Does it matter who wins February’s presidential election? Nigeria’s economy is already damagedThe front runners in next year’s presidential election are stepping up their campaigns, but more and more Nigerians are asking if it would matter who wins the crucial election in 2023, given that the country’s economy has already been damaged by seven years of mismanagement under the outgoing government of President Muhammadu Buhari.
Buhari came to power in a blaze of glory in 2015, his global goodwill rose high to the heavens. However, seven years after, the nation’s economy is gasping for breath and in the unusually long-lame-duck presidency that Nigeria faces, the odds are that the flagging economy will relapse even further.
Buhari had replaced Goodluck Jonathan who was infamously called clueless by Buhari’s propaganda machine, and many western governments had vowed not to do business with the then outgoing administration over mounting cases of corruption. However, today, Buhari’s administration is arguably the one better suited to be called clueless.
The president, himself, betrayed his own ignorance of simple economic matters when he failed to identify the magnitude of the burden that a reckless petrol subsidy programme placed on the economy and in the end, he chooses to ignore what is perhaps today the biggest hole in the country’s finances
Senior officials in Buhari’s government say privately they are aware of the hopeless state of the economy, especially in the midst of a devastating cost of living crisis that is not abating.
Why is Nigeria’s economy in such a bad state? Buhari came to power with little or no preparation to stem the collapse of the continent’s biggest economy, which was already challenged by the fall in oil prices, and instead he superintended over its worsening.
For six months, the president could not appoint his ministers and when he eventually did, Nigerians bemoaned a cabinet that was at best second class and even at that the president failed to give clear mandate to his cabinet to urgently turn around the economy. The president, himself, betrayed his own ignorance of simple economic matters when he failed to identify the magnitude of the burden that a reckless petrol subsidy programme placed on the economy and in the end, he chooses to ignore what is perhaps today the biggest hole in the country’s finances.
Buhari embarked on a borrowing binge after the petrol subsidy spending emptied the treasury and Nigeria’s debt level rose, an already weakened fiscal position became even more helpless. Nigeria’s debt servicing relating only to interest payments now consume virtually all of the government’s revenues and the country’s bonds are facing the threat of being declared junk.
Last week, the president called the job of managing Nigeria tough, saying, “I am eager to go.” But he has made the job tougher than it should have been and for the people who voted him into power, he is leaving them worse off.
According to Bloomberg, “Buhari’s policies such as import curbs have spurred inflation as they limit supplies of some goods, yet manufacturing is still inadequate. The country produces way less power than it needs and imports petrol despite being Africa’s biggest oil producer. Debt repayments eat up almost all of government revenue and the naira has plummeted to repeated lows during Buhari’s time in office.”
It concluded, “Nigeria is home to more extremely poor people than any other country, according to a United Nations’ measure, and the unemployment rate has surged to among the world’s highest. The outgoing president may be satisfied with his performance but it’s unlikely that most Nigerians will agree with him.”
Nigeria is poised to lose its frontier market status because of persistent foreign-exchange shortages in Africa’s largest economy with MSCI Inc. considering downgrading the MSCI Nigeria indexes to standalone markets status from frontier market because of “a continual and severe deterioration in the ability to repatriate funds from Nigeria.”
The loss of frontier market status could cast doubts on perhaps the only bright spot in Nigeria’s flagging economy and stir more despair for investors with Africa’s biggest crude producer rationing dollars despite a surge in oil prices.
Nigerian bonds have sold off sharply this year, with the spread on the Bloomberg EM Sovereign Nigeria index rising by 327bps year-to-date (ytd) through 17 June versus a 105bps rise in the aggregate index. This has happened largely because of a chronic mismanagement of Nigeria’s exchange rate regime that has limited the improvement of Nigeria’s current account and weighed severely on its financial account, with gross reserves actually declining to below $39 billion from $40.5 billion at the beginning of the year,
Nigeria’s sell-off has been surpassed only by Tunisia, El Salvador, Pakistan, Ethiopia, Ghana, Honduras and Kenya, among index constituents that are not in default or directly impacted by the Ukraine war, and the Nigeria 7 ⅞ 02/16/32s now yields a whopping 13.13 percent (1,004bps z-spread) and have a cash price of just $71.7 at the time of writing, implying a high degree of default risk.
This has occurred despite a sharp rise in oil prices, which comprises c5 percent of GDP, c45 percent of revenue and c85 percent of exports. However, chronic mismanagement of Nigeria’s exchange rate regime has limited the improvement of Nigeria’s current account and weighed severely on its financial account, with gross reserves actually declining to below $39 billion from $40.5 billion at the beginning of the year, despite the oil price environment and the naira trading at a c45 percent premium on the parallel market.
Further, refusal to remove Nigeria’s costly petrol subsidy means that every $10 increase in oil prices increases the budgetary cost of subsidies by 0.5 percent of GDP, according to our estimates. As such, a rise in oil prices is a mixed blessing, helping to improve Nigeria’s external position but weighing on its budget.
Further, a sharp decline in production (from 1.88mbpd in 2019 to 1.49mbpd over the first five months of the year and 1.28mbpd in May, well below the 1.8mbpd OPEC quota) has limited the overall benefit from higher prices, so its underperformance relative to other oil producers is justified
Since Buhari took power in 2015, Nigeria has suffered two debilitating economic contractions that continue to ripple through with disastrous consequences for the people. Poverty is rife compounded by an ever-rising inflation and Nigeria is approaching a fiscal cliff with a severe debt servicing that consumes virtually all government revenues.
With no end in sight to the double whammy of soaring petrol subsidy and plunging crude oil production, the World Bank warned weeks ago that a fiscal time bomb could explode in Nigeria. “Despite rising oil and gas revenues for the Federation, deductions for the petrol subsidy are causing stagnation in net oil and gas revenues transferred to the Federation Account. Many states are expected to see a drop in federation revenue transfers in 2022, despite growing expenditure needs,” the bank said.
Poverty is surging and the number of out-of-school children in Nigeria is now the highest in the world, with the country accounting for one in every five of the world’s out of school children, according to UNICEF data.
In the two years from 2018, the country dropped three places from 158 to 161 in the Global Human Development Index, HDI, published by the United Nations Development Programme, UNDP, and is a measure for assessing long-term progress in three basic dimensions of human development: a long and healthy life, access to knowledge and a decent standard of living.
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Nigeria is in the throes of an inflation crisis, which the Economist Intelligence Unit, EIU, recently said is being worsened by the country’s central bank.
According to the EIU, “the CBN has continued to print money for the Federal Government, whose overdraft facility with the CBN reached N19 trillion ($46bn) in April 2022, up from N17.4trillion at end-2021. The CBN is also operating a range of direct lending schemes for the agricultural, manufacturing and energy sectors, currently totalling about N3.6 trillion ($9bn).” All these make nonsense of the apex bank’s monetary tightening initiatives.
A new report by SB Morgen, titled, ‘Nigeria’s History of Inflation: A Tale of the Destruction of Value’, identified the 2019 border closure by Buhari, high import tariffs, petrol subsidy, and the current exchange rate regime of the Central Bank of Nigeria as major factors stifling supply, thus fuelling a surge in prices of various commodities, which leave the people poorer.
“All of these unorthodox policies have ensured that inflation remains firmly in the double-digit realm under the Buhari administration, while purchasing power has more than halved, wiping out large sections of the middle class,” the report said.
“These policies have also seen to it that most of the institutional safeguards put in place after the return to democracy to foster responsible fiscal and monetary policy as well as put inflation in check have been disregarded and rendered redundant,” the report added. The country’s fiscal deficit, which stood at N800 billion in the whole of 2015 climbed to N7.3 trillion in 2021.
Nigeria’s electricity grid fails more often than it delivers power and cannot in truth be regarded as a grid anymore. Homes go without power for days in Nigeria, including in the capital of Abuja, and the rapid jump in diesel price from N145/litre in 2015 to today’s N800/litre ensures that even some of the middle class who have power generators can no longer keep their generators running.
