The recession in Nigeria, announced in July by finance minister Kemi Adeosun and confirmed when the National Bureau of Statistics subsequently published figures showing a 2.06% dip in economic growth, is indicative of the country’s vulnerability to the vagaries of oil.
When oil prices started to tumble in mid-2014, the government – its sights set on the following year’s elections – did not take steps to mitigate the economic impact. By early 2015, Brent crude oil was trading at $53 (£41) a barrel and growth was slipping fast.
The situation was compounded when Muhammadu Buhari, who won the presidential race after campaigning on the delivery of a robust economy, failed to act with the required speed. The early stages of his administration were fraught with delay in appointing ministers, stagnating public contracts and an inconsistent approach to the exchange rate that worsened the crisis, tipping the economy into recession.
The Nigerian government has sought solutions, but the recession has been further compounded by rising inflation that hit 17.6% in August. The inflationary spiral was triggered by the high cost of energy prices following the removal of state subsidies, combined with an alarmingly swift depreciation in local currency. Nigeria’s currency has lost 114% of its value in a year and there are signs that this trend might continue, raising local prices in a nation dependent on imports.
The government is considering raising $1bn in the eurobond market. However, the challenge lies in the cost of borrowing after ratings agency Standard & Poor’sdowngraded Nigeria’s credit rating from B+ to B, five steps below investment grade.
Another possibility being mooted by the government, as it looks to shore up itsforeign reserves to $24.7bn and boost foreign exchange liquidity to forestall the depreciation of the naira, is the sale of its national assets. The Nigerian industrialist Aliko Dangote, Africa’s richest man, recently proffered this solution, and the senate president, governors and central bank have all indicated agreement. The tone taken by the government is that state assets – including government shares in oil joint ventures, the Africa Finance Corporation, the Nigerian Liquefied Natural Gas Company and major airports – will be sold to shore up its foreign exchange base.
Nigeria has benefited from the good fortune of NLNG, the largest tax-paying entity in west Africa, which has turned over $33bn to the government in the past 16 years. However, the country has persistently underfunded its share in joint ventures with international oil companies. As of May 2016, the annual funding gap stood at roughly $4.28bn. While the sale of Nigeria’s share in the joint ventures is a positive step, there has to be deeper interrogation of selling NLNG, which has been valued at $16bn and is expected to return at least $8bn to the Nigerian government.
There is the option of joining the International Monetary Fund programme, but the government – perhaps scarred by the memory of the punitive cuts to public efficiency that accompanied structural adjustment programmes in the 1980s – appears uninterested.
While the country is mulling over the sale of national assets, it has still not resolved the problems that are hampering the private sector. The Central Bank of Nigeria’s rate-setting committee maintained baseline interest rates at 14%, triggering commercial lending rates of up to 28%. Subsequently, the finance ministry supported a drop in interest rates to catalyse economic activity, contradicting the CBN and highlighting a lack of harmony on monetary and fiscal policy that – at a time when national debt has risen by 4.71tn naira inside a year – is likely to compound the uncertain nature of the government’s policy response.
In the end, Nigeria might have to put its assets up for sale, but analysts will remain concerned that it is a short-term fix for a country that needs new engines of growth for its exports. Is it not too hasty to sell national assets built up over years, such as NLNG, in response to a recession that has spanned just two quarters? In a distressed energy market – and with the outlook bleak for intensive energy markets – will these assets be sold at the right value?
As lead partner of BudgIT, an organisation that promotes transparent public resources, I am worried about the process and particularly concerned that national assets might be sold to cronies who will seek government bailouts to put them in shape. The sale of power plants in Nigeria, which triggered a round of bailout funds by the central bank, is an obvious example of the potential pitfalls.
Nigeria might seem to be on track with diversification, but the political risks posed by the 2019 election are obvious. Even if the reserves get a boost, good plans can be undone by a change of government. For Nigeria to continue selling public assets as a short-term fix to a structural problem seems deeply introspective. The bleeding might be delayed but, if the portfolio of national exports is not expanded beyond oil, it will be back to the drawing board. National assets should only be sold as part of a long-term plan that is strictly followed through.