Should investors keep giving the Buhari administration the benefit of the doubt?
After the release of Nigeria’s Economic Growth & Recovery Plan assessing the urgent need for reform in an economy in recession for the first time in 25 years, investors keep buying Nigerian bonds. But will the Buhari administration deliver on economic reform?
On March 21st 2017, Standard and Poor’s affirmed Nigeria’s B/B rating, a stable economic outlook. A couple of weeks before this cautiously optimistic assessment of the country’s economic recovery, high profile investors were competing on the London Stock Exchange for Nigerian debt, a 15-year, $1 billion Eurobond issued while President Buhari was receiving care in London for an undisclosed illness. Will such enthusiasm for a Nigeria in recession last, when the country’s wavering leadership has not yet delivered on the promises of change made after the first-ever defeat of an incumbent president in 2015?
Oil dependency and economic mismanagement
The Nigerian economy, which due to a GDP reevaluation grew by 90% almost overnight in 2014 and overtook South Africa as the continent’s largest economy, has shrunk by 1.5% in 2016. Moreover, the country is also dealing with rampant inflation, which reached 18.72% in January 2017 alone. While both Nigeria and South Africa are today in recession, the sharp fall of the naira after the Central Bank dropped a peg to the dollar, as well as the country’s high dependence on oil, cost Nigeria its position. Oil accounts for roughly 90% of exports and 75% of consolidated budgetary revenues, and the industry has been crumbling under the twin burdens of corruption and low commodity prices.
In a January 2017 policy paper, the IMF attributed economic difficulties to mismanagement and domestic policy failures in adjusting to lower commodity prices. President Buhari and Central Bank Governor Emefiele have indeed been strong opponents to a floating currency that would have, according to experts, unblocked investment and boosted local production through a sharp devaluation of the naira. Instead, a half-hearted policy holding the naira in a tight range around 315 per dollar and encouraging the limitation of imports to “essential” products led to the collapse of the naira on the black market and unrestrained speculation.
Will the Economic Recovery and Growth Plan be enough to restore growth?
The Economic Recovery and Growth Plan (ERGP) which unveils a road map for Nigeria’s economic recovery, growth and sustainable development was released in early March 2017. This medium-term economic plan, required by international financial institutions to unlock further loans to Nigeria, presents a remarkably straightforward assessment of the country’s shortcomings. The priorities for reform highlighted in the report are the over-dependence on oil, low government revenues, a large infrastructure deficit, a rising debt service and double-digit inflation. The EPRG; however, falls short in terms of its vision for future reforms and their implementation.
According to a report seen by Reuters, the IMF is expected to warn Nigeria its economy needs urgent reform, and the current roadmap is unlikely to drag the country out of recession unless urgent reform such as a change in exchange rate policy is implemented. This could delay talks concerning $1.4 billion in international loans from the World Bank and the African Development Bank.
Additional challenges faced by Nigeria’s government
Macroeconomic imbalances and flat economic growth are far from the only challenges faced by the Buhari administration. Even if the stabilizing presence of Yemi Obinsajo, the liberal Vice President who ran the country during the President’s illness, has appeased tensions in the Delta region – where militants, notable the Niger Delta Avengers, disrupted oil production in 2016 – his leadership on economic issues cannot be taken for granted.
In a rather extreme analysis, Stratfor forecast that if President Buhari was to leave office abruptly, the administration’s gains in the fight against Boko Haram could be reversed as Muslim northerners would lose the leadership race to Yemi Obinsajo, a Christian southerner. The Constitution provides that the vice president shall replace President Buhari as head of state if he were to leave office. Without going as far as suggesting that only a northerner could contain extremism in Borno State, President Buhari’s illness unsettles the country and could lead to the disruption of Nigeria’s religious and regional balance of power.
The grim economic and security outlook in Nigeria, coupled with the President’s mystery illness, generate a high degree of uncertainty that would be further heightened by the delay of international loans expected to support the Economic Recovery and Growth Plan. This could be the final blow to the country’s recovery efforts and investor confidence.