Nigeria: Banking on Buhari

Oil industry: Plagued by scandals and a falling price. Picture: GALLO IMAGES/ULLSTEIN BILD VIA GETTY/MARKUS MATZEL

MAY 29 heralds the start of a new dispensation for Nigeria when Muhammadu Buhari, a 72-year-old retired general and former military head of state, is sworn in as its new president. In his fourth electoral attempt at the presidency he achieved the unthinkable by defeating the incumbent, Goodluck Jonathan, in what observers have called the closest presidential election in Nigerian history. Fears of a violent aftermath were defused when Jonathan conceded defeat hours before the formal announcement of the results.

It was a pleasantly surprised world that watched Nigeria snatch calm from the jaws of chaos.

Since then the questions have mounted as to what a change of government would mean for Africa’s largest economy. The obvious place to start would be to sum up the achievements and failings of the outgoing government.

Under Jonathan, Nigeria enjoyed record-high oil prices, averaging in excess of US$100/barrel between 2011 and 2014. The country launched a sovereign wealth fund and a national mortgage refinancing company that was touted as being as potentially game-changing as Fannie Mae and Freddie Mac were in the US. The Jonathan government also completed the privatisation of failing state-owned power plants, even though this did not translate into the expected improvement in generation output.

But its failings were legion, and ultimately of greater consequence than its successes. The biggest failing was in security. Under its watch Boko Haram grew from a ragtag group of terrorists to an occupying army. In spite of a state of emergency declared in May 2013, by the end of 2014 Boko Haram was occupying a territory as large as Swaziland in the northeast of Nigeria. Nothing crystallised the government’s inability to tackle Boko Haram as much as the abduction, in April 2014, of more than 200 schoolgirls from the village of Chibok.

A series of scandals also plagued the oil industry, Nigeria’s mainstay, ensuring that when the long spell of $100/bbl-plus oil ended there was little to show for it in terms of savings, investment or infrastructure spending.

A fuel subsidy scandal saw a four-fold ballooning of subsidy payouts in the first year of Jonathan’s government. The half-hearted reaction by the government dented its reputation considerably.

The oil-boom party came to an abrupt end around the middle of 2014, when oil prices began a downward slide. By the end of 2014 prices had halved to around $50/bbl. The first quarter of 2015 has seen a slight rise, so that it now hovers around $60/bbl. Nigeria’s budget, based on a "benchmark" oil price of $77,50/bbl in 2014, has had to settle for a terribly modest $53 in 2015.

The effects are all too obvious. Nigeria is this year projected to earn about a third less than it did last year. As many as two-thirds of the country’s 36 states — lured into profligacy by the monthly allocation of oil revenues that is the perverse highlight of Nigeria’s federal system — are now struggling on the brink of insolvency, unable to pay workers’ salaries and forced to resort to expensive bank debt to stay afloat.

An inability — or unwillingness — to save during the oil price boom of 2011 to 2014 has left the country poorly positioned to deal with the dwindling revenues.

Foreign reserves, at less than $30bn, are at their lowest in more than a decade, while government debt is at an all-time high. Since late 2014 the naira has depreciated by about 20% against the US dollar, fuelling a panicked sell-off of equity and bond market holdings by foreign investors.

Debt levels have soared, so that this year a quarter of the budget will be spent on servicing domestic debt, up almost 100% in nominal terms since 2013.

This is the situation that Buhari will be inheriting. Expectations are so high that senior party officials now openly worry that the government is being set up to fail. One diplomat likens Buhari to Narendra Modi, elected on a groundswell of intense enthusiasm to lead India a year ago. Modi’s honeymoon was short-lived; campaign promises perceived by voters to have been broken are quickly overshadowing the modest progress being made on a number of fronts. Buhari’s trajectory is likely to be similar.

For anyone seeking to divine the economic direction of the Buhari government, the place to start would be his time as military head of state 30 years ago.

The circumstances of that era bear an uncanny resemblance to today’s situation: falling oil prices, rising inflation, an increasingly buffeted local currency.

Buhari’s approach was to slash tens of thousands of civil service jobs, reduce the number of local governments by two-thirds, hike interest rates, introduce stringent import restrictions, and cut government spending by 15% in the budget he inherited. He also vehemently resisted pressure from the IMF to devalue the naira in exchange for a generous bailout.

From all indications, the economic priorities of the civilian President Buhari will revolve around plugging revenue leaks and looking for ways to swell government income. In recent weeks attention has focused on the myriad ways Nigeria has lost substantial revenues: entrenched patterns of abuses in the granting of tax holidays and import waivers; nonremittance of revenues to the federal treasury by government agencies like the customs service, the national oil company, and the tax office; payments of salaries to "ghost workers"; and more.

In 2013, Central Bank governor Lamido Sanusi raised an alarm over the Nigerian National Petroleum Corp (NNPC) being unable to account for $20bn of oil earnings. When Jonathan removed him from office months later it was easy for many watchers to discount the official reason — "financial recklessness and misconduct" — and assume it was payback for his audacious act of whistle-blowing.

In his final weeks in office Jonathan fired Saratu Umar, head of the Nigerian Investment Promotion Council, the agency vested with the power to grant tax holidays to investors and businesses. The reason remains unknown, but it is thought to be linked to a letter that finance minister Ngozi Okonjo-Iweala recently wrote to Umar, lamenting the "apparent abuse in the grant of Pioneer Status (tax holiday) to companies" by the council. This practice is believed to have deprived Nigeria of several billion dollars in potential revenue.

It’s not all bad news — or, more accurately, things could have turned out much worse. Charles Robertson, global chief economist at investment bank Renaissance Capital, says that if Nigeria’s government had binged on debt the way some other frontier and emerging markets did during the commodities boom, the sudden fall in oil prices would easily have pushed the budget deficit from the current projected 1,12% of GDP (2015) to more alarming levels.

Importantly, there appears to be a consensus among analysts that the dip in revenues offers Nigeria an opportunity to carry out long-overdue structural reforms of its dangerously oil-obsessed economy. As Mallam Nasir Ahmad El-Rufai, a former director-general of the bureau of public enterprises, put it, $50/bbl oil is welcome because it will "force us to make hard choices".

Andrew Lapping, portfolio manager of Allan Gray Africa Equity Fund, agrees. "Less money can drive reform; it forces you, you’ve got no choice." Every opportunity to shift focus to the non-oil sector ought to be welcome; in recent years the non-oil sector has been the key driver of Nigeria’s economic growth (the oil sector declined through most of 2014)

Not everyone is confident Nigeria will be disciplined enough to see this as an opportunity to reform its economy and curb the monumental levels of corruption, reflected in its dismal showing on Transparency International’s annual country rankings. "[There’s] a narrative that suggests that $50 oil [will be] a control on corruption. I think it’s a dangerous argument," says Folarin Gbadebo-Smith, executive director of the Centre for Public Policy Alternatives, a Lagos-based think tank. "The absence of food on your table is not the same thing as a control on your diet."

Buhari’s pedigree suggests that diet control will come easily to him, though. There is also an opportunity to raise government revenues by focusing on tax reform. Analysts have suggested that the federal government should seek to copy the hugely successful model of Lagos State: it earns twice as much from taxes as it does from its monthly share of national oil revenue.

"Nigeria’s tax take as a proportion of GDP is just 12%-13%, much lower than the 20%-25% you would expect for an emerging market economy at a similar stage of development," says Ayo Salami, chief investment officer of the Duet Africa Fund. "A big chunk of the economy is just not being taxed."

Every extra naira will come in handy. In its manifesto, Buhari’s party promised to embark on a huge programme of public works projects, employ "at least" 100 000 more police officers, introduce free daily meals for primary school children, and launch a conditional cash transfer scheme for millions of citizens. Defence spending is also likely to rise, considering Buhari’s background as a retired general, and his promise to rout Boko Haram, whose five-year insurgency has claimed more than 10 000 lives and displaced more than a million Nigerians. Rebuilding the devastated northeast region will also require substantial funding.

The party is confident it can find the billions of dollars required to pay for its lofty ambitions. "We are confident that by blocking avenues of wastage and corruption alone, savings could run into trillions of naira that could be deployed for productive use," wrote Kayode Fayemi, policy director of the presidential campaign, in a January letter responding to criticisms by Charles Soludo, a former Central Bank governor.

The success of Buharinomics will no doubt depend not only on the quality of the economic team but also on how well its members resist the temptation to choose teamwork over individual flashes of brilliance. Buhari’s key economic appointments will include a finance minister, a deputy finance minister, a chief economic adviser, a national planning minister and an economic management team. It is likely that these will be drawn from the economic policy unit of Buhari’s presidential campaign team, key members of which include: Ifueko Omoigui-Okauru, an accountant who ran Nigeria’s federal tax service between 2004 and 2012; Wale Edun, former bank executive and commissioner of finance in Lagos, Nigeria’s richest state; Pat Utomi, a former presidential adviser and currently a professor at the Lagos Business School; and respected economists Doyin Salami and Ayo Teriba. During the IMF meetings in April in Washington, Omoigui-Okauru, Edun and Abba Kyari (a former bank executive) represented the incoming government.

There is speculation that Buhari will be seeking to appoint a new Central Bank governor, even though the current one is only one year into his five-year term, and a parliamentary majority would be needed to effect a midterm change.

"The relationship between the president and the Central Bank governor [is important], because economic policy is an outcome of an alignment between government and the Central Bank," says Bismarck Rewane, CEO of Financial Derivatives Co, a consultancy. He says Buhari will be more "development-oriented" in the economic direction, in contrast to the "growth-oriented" approach of the past decade.

Considering how central it is to the Nigerian economy, the oil industry would be the ideal starting point for reforms aimed at removing the long-standing obstacles to development. Speculation is rife that petrol and kerosene subsidies, which cost as much as $5bn annually, will be abolished early in the life of the new government. Central Bank governor Godwin Emefiele has called for a sell-down of the government’s majority stake in the "joint venture" contracts that account for a third of Nigeria’s daily oil output — a proposal that has been backed by prominent players in the industry. It is estimated the move, if implemented, will raise as much as $75bn, which is almost twice what Nigeria is projected to earn from crude oil sales this year.

It was not surprising, then, that fuel wholesalers — who score on the subsidised petrol pump price and are owed $1bn by government — struck this week by withholding supplies, which immediately crippled business. Buhari will have to move beyond accusing his predecessor of "sabotage" for having left the crisis unresolved.

But perhaps the most important reform that existing and potential oil industry investors will be looking to see is the passage of the Petroleum Industry Bill, the omnibus legislation that seeks to unbundle and privatise the notoriously corrupt NNPC and rewrite the fiscal terms of the oil industry. The draft bill has been caught up in much controversy since it was introduced seven years ago, with the powerful international oil companies complaining that it is deeply unfavourable to them. The uncertainty surrounding the legislation has held up fresh investment in the sector in recent years and led to an "unprecedented decline" in the operations of the major oil and gas companies, according to Tajudeen Umar, a petroleum geologist and former NNPC staffer. He estimates that successful reform of the oil industry could raise production capacity from 2,8m to 3,5m barrels/day over the next five years.

Nigeria’s erratic electricity supply, cited by business as a major drawback to growth, is also a key challenge facing the new government. The country has installed power generation capacity of 10 000MW but currently manages to produce only 3 500MW-4 000MW, according to a McKinsey report.

Another likely turf for early reform would be in the budgeting process. A review of the recently passed budget is likely, considering how much criticism it has attracted on account of the staggering extent to which it is skewed towards recurrent expenditure, and incompatible with the goals and ambitions of the new government. One option is to pass a supplementary budget; another (more drastic) option would be to jettison the old budget and draft a new one.

Local and foreign investors and the wider business community will be paying keen attention to the countless economic policy decisions that May 29 will set in motion. Many, perhaps even most, will choose to err on the side of pessimism. But a handful are choosing to see opportunity bound up with Nigeria’s much-discussed risk.

"You have to look at the big picture in the long term — over a 10-year cycle," says Allan Gray’s Lapping. He is referring specifically to the prospects of Nigeria’s stock market, but his sentiments could be expanded to the country as a whole. Allan Gray is a new entrant to the Nigerian market; it recently listed its Africa Equity Fund in Nigeria, the first such listing of a collective investment scheme by a foreign firm.

Renaissance Capital is another bastion of bullishness. As CEO Igor Vayn put it recently: "We think Nigeria is on the cusp of a recovery, and the low oil prices combined with a change in government provide the best investment opportunity in years."