Thunder From Under
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As the 2022 financial year kicks off, developments on the national and international scene have raised serious concerns about Nigeria’s economic prospects. Maintaining its growth forecast at 2.6%, the World Bank reiterated its dire warnings about the sharp decline in government revenue, exchange rate volatility, fiscal deficits and the trajectory of COVID-19. Its sister lender, the International Monetary Fund, and domestic private sector operators are worried about the cost of more than N3 trillion naira in fuel subsidies this year, worsening insecurity and debt and unsustainable service. Everyone is worried that weak governance is compounding the problems and casting doubt on the leadership’s ability to weather the storm.
By all accounts, 2022 will be difficult. The IMF predicted that debt servicing could eat up all government revenue. He reaffirmed that nearly 93% of revenue would be spent on repayments, maintaining a three-year trend where the ratio of debt service to revenue was 85.5% in 2021 and 97% in 2020. The rise oil prices fueled by Russia- The war in Ukraine is bad news, according to the World Bank, which predicts that gasoline subsidies will reach more than 4 trillion naira. This translates into more borrowing, less revenue for all three levels of government, and critical social sectors starved of funding.
Already, the President, Major General Muhammadu Buhari (Ret’d) has asked the National Assembly to approve additional spending of N2.56 trillion to cover the N3 trillion grant bill. presented by the Nigerian National Petroleum Company for which 443 billion naira was initially provided in Budget 2022. While a deficit of 6.25 trillion naira, debt service of 3.8 trillion naira are already factored into the 17.13 trillion naira spending plan, the projected revenue of 9.12 trillion naira is at risk.
Ironically, one of the disheartening headwinds is soaring crude oil and gas prices that would normally have been a boost for a major exporter. But as the country is irrationally entirely dependent on imports of refined petroleum products, higher prices mean higher import costs and higher subsidy costs, which provided for a shutdown which the government postponed for another 18 months. . Moreover, since much of the gas associated with crude oil extraction is still flared and government dominance over the gas sector crowds out competent private players and entrenches inefficiencies, exports of gases are paralyzed. The national economy has been hit hard by the shortages.
At least 14 gas-fired power plants are down, depriving the national grid of more than 4,000 megawatts of electricity. Having been in short supply for more than four decades, power shortages have worsened in the past two months. Transport costs have risen sharply, impacting consumer prices and reversing poverty reduction measures. Inflation, which had fallen to 15.6% in January, is expected to increase further.
Corruption, government fiscal recklessness, and outside pressure, combined with its own incompetence, frustrated the monetary authority’s efforts to manage the exchange rate effectively. In free fall, the naira fell further to trade at 581 naira to 1 US dollar on the parallel market and at 416 naira/1 dollar at the official counter of investors and exporters. For an economy dependent on imports, this spells disaster. Foreign exchange reserves with which the Central Bank of Nigeria “defends” the naira fell to $39.98 billion in January. Continental rivals South Africa and Egypt had $57.69 billion and $40.98 billion respectively.
Expect further job losses, says Lagos Chamber of Commerce and Industry, citing high prices, subsidy burden, recent excise duty of 10% per liter on carbonated soft drinks and increased borrowing. Youth unemployment, already at 55%, could worsen, admits the Ministry of Labor and Employment.
Truly, this year will be crucial for Nigeria’s survival as a viable entity. Impacted by the global COVID-19 pandemic, raging insecurity across the country has compounded recovery efforts. Whole swaths of the country have been made unsafe for agriculture, the main occupation in the vast hinterland, for trade, travel and social activities. In the week of February, 138 people were murdered and 101 kidnapped, the Nigerian Security Tracker reported. Some 14.4 million people in 21 states are facing a food crisis, the FAO adds.
Investors flee. Forbes magazine has described the country as “Africa’s money-losing machine”, where foreign investor interest fell 27.5% in the first quarter of 2021. In the first seven months of 2020, foreign portfolio investment fell 228%. The worst is expected this year.
Buhari and the 36 state governors are expected to go into emergency mode. To save money, the government should immediately transparently sell its four disastrous and moribund refineries to reputable global brands. Adopting targeted sales that will disqualify emergency and incompetent consortia, it should likewise concede commercial operations at airports and seaports. Buhari is expected to end the stillborn deal with Russia, now a pariah state, over the Ajaokuta Steel Company and sell it to one of the world’s leading steelmakers. It is also expected to consider an international IPO to reduce its 49% stake in the NLNG. Privatizations will not only raise desperately needed cash; they will also free up funds for critical infrastructure and social spending.
There should be a debt moratorium; the government should block tax leaks, scrupulously collect all its revenues, and compel revenue-generating agencies to disburse all funds in real time. The chaotic foreign exchange market should be reformed. Drastic measures must be adopted to resolve the electricity crisis.
Federal and state governments should drastically reduce their battalions of appointees, reduce benefits and compensation, and reduce bureaucracy. Buhari should immediately reduce the size of the presidential air fleet; ministers, governors and high officials should reduce their luxurious life.
The government should reform the tax system and raise the dismal tax-to-GDP ratio of 6.1% to reach and exceed the African average set by the OECD at 16.5%.
The central government and state governments should devise policies to liberalize the business environment to attract foreign and domestic investment in agriculture, mining, manufacturing, electricity, oil and gas downstream and infrastructure. States should each have economic programs; investing in rural infrastructure, education, health and sanitation.
Nigeria faces an emergency; Buhari should rally the organized private sector, experts and the vast informal sector to manage the crisis and get the country out of the woods.
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