Nigeria’s 8-year ‘long COVID’ as Buhari struggles with economy

BY OLIVIA NNOROM

In the lead up to 2023, when elections are expected to take place for a new government to replace the current administration of President Muhammadu Buhari, now into its seven years and six months, it is becoming clearer that long before the outbreak of COVID-19 in late 2019 in China and across the world in 2020, Nigeria has been suffering its own ‘long COVID’, the long lasting symptoms that afflict people who have suffered a case of covid-19.

With the economy in a tailspin since 2014, the Buhari government, it is now clear, has been unable to rise from an apprenticeship approach in economic policy formulation to deal with the major challenges that have confronted the economy in the last seven and a half years. The major legacy left for the Daura-born retired military general may well be delivering a credible election next year, as millions have given up expecting any possible economic turn around in the government’s last six months before hand over.

Nigeria’s ‘long COVID’, which the Buhari government has battled with throughout its two terms of office, are the economic headwinds, sometimes of global nature, but most times self-inflicted, from which it seems not to have been able to find a headway around.

For instance, in just under a week after the International Monetary Fund (IMF) lowered Nigeria’s projected GDP growth for 2022 from 3.4 percent to 3 percent, citing the country’s weak oil production and the heavy impact of flooding, the National Bureau of Statistics (NBS) came out with its report showing a slowdown in the country’s economic growth to 2.25 percent in Q3 2022, which was a 1.78 percent points drop from the 4.03 percent growth rate recorded in Q3 2021 and 1.29 percent points relative to 3.54 percent in Q2 2022.

The NBS, in the report, attributed the slowdown in growth “to the base effects of the recession and the challenging economic conditions that have impeded productive activities”.

Africa’s biggest economy has been facing severe headwinds for some time now; ranging from lower oil production to soaring inflation, with the Central Bank of Nigeria (CBN) adopting tighter monetary policy to put inflation in check. However, analysts say the biggest drag on the economy in third-quarter 2022 came from a decline in oil and gas extraction due to repairs of platforms, insecurity and sabotage.

Massive crude oil theft and insecurity in the country’s oil-producing Niger Delta region have combined to slash output and revenues from oil, which accounts for about two-thirds of government revenue and 90 percent of its foreign exchange reserves.

Nigeria, Africa’s top oil producer, recorded an average daily oil output of 1.20 million barrels per day (mbpd) in the third quarter of 2022, lower than the daily average of 1.57 mbpd recorded in the same quarter of 2021, according to NBS data.

The oil sector grew by 22.67 percent (year-on-year) in Q3 2022, indicating a decrease of 11.94 percent points relative to the rate recorded in the corresponding quarter of 2021.

In terms of contribution to GDP, the oil sector contributed 5.66 percent to the aggregate real GDP for the period compared to 94.34 percent contributed by the non-oil sector, an increase from 93.67 percent recorded in the previous quarter.

Though Nigeria has maintained a positive growth trajectory, rising for the eighth consecutive quarter, the Q3 2022 GDP figure is the country’s slowest growth in the last six quarters.

Analysts at Proshare Research in a note said Nigeria’s elevated inflation and higher cost of funds would depress private sector growth and household spending in the fourth quarter, bringing the expected real GDP growth for the year to around 3 percent. This is in line with the IMF projection that Nigeria will grow at 3 percent in 2022, down from its earlier projection of 3.4 percent.

“Apart from the Mining sector, Electricity (-3.56%) and Manufacturing (-1.91%) also recorded large contractions in the quarter, reflecting the higher cost and unavailability of petroleum products, the cost of inputs, higher taxes and government levies, as well as higher cost of borrowing associated with the aggressive rate hikes by the Monetary Policy Committee in the period,” Proshare Research said.

In its last monetary policy committee meeting, the CBN raised the benchmark interest rate, or Monetary Policy Rate (MPR), for the fourth time in a row in a continued attempt to tame the country’s rising inflation rate, after previous increases in the MPR failed to rein in the soaring inflation.

The CBN’s Monetary Policy Committee (MPC), at the end of its last meeting of 2022, voted to increase the benchmark interest rate (MPR) by 100 basis points to 16.5 percent, making a combined increase of 500 basis points in the last seven months.

The MPC had raised the MPR by 150 basis points in May, from 11.5 percent to 13 percent, before further increasing it by another 100 basis points to 14 percent in July. In September, the MPC also raised the rate by 150 basis points to 15.5 percent.

Godwin Emefiele, governor of the CBN, said the MPC was concerned about “the continued aggressive movement in inflation, even after the three consecutive rate hikes at its previous meetings”. He expressed the bank’s unrelenting resolve to restore price stability while providing the necessary support to strengthen the fragile recovery.

There are many disjoints in the Nigerian economy which are responsible for the wobbly nature of the economy in recent times, according to Mustapha Suleiman, a financial expert.

“I think there has been an absence of coordination that is needed to rein in the various parts of the economy. The camaraderie that is expected between the fiscal and monetary policymakers seems not there in this administration. Until there is effective coordination between these two, the economy will continue to wobble,” Suleiman said.

Idris Bawa, a lawyer with wide economic experience working with international organisations, suggested that to stem the tide of inflation, there is need to emphasise industrialisation and pursue a deliberate contractionary monetary policy to reduce the money supply within the economy.

“A contractionary policy aims to reduce the supply of money within an economy by lowering the prices of bonds and raising interest rates. Thus, consumption falls, prices fall and inflation slows down,” Bawa said.

“The recent Naira redesign is a good step to mop up currency in circulation. The first thing the CBN should have done was to suspend all licences of Bureau De Change, mop up the hard currencies in circulation before rolling out the policy. This would force people to return their monies in the system to the banks,” he said.

“The need to strengthen the Naira is very important. Promoting export, getting farmers to form cooperative bodies, supporting them to export would enhance the Naira and in the long run curb inflation,” he further said.

Bawa, who currently works as an advisor at GIZ, harped on the need to address the rate of compromise and corruption by actors within the system, as well as address hunger and insecurity.

Meanwhile, with inflation not looking to abate, there are indications that there will be further rate hikes by the CBN.

Emefiele, after the MPC meeting in September, had said the CBN “will keep increasing the interest rate to reduce the high effect of inflation”, noting that “the tested monetary policy theory is that the easiest way to tame inflationary pressure is to raise rates”.

Just ahead of the November MPC meeting, the IMF had urged the CBN to maintain its stance of further tightening in response to rising inflation despite a cumulative 400 basis points raise.

More cause for concern

In its Staff Concluding Statement of the 2022 Article IV Mission on Nigeria released recently, IMF warned that with the increase in Nigeria’s fiscal deficits and high debt servicing costs, public debts may rise over the medium term.

“Without bolder revenue mobilisation efforts, costly fuel subsidies and rising debt servicing costs will keep overall fiscal deficits above 6 percent of GDP in the medium term raising public debt to about 43 percent of GDP by 2027,” the IMF said.

“While still deemed sustainable, such a level of debt is projected to take up nearly half of general government revenues in interest payments, making the fiscal position highly vulnerable to real interest rate shocks. It also leaves little fiscal room for vital social spending on education and health, where Nigeria fares poorly compared to peer countries in sub-Saharan Africa (SSA),” it said.

The global financial institution also emphasised that the effects of recent flooding in Nigeria coupled with high fertiliser prices could become more entrenched in the country, impacting negatively both agricultural production and food prices in 2023. Similarly, it noted that further volatility in the parallel market exchange rate and continued dependence on central bank financing of the budget deficit could exacerbate price pressures.

“In the medium term, there are downside risks to the oil sector from possible price and production volatility, while climate-related natural disasters pose downside risks to agriculture. There are also upside risks from a stronger rebound in oil production, investment in the gas sector and Dangote refinery coming on stream with a large production capacity,” it said.

Going forward

The IMF report said Nigeria requires urgent revenue mobilisation and fuel subsidy reforms to create much-needed fiscal space. To achieve this, it recommended some measures estimated to create fiscal savings of close to 6 percentage points of GDP during 2023-27 while also making room for higher social spending.

The IMF asked Nigeria to remove fuel subsidies and address oil theft, step up implementation of tax administration reforms, adopt tax policy reforms, increase well-targeted social assistance, and implement structural policies to strengthen agricultural productivity and address corruption, noting that enhancing the performance of the agricultural sector is key to job creation, food security, and social cohesion going forward.

To enhance a unified and market-clearing exchange rate considered a critical factor towards enhancing confidence, the IMF reiterated its past recommendations to move towards a unified and market-clearing exchange rate by dismantling the various exchange rate windows at the CBN accompanied by clarity on exchange rate policy and supportive fiscal and monetary policies.

“In the medium term, the CBN should step back from its role as main FX intermediator, limiting interventions to smoothing market volatility and allowing banks to freely determine FX buy-sell rates,” it stated.