Nigeria’s incoming government will face shocks on two fronts as it picks up the reins in May.
A Buhari-led APC government will face the daunting challenge of dealing with revenue shocks on both the public sector and the international trade sector of the economy (with its impact on the country’s balance of payments).
The government on its own, excluding other parts of the economy, will be expected to cope with its own internal shock arising from a cliff-like drop in revenue, as its main revenue earner – oil, continues to face an uncertain future.
On a separate vein, another sector, which will experience a big shock, is the international sector (international trading), as oil receipts fall. Virtually all of Nigeria’s exports are crude oil based, while its imports are widely varied.
According to analysts, shocks from these 2 sectors would have been expected to feed into the larger economy, especially the banking system. But recent stress-testing of the banks by the apex regulator showed the banks not to be in immediate danger.
Although the challenge of weaning Africa’s largest economy from oil and setting it on a sustainable growth track will be daunting, the new economic managers will take solace in the fact that both the government (the ‘public sector’ in economic parlance) and the oil sector of the economy are relatively small parts of the overall economy.
According to Paul Collier, Professor of economics and public policy at the University of Oxford, Nigeria’s government is one of the smallest in the world, in terms of revenue and spending. Nigeria’s oil economy has also shrunk to about 14 percent of the economy.
“There will be huge shocks to small sectors of the economy”, says Professor Collier. “But Nigeria is a big economy that is not directly affected [by the drop in oil prices], which is good\\’.
Nigeria’s current episode of macro-challenges is also not as turbulent as in 1986 when the country took a huge double-shock to its economy.
Then in 1986, Nigeria faced a big global oil-shock, as well as a foreign debt shock. The effect was crippling, as foreign lenders not only refused to continue lending to Nigeria, but also began to recall past loans made to the country. The debt shock came after previous government administrations went on an imprudent borrowing spree.
The effect of the debt shock on the economy was as intense as the effect of the oil shock.
“Nigeria, which went through this catastrophic shock saw it spending power per capita fall by 50 percent”, says Professor Collier.
“But that is not the case now. Nigeria has not built up it assets, but at the same time, debt has also not been piled up”, he says.
The election victory of the pro-change APC Party has raised hopes that a strong government led by Muhammadu Buhari, can plug corruption-induced leakages and set the economy on a more sustainable path to development.
Such economic sustainability should see Nigeria move from a rentier state that crimps private sector competitiveness, to a more productive economic clime that is hospitable for businesses.
The International Monetary Fund (IMF) cut its forecast for the Nigerian economy to 5 per cent in 2015. The economy grew by 6.1 per cent in the 3rd quarter of 2014.
According to the IMF, the magnitude of the adverse oil price shock will sharply reduce fiscal revenues and limit fiscal spending in the country.
