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Buhari’s bottling it

  • 12Apr 16
  • Kevin Daly Senior Investment Manager, Fixed Income

President Muhammadu Buhari can hardly be blamed for all of Nigeria’s woes. He inherited a difficult situation when he was elected a year ago but you have to question how he has responded to the reality of low oil prices.

Pilfering and incompetent politicians have, in large part, accounted for why normal Nigerians haven’t enjoyed the spoils of its vast oil reserves. Around 61% of Nigerians lived on less than a $1 a day in 2010 according to Nigeria’s own statistics agency.  The CIA World Factbook put unemployment at nearly 24% in 2011. That’s a problem in any country but particularly one with such a large, young population looking for a living.

Corruption has hollowed out a lot of Nigeria’s potential for years. Fittingly it was the country’s Information Minister who alleged earlier this year that a mere 55 Nigerians have stolen N1.34 trillion or about $6.8 billion in eight years. He pointed out that the money could have paid for 635.18 kilometres of road and a score of other infrastructure that the country sorely needs. Two years ago the country’s central banker was sacked for pointing out that $20bn of oil revenue had simply gone missing. Many Nigerians simply shrug at the scale of the corruption, familiarity breeding forlorn disinterest.

Nigeria has been at the centre of corruption scandals for years, just one reason why over 60% of population still live in poverty. It is a rich nation, and one that can bring prosperity to all, but Buhari must continue to deliver on his promises.

In fairness to Buhari, he has acted on his election promise to crack down on corruption, ruffling a lot of feathers with a series of investigations and arrests. Finance Minister Kemi Adeosun has turned up 23,000 fake workers on the government payroll. Removing them has saved N2.29bn a month. Another 11,000 have been found. So one should give credit to the first opposition-led government since elections were resumed in 1999.

Buhari has also delivered on his election pledge to tackle Boko Haram. He certainly can’t claim victory but a joint operation with neighbouring countries has seen the militant group lose much of the territory it held in the north east. The challenge for the government now is to retain those gains. The group continues to kidnap and bomb. Any long term solution to Boko Haram needs to include stopping the corruption which drives frustrated young men into the group’s hands.

But it’s on the economy where Buhari has made the most missteps. Perhaps he erred too much on the side of caution in putting together his cabinet, which occurred some seven months after the ground-breaking victory in March 2015. He said this was to give time to form a corruption free team. While this was a noble cause, growth slumped to 2.8% in 2015, far below the level needed to create the jobs and income that the country needs. Much of the slowdown was in the non-oil sector with falling incomes hitting demand. The continued decline in oil prices and the reluctance to adjust an overvalued currency have exacerbated the economic woes.

Buhari’s strong influence is largely to blame for the current gridlock on exchange rate policy, which has had economic implications. After the election and before the cabinet was assembled, the central bank introduced import controls on a number of items in order to stem the decline in foreign currency reserves and help ensure an exchange rate of around N200 to the US dollar. Foreign exchange reserves are currently around $28 billion, comfortably above the critical level of three months of import cover, but well below where they should be for an oil exporting country.

While Central Bank Governor Godwin Emefiele has repeatedly said that a devaluation would have a detrimental impact on inflation, the ruinous policy of pegging the naira to the US dollar means the real value of the currency on the streets has collapsed. Unable to get dollars from the central bank, people have had to turn to the black market to source them. That has seen the black market dollar rate hit a record breaking N400 to the dollar. Official inflation spiked to 11.4% in February but is likely to be much higher on the streets since dollars are so scarce. Meanwhile, the import ban is causing manufacturing activity to slow because companies can’t get the dollars they need to buy their input goods, almost all of which are imported.  

It’s hard to underestimate how much the central bank’s policies have formed a noose around the neck of the economy. Nigeria was always going to struggle when a decline in the oil price occurred, as it accounts for about 50% of revenues and more than 95% of foreign income. By Buhari’s own admission, Nigeria "virtually imports everything, from rice to toothpicks". This is cited as a reason why imports must be restricted but it is exactly the opposite. Nigeria simply does not have the infrastructure to produce enough of the goods it imports. It produces roughly as much electricity as Slovakia, a country with about 168 million fewer people.

Buhari has not ruled out a devaluation yet he’s clearly not sold on the benefits, which suggests a continuation of existing policies that will do no favours to the economy. Rising oil prices could provide a respite, but the bottom line is that Nigeria’s economy cannot function properly in the short to medium term with such measures in place. Companies and individuals can muddle through for a time but there’s only so long that they will be able to get by without having to shut down.  Every day that the government’s policies persist is another day closer to a disorderly devaluation that would be disastrous.

A hike in interest rates in March marked a return of some degree of conventional monetary policy and more hikes are possible if inflation continues to accelerate. That might put a further dent on growth, but if there’s a silver lining, the shift in monetary policy suggests Buhari is allowing policy makers to get on with their jobs. Less interference from the top would certainly be an encouraging sign, although there are challenges ahead for Buhari after a mixed first year at the helm.

This article was originally published on the FT online, 11 April, 2016.

Image credit: © PATRICK SEEGER/epa/Corbis

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