President Muhammadu Buhari took power in Nigeria with a strong mandate for reform, but 20 months later many people are losing hope.There is undeniably good news for Nigeria.
The government has made progress in dealing with the Boko Haram insurgency, for example. It is easy to forget how bad the security situation was in the North two years ago, but Nigeria could have ended up as a failed state without proper action. Progress is also being made in the fight against corruption. The reform of oil subsidies has been imperfect but has reduced the pressure on the government’s budget.
The most positive development during recent months is the shift to locally sourced products and the development of new export niches. The fact that a restaurant chain like Kilimanjaro is today sourcing almost all of its rice and poultry needs locally is a showcase of how import substitution is finally taking root in Nigeria.
The bad news is that there is a lot of bad news and that the government is mismanaging the perfect storm combination of lower oil prices, foreign exchange shortages, recession, accelerating inflation and upheaval in the South. Few people doubt the sincerity of the current administration, but Nigerians did not elect it just for good intentions. Governments need to deliver results and so far, Buhari and his team have been underwhelming.
When asked about the current environment, more and more Nigerians are raising two fingers, indicating that they only need to face two more years of Buhari. But Nigeria is far from doomed and has sufficient tools to turn around its economy and regain its spot as one of the African growth powerhouses.
Shift foreign exchange strategy
As a first step, Nigeria needs to dramatically shift its foreign exchange strategy, as this is the single biggest issue facing the country today. Foreign investors have very little confidence in the current central bank leadership and foreign equity portfolio flows in Q3 stood at a dismal $200m, down from $3.7bn in Q3 2014.
Equity flows have historically accounted for 80–90% of capital inflows and regaining these flows should be a key short-term priority. The Central Bank of Nigeria (CBN) has shown little concern for foreign investors to date and continues to introduce measures to micromanage the flows of hard currency and stifle any improvements in the markets.
The net result is a liquidity crisis and an environment where corrupt intermediaries are profiting on a daily basis from the difference between the official foreign exchange rate and the black market rate. It is time for a shift in policy.
The naira’s exchange rate should be determined by the market and not by central bank officials. Floating the Nigerian currency may move it to 500 to the dollar but the currency should move back to a 350–400 level when confidence returns. Egypt and Zambia have both gone through massive depreciations and are finding their feet again. The South African rand fell to close to 17 to the dollar in January but is now back to 13.7.
On the fiscal side, the minister of finance has introduced measures to increase tax revenues and cut unnecessary spending. On taxation, the country should also move away from its over-reliance on oil revenues and taxing salaries and corporate profits. As a quick win it can start introducing taxes on hard assets like cars, houses and land. In some developed countries cars are taxed at a rate of more than $3,000 per year.
Bring peace to the Niger Delta
The continuous sabotage of oil and gas infrastructure in the Niger Delta region has been another major setback, keeping oil production below the budgeted 2.2m barrels per day. Beyond lower export revenues, the lower production is also affecting Nigeria’s power infrastructure, which is dependent on gas from the South.
Much-needed power infrastructure investments are frustrated by the uncertainties related to the availability of gas resources. The government needs to solve the stalemate in the Niger Delta.
The peace dividend would be tremendous, with a significant potential increase in oil revenues and more importantly reliable power. The best way forward is to agree on an increase in share of allocation of revenues to the oil-producing regions and to introduce a programme that distributes part of the revenues on a monthly basis directly to the local population.
As of today most of the revenues end up with the federal government or local officials. Longer term, real structural reforms are needed but in the short term it is important to be pragmatic. Nigeria is facing many other challenges in areas ranging from real estate to education, and similar to the above, the government is not making sufficient progress.
Hope should however not be lost as the country can be turned around and the existing administration has many good plans to tackle such issues. The presented 2017 budget lacks sufficient ambition but is a good base if it is well executed.
Buhari and his government have so far lacked a sense of urgency and the world is counting on them to deliver what is expected. Local and international stakeholders are waiting for actions to stop Nigeria’s decline. Buhari can and should deliver, but he has just two more years before judgement time.