In Nigeria, all bets are off
LAGOS, Nigeria — When oil prices soared last year, the Nigerian stock exchange zoomed upwards. In the commercial capital, Lagos, it seemed like the good times might never stop.
Swanky bars and upmarket nightclubs sprang up in central Lagos filled with high-earning professionals. Many of them were Nigerians returning from overseas as "repats" to take a share in the country’s economic good fortune.
The country was also benefiting from a period of relative political stability after the end of military rule a decade ago. Nigeria’s new democratically-elected leaders embraced International Monetary Fund liberalization policies and from 2003 the economy grew by leaps and bounds, registering growth rates above 6 percent over several years.
Nigeria is Africa’s third largest economy, behind South Africa and Egypt, thanks largely to its oil production. Long Africa’s biggest oil producer, Nigeria now competes with upcoming Angola for the continent’s top spot.
Nigeria’s oil exports account for 95 percent of all foreign exchange earnings and more than 80 percent of government revenue. As oil prices climbed to record highs in 2007-2008, foreign investors flocked to Nigeria and the Nigerian Stock Exchange was one of the best performing of its kind in the world.
But the worldwide financial meltdown and the collapse in global oil prices — from a peak of about $150 last summer to near $40 today — has thumped the Nigerian economy and forced the government to redraw its economic plans. Initially slow to respond to the harsh economic climate, President Umaru Yar’Adua has put in place a new budget that many say will help the Nigerian economy weather the storm.
The global economic crisis has had a more pronounced negative impact on Nigeria’s economy than many, including the government, at first acknowledged.
“Initially there was a perception that we were remotely connected to [global] events … and we would be able to weather the storm,” Finance Minister Mansur Muhtar told a conference of business leaders in Lagos in mid March. “But it is increasingly dawning on us that going forward it is going to be a very turbulent ride."
In just a few months, the Nigerian currency, the naira, has fallen about 25 percent against the dollar. The stock market sank by 40 percent, and nearly $3 billion of foreign investor cash has fled the bourse. Economists estimate economic growth in Nigeria will slow to 3 to 4 percent — down from the 8.1 percent projections published by the IMF last October.
Though 3 percent growth sounds substantial compared to negative growth projections for much of the developed world, it barely keeps even with growth of Nigeria’s population of 140 million.
While Nigeria’s relatively small proportion of high-earning professionals will be hit hardest in these leaner years, charities such as the U.K.’s Action Aid earlier in March warned that the global financial crisis could also make life more difficult for the poorest in many African countries.
“There is a real risk that development will start to go backwards in many countries as the money dries up and that the recession will lead to worsening poverty and terrible consequences for the men, women and children caught in its grip,” said Claire Melamed, Head of Policy.
The IMF this month warned that sub-Saharan Africa may be harder hit in this global recession than during previous worldwide contractions, due to restricted credit flows. Uncertainty over the depth and length of the global economic downturn is a concern, too.
“The slump in global growth could persist longer and the impact of the slowdown could be more pronounced than expected, negatively affecting sub-Saharan Africa’s internal and external equilibrium,” said the IMF in a March report.
The Nigerian government has been slow and uncertain in its response to these shocks, sparking further speculation about the health of the ailing president Umaru Yar’Adua. Since taking office in May 2007, Yar’Adua’s administration has been overshadowed by speculation about the president’s health. Known to suffer from long-term kidney complaints, and more recently rumored to have developed lung cancer, the president has spent many weeks outside the country for unspecified health check-ups and treatments.
Yar’Adua’s health is seen as a drag on government activity. His slow and deliberating style has won Yar’Adua the nickname "Baba Go-Slow" after Lagos’s interminable traffic jams. Critics have slammed the quiet northern president for lacking the physical fortitude needed to govern a boisterous nation like Nigeria.
The government’s slow response in acknowledging, and finally acting on, the double shock of a global financial crisis and a collapse in oil prices has earned Yar’Adua further criticism from economists.
“Crisis, by its nature, calls for swift and decisive steps, rather than slow and calculating steps,” said Bismarck Rewane of Financial Derivatives in Lagos.
In a belated bid to manage Nigeria’s worsening position, President Yar’Adua on March 10 signed a much delayed 2009 expansionary budget, allocating $21.2 billion for government spending — much higher than earlier drafts.
Here is the good news: The government can meet these spending commitments thanks to a $20 billion Excess Crude Account, a landmark IMF reform in which windfall oil earnings above benchmark projections are deposited. The account is designed to smooth out the boom-bust cycles of Nigeria’s oil-based economy. This cushion is expected to help Nigeria to avoid the disruption of previous drops in oil prices, such as the 1980s when a fall in commodity prices meant the government could not pay civil servants bringing on political instability.
Other recent measures have met with criticism, especially from the business community after the government sought to bolster the falling naira by implementing currency controls reminiscent of the country’s dark military days.
Then on March 24, there was news that oil output has fallen to 1.6 million barrels per day, the lowest in 21 years, as a result of violence in the Niger Delta region and federal funding shortfalls. This drop in production casts doubt on the new budget, which was based on forecasts of oil production of 2.3 million barrels per day. The government has also postponed plans to raise $500 million by selling government bonds.
However, in another positive development, on March 24 the oil unions called off a strike, after the government pledged to improve security in the Niger Delta area, which has seen a marked increase in rebel violence in the past two years.
Despite the government’s slow response and the economy’s dependence on oil exports, economists are broadly optimistic that Nigeria will be able to weather the storm as long as there are no further shocks on the horizon.
“Ultimately [the economic crisis] will have a positive impact, as it’s jolting the government into action,” said Rewane. But throw some political instability into the mix, such as a leadership struggle in the event of President Yar’Adua’s death in office, and the chances of Nigeria riding out the storm don’t look so good. “In that case,” Rewane said, “all bets are off.”
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