The year 2015 is likely to be a year of contrasts in which a difficult and uncertain start will most probably give way to a promising end, as renewed post-election economic reform efforts to address fiscal, structural, and financial challenges highlighted by low oil price and weak capital inflows on the eve of election will open up new growth and investment opportunities, thereby brightening the outlook. Thus, while the twin external shocks on the eve of general elections had imposed short-term challenges and created significant uncertainties about the economic outlook in 2015, they have also beneficially elevated the place of economic and fiscal reforms in the pre-election conversation. A strong consensus for reforms has fortuitously been built among the populace that it makes sense to expect a high pace of reforms after the election. This will brighten the outlook for the second half of 2015 and beyond.
Specifically, the three big gains within Nigeria’s reach are: (a.) Nigeria’s fiscal outlook can easily be stabilized by revenue reforms that provide the fiscal space required for growth and stability; (b.) Breaking government monopoly in key potentially large economic sectors and allowing entry of reputable private firms will release fresh growth and investment impetus; (c.) Foreign longer-term financial inflows that will be attracted to the liberalized sectors will reduce Nigeria’s dependence on volatile short-term capital inflows. Nigeria is clearly coming up with a better contemplation of her economic and financial future, and it should be easier to engage others to come and invest in that future.
Economic contrasts of 2014
2014 turned out to be a year of interesting contrasts for the Nigerian economy: a remarkably favourable first half-year in which oil price reached a peak of US$115 per barrel and equity market capitalization touched an historic peak of N14 trillion by midyear was followed by a very challenging second half-year in which the economy was buffeted by the twin shocks of global commodity price slump and global liquidity volatility that dwindled both exports income and capital inflows for the county. By year-end, oil price had dipped below US$50 per barrel, just as market capitalization shrank below N10 trillion, external reserves dropped to US$34 billion, and the naira exchange rate had lost a tenth of its value.
Uncertainties about oil price
2015 has thus started on a challenging note for the Nigerian economy. Uncertainties about the oil price loom very large on the global scene, translating to a daunting fiscal challenge for the Nigerian government. In its January 2015 Commodity Markets Outlook, the World Bank forecasts oil price of US$53 for 2015 and US$57 for 2016. Down from average of US$95 in 2014, oil exporters are out for a difficult ride in 2015, and the Nigerian government is already bracing up for the challenge by proposing a combination of spending cuts and raising additional revenue from non-oil activities, especially by imposing higher consumption taxes on luxury items.
Uncertainties about elections
Domestically, general election scheduled for February, and now rescheduled for March-April 2015, adds some uncertainty to the economic outlook, with local and external observers hoping for a peaceful election that will yield an outcome that will be acceptable to all. A peaceful and conclusive election should see a resumption of foreign capital flows to Nigeria as uncertainties about the election must have combined with the fall in oil price to explain the wave of capital outflows from Nigeria towards the end of 2014. Most of the fiscal adjustments are likely to occur after the election. With the polls now shifted towards the May 29th date for inaugurating newly elected government, this could delay till June.
The silver linings
Economic and political uncertainties aside, Nigeria’s outlook is brightened by the large and varied opportunities in different sectors of the economy. Over the past decade, Nigeria had unleashed huge growth potentials through the liberalization of its telecommunications sector, which saw the sector grow from less than half a million telephone lines in 2001 to over 130 million in 2014. It is expected that similar liberalization of the generation and distribution segments of the electric power sector towards the end of 2013 will trigger a new wave of growth in the near future, especially if the transmission segment is also liberalized after elections. Complementary liberalization of gas supply, pipelines and refineries after the elections will open up additional investment opportunities that would underpin future growth.
Thus, while the twin external shocks on the eve of general elections had imposed short-term challenges and created significant uncertainties about the economic outlook in 2015, they have also beneficially elevated the place of economic and fiscal reforms in the pre-election conversation. A strong consensus for reforms has fortuitously been built among the populace that it makes sense to expect a high pace of reforms after the election. This will brighten the outlook for the second half of 2015 and beyond.
It is therefore reasonable to expect the following key changes after the elections:
Revenue reforms
Higher government revenue from increased fiscal transparency and higher non-oil taxes consumption of luxury goods and items of ostentation. Nigeria’s oil GDP of about N10 trillion was just about 13 percent of the N80 trillion GDP that Nigeria was believed to have generated in 2013, the remaining N70 trillion or 87 percent being non-oil GDP. Searching questions have rightly been raised about why oil that is just 13 percent of GDP accounts for 70 percent of government revenue, and non-oil activities that are 87 percent of GDP. The low oil price regime will push Nigeria to raise more non-oil revenue which is currently about 3.7 percent of GDP and 5 percent of non-oil GDP compared to an average of about 25 percent of GDP in the other African countries with medium-to-large economies such as South Africa, Egypt, Algeria, Angola, and Morocco. Nigeria thus has the potential to raise additional revenue required to run the government from the booming non-oil sectors. Nigeria’s Value Added Tax (VAT) rate of 5 percent across the board is low in comparison with South Africa, Egypt, Algeria, Angola and Morocco, which have standard VAT rates of 10 percent but administer much higher rates of 25 or 30 percent on luxury goods. It is better for Nigeria to fix the weaknesses in her revenue generation drive than let fiscal contraction hurt economic growth.
Structural reforms
New private refineries, privatization of power transmission, liberalization of gas supply, pipelines, and rail transportation, with concomitant increase in manufacturing and industrial activities. Nigerian government is most likely to do to its rail transport sector what it has beneficially done to its telecommunications sector, and has recently done to its power sector; namely, end government monopoly, carve out the country into zones and allow private firms to bid for the rights to build and/or operate rail lines under the oversight of a new regulatory body. Not just rail, but pipelines, gas, and refineries. If these are successfully done, manufacturing should be expected to become spontaneously competitive and manufacturing exports should grow. Not just manufacturing will benefit. All other sectors will benefit from the competitiveness and scale that functioning cargo rail transport system will afford. Nigeria’s economic activity and growth had hitherto been concentrated in sectors that are being stimulated directly by favourable global commodity prices such as crops, trading, oil and gas, telecoms and communications, and real estate. These are Nigeria’s five largest sectors. Manufacturing is sixth, and Food, Beverage, and Tobacco (dominated by Beverage) constitutes 70 percent of it. Food, Beverage and Tobacco contributes nearly 5 percent of GDP but the other 12 manufacturing sub-sectors remain small, with none individually accounting for up to 0.5 percent of GDP! The manufacturing sub-sectors have not been capable of meeting local demand or compete on the global export market, having been weakened by the absence of domestic cargo rail transportation in Nigeria in particular, and disruptions to energy supply in general. The once-vibrant Nigerian manufacturing collapsed in the 80s after the collapse of the once-functioning rail transport system in the country.
Financial reforms
Higher longer-term capital inflows will be attracted to the newly liberated sectors, and government could attract additional medium-to-long-term capital inflows by issuing of medium-to-long-term foreign currency bonds like Diaspora bonds or infrastructure bonds. On the global scene, it seems likely that the quantitative easing planned by the European Central Bank and the Bank of Japan should more than eventually compensate for the end of United States’ liquidity injections and ensure a higher level of global liquidity in 2015. Nigeria also has fresh opportunity to reduce the dominance of short-term capital inflows to the private sector, often referred to as ‘hot money’, as sector liberalization measures will boost medium and long-term equity and other inflows into new refineries, power transmission, and rail development. Government can also attract longer-term inflows by offering strong enough medium and long-term value propositions in form of foreign-currency savings bonds, targeted at Nigerians in Diaspora, or foreign-currency investment-bonds, such as infrastructure bonds, open to anyone looking for attractive long-term investment opportunities.
2015 is thus likely to be another year of contrasts in which a difficult and uncertain start will most probably give way to a promising end. Renewed post-election economic reform efforts to address fiscal, structural, and financial challenges highlighted by low oil price and weak capital inflows on the eve of election will open up new growth and investment opportunities, thereby brightening the outlook. Nigeria is clearly coming up with a better contemplation of her economic and financial future and it should be easier to engage others to come and invest in that future.
Ayo Teriba
