© Reuters. FILE PHOTO: A supporter of the Congress Progressive Party holds a book with a picture of the APC presidential candidate, Bola Tinubu who has been declared winner of the 2023 Nigerian presidential election, in Abuja, Nigeria March 1, 2023. REUTERS/Issa Al-Bireh
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Written by McDonald Dzirotoy and Libby George
LAGOS (Reuters) – Nigeria’s next president, Bola Tinubu, will inherit anemic economic growth, record debt and shrinking oil production, but before he can begin to solve these pressing problems, he will need to win public support for painful decisions.
Life is tough for the citizens of Africa’s largest economy, and the tangle of protectionist economic policies and foreign exchange interventions has spooked investors.
Nigeria’s attempt to cut costly fuel subsidies a decade ago met with massive public protests and had to be dropped.
Tinubu, a member of President Muhammadu Buhari’s All Progressives Conference, helped propel the outgoing president to power in 2015.
Now, international businessmen, investors and citizens are hoping he can use his experience as Governor of Lagos State to recharge Nigeria’s faltering economy and finally face its toughest challenges.
In debt, in trouble
Nigeria’s debt has ballooned by nearly 60% since 2015, reaching $103 billion last year, according to the Debt Management Office. Its growth is outpacing the expansion of gross domestic product, and the government has warned that once non-booking loans from the central bank are added to the account, it could reach 77 trillion naira ($167 billion).
While Nigeria’s debt-to-GDP ratio is a modest 23.2%, compared to 60% in fellow oil-producing Angola, experts say the portion of revenue needed to service the debt is concerning.
In January, ratings agency Moody’s (NYSE) downgraded Nigeria, citing these figures. By some accounts, debt-servicing costs exceeded revenues last year.
Nigeria’s “shockingly low levels of government revenue” also raised questions about its ability to spend to boost growth, said Gregory Smith, emerging markets fund manager at M&G Investments.
“Debt stress is a symptom of a lack of government revenue,” Smith said.
Smith said that increased tax collection will be key for Tinubu.
Oil theft, subsidies
Some of the revenue problems stem from rampant industrial-scale thefts that last year sent oil production to its lowest in more than 30 years. Oil and gas typically finance half of Nigeria’s budget and 90% of its foreign currency. Continuing theft, lack of investment and industrial disputes impede production.
Moreover, crippled fuel subsidies drain what is left of oil sales. Fitch Ratings estimates that the implicit gasoline subsidy cost the government approximately 2.4% of GDP in lost revenue. Experts say taming subsidies and increasing oil production are key.
“The market seems short-sighted in focusing on these two things in particular: foreign exchange policy and the removal of fuel subsidies as well as a broader change to CBN,” said Yvette Babb of fund manager William Blair.
Buhari’s government created a complex web of official and parallel exchange rates in an effort to shore up the beleaguered naira. It also established a long list of items prohibited from the use of central bank foreign exchange.
Businesses say the resulting widespread dollar shortage is crushing, while investors say the difficulty of getting money out of the country has stifled investment.
Naira bonds, and investing locally, is almost impossible as a result, Smith and Babb said.
“The main thing is the problems of being able to get out of the market even if you feel you can make a return,” Smith said.
Government data showed that foreign direct investment fell from $2.2 billion in 2014, a year before Buhari took office, to $468 million last year.
Changes are hard to sell
Getting Nigerians to endure painful reforms hinges on convincing them that they will make life better – and that would be a hard sell.
Inflation is at its highest in nearly two decades, eroding savings and salaries. Unemployment reached a record high of 33%, which led to a brain drain. In addition, Tinubu’s 8.79 million votes are the fewest a Nigerian president has won since the country’s return to democracy in 1999, which limits his goodwill.
“He may need to show what he can offer the Nigerian people before he can get rid of something that obviously reduces the cost of living for a large proportion of the population,” Pap said of the fuel subsidy. Allowing the naira to weaken “comes at a cost,” she added.
($1 = 460.0000 naira)
