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Economic reforms accelerate in the shadow of the pandemic (as the naira nudges 500 to the US dollar)

Faced with a foreign exchange drought, policy makers are rapidly discarding the shibboleths of Buhari-nomics

Ending the fuel subsidy, devaluing the naira, incentives for big oil investors and privatising the power transmission network were all anathema to the policy predilections of President Muhammadu Buhari. Yet they are all happening with the President's reluctant approval.

The rationale is clear enough. This week marks six years of the Buhari presidency, which was punctuated by two economic crashes. The first, the oil price slump in 2015, halved export earnings. The second, triggered by the pandemic and concomitant commodity price slump, cut export earnings, pushed up prices and demolished jobs. Now there are signs of a painfully slow recovery.

In the short term, the treasury can't pay its bills. Although oil revenues, providing 95% of the country's foreign exchange, are up this year, debt-servicing and recurrent spending are crowding out the capital investment needed for modernisation and job creation. 

At least 26 out of 36 states saw no capital investment last year. Most of those states are in the north, where over 70% of the poorest Nigerians live, and have been blighted by insurgent attacks, herder-farmer clashes and banditry (AC Vol 62 No 10, A country at war with itself).

In the medium term, the rising unemployment rates – 33% for population of working age and 53.4% for youths aged 15-24 – heralds a political breakdown. 

That much is clear to President Buhari who told expatriate Nigerians in Paris on 19 May that the country risked being locked into a mutually-reinforcing cycle of under-investment leading to mass unemployment triggering communal clashes and banditry.

This combined pressure on state finances, jobs and security is forcing sharp policy twists. First and most obvious is the exchange rate. Godwin Emefiele, Central Bank of Nigeria governor, unceremoniously announced 7.6% devaluation in the naira at a press conference in Abuja on 25 May. 

'We found out we were no longer dealing in this so-called CBN official rate for transactions,' said Emefiele. 'We are still running a managed float, we are monitoring the market.'

A trader in Nigeria assets said the dropping of the central bank's official rate and its merger with the so-called Nafex rate (introduced to encourage exporters and investors) is seen as a deliberate change in stance to boost US dollar inflows.

This isn't the end of the story. Now, traders are pushing the government to narrow the spread between the Nafex rate averaging this year at N410=US$1 and the parallel rate at which a US dollar was selling for N495 in the last week of May. 

Emefiele and his advisors will be studying the inflows over the next month. Their hope is the parallel rate will start to fall once the dollars start returning but there are no guarantees. 

There are also risks, such as stoking inflation. Food prices are already at record levels because of insecurity and rising transport costs.

Fuel prices are set to rise, both from the logic of the devaluation and the inability of the government to finance the fuel subsidy scheme. Staunch opposition from citizens' groups and trade unions will create more political ructions.

Less clear is the trajectory of the government's long delayed Petroleum Industry Bill. It had been set to go through both houses in the National Assembly by the middle of this year (AC Vol 62 No 9, Oil reform gathers pace).

Now, we hear, there have been some amendments behind the scenes which could cause further delays to the law. This comes as several international oil investors are discussing operating terms with Nigeria's state oil company for the Bonga South West project, worth some $10bn and including one of the biggest fields in the region.

Plotting a path through the global energy transition and falling oil consumption, the international companies will drive a hard bargain. Royal Dutch Shell, key to the offshore Bonga project, worries Abuja with its declared intention to sell all its onshore oil assets in Nigeria. 

Debates on how to bring in new investors, switching emphasis from oil to gas, and restructuring the energy sector have been swirling around for decades. But successive governments have shown little sign of urgency.

After a succession of disturbing analyses and forecasts from the Treasury, the Vice President's team and his own Economic Advisory Council, President Buhari has agreed to an economic reset. How quickly, or even whether, these policy changes can turn around Nigeria's unwieldy economy under the current harsh global conditions will be the next focus for Buhari's advisors (AC Vol 62 No 1, Ready to rumble & Vol 61 No 25, Unbalancing the books).

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