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Nigeria’s election has been won and the parties are in full swing. The markets are also jiving to an optimistic beat.
But after the debris from the celebrations has been swept up, president-in-waiting Muhammadu Buhari will inherit the far more daunting tasks of tackling slowing economic growth, controlling inflation, reversing falling foreign reserves, and reverting the country’s fiscal and current account deficits back into a surplus. And all as oil prices remain subdued.
1. It should not be all about the oil price, but for the government it is
Economic growth in the past decade has not been all about oil. But the government’s inability to tax the ballooning services and agriculture industries has left it reliant on revenues from oil.
Not only do oil and gas account for more than 90 per cent of Nigeria’s export revenues, which have roughly halved in the past six to eight months, the government relies on them for 70 per cent of fiscal revenues. So the 45 per cent fall in Brent crude since last June has wreaked havoc on its financial health. While the outgoing government has said tax revenues added $600m to non-oil revenues last year and should double this year, it said it still needs to reduce its reliance on oil to closer to 40 per cent.
Oil woes pushed the fiscal account from a surplus to a deficit of 2 per cent of economic output last year, according to Ecobank. That comes after years of running a surplus of between 2-6 per cent. The pan-African bank’s chief economist Angus Downie expects the deficit to worsen this year to between 2.8-3 per cent of GDP, while Standard Bank’s Razia Khan expects the deficit to continue into 2016, reaching 3 per cent of GDP.
Renaissance Capital says that the Nigeria Gen Buhari is inheriting points to the potential introduction of “austere fiscal policy and a clampdown on graft”.
2. Slippery slope with foreign reserves
Being an oil-rich country, Nigeria should be brimming with foreign reserves. However, its reserves are feeling the pain of both its reliance on the commodity for forex inflows, and its attempts to arrest the slide in the naira.
The central bank’s reserves fell below $30bn in March, equating to roughly five months of import cover. Three months’ cover or total cover of short-term debt is seen as generally acceptable levels, the IMF says. While Nigeria is still comfortable in that regard, it really should be able to maintain about a year’s worth, Ecobank’s Mr Downie says.
3. The oil price decline is not all bad, but it is limited
Ecobank points out that in spite of its wealth of crude oil Nigeria only refines about 40 per cent of its domestic requirements. The drop in prices can to an extent then reduce the cost of refined products it imports.
And the country has capacity to increase the supply of oil from its current 1.9m barrels a day to as much as 3.5m-4m b/d if it wanted to go down that route to try to increase revenues, says Mr Downie. However, as is the case with other oil producers, increasing supply not only takes time, it has the potential to further depress prices as more supply is brought on.
4. But the falling naira is stoking inflation
Unsurprisingly, the impact of falling oil demand and the uncertainty ahead of the election have pummelled the naira. The dollar has gained 17.2 per cent against the Nigerian currency in the past year, making it the third-worst performer in Africa.
This is pushing up the price of imports, stoking inflation and hurting businesses across the board. Standard Chartered expects annual average consumer prices to rise 9.4 per cent this year and 9.7 per cent in 2016. Capital Economics also sees a rising trend.
Standard Bank expects the central bank’s key policy rate of 13 per cent this year to drop to 11.5 per cent next year. Such high interest rates could curtail companies’ ability to borrow to invest in their businesses, underscoring the knock-on effect that the fall in crude has on the broader economy.
5. Changes ahead
Nigeria last year inadvertently stormed past South Africa to become Africa’s largest economy after its GDP was rebased to take into account the ballooning service sector, including its telecoms and Nollywood film industries. It turns out that the oil and gas sector only accounts for about 16 per cent of GDP.
As Capital Economics points out, while growth is slowing it is the non-oil sector that has been driving growth.
While this is good news for a more diversified economy, consumers could have a tough time ahead in the short term.
Renaissance Capital says that any austerity policies introduced by the Buhari administration could include an increase on import tariffs and VAT, which would weigh on consumers. However, its food and healthcare analyst Robyn Collins is optimistic that a longer-term clampdown on graft “could support meaningful growth in the Nigerian middle class for the first time”.
6. Boko Haram
The terrorist group’s impact on the Nigerian economy is somewhat of a wild card. Capital Economics’ John Ashbourne points out that “the reason [it] was never really an economic problem is that the entire northeast makes up just 6.6 per cent of Nigeria’s GDP. And Boko Haram was only ever, at its height, active in a fraction of the region”.
It is unclear the strategy that former military ruler Gen Buhari will take to deal with Boko Haram. Renaissance Capital is hopeful that the new president will be more effective in handling the insurgency, which should help consumer companies like Unilever, which gets 30 per cent of its country revenue from the north.
Foreign investors have already been scared off by the volatility — underscored by the 18 per cent decline in Nigeria’s stock market in the year to March 31 (before the election results came in).
The country may have been identified as one of the “Next 11” of economies with great potential. But if the terrorist group is not controlled, there is every possibility of further outflows, making the economy and fiscal health even more vulnerable, especially if oil prices do not recover.