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| Goodluck Jonathan |
The Economist has
described former Nigerian president, Goodluck Jonathan, an ineffectual buffoon
in an article titled: “Cheap oil is causing a currency crisis in Nigeria.
Banning imports is no
solution”
In the article which an analysis of President Muhammadu Buhari’s
administration and policies, The Economist took a dig at Jonathan and how he
managed Nigeria.
Read “Cheap oil is causing a currency crisis in Nigeria. Banning
imports is no solution” below:
More than 30 years ago, a young general swept to power in the
fifth of Nigeria’s military coups since independence in 1960. The country he
inherited was a mess: bled dry by pilfering politicians within and hammered by
falling oil prices without. Last year that general, Muhammadu Buhari, became
president again—this time in a democratic vote.
The problems he has
inherited are almost identical. So are many of his responses.
Mr Buhari, who—unusually among Nigeria’s political grandees—is
said to have just $150,000 and a couple of hundred cattle to his name, abhors
such excess.
As military ruler he
jailed, fired or forced into retirement thousands of bureaucrats whose fingers
had been in the till. This time, the Economic and Financial Crimes Commission
(EFCC) has arrested dozens of bigwigs, including a former national security
chief accused of diverting $2.2 billion. The EFCC has a poor record of securing
convictions; but a single treasury account has been introduced to try to stop
civil servants siphoning off cash. And agencies which may not be remitting
their fair share to the state are having their books trawled by Kemi Adeosun,
the finance minister.
Such measures are doubly important because the economy is
swooning along with the oil price. The sticky stuff directly accounts for only
10% of GDP, but for 70% of government revenue and almost all of Nigeria’s
foreign earnings.
Oil’s price has fallen by half, to $32 a barrel, in the months
since the new government came to power, sending its revenues plummeting. Income
for the third quarter of 2015 was almost 30% lower than for the same period the
year before, and foreign reserves have dwindled by $9 billion in 18 months.
Ordinarily there would be buffers to cushion against such shocks, but Mr
Jonathan’s cronies have largely squandered them. Growth was about 3% in 2015,
almost half the rate of the year before and barely enough to keep pace with the
population. The stockmarket is down by half from its peak in 2014.
Domestic oil producers are feeling the pinch worst. Many
borrowed heavily to buy oilfields when crude was worth more than $100 a barrel,
and are now struggling to pay the interest on loans, says Kola Karim, the
founder of Shoreline Group, a Nigerian conglomerate. This, in turn, threatens
to create a banking crisis. About 20% of Nigerian banks’ loans were made to oil
and gas producers (along with another 4% to underperforming power companies).
Capital cushions are plumper than they were during an earlier banking crisis in
2009; but, even so, bad debts are mounting and banks that are exposed to oil
producers may find themselves in trouble. “It wouldn’t surprise me if one or
two went down,” says a senior banker in Nigeria.
The government’s response to the crisis has been three-pronged.
First, it is trying to stimulate the economy with a mildly expansionary budget.
At the same time, it is trying to protect its dwindling hard-currency reserves
by blocking imports. Third, it is trying to suppress inflation by keeping the
currency, the naira, pegged at 197-199 to the dollar. Only the first of these
policies seems likely to work.
The budget, which includes a plan to spend more on badly needed
infrastructure, is a step in the right direction. Although government revenues
are under pressure from the falling oil price, Mr Buhari hopes to offset that
by plugging “leakages” (a polite term for theft) and taxing people and
businesses more. That seems reasonable. At 7%, Nigeria’s tax-to-GDP ratio is
pitifully low. Every percentage point increase could yield $5 billion of extra
cash for the coffers, reckons Kayode Akindele of TIA Capital, an investment
firm. Mr Buhari also plans to save some $5 billion-$7 billion a year by ending
fuel subsidies—a crucial reform, if he sticks with it. Even so he will be left
with a deficit of $15 billion (3% of GDP) that will have to be filled by
domestic and foreign borrowing.
Yet his policies on the currency seem likely to stymie that. The
central bank has frozen the naira at its current overvalued official rate for
almost a year. The various import bans (on everything from soap to ballpoint pens)
are supposed to reduce demand for dollars, but have little effect. Businesses
that have to import essential supplies to keep their factories running complain
that they have been forced into the black market, where the naira currently
trades at 300 or more to the dollar. Several local manufacturers have suspended
operations. International investors, knowing that the value of their assets
could tumble, have slammed on the brakes and some have pulled money out of the
country just as their dollars are most needed (see chart).
Nigeria is fortunate in having low levels of public debt (less
than 20% of GDP), but it is not helped by high interest rates, which mean that
35% of government revenue goes straight out of the door again to service its
borrowings. It would not take much to push it into a debt crisis.
Frustratingly, this crunch is one that Nigeria has been through
before—under the then youthful Mr Buhari. Then, as now, he refused to let the
market set the value of the currency. Instead he shut out imports, causing the
legal import trade to fall by almost 50% and killing much of Nigeria’s nascent
industry in the process. Between 1980 and 1990, carmaking fell by almost 90%.
Today, as in the 1980s, the president is making a bad situation worse.
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