The first ever opposition takeover by means of an election in Nigeria earlier this year was in some ways a heartening event for believers in democracy, domestically and abroad. Outgoing president Goodluck Jonathan broke convention by not challenging the result in the courts, and even called the winner to congratulate him.
But Muhammadu Buhari — a former military head of state in the 1980s famous for declaring a “war on indiscipline” — can hardly be said to have enjoyed an investor honeymoon since his return to power earlier this year. Nigeria’s stock market fell more than 10% between the announcement of Buhari’s victory in late April and the end of September.
The president’s failure to announce his cabinet — even by an indicated deadline of September — is delaying corporate investment, says Michael Larbie, head of Rand Merchant Bank’s Nigeria operation. It has contributed to a “slow and uncertain business environment”, says Larbie. “Investments normally start to slow before an election, but usually activity picks up quite quickly afterwards.” He does not expect a pick-up in dealflow before early 2016.
Buhari may have needed to show he was carefully checking that ministerial candidates could prove their clean past, including payment of taxes, given that the president ran on an anti-corruption platform, according to analysts. The previous government’s lack of preparation for a decline in the oil price, partly because of an inability to prevent leakages in the oil sector, was a large reason why Buhari won, analysts say.
Nigeria, undoubtedly, is among the states that are most exposed to the fall in the oil price. At the end of 2014, there was only $2bn in the Excess Crude Account, set up in 2004 to save money from revenues during periods of high prices. State governors blocked the move after 2011 to an alternative fund, the Nigeria Sovereign Investment Authority.
EMERGING FUNDING
Now the state governments are feeling the cost, as lower oil revenues has meant cuts in their allocations from the federal account. Some state government finances are so bad that the central bank has had to implement an emergency N300bn ($1.5bn) funding programme. In addition, banks had to restructure around N574bn in state government debt in August and September, government figures show.
Nigeria’s problems today may stem in part from management of oil sales by the national oil company, the NNPC, which got worse after 2010, according to a report in August by New York non-profit organisation the Natural Resource Governance Institute. Despite average oil prices topping $110 barrels between 2011 and 2014, treasury oil receipts actually fell, according to the report, due to oil theft, NNPC withholdings of oil revenues, and mismanaged sales arrangements.
The victory of a candidate from an opposition party, especially on an anti-corruption platform, is therefore encouraging for many, after years of patronage by the one ruling party. Politics in Nigeria has been largely about pacifying party grandees and political godfathers, says Ayo Salami, chief investment officer in African public equities at London-based Duet Asset Management.
“Politicians are coming to realise they’ve got to show results to the wider electorate,” says Salami. Buhari’s asset declaration in September has added to his incorruptible image — it showed a bank account with $150,000 — which is modest, says Salami, given his previous occupation of senior government posts.
Larbie at Rand Merchant Bank says optimistically: “We’re beginning to get some sense of a reduction in revenue leakages and spending wastage.”
On a visit to the US in July, Buhari said he would “trace and repatriate” what he called “mindboggling” sums of missing state oil revenues, saying offenders would be prosecuted. The recent arrest of Diezani Alison-Madueke in London, apparently co-ordinated with the Nigerian authorities, may be a sign those threats are real, though the former oil minister has previously publicly denied any wrongdoing.
Buhari has replaced the head of the NNPC with Emmanuel Ibe Kachikwu, a lawyer and former ExxonMobil employee. Alan Cameron, Africa-focused economist at London brokerage Exotix says Kachikwu’s status as an outsider to the NNPC could signal a shift to greater professionalism, and may help Kachikwu shake things up. Already, all eight executive directors at the NNPC have been replaced.
OIL REFORM
Other new policies so far at the NNPC include reviewing deep sea production sharing agreements, and cancelling agreements (which it said were slanted in favour of the contractors) whereby the NNPC would swap crude for refined oil products, due to its own lack of refining capacity. It has also cut top management numbers from 122 to 83.
“When it comes to the oil sector, Buhari has the right ideas and has shown a willingness to implement them,” says Cameron. The news in late September that Buhari would himself assume the post of oil minister was welcome too, according to Cameron, given the president’s experience (he was previously oil minister in the 1970s).
Buhari’s past as a military man means there is confidence too in his ability to counter the Islamist Boko Haram attacks in the north — one of the more worrying troubles under the previous government. Aside from appointing new top brass, the presidency has launched a probe into weapons procurement as part of its anti-corruption programme, saying previous practices may have resulted in sub-standard weaponry, hurting morale.
Buhari has attempted to strengthen a coalition with neighbouring states, so the enemy can be pursued when it flees across the border. He has shifted the headquarters of the army’s fight against Boko Haram from the capital Abuja to Maiduguri, much closer to Lake Chad, at the centre of the violence.
But when it comes to the economy Buhari’s military instincts are less well perceived — at least in the mind of liberal economists, who view Buhari as having an instinct for strong state leadership. Greg Kronsten, chief economist at FBN Capital, says the Lagos and south-western elements of Buhari’s coalition are more liberal than those strong in the north, which is Buhari’s faction.
“It’s not going to be the free market, gung-ho solution some people think,” says Kronsten, speaking of how the Buhari-era economic policy might pan out. It is an impression shared by other Africa specialists too. Cameron at Exotix, for example, says Nigeria is quite clearly implementing statist approaches under Buhari.
“It looks like Nigeria is being run as a command economy,” says Cameron. “That’s a dangerous message to be sending to domestic and international investors.”
Buhari is an “interventionist corporatist”, in Salami’s view: “He believes in the power of the state, that the state can do good.” The danger, says Salami, is that important reforms, such as cutting red tape, to make it easier to do business, will be forgotten. “He will say everything is due to corruption, and if he can get non-corrupt people, everything will be solved, and the machinery of government will work.”
DRACONIAN FLAT
One example these sources mention is lack of indication from Buhari that he will seize the opportunity of lower oil global prices to cut domestic energy subsidies, which many economists say is one of the biggest drags on the economy. “Buhari’s thinking seems to be that if paying subsidies was more efficient, the cost would be less,” says Salami, arguing subsidies are also costly, for example, because they are a disincentive to investment in local oil refineries.
Buhari’s economic policy so far has made impressive steps in a push for a Treasury Single Account at the central bank for federal government receipts, giving less scope for agencies and ministries to make their own arrangements. This is a scheme that has been under discussion for decades, says Salami, but Buhari gave a deadline of September 15 and threatened sanctions for non-compliance. “It was done in characteristically military fashion, by draconian fiat — “‘do it you’ll hear from me’,” says Salami.
Buhari’s decision in late August to replace the head of the federal tax service with Babatunde Fowler, former head of the tax board in Lagos — “one of the best run states” according to Adesoji Solanke, head of the research team in at Rennaissance Capital in Nigeria — has also been a well perceived initial step. The government says Fowler increased Lagos’s average monthly tax haul from an average of N3.6bn in 2006 to N20.5bn in 2013.
However, worries about Buhari’s statist economic instincts, in the absence of announcement on the finance minister, are all the more potent for private economists and investors, given his coming to power has coincided with what many see as an illiberal turn in central bank policy.
Interest rate rises and devaluations of the naira in late 2014 and early 2015 have eaten into economic growth. But since mid-March the naira has barely budged from just under N200 to the dollar, despite the renewed sell-off in commodities and emerging markets this year. That is due to a slew of what the central bank calls “administrative measures” designed to prop up the currency.
CURRENCY CAP
One of the most visible of these for richer Nigerians is a new limit on foreign ATM withdrawals from naira-denominated accounts, capped at $300 a day and $50,000 annually. The central bank has also reportedly capped the rate at which banks and bureau can trade dollars to within N2 of the rate given in the central bank’s own foreign currency auctions, and, say bankers, imposed limits on banks’ ability to extend and restructure dollar-denominated debt.
Most controversially, in the summer the central bank went so far as to pronounce it would not allow access to foreign currency for a list of 41 items — many essential — ranging from cement, clothing, chickens and vegetable oil, to planes, toothpicks, and soap. It even included rice, with Nigeria being one of the world’s biggest rice importers.
JP Morgan said in September it was removing Nigeria from its local currency government bond index due to the exchange restrictions. Kronsten at FBN Capital says outflows related to the measure will mean a maximum of $1bn in foreign holdings of naira debt will remain after index trackers exit the market. That compares to non-resident holdings of around $4 billion in 2014, according to the IMF.
Although the central bank’s position is that it continues to service foreign investors, Solanke at RenCap says there is talk that some foreign investors are struggling to receive all their foreign currency bids.
Solanke says RenCap’s estimate is that the naira needs to devalue to about N230 to the dollar. But central bank governor Godwin Emefiele (who was appointed late in the Jonathan era) has said the naira’s official value is appropriate — a view Buhari is widely seen to share after public comments opposing devaluation, leading some to fear for Emefiele’s independence.
“The president has made his views clear,” says Cameron. “Emefiele is doing what he thinks the presidency wants him to do.”