President Buhari took office as Nigeria’s president a year ago on a wave of optimism that the ex-military ruler could revive a nation battered by falling oil prices and decades of corruption. Now, Africa’s biggest economy is on its knees and Buhari has been forced to throw in the towel on a central pillar of his economic policy -- a currency peg.
“It
was difficult to imagine a scenario in which things got worse,” said
Malte Liewerscheidt, a Nigeria analyst at Bath, U.K.-based consultant
Verisk Maplecroft. “But it’s been a lost year. What’s missing is sound
macroeconomic policies.”
Nigeria will soon enter a recession,
according to the central bank, and an upsurge of militant attacks since
February has sent crude production, which usually accounts for 70
percent of government revenue, plummeting to an almost 30-year low. Delays in approving a budget and a cabinet as
well as Buhari’s refusal to weaken an overvalued currency -- until he
relented this week -- have caused foreign investors to flee.
Foreign
investors, fearing a devaluation, are staying away. Foreign direct
investment was the lowest last year since the 2007-08 global financial
crisis, and Citigroup Inc. said deals have ground to a halt. Capital controls prompted JPMorgan Chase & Co. in September to kick Nigeria out of its local-currency emerging-market bond indexes, tracked by more than $200 billion of funds.
Bond Losses
This
year, Nigeria’s local-bond yields have climbed 276 basis points to
13.46 percent, leaving them as the only such securities among 31
emerging markets tracked by Bloomberg to make losses. Electricity output
has plunged to
about a 30th of that of South Africa, Africa’s second-biggest economy,
as attacks on pipelines cut supplies of natural gas to power plants.
When
Buhari beat then-President Goodluck Jonathan in the first election
victory by an opposition candidate, U.S. President Barack Obama’s
administration called it an “historic step for Nigeria and Africa.” A
73-year-old retired major-general who ruled from 1983 to 1985, Buhari
campaigned to end the corruption he said was “killing” his country. He
and his All Progressives Congress party promised to crush Boko Haram,
whose Islamist insurgency has led to thousands of deaths in the
northeast since 2009, and foster economic growth of as much as 10
percent.
Naira Peg
Now
recession looms. The economy contracted in the first quarter by 0.4
percent, the first decline since 2004. If Buhari doesn’t alter his
stance on the naira and loosen the restrictions used to defend its peg
to the dollar, output will probably sink further, according to Mark
Bohlund, an Africa economist with Bloomberg Intelligence in London.
“The
Nigerian economy is at high risk of experiencing its first full-year
recession since 1987,” Bohlund said. An improvement next year depends on
security being restored in the oil-rich Niger River delta region and “a
shift toward more market-based economic policy.”
Buhari
was dealt a tough hand. He inherited a virtually empty treasury and
Jonathan’s administration did little to diversify the economy, leaving
it vulnerable to the crash in oil prices since 2014. A rainy-day fund
known as the Excess Crude Account was whittled down to barely $2 billion
when Buhari took office, from $21 billion in 2008.
Boko Haram
The president has won plaudits from investors for beating back Boko
Haram and trying to overhaul graft-ridden institutions, including the
Nigerian National Petroleum Corp., the management of which he sacked.
Yet they have been left bemused by his economic policies.
He
opted to keep gasoline prices capped at 87 naira ($0.44) a liter ($1.76
a gallon) until months of shortages and unrest over long fuel lines
forced him to increase them by 67 percent in mid-May. He has also clung
to the naira peg even as evidence showed a dollar shortage was
strangling the economy. Buhari continues to oppose devaluation, though
he has given the central bank leeway to implement a more flexible currency regime, his spokesman, Garba Shehu, said on Monday.
Under
Governor Godwin Emefiele, the central bank began to fix the naira at
197-199 against the dollar in late February 2015, even as other oil
exporters from Russia to Colombia and Kazakhstan let their currencies
drop. Buhari has backed that stance since coming to power.
Businesses
are struggling to operate as the central bank, whose reserves have
fallen to a more than 10-year low, runs out of the dollars they need to
import raw materials and equipment. Many are forced to turn to the black
market, where the naira value has plunged to around 350 per dollar.
That’s pushed the inflation rate to 13.7 percent, the highest in almost
six years.
Currency Squeeze
U.S. carrier United Airlines said would it stop flying to
Nigeria next month, in part because of the hard-currency squeeze.
Foreign airlines have the naira-equivalent of $575 million trapped in
the country that they can’t repatriate, according to the International
Air Traffic Association. The Africa president of Unilever, whose
Nigerian unit has seen its shares drop 29 percent since Buhari became
president, called the currency policy “very insane.”
The
central bank’s Monetary Policy Committee voted on May 24 to allow
“greater flexibility” in the foreign-exchange market, which investors
hoped meant that banks would be allowed to trade the naira more freely.
Yet, while Emefiele said a new system would be unveiled “in the coming
days,” no changes have been made.
Policy Failure
It
was an “admission of the inevitable failure of the policy, which
created a black market economy,” said Kingsley Moghalu, a former deputy
governor at the central bank who now teaches at Tufts University in
Boston. “The exchange-rate policy contributed quite significantly to
creating a recessionary situation. It hit manufacturers, who could not
access forex. It has created unemployment.”
The economy is so weak that Finance Minister Kemi Adeosun says officials probably won’t be able to collect enough taxes to
meet the revenue target in this year’s record 6.1 trillion naira
budget, which was only passed this month after senators said Buhari’s
team made mistakes in the first version sent to them.
Nigeria’s 36 states, most of which depend on monthly handouts from
the federal government, are on average three to four months late with
salary payments to teachers, doctors and other civil servants, according
to the oil minister.
“There’s
a sense of exasperation among investors,” Ronak Gopaldas, a
Johannesburg-based analyst at Rand Merchant Bank, said. “There’s still a
level of goodwill toward Buhari and his government but it’s
dissipating. The man on the street is really struggling.”
Source: LindaIkeji