Nigeria is days away from choosing its next president. One of the candidates Nigerians have to choose from has struggled to lift the economy or achieve 10-12 percent GDP growth he promised while campaigning to be elected in 2015. Another is frequently being accused of corruption, although none of the accusations have led to a trial. There is also a former deputy governor of the central bank and a well known activist who has exposed corrupt practices in the past through his media platform.
Whoever wins will face a country at risk of a lost decade (flat per capita GDP), unless policymakers implement significant reforms to reduce dependence on oil.
Nigeria currently plans its budgetary allocation on oil revenues, with a benchmark price for oil used for each budget. For 2019, the country based its expected revenue on an oil price of $60 per barrel. While this has been criticized at a time prices are barely above $60, Special Adviser to Nigeria’s President Muhammadu Buhari on Economic Matters, Dr. Adeyemi Dipeolu says he doesn’t see the benchmark price more of a problem than meeting production quota. He believes if Nigeria can pump enough oil, the country will be fine for now. And if prices go south, there could be a supplementary budget.
“The satisfaction for me is the day we are able to say oil revenue only accounted for a lower percentage of Nigeria’s revenue,” Dipeolu said.
Oil price and production volume have been critical to Nigeria’s economic growth. The black gold is the country’s main foreign exchange earner and has been the reason for currency stability. Worse still, even non-oil revenue growth has been influenced by oil. But now, Nigeria has no choice than to build a future outside oil.
According to the International Energy Agency (IEA), oil is projected to sell at $88 per barrel in 2025. The days of boom which saw oil sell at $145 per barrel in 2015 is not coming back anytime soon.
Nick Stansbury, head of commodities research, overseeing $1.3 trillion at Legal & General Investment Management Ltd. believes the oil sector faces stagnating demand within seven-to-ten years. Hence, it may lose the ability to bring itself back into balance when oil prices drop. A 2010 report by Oxford Economics had explained why this could happen. The report forecasted a decline in the level of global oil intensity — the amount of oil needed per unit of GDP — especially due to measures to discourage the demand for hydrocarbons.
OPEC’s production cut, which was hoped would help stimulate prices will not have much effect if Russia does not reduce output as part of a December announcement about a planned output cut of about 1.2 million barrels per day that would include Russia. Already, Moscow has dismissed reports that Russia and OPEC were discussing a formal arrangement raising fears that the reduction in output may not happen as planned, and so goes the plan to stimulate prices.
There is also Saudi Arabia, the de-facto leader of OPEC, whose oil company Saudi Aramco is set to venture into international oil and gas exploration.
“We are no longer going to be inward-looking and focused only on monetising the kingdom’s resources,” Saudi oil minister Khalid al-Falih told the FT. “Going forward the world is going to be Saudi Aramco’s playground.”
Recent happenings point to the fact that oil prices are not going on a bullish run anytime soon and countries like Nigeria, with huge infrastructural needs, rising debt, growing unemployment and the world’s highest number of poor people, have to look for solutions to their economic challenges beyond oil.
Sadly, rather than expanding avenues to increase its revenues, amid other reforms like reducing government spending, Nigeria keeps looking at other options such as issuing Eurobonds, with almost $10 billion in the last two years. According to the International Monetary Fund (IMF), rising debt levels along with tighter financing conditions have lifted Nigerian bond yields, crowding out credit to private businesses as banks have bought government debt instead of giving out loans. Today, the cost of paying interest on the loans held by Nigeria exceeds 20 percent of government revenue.
Nigeria’s Finance Minister recently acknowledged the need for the country to increase revenues, but more needs to be done to walk the talk. She mentioned a couple of initiatives being planned to grow government revenues, including the introduction of sugar tax and an increase in value added tax. But there also needs to be a reduction in government spending and a stop to fuel subsidy which cost N800 billion in the first half of 2018 alone. Nigeria has four refineries and none has worked in full capacity for more than a decade. Privatising these assets will raise much needed funds for the country. The government also hold stakes in joint oil ventures, which can be sold to prop up revenues.
Brookings noted in a January report that Nigeria has a chance to raise tax revenues above current levels if it further strengthens tax capacity and improve governance in revenue collection. Improving governance in Nigeria has seen tax collection increase and may help plug tax gaps in the country, but in the medium to long term, strengthening tax capacity should be a key policy objective. Brookings noted, however, that tax capacity is largely determined by entrenched structural factors such as the stage of economic development, the size of the informal sector, and the sectoral composition of economic activity, among others. How Nigeria performs in this regard will play a huge role in its economic future. However, none of the candidates contesting for Nigeria’s presidency has said much about how they intend to fix Nigeria’s revenue challenge and grow the economy.
One of the front runners for Nigeria’s presidential election holding on Saturday February 16 is current President Muhammadu Buhari, who by several standards have underperformed on the economic front. Even his perceived integrity which made many vote for him in 2015 is now tainted by accusations of nepotism and selective fight against corruption. His ability to take Nigeria to desired level of economic prosperity is under question. The other frontrunner is former Vice President Atiku Abubakar, who has tried without success to shrug off the label of corruption which is the major reason his critics believe he does not deserve to lead Nigeria.
There is also Kingsley Moghalu, a former deputy governor of the central bank, who should understand the economy better and give Nigeria a chance at achieving its full potential. But he lacks grassroots popularity, which is key to winning elections in Nigeria. Money also plays a major role in how Nigerians vote, with vote buying becoming rampant in the country where more than 80 million people live in extreme poverty, a stage on which Moghalu cannot compete with President Buhari and Atiku. Fela Durotoye and Omoyele Sowore are other candidates that have been written off by several analysts, leaving the ruling party All Progressives Congress (APC) and main opposition Peoples Democratic Party (PDP) as favourites to produce Nigeria’s next president.
Whoever wins needs to work on expanding the country’s fiscal capacity, reducing waste and start charting a future with oil revenue as excess. There is also need for deep reforms that will encourage investment. But the work will become even more difficult if the elections end in violence as feared by some analysts.