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In Nigeria, all bets are off

The government tries to moderate the boom/bust effect of oil prices on economy.

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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