In Nigeria, the 2019 elections will be the big issue over the coming year.
The campaigns have started in earnest, and it is beginning to look like the duel will be between Muhammadu Buhari, the incumbent president, and Atiku Abubakar, a former vice-president. President Buhari’s ill health made almost everyone assume he would not seek re-election.
But having started to recover, he has begun to give signals he will ask for peoples’ votes in two years’ time. With a veteran politician like Abubakar expected to put up a good fight in a system likely to be fairer because of a less overbearing incumbent, it will fall to the president’s underlings to take him on in the trenches, where almost anything goes.
They are probably doing so already. In September, the authorities terminated a lucrative logistics contract Abubakar’s firm had with the ports authority. They asserted the terms violated the Nigerian constitution.
More challenges are likely to follow for the former vice-president. It would not be totally out of the question if a corruption probe were suddenly launched. That way, President Buhari would not need to contend with him at the polls.
As an informal agreement between the major political parties dictates that the presidency will go to a politician from the north in 2019, potential candidates from the region are already battling one corruption case or the other. Abubakar had been left unperturbed, but that was while he was still a member of the ruling All Progressives Congress (APC) party.
This changed in December, when he moved to the leading opposition People’s Democratic Party (PDP). Will the expected mudslinging and schemings put the largely optimistic 2018 Nigerian economic outlook at risk? Not necessarily.
The prospects of politically induced violence are minimal. It could actually be a positive that the political cycle is gathering steam much earlier than usual. The Buhari government is already beginning to be more responsive to the needs of the people.
After only the slightest outcry, action is taken. When Nigerians complained about the misdemeanours of an elite police unit in December, the head of police quickly ordered a reorganisation. In the past, such protests would have gone unheeded.
While it is unduly sensitive to the Brent crude oil price, the technically diversified Nigerian economy should be boosted by an expected pick-up in agriculture, lower inflation and interest rates and increased public spending. The International Monetary Fund (IMF), which expects 0.8% GDP growth in 2017 and almost 2% in 2018, could revise its forecasts upward when it next publishes its economic outlook report.
Some economists urge caution amid the optimism. Ayomide Mejabi, an economist at Stanbic IBTC Bank, says: “The economy continues to show signs of weakness, especially if one focuses on the non-oil economy.” He urges the Central Bank of Nigeria (CBN) to ease monetary policy if the recent economic recovery is to be sustained.
His advice will probably be heeded if the inflation outlook is anything to go by. Still high but slowing consumer inflation of about 16% in the second half of 2017 was primarily due to high food prices, driven largely by domestic factors.
Informal exports of food to neighbouring countries and the increasing reliance on domestic inputs by local manufacturers have been pressuring prices. The situation may improve in 2018. “We are very optimistic that food prices will come down, and as they come down it will help to complement the reduction in core inflation,” said CBN governor Godwin Emefiele on the sidelines of a conference in London in late October.
Base effects would help, in any case, with annual consumer inflation likely slowing to the high single digits by mid-2018. “We are hoping that by the middle of next year we should begin to approach the high single digits,” said Emefiele. This may be indicative of the timing of a much-anticipated easing of monetary policy by the CBN.
Otherwise, Emefiele has been noncommittal on the timing of a potential rate cut if his inflation expectation is vindicated: “I would like to see low interest rates and I would like to see low inflation and I would be happy to see it as quickly as possible. When? I cannot categorically say,” he told the media in London. But would commercial bank interest rates fall in tandem? Not necessarily.
Banks are forced to charge a high interest rate premium due to the tough business operating environment. For example, their ATMs are run on standby generators. Consequently, Nigerian banks must transfer some of the costs.
Recovery is still fragile
In the medium to long term, structural reforms must be implemented regardless. Power supply remains erratic and logistics are a nightmare for firms, despite reforms, although it is improved.
The authorities’ Economic Recovery and Growth Plan (ERGP) uses the right buzz words but does not inspire much confidence among market participants. Not all of it is being implemented. The foreign exchange ban on some 41 imported items remains in place.
The plan also assumes the Buhari government will be in place after 2019. Even so, it represents “the best attempt at a structural reform plan in many years” according to Stanbic IBTC’s Mejabi.
Fears about a relapse into recession are related to the oil price. Nigeria’s economic trajectory has been moving in sync with the oil markets. When prices fell, the economy went into a five-quarter recession. When oil prices recovered, positive growth returned.
And because crude oil prices are not expected to rise to the heady levels of $100 a barrel and more of some years back, the 7% GDP growth target of the authorities by 2020 may be elusive.
“In order for the economy to continue growing at a steady pace, private sector credit needs to grow once more,” says Mejabi, who assumes a base case growth forecast for 2018 of around 2%. In the event that oil prices remain above $50 per barrel and structural reforms are implemented, growth could improve to about 5%.
Analysts are doubtful the CBN would abandon its multiple exchange rate system, even though the special foreign exchange window for investors and exporters, where the rates are set by buyers and sellers, is proving quite buoyant. With crude oil prices also expected to remain above $50 in 2018, foreign exchange reserves are expected to rise above $40bn in the year, from about $35bn in November.
Possible interventions in the foreign exchange markets by mid-2018 – when capital reversals on fears about the 2019 elections may begin to gain pace – should not be a problem. However, it would be better still to let go of the lever and save more foreign exchange for the next rainy day, which will surely come.