Nigeria has long been touted as Africa’s next economic powerhouse, not least given its 150 million-strong population and abundant natural resources. Following largely peaceful elections in April, the talk is that Africa’s most populous nation now has its best shot yet at realizing its potential.
But Nigeria has been here before. And the government headed by President Goodluck Jonathan faces many of the challenges that halted progress under his previous administration. Its immediate agenda for economic reform is formidable. This includes: transforming oil revenue collection; streamlining government expenditure; scaling back a bloated government; and resisting the powerful vested interests determined to thwart the process.
DEBT CONCERNS
The picture is complicated too by a troubling economic backdrop. The bill from the 2009 financial crisis is coming due: domestic and external debt levels have rocketed to $39.7 billion, around 20% of GDP. And despite sharply rebounding oil prices, Nigeria’s Excess Crude Account, its rainy-day oil revenue fund, has fallen from over $20 billion in 2007 to only $300 million at the end of 2010.
“The fiscal expansion during the 2009 crisis was good, but it is not party time in terms of oil revenue any more,” says Onno Ruhl, World Bank country director for Nigeria.
Over half of the planned spending in the N4.972 trillion ($32 billion) March budget is on recurrent expenditure. “Capital expenditure – some of which never gets executed – is too low,” says Ruhl.
Many analysts worry that this spending has not led to tangible improvements to the country’s woefully underdeveloped infrastructure. “Debt to GDP levels are not the problem; the question is, what has this debt been used to buy? Where are the assets?” says Bismarck Rewane, managing director of Lagos-based advisory firm Financial Derivatives.
NGOZI’S CHALLENGE
A key priority for Jonathan’s new administration is tackling the burgeoning deficit.
Optimists point to the return of widely praised technocrat Ngozi Okonjo-Iweala, formerly a managing director at the World Bank. Upon resuming her post as finance minister in August she has promised to put Nigeria’s fiscal house in order.
But many obstacles lie in her path. The federal budget has been rising by more than 30% a year as politicians have ramped up spending. A new law to increase public-sector minimum wages has sparked lobbying from state governments for an even greater share of Nigeria’s oil earnings.
Meanwhile central bank governor Sanusi Lamido Sanusi’s move to nationalize three more defunct banks – in what he hopes will bring an end to the lingering banking sector crisis – has piled significantly more onto the original $4 billion bank bailout in 2009. State asset management firm AMCON injected N679 billion ($4.39 billion) into the three banks in early August, while analysts anticipate further costs as part of the restructuring.
Cutting costs will also mean cutting government itself. But privatizing agencies, taking civil servants off the payroll and rooting out ‘ghost workers’ inevitably smacks up against vested interests.
Nasir el-Rufai, a former cabinet minister and leading opposition figure, points to the fact that some state governors are guilty of questionable largesse. He cites cases of politicians hiring hundreds of assistants where only a fraction of those are warranted. “Once governors have been elected, they use it as an excuse to give government jobs to all those that have helped them,” he says.
GROUNDED OIL REFORMS
Spending cuts alone will do little to balance the books without additional reforms aimed at ensuring that the central government receives a greater share of the spoils from the country’s oil, which presently accounts for 85% of government revenues.
Under the current system, revenues from oil sales go directly to state oil firm NNPC before reaching the central bank. But this muddled and opaque amalgamation of agencies, ministries and departments – which deals with everything from the allocation of exploration blocks to fuel import licences – means not all revenues reach central bank coffers. The CBN has warned explicitly about the damage caused by “oil revenue leakages”.
“All the average observer sees is the oil price going up but no rise in foreign exchange reserves,” says Razia Khan, head of Africa research at Standard Chartered. “Despite high oil prices and increased output, there hasn’t been any significant increase in the amount injected into the central bank.”
It’s difficult to gauge how much the government is losing in oil revenues, but Standard Chartered says FX reserves stood at $33.26 billion in January 2011 which, while representing “a healthy level of import cover”, is down significantly from earlier peaks of over $60 billion.
To break up NNPC’s monopoly, boost oil revenues and build national champions in an industry still dominated by foreign oil groups, politicians have been trying to pass a Petroleum Industry Bill (PIB) for the best part of the past decade.
Yet despite positive signs in the immediate aftermath of the elections that the bill may finally be passed, the government appears to have ceded ground, with concessions meaning that even if it does pass through parliament, it will lack the punch of its original premise. According to NEITI, the agency in charge of auditing the oil industry, the government stands to lose $3 billion a year in taxes following successful lobbying by foreign oil companies that the proposed fiscal regime would stifle investment.
Analysts also warn that the concessions made to international oil groups could make it tougher for local players to compete. The benefit they would have felt by the government taxing their smaller onshore fields less will be eroded. “There will be no level playing field between indigenous and foreign players now – foreign players will continue to run with the ball,” says Sebastian Spio-Garbrah at New York-based consultancy DaMina Advisors.
In many ways, market forces have prevailed. Recent falls in oil prices from near-record levels this year have reduced the government’s bargaining power with the oil majors. “Nigeria is now negotiating from a position of weakness,” says central bank governor Sanusi Lamido Sanusi. Calls to leave the industry well alone have intensified, and local players still lack the scale, or profitability, to do the big projects.
POLITICAL WILL NEEDED
Furthermore, reform of the NNPC by restructuring the company into separate, individual entities that are funded through joint ventures with oil majors and the capital markets is also proving to be a fraught process.
Part of deregulation includes abolishing fuel subsidies, which cost the government around $4 billion a year. Nigeria imports around 85% of its fuel needs because of the dilapidated condition of its state-owned refineries and subsidizes the price at the pump. The challenge here is for the government to overcome powerful petroleum marketing firms that import and distribute refined fuel.
Such giant steps to reform an arm of the state that hasn’t shown the government audited accounts for years into a commercial entity requires huge political will and capacity building, warns the World Bank’s Ruhl; the passage of the PIB is only the first step. “This kind of reform has been done before, but signing a law doesn’t make it hunky dory. It is a process,” he says.
Even if progress is made in reforming the NNPC and increasing the central government’s oil revenue take, major questions remain over how best to use these funds.
Some suggest that a new sovereign wealth fund (SWF) – agreed in principle but still not operational – should help. “The wealth fund is a buffer mechanism against boom and bust ensuring long-term stability,” says Ruhl.
Others believe that rather than locking up oil revenues in a SWF or overseas assets, the government should reinvest them directly into addressing the nation’s chronic infrastructure shortfall and building up alternative sources of revenue.
“The problem of addiction is to resolve the addiction rather than to lock the cocaine away. The preferable outcome is that they become an efficient member of society,” says Financial Derivatives’ Rewane.
INDIVIDUALS NOT INSTITUTIONS
The stalled PIB is another example of the fact that reform in Nigeria is rarely institutionally led. Successful reforms have typically been driven through by powerful individuals, which puts the PIB at something of a disadvantage: its main proponent, former petroleum minister Rilwanu Lukman, is no longer in office, and so far it has not been a priority for incumbent Diezani Allison-Madueke.
“Since Lukman’s departure there has been a diminishing of interest in this project. It doesn’t mean it won’t come to the fore, but subsequent ministers have not seen it as a do-or-die situation,” says Spio-Garbrah at DaMina.
The fruits of strong leadership are seen elsewhere in Nigeria – most notably at the central bank, where governor Sanusi, secure in his term until 2014, continues to turn Nigeria’s financial sector on its head.
Most recently he has liberalized foreign investment in the bond market by lifting the one-year minimum holding requirement on government bonds, ending a policy that had deterred foreign investors who wanted the ability to exit their naira exposure. “It discouraged investment,” Sanusi tells Emerging Markets.
Analysts agree that this move has had a positive effect. “In 2008, most interest came from hedge funds. This space is now being filled by real money with long-term horizons,” says Standard Chartered’s Khan. Sanusi also hopes to attract investment into the electricity sector, with plans to free up N400 billion ($2.7 billion) from Nigeria’s pension funds.
There are hopes that the appointment of finance minister Ngozi, a fiercely outspoken reformer with an impressive track record at the World Bank, will have a similar galvanizing effect on the fiscal front.
However, some critics worry that Ngozi’s ability to push through reform could be limited by a lack of other proven reformers in the cabinet. Sanusi can drive change sure in the knowledge he is backed by AMCON chief executive Mustafa Chike-Obi and Securities and Exchange Commission director-general Arunma Oteh, they say.
OTHER PRIORITIES
Some analysts believe that undue attention is being paid to the delays to the PIB, and point out that progress towards other important goals is being achieved.
The hope is that Sanusi’s close involvement in power sector reform, which involves unbundling a state entity and privatizing electricity generation and distribution, will help drive the process. Unlike the PIB, power sector reforms are already enshrined in law and just need enacting.
Other sectors call for drastic attention. Agriculture, the biggest sector of the economy, earns the government next to nothing, and is crippled by infrastructure challenges and a lack of access to credit. These challenges are common among Nigeria’s small private-sector businesses across all sectors.
“Banks are lending more, but it is not going to small and medium enterprises, and this is a source of concern,” says Sanusi. Structural bottlenecks in agriculture, such as a lack of roads or storage for farmers need to be addressed first. Manufacturing is in an even worse state, leading to some calls for a weaker naira to help boost exports. Defunct agriculture and manufacturing also leave Nigeria dependent on imports of everything from food to fuel, keeping inflation stubbornly high at 9%.
Nevertheless, in an economy where only the strongest and most tenacious businesses survive, other sectors less dependent on public infrastructure and able to provide their own power have shown what is possible.
Many analysts believe that telecoms, IT, hospitality, entertainment and other private-sector, domestic demand-driven industries will fuel growth in the future, providing more jobs than the oil sector. “The secret to understanding Nigeria’s future is to flip the lens from oil onto everything else,” says Ruhl.