Nigeria’s economy has all it takes to rank amongst the world’s top 10 economies. Driving the polity effectively towards that goal is the urgent task of the country’s present political and economic managers.
Nigeria’s 2015 general elections have been won and lost. The nationwide focus on politics for almost a year has however been detrimental to the economy and the financial markets. Despite being poised for fast growth, Africa’s largest economy is currently crawling on all fours.
Key economic and financial indicators are down year-on-year and year-to-date. Ditto for corporate earnings. The most significant being a 1.5 percent loss in GDP growth and speculative devaluation and volatility of the national currency, the Naira, which has lost at least 20 percent of its value against most benchmark currencies.
The year-end outlook is also not bright. Most investors and corporate players are coasting and seem to have accepted 2015 as a lost year from a productivity standpoint. Politics in Nigeria as clearly proven by recent events is driven by political and personal interests at variance with the national economic interests.
The cumulative cost of perceived political instability, record low crude oil prices, and dipping confidence in economic and financial markets has cost Nigeria something between $25 and 30 billion dollars, but who is really counting?
Certainly not the political class. They have not come to terms with the fact that a new budget cycle has commenced, and it’s clear that the only tangible approach the new government can take, is to start the process of amending the existing budget to reflect present economic realities.
The consequences are beginning to materialize. After stating that the Central Bank of Nigeria’s currency controls were making Nigeria’s bond market transactions too complex to meet its rules, the United States–based investment bank JP Morgan has moved to expel Nigeria from its Emerging Market Bond Index (EMBI) by the end of September 2015. JP Morgan states that their actions are the result of illiquidity and lack of transparency in Nigeria’s foreign exchange market.
This exit will hurt Nigeria’s financial and economic ratings, putting the nation’s $31bn external reserves under threat of further massive sell-offs of Nigerian assets by foreign portfolio investors. The cost of borrowing will increase; access to the international financial markets for both sovereign and corporates will also become limited. More importantly, this exit will stem the inflow of portfolio investments which peaked at US$20.5Billion in 2013, that otherwise could help stabilize the Naira and balance of payments.
JP Morgan’s EMBI with around $210 billion in assets under management is the most widely used and comprehensive emerging market sovereign debt benchmark. Nigeria was added in the index in 2012 when liquidity was improving, making it the second African country after South Africa to be included.
To state the obvious, the lack of articulation on policy and economic direction by the new government is not helping matters and it is unsettling the financial markets. Time is money. In the fast emerging global fiscal order, lost time and opportunities may be gone forever.
The next challenge the Nigerian government faces is the validation and structured financing plan for the current fiscal deficit, estimated at 6.5 trillion Naira. The government’s actions on Nigeria’s fuel subsidy could significantly increase this figure. With the recent restructuring and swap of state government commercial bank loans into Treasury Bonds, the new government has increased the domestic debt profile by 1 trillion Naira overnight. Unfortunately state governments have not been compelled to execute conditional covenants, such as adhering to the tenants of the Fiscal Responsibility Act, which stipulates provisions for fiscal discipline.
With a $49 billion domestic debt and $10.8billion external debt overhang, Nigeria is now committing 23 percent of its fiscal revenues to servicing debt. At the current projected fiscal deficit, the country might exceed the revenue-to-debt service best practice benchmark of 25 percent by the end of 2015. Unfortunately the alignment of fiscal and monetary policy which befitted the Nigerian economy over the last five years, seems to have been lost over the last several months.
Furthermore, the apex financial institution and industry regulator, the CBN, seems to have lost its independence and the intellectual fecundity central banks are renowned for. With an outflow of new policy pronouncements almost every week, the Bank has struggled to articulate a well thought out strategy for managing the Naira. This misalignment of fiscal and monetary policy has started to impact the macroeconomic indicators as inflation creeps up into double digits and unemployment also stands at a record high 35 percent.
Our commercial banks have also exacerbated the situation: about 50 percent of their loan books are denominated in US dollars. These artificially high rates, and the distortion it causes are not sustainable in the long run. Further more, while Western nations over the last eight years have maintained rates at below 1 percent in clear bid to spur economic recovery, Nigeria’s interest rates of 25 percent cannot support productive investment and development. Major reforms are therefore required in the banking system to support the single digit rates that will allow for investment and continued growth.
Until recent times, the Nigerian economy sustained a 7% annual growth rate, ranking it amongst the top three fastest growing economies globally but in recent months this has changed. To be competitive, our substandard physical and social infrastructure must be upgraded; we need to make education, healthcare, and power, key priorities. This is in addition to addressing corruption, and deficits in good governance and the rule of law that are keeping Nigeria from realizing its potential as a G10 economy.
Indeed, despite the absence of a cabinet, the euphoria the new government has generated, including its ongoing efforts to clean up the Augean stable is highly commendable. Going forward, the President and his ministerial team (when he finally unveils them) will need to balance the dual priorities of institutionalizing probity and economic management. Curbing high level graft must be accorded equal weight as curbing hyper-inflation.
President Buhari needs to demonstrate policy leadership and must not be shy on economic issues. To achieve G10 targets, our economy needs the right drivers with strong thought leadership and political backing. The new President has been elected on a change platform and with the right support can move the country forward – if he makes the economy a top priority.