By *Ronak Gopaldas | From CNBC Africa
With post-election euphoria subsiding, the enormity of the challenges that lie ahead for new Nigerian President Muhamadu Buhari and his administration have now become abundantly clear. The president inherited an economy crippled by an oil price slump, a treasury which, in his own words, is “virtually empty”, along with mounting currency pressures, rising inflation, and a host of structural issues which will not be remedied in the short term. The president’s honeymoon period will be a short-lived one, as he faces the urgent task of devising a sustainable strategy to guide Nigeria through its current economic crisis.
The already challenging economic environment is now being aggravated by elevated levels of policy inertia. Despite being elected in March and inaugurated two months later, President Buhari has still not appointed a cabinet; the latest news indicates that a cabinet announcement will happen only in September. This has been viewed in a disappointing light as the president was expected to be a more decisive leader than his predecessor. The result has been a marked reversal in the positive sentiment which characterised the post-election environment, most notably amongst the business community. The stock market rout over the past few months reflects these dynamics. However, as one commentator in Nigeria noted, “one campaigns in poetry but governs in prose”, and this is particularly true of the current predicament in which President Buhari finds himself.
Buhari’s critics call him “Baba Go Slow” and argue that the current policy inertia was an inevitable development arising from the complexities and internal politics within the young and ideologically fragmented All Progressives Congress coalition. However, his supporters argue that the delays are indicative of a deep desire to make the right appointments and have urged patience as he attempts to set up the foundations for economic progress via credible and technocratic appointments. Either way, a great deal of political capital hinges on the September announcements which cannot come soon enough for a country that is currently in policy limbo.
As a president who campaigned on a message of change, especially security and corruption, the big elephant in the room remains the economy, and clarity in this regard is sorely lacking. There are currently more questions than answers around what the policy impulse will be, clouding the outlook for both fiscal and monetary policy.
On the fiscal side of the equation, questions centre on how the authorities intend to plug revenue shortfalls. Already, the president has indicated that the removal of fuel subsidies are off the table, a proposal that many, including the International Monetary Fund, have argued would provide substantial relief to the fiscal accounts. A supplementary budget was widely expected to be announced once the new government assumed office, however, this too has not materialised, creating further uncertainty.
In the current context, austerity measures are critical and boosting revenue through improving tax collection, eliminating payments of wasteful subsidies, and rebalancing the disparity between recurrent expenditure and capex will be some of the key priorities to tackle. With the government’s ‘anti-corruption’ stance many hope that blocking leakages will help plug the revenue gap. However, recovering money that went missing will take time, while the new administration is not guaranteed that those funds are still available to recover.
The Central Bank of Nigeria’s (CBN) continued efforts to defend the currency reflect a desire to maintain the ‘status quo’ until more clarity emerges on the fiscal policy direction. However, delays in naming a finance minister have complicated matters, and concerns have arisen over how long the CBN will be able to maintain the current policy stance. Thus far, the currency has been artificially maintained, drawing harsh criticism for “spontaneous” monetary policy from various quarters, including The Economist magazine.
The imposition of new forex controls by the CBN – restricting the supply of US dollars to importers of a wide range of products – has helped to stabilise the country’s reserves which became severely depleted. However, the latest round of forex controls, together with those already implemented, only serve as a temporary solution. Parallel market rates currently range between N220-230 to the US dollar, illustrating a wide disconnect between this level and the official rate of N197 set by the CBN. Ultimately, with imbalances in the Nigerian economy growing and the currency still considered over-valued, the currency will come under further pressure. It will be difficult to sustain capital controls at current levels especially when considering that loosening restrictions is seen as a prerequisite for the country to remain in the JP Morgan Emerging Market Bond Index. Against this backdrop international investors are likely to hold off from investing money into the economy until the expected devaluation takes place. A removal from the index may well result in a sharp sell-off of foreign-held Nigerian fixed income assets and thereby put further pressure on the currency.
According to analysts in Nigeria, businesses are battling to cope with the current realities on a practical level. Economist Tunji Andrews believes business remains in the dark on the nation’s economic direction. “Whilst they cannot abandon already existing operations, it’s also difficult to embark on new or expansionary projects; so as not to fall on the wrong side of policy.” This downbeat view is echoed by Abuja-based commodities trader Archit Tiwari, who argues that the business environment has been extremely tough since the start of the year. “With the fall in the value of the naira and then the new CBN rules, sourcing forex has become very tough. Since everybody is unsure about what levels the naira will touch, importers are sitting on stock and not selling it. Exporters too are finding it difficult to adapt to a fluctuating conversion rate. In the agriculture sector, there were high hopes from the government, but ministers have not yet been appointed and there is still no clarity on what policy direction will be taken. With many states not paying wages on time, demand is very low too.”
With nothing that President Buhari or his administration can do to change the oil price, Nigerian authorities will need to focus on reform policies to address fiscal weaknesses and deterioration in the country’s forex buffers. However, delays in the formation of the cabinet, and a lack of tangible progress on the security front, have begun to chip away at the enormous goodwill the president inherited upon his inauguration. As the country battles chronic energy shortages, tighter credit conditions and a generally unfavourable economic climate, it is imperative that a clear direction for economic reform is forthcoming. With the new administration still getting to grips with the policy puzzle, investors have adopted a “wait and see” stance with the hope that their cautious optimism is not unfounded. However, the risk of any positive momentum dissipating is very real unless the country’s policy vacuum is addressed timeously.
*Ronak Gopaldas is the Head of Country Risk at Rand Merchant Bank in Johannesburg
