NIGERIA: Losing its way
Nigeria has been praised for its reform efforts. But current political wrangling may well frighten off investors
In December 2013, Nigerias official gross domestic product could take a huge leap forward. The country is rebasing its economic growth calculations, and the revised figure is estimated to show a 40% leap from its current $250 billion to around $350 billion, meaning that it will graduate into middle-income status.
Its a rare piece of positive news for Nigeria, which has shuddered recently with fresh outbreaks of violence. The loud vigour of its reform agenda has quietened in face of the realities of its complex political environment. A schism in the ruling Peoples Democratic Party (PDP), which has held power since the transition to civilian rule in 1999, has created yet more turmoil.
The former vice-president, Atiku Abubakar an influential figure in Nigerian politics stormed out of the partys national convention at the end of August along with seven state governors and announced that he was setting up a rival PDP.
Facing a revolt within his party, the president, Goodluck Jonathan, reshuffled his cabinet in September, sacking his ministers of education, foreign affairs, science and technology, housing and urban development, national planning, and environment, as well as several junior ministers of state.
Key players, including the finance minister and former World Bank vice-president Ngozi Okonjo-Iweala, and the petroleum minister Diezani Alison-Madueke, survived the cull, while the portfolios being handed out are likely to have little impact on the progress of the reform agenda. The wider instability within the party, however, could.
Challenges to Jonathans legitimacy will inevitably blunt any momentum built up in the past few years and raise the level of politicking ahead of elections, currently scheduled for 2014. This process has, to date, always been damaging economically and socially. Expenditures at the state and national level usually rise as governors and politicians resort to patronage to get ahead. The concern about the split in the PDP, and the political manoeuvring since then is that it detracts significantly from the much-needed focus on economic reforms in the months ahead of the election, Razia Khan, head of African economics at Standard Chartered, says. With oil output well below budgeted levels, and formulation of the 2014 budget made more difficult as a result, this is something that Nigeria cannot afford.
Central bank governor Sanusi Lamido Sanusi, praised abroad for his efforts to clean up the banking sector and, most recently, for managing to bring inflation down into single digits and keep it there, is also worried about the impact of politics on the economy.
The biggest challenge facing the Nigerian economy in the year ahead, in my view, will remain a loose fiscal stance at a time of revenue attrition due to oil theft and other fiscal leakages, Sanusi tells Emerging Markets. The rising fiscal deficit, low level savings into the Excess Crude Account (ECA), and likely pre-election spending will be major sources of instability in the foreign exchange and money markets. The short-term focus on elections at the end of 2014 will also mean even slower progress in much-needed structural reforms and fiscal consolidation.
The government, at first stuffed with technocrats and pugnacious about its ability to deliver change to a political and economic system where most others had failed, seems to have lost its way within the infighting and factionalism of Nigerian politics.
Those reforms included the long-running and badly-designed petrol subsidy programme, which cost the government more than $6 billion 20% of the total budget in 2012. That system had been blighted by vested interests and massive corruption. A parliamentary inquiry found that $6 billion had been drained from the state coffers over three years, with money sometimes handed over by the state for imports that never arrived. At last count, only 6% of the money had been recovered.
An attempt to cut subsidies in January 2012 led to strikes and sit-ins. As well as those making a fortune through the system, people at the other end of the wealth spectrum relied on government support for their livelihoods. What kept the rich in mansions kept the poor in bread.
There have been some considerable achievements under the Jonathan government, even if they have been slow to come. A structure and management team for the countrys sovereign wealth fund has been announced and approved, replacing the inefficient ECA with three separate vehicles. One, a stabilization fund, will take on the mandate of the ECA and be used to shield the country against external shocks. An infrastructure fund will make direct investments to improve transport and power networks, while a third, the Future Generations Fund, will invest in a broader portfolio of international assets, with the aim of preserving and growing the countrys cash reserves.
Agricultural reform has been slow, but analysts and investors say that there has been progress, with some of the corruption cut out of the agricultural subsidy system. Food production has increased by 8 million tonnes, well on the way to the governments target of 20 million tonnes by 2020, and food imports have dropped by $5.2 billion under the current government, partly due to the new 100% duty on rice, which was put in place to stimulate domestic growth. The agriculture ministry, headed by the respected agricultural economist Akin Adesina, has set an ambitious target of self-sufficiency in rice by 2015, weaning Nigeria the worlds second-largest importer off its dependency on rice from abroad. Major global conglomerates, including Cargill and Syngenta, have set up in the country.
For investors, Nigerias demographics have obvious value: a population of 160 million, growth rates above 5% for years and rapid urbanization driving developments in formal retail and fast moving consumer goods. Yum! Brands, owners of KFC, and the WalMart-owned South African retail chain Massmart have moved in too, taking prime locations in new shopping malls in Abuja and Lagos.
Kamal Shah, who heads the Africa practice at law firm Stephenson Harwood and has worked extensively on arbitration and asset tracing in Nigeria, says that for many businesses, the turmoil is just a backdrop to the enduring attractions of the market.
Politics in Nigeria have always come and gone. I think that in the medium to long term this is not going to deter companies from getting into Nigeria, he says. Look at the retail market alone, whether its pharmaceuticals or the drinks industry. Diageo sells the most amount of Guinness in Nigeria outside of the EU, and theyre not pulling out for sure. In fact, Diageo is investing heavily in Africa because of the mid-market boom, and that just means people have more money to spend.
OIL STILL KING
But while Nigerias consumer markets are the stuff of investment brochures everywhere, oil is still the main driver of growth in Nigeria. Hydrocarbon revenues make up 80% of the government budget and 95% of export earnings. The Petroleum Industry Bill (PIB), a key piece of legislation aimed at increasing the governments take of profits from the oil business from the current 61% to around 73%, has had a laboured passage, and is now unlikely to become law until after the 2014 elections.
Wood Mackenzie, the energy industry consultants, forecast that Nigerian production would decline by as much as 20% up to 2020, as investment in exploration is stunted by the uncertainty around the PIB. Oil majors have, predictably, complained, and warned that the fall in production could be higher, at 25% or more. The Oil Producers Trade Section, a group of companies accounting for the bulk of Nigerias production, warned that the bill will make it uneconomical to continue to invest in Nigerian oil and gas, and that a dwindling trickle of new projects would not offset declining output.
Of the countrys 2.5 million barrels per day output, around 400,000 barrels are lost to illegal bunkering (supplying fuel to ships) and other disruptions to pipelines. Sanusi warns that any major falls in oil prices would have a major destabilizing effect on his countrys economy. Oil continues to account for almost all of export earnings and a significant portion of government revenues, Sanusi says. The slow progress in structural reform and narrow tax base mean we are less prepared for an oil price shock than we should be, had we implemented the right structural policies around power, agriculture and infrastructure in good time. The country has so far benefited from high crude prices which have somewhat ameliorated the impact of oil theft and output losses in the Niger Delta.
But, he concedes, the major difference between now and 2008 is that banks are no longer sitting on bubble-capital and there are tight macro-prudential regulations around exposures to the capital market, oil marketers and related parties. Improved regulation, supervision and risk management mean the banks are less vulnerable now than they were during the last oil price crash.
Beyond these immediate concerns, there are longer-term worries about the shape of the economy and the already fragile unity of the country. The shale gas boom in the United States is changing the configuration of world energy markets as the worlds biggest consumer of hydrocarbons heads towards limited self-sufficiency. Currently around 40% of Nigerias oil goes to the US.
Granted, the outlook for oil output is not as promising as it should be, Standard Chartereds Khan says. For all the rhetoric on how the non-passage of the PIB has held up investment in the sector yes, this has had an impact on output but not as much as outright oil theft some investment has continued, with [international oil companies] swapping onshore assets for offshore.
What impact will this have on reform? I have often felt that the best base case scenario for reform would be one in which Nigerias oil revenue was severely tested perhaps by falling oil prices. This might almost force the pace of reform, with Nigeria having to make decisions it might not choose if oil revenue were not under pressure.
Amid the administrative chaos, Nigeria is also fighting an Islamist insurgency. In May, the president declared a state of emergency in the countrys north. Over the last two years, several thousands have been killed in fighting involving Boko Haram militants, who have grown in confidence. Crackdowns by state security forces and the killing of one of the groups leaders have done little to stem the rising sense of fatalism about the countrys stability.
Neighbouring Mali, once a relatively peaceful and stable democracy, almost collapsed in 2012 when a combination of Islamist militants and Tuareg irredentists made military advances that ultimately brought down the government and prompted a French-led intervention. Malis return to democratic rule is underway following elections in August, but the damage done by its civil war will take far longer to fix. Niger, which also straddles the Sahel, has faced ongoing instability since a coup in 2010. Both countries politics are appreciably different from that of their larger neighbour, Nigeria, but the government in Abuja is well aware of the damage that insurgency on the nations periphery could do to its economy.
For all its flaws, the PDPs internal logic has kept an otherwise fragmented country together. A certain balance was achieved by the unwritten agreement that handed two terms to a northerner and two terms to a southerner one that Jonathan, who was vice-president when his predecessor, Umaru YarAdua, died in office, now stands accused of breaking.
Additional reporting by Antonia Oprita