2015: Nigeria’s challenging year

As with many hydrocarbons producers elsewhere in the world, Nigeria endured a challenging 2015 as falling oil prices impacted the country’s exports and exchange earnings.

This was compounded by a range of broader macroeconomic pressures, including uncertainty in the lead up to the 2015 presidential elections, a strengthening US dollar and insecurity in the north of the country. According to the IMF, these headwinds slowed Nigeria’s GDP growth to an estimated 3.2 per in 2015, the lowest rate since 1999.

While growth remains well above the average for advanced economies, the outlook for the coming year looks brighter still, on the back of greater policy stability and an uptick in growth – bucking the IMF’s predictions for a global slowdown.

Electoral confidence

GDP growth is expected to rebound to 4.1% in 2016 and 4.2 per cent in 2017, according to the most recent IMF estimates, and central to maintaining that is a spate of new policies from the government of President Muhammadu Buhari.

In a boost to the country’s democratic credentials, Buhari’s election in March 2015 marked the first time in Nigeria’s history that an opposition party defeated the ruling party in open elections. Although it took several months before the cabinet was finalised, the government has unveiled a series of measures aimed at improving stability, increasing growth and addressing structural bottlenecks.

Atop the administration’s list of priorities is improving security in the north of the country, where attacks by terrorist group Boko Haram have dampened investment and strained public finances. The president has also launched a high-profile anti-graft campaign to reduce incidents of corruption.

Spending boost

According to the World Bank, crude sales typically account for around 75 per cent of Nigeria’s budget spending. However, with Brent futures dipping below $30 in early January, and Nigeria’s 2016 budget based on a price of $38 per barrel, government hydrocarbons revenues are expected to see substantial declines.

Nonetheless, the Buhari administration has also signalled plans to stimulate the economy through greater public spending, announcing a N6.1 trillion ($30.6 billion) budget for 2016 in late December, up nearly 25 per cent over the previous year’s initial budget. According to Vetiva Capital Management Research, N3.86 trillion ($19.4 billion) of the total is expected to come from oil sales, with the remainder to come from other revenue collection and debt financing.

The new budget is expected to increase the country’s fiscal deficit to N2.2 trillion ($11 billion), or 2.2 per cent of GDP, taking the country’s overall public debt profile to 14 per cent of GDP.

To help bridge the gap, Kemi Adeosun, the minister of finance, has suggested Nigeria will seek additional funding on international debt. The move comes in spite of rising costs for developing market borrowers, with statements by the president suggesting it could look for as much as N900 billion ($4.5 billion) in financing abroad.
Nigeria, which is currently rated “B+” by Standard & Poor’s, currently has some $1.5 billion in dollar-denominated bonds outstanding following issuances in 2011 and 2013. Yields on securities due in 2023 rose by some 300 basis points over the second half of last year.

Diversification

The government is also looking to encourage greater economic diversification to reduce reliance on revenues from oil and gas exports. Adeosun said the government hopes to boost
non-oil revenue by N1.6 trillion ($8 billion) in 2016, with an emphasis on more effective revenue collection from government agencies and parastatals.

In line with the national drive to diversify the economy and propel non-oil growth, many sectors – namely, mining agriculture, telecoms and industry – are expected to play an increasingly important role.

Mining, for example, could boost Nigeria’s GDP by 10 per cent in the next five years, according to a recent report from PwC, with more than 44 minerals in 500 locations seen as ripe for development. Agriculture is also seen as a promising area for growth, with McKinsey forecasting that agricultural improvements could see sector revenues more than double to $263 billion per year by 2030.

Policy revisited

While diversification efforts have been ongoing for several years, the urgency has increased, particularly with the strengthening US dollar. The Central Bank of Nigeria has held the naira at between N197:$1 and N199:$1 since March, roughly 20 per cent down from where it was in 2014.

However, with the state tapping into its foreign reserves – which have fallen 15 per cent year-on-year to around $29bn in December – to make up for foregone oil revenues, it has sought to reduce dollar sales and curb speculation, introducing new capital controls. The result has been a spike in the parallel market exchange rate to as high as N305:$1, according to press reports.

Nigeria is far from the only African economy to face this situation: the South African rand and Ghanaian cedi have both been hit particularly hard, dropping more than 20 per cent against the US dollar, while, according to Bloomberg, the Zambian kwacha ranked as the worst-performing currency in the world.

Nonetheless, given Nigeria’s stable political environment, large population and growing middle class, the country is expected to weather challenges such as lower oil prices and downward pressure on the naira, and remain an attractive destination for foreign investment in the long term.

*Being a review of Nigeria’s 2015 fiscal year by the Oxford Business Group.