other concerns are non-policy related but warrant attention. These include perennial security concerns in every corner of the country. The military, asides the Boko Haram counter-insurgency in the country’s north-east, has active deployments in every state of the country bar Kebbi. There has been renewed militancy in the oil producing Niger Delta region. Clashes between settler ethnic groups and itinerant herdsmen over property access and rights have increased dramatically. The seven-year Boko Haram insurgency has continued to rear its ugly head, in spite of a determined military campaign.
There are a range of opinions on where the Buhari government and the economy need to go from here. The key is not for Nigeria to spend its way out of recession, but to “give incentives for economic activity and business to thrive,” says African Development Bank President and former Nigerian agriculture minister, Akinwumi Adesina. Capital Economics economist, John Ashbourne, believes the naira will have to be weakened further this year, "but the fall is unlikely to be as strong as the one seen in 2016.”
There also has to be a commitment to transparency and openness in governance as well as getting to grips with systemic problems within Nigeria's convoluted federal system. But for now, it would seem the rosy declarations by Fidelity Investments, which said in 2011 that Nigeria, Mexico, Indonesia and Turkey were the emerging markets of the future, is far-fetched on the part of Nigeria. Whereas Fidelity Investments’ position was reinforced by Jim O’Neill, the former Goldman Sachs economist, and McKinsey forecasted that Nigeria’s economy had the potential to grow by 7 percent annually through 2030, ultimately becoming larger than the Netherlands, all that is a distant fairy tale in light of current economic realities.