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Monday, March 27, 2023

Nigeria Economy Comes Full Circle to 1999

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Twenty-three unbroken years into Nigeria’s democratic experiment, it’s looking like déjà vu all over again for Africa’s most populous nation as current economic realities begin to resemble the difficult conditions pre -1999.

When ex-President Olusegun Obasanjo was elected on February 27th 1999, he had the hapless task of overseeing an economy and political system largely destroyed by 16 straight years of brutal military rule.

A largely stagnant economy in that time period meant that income per person fell from $788 in 1980 to $679 in 1999 even as Nigeria’s population surged to nearly 100 million people.

Today, income per head has also been sliding from $2,693 in the year 2015 to $2,099 last year (2021) even as the Nigerian population crosses the 200 million mark.

Nigeria’s currency, the naira, went from near parity (N1: $1) or slightly stronger than the dollar in 1980 to losing over 99% of its value such that N1 was now worth only one American cent in 1999.

These days the naira is also in a slow motion crash moving from $1: N198 in 2015 to today’s dollar value of N445 in the official investor & exporters (I&E) FX market. In the thinly traded parallel market the Naira exchanges hands for as low as N630 per dollar leading to a record high divergence between official and parallel Market.

As you can guess by now it was the exact same scenario in 1999 and earlier years under Abacha, which also led to corruption as the dictator’s cronies got dollars cheaply (official rate), which they in turn flipped for a tidy sum in the black market.

Under the foreign exchange decree of 1995, the Autonomous Foreign Exchange Market (AFEM) was reestablished, allowing private companies to source foreign exchange at the parallel market rate (about N86 to the dollar in October 1998). The official exchange rate remained at N22 to the dollar.

Just as Nigeria faced fuel shortages and scarcity in 1999 it faces them today. Back then it was the corruption emanating from dictator General Sani Abacha’s fuel import license scams and unwillingness to fix local refineries that led to the shortages.

Today, shortages are fed by the petrol subsidy scam and still lack of functional refineries for what would be the world’s eighth largest oil producer and OPEC member.

Nigeria’s oil sector which makes up some 10% of GDP and 40% of government revenues has shrunk by 26% since 2018 alone, according to data by Afrinvest West Africa.

“It would be more difficult than 1999…at that time, criminality, corruption and power weren’t as wide spread and even population was less,” the CEO of a major financial services firm in Lagos told MoneyCentral.

“Do you appreciate how they have democratised oil theft. The actual production is still around 2mbpd, but over 600k/bpd is “stolen” by cabals who back the Niger Delta militants from end to end till it gets exported and they are not even bringing back the money…only inflow trickles when they need it. It’s too big a racket that it would be tough to stop…it’s democratised and involve cabals from the oil region. That is why it is waste for IOCs to invest in further exploration and even production offshore.”

In 1999, young militants began to attack oil installations, kidnap oil workers and damage pipelines to demand compensation for oil spills.

Today in 2022, that has graduated into a sophisticated oil theft operation, resulting in a loss of crude oil export earnings valued at over $50 million per day ($1.5 billion a month), which also indicates a shortfall in government revenue from crude oil royalty.

Daniel Onasanya research Analyst at Afrinvest, says: “political risk accentuates Nigeria’s economic uncertainties, while subsidy payment accounts for nearly 50% of total deficits.”

Empty treasury

 The Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed on Thursday sounded the alarm bells as she revealed a total of N6.72 trillion as a full-year budget for petrol subsidy payments in 2023.

That will be if the next Nigerian president decides to continue with the policy that has been identified as a drain on the economy and state finances.

Ahmed also revealed that the country’s debt service cost in the first quarter (Q1) 2022 was N1.94 trillion, N310 billion higher than the actual revenue received during the period.

The Minister of Finance disclosed these when she unveiled the Medium Expenditure and Fiscal Strategy Paper (MTEF-FSP) in Abuja.

When Obasanjo took over in 1999 the state’s coffers were also empty, and the country was in the throes of a sovereign debt crisis, with billions in unserviced debts, making it ineligible to borrow more to fund a growing deficit.

The lack of a domestic bond market in 1999 meant the government at the time had to increasingly rely on Ways and Means financing (money printing) by the Central Bank, which was hardly independent at the time, to fund government expenditure with the resultant surge in inflation destroying what little middle class was left in the country.

Today, something similar is taking place. The Nigeria Government borrowing from its Central Bank hit a record high of N19.6 trillion as at May 2022.

As of the end of 2021, data obtained from the Central Bank of Nigeria (CBN) showed that Way & Means lending to the Nigerian Federal Government stood at N18.4 trillion ($43bn). Fast-forward to May 2022, the number had risen to N19.6 trillion ($46bn).

This implies a new disbursement of about N1.2 trillion in the first half of 2022. Analysts say that the federal government action is leading to financial repression.

Financial repression is a term that describes measures by which governments channel funds from the private sector to themselves as a form of debt reduction.

The CBN held 85.1 percent of the government’s domestic debt at the end of 1997. Since the CBN monetizes much of the deficit, budgetary shortfalls had a direct impact on the money supply and on price levels.

Like then Nigeria’s inflation rate is elevated and increased to 17.71 percent on a year-on-year basis in May, 2022, according to latest figures released by the National Bureau of Statistics (NBS).

Falling growth and rising poverty

The National Bureau of Statistics shows that the poverty rate fell from 70% in 1999 (when Obasanjo took power) to 54% in 2004. Poverty however, is on the rise again.

The World Bank said in June that the current inflationary pressure will push an additional one million Nigerians into extreme poverty by the end of this year.

The Bank in its latest Nigeria Development Update report, titled, “The continuing urgency of business unusual”, stated that the additional one million is different from the six million Nigerians that were already predicted to fall into poverty this year because of the rise in prices, particularly food prices.

Also driving poverty and unemployment is the dismal growth rate for Nigeria in recent years.

Nigeria’s growth rate has dropped from an average of 4.72% per annum between 2011 and 2015, to only 0.8% per annum between 2016 and 2021.

Nigeria’s unemployment rate was estimated at 27% in 1997.

The jobless rate in Nigeria rose to 33.3% in the three months through December 2020, according to a report published by the NBS while the economy was 64% smaller in size in 1999 at $59.37 billion compared to 1980 during the oil boom years.

A new debt trap

Nigeria is currently grappling with liquidity risk as its debt sustainability condition is severely threatened amidst rising debt stocks and low revenue.

One of Obasanjo’s greatest economic victories was the dramatic reduction of Nigeria’s external debt from $36 billion in 2004 to $3.5 billion in 2006.

Nigeria’s foreign debt ballooned from $13 billion in 1981 to $24 billion in 1986, when sharply lower oil revenues and continued high import levels escalated balance of payments deficits.

Debt service obligations including payment of arrearages, were then projected to be over $8 billion annually for the next several years.

However, according to the 1997 Central Bank of Nigeria’s annual report, Nigeria’s total debt stock at the end of 1997 fell to $27.09 billion, compared to $28.06 billion in 1996.

The reduction was attributable to principal repayments, debt reconciliation, particularly the Paris Club debts, and conversion of some debts under the Debt Conversion Program.

The exact debt figure was still in dispute with multilateral financial institutions when Obasanjo took office.

The 1998 budget allowed only $2 billion for foreign debt payments, thus ensuring continued build-up of arrears.

Just as in 1999, Nigeria may be facing a sovereign debt crisis, unless the Government that takes over next year decides on some tough reforms.

The nation’s total public debt stock has ballooned to N41.6 trillion, while the foreign component has eclipsed the 2004 levels that Obasanjo paid off, standing at $39.96 billion as at March 2021, according to data from the Debt Management Office (DMO).

Low foreign investments

Back in 1999 Nigeria was a pariah state that failed to service its debts, had multiple exchange rates that deterred foreign investments and was seen as extremely corrupt.

While some progress has been made with the establishment of the DMO and EFCC, the foreign exchange management system is still seen as a deterrent to large scale inflows of dollars, by foreign investors, just as was the case in 1999.

Net Foreign Direct Investment (FDI) flows as a percentage of GDP stood at a tiny 0.6% in 2020, the same level as it was in 2015, and the lowest since 1998. In 1998 it was 0.5% of GDP, according to World Bank data.

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