An Emerging Markets Crisis? (Part 5 of 5: Nigeria)

In 2014 it was confirmed that Nigeria had overtaken South Africa as sub-Saharan Africa’s largest economy, with a half a trillion dollar a year economy. This showed how quickly the whole BRICS grouping was becoming obsolete. Just a decade into its history and it had already become clear that Africa’s most dynamic economy was not that of South Africa, the S in BRICS. The real mover and shaker of the continent was Nigeria, a country that had grown at betwen 6 to 7% per annum for over a decade and one which was already the cultural centre of Black Africa, with its largest film industry and its most mature publishing industry. Despite a well-dserved reputation for heroic levels of corruption at all levels of government, the country had made steady advances in terms of economic diversification too, and the oil industry now accounted for less than half of GDP. This indicated that there was now much more to the Nigerian economy than oil just exports. The domestic market was playing an increasingly important role, and it was more and more dominated by services. However, when it came to exports, oil was still king in Nigeria. In fact, an incredible 95% of all its export earnings came from oil. It was this metric which made it so vulnerable to a downturn in the price of crude. The current collapse in the price of oil is therefore having a catastrophic effect on the Nigerian economy.

On the surface, it may appear that Nigeria is more in the grips of a slowdown than a true crisis. After all, it still grew by 3.2% in 2015, which is a lot faster than many countries. However, Nigeria’s population is also booming, which means that on a GDP per capita basis the economy is now barely growing at all. The country, like so many other commodity-based economies, has crawled to a virtual standstill. Because about 65% of government revenues come from the oil sector, the country is now severely challenged in its ability to pay salaries and fund new infrastructure projects. This is potentially disastrous in a country which needs to pay soldiers to fight an insurgency against the murderous Boko Haram, infamous for abducting schoolgirls in the lawless northeast of the country. It is for these reasons that Christine Lagarde, the managing director of the IMF has recently visited Nigeria to discuss its fiscal crisis. She recommended increasing the VAT and slashing fuel subsidies. With echoes of a debat which has been endlessly rehashed in recent Indonesian history, Lagarde commented: “Indeed fuel subsidies are hard to defend.Not only do they harm the planet, but they rarely help the poor. IMF research shows that more than 40 per cent of fuel price subsidies in developing countries accrue to the richest 20 per cent of households, while only 7 per cent of the benefits go to the poorest 20 per cent.” Of course, fuel subsidies are often one of few tangible benefits that citizens receive from the government in developing countries, so removing them can be political dynamite.

Perhaps the most serious sign to date of how bad Nigeria’s finances are came last month when the country’s newish president, Muhammadu Buhari, went to the World Bank requesting a bailout. The country faces a $15 billion budget shortfall for the current year and due the nation’s history of defaulting on loans, finding finance is not always easy. Nigeria has asked for concessionary loans worth $3.5 billion from the World Bank and the African Development Bank. The government is attempting to fund itself by taking on about $5 billion more debt on the Eurobonds market. This will help it get through 2016, but unless oil prices rebound sharply this year, the country now has a massive inbuilt structural deficit which will make it hard to avoid large-scale cuts and layoffs. Like other emerging markets with commodity-based economies, Nigeria is experiencing its worst fiscal climate in many years, and conditons remain turbulent.

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