If you are a young Nigerian, life was already hard enough before the price of oil collapsed and Boko Haram established themselves as a real threat to Africa’s largest oil producer. The country’s now delayed elections are unlikely to improve their lot or that of weary investors.
For years Nigeria’s 170m people have laboured to overcome endemic power shortages, a lack of jobs, crippling corruption and institutions which have persistently failed to serve them. Nigeria’s own statistics agency found that 61 per cent of Nigerians lived on less than a dollar a day in 2010.
Electricity consumption per head of population is around 149 kw-hour (Mexico’s, by comparison, is over 2,000 kw-hours). Former central bank Governor Lamido Sanussi was sacked last year after exposing a multi-billion dollar subsidy racket involving the state oil company.
Nigeria’s oil wealth has helped create a north/south divide which has been exacerbated by the rise Boko Haram. Oil production and most economic activity is concentrated in the south of the country with Lagos its epicentre. The widely dispersed population has struggled against disease, too few schools and poor harvests made worse by a lack of fertiliser and machinery.
The population has (quite rightly) felt ignored by Abjua for years. The divide has become so stark and painful that the government has been forced to rebut accusations that the country could splinter as Boko Haram extended its reach.
Nigeria’s economy heavily relies on oil and gas revenues so the oil price collapse has only compounded the country’s problems. The government’s 2015 budget is predicated on an oil price of $65 (already revised down from $73 back in November) but, with Brent prices well below that, those projections already look overly optimistic.
That means that the country’s budget deficit, already at NGN755bn, will only increase. A deficit of that order is not a disaster given the very low government debt level of 12 per cent of GDP, among the lowest in the world, but is enough to see the currency come under continued pressure in the months ahead.
The central bank has struggled to shore up the naira, in spite of running down already limited reserves well below the official $34bn figure (the Central Bank only publishes a 30-day moving average), raising interest rates and devaluing the official exchange rate in November last year. The currency devaluation did little to resolve nerves in the market, prompting the central bank to impose restrictions on domestic banks prohibiting them from holding net open FX positions.
This had ‘panic’ written all over it, with the central bank likely reacting to concerns about a steeper devaluation prior to the February election. Activity in the local market essentially came to a halt, prompting JP Morgan’s index team to warn that they may remove the country from its local currency indices after a review. Nigeria faces the prospect of higher borrowing costs if they are ejected from the index, so they will need to address the liquidity situation sooner rather than later.
Meanwhile, the International Monetary Fund (IMF) has downgraded the country’s growth outlook this year to 4.8 per cent from 7.3 per cent. That is far too low to create the kind and volume of jobs which Nigeria needs. Unemployment is stuck around 25 per cent, millions of whom are young. Dissatisfaction about a lack of jobs, frustration at endemic corruption and a perception that not enough has been done to curb Boko Haram are the key issues shaping the election debate.
Incumbent President Goodluck Jonathan, from the south, has been criticised by opposition challenger Muhammadu Buhari for not doing more to stop corruption and Boko Haram. Buhari is a former general from the north who has a fierce track record against corruption and his background gives him credibility on security. Jonathan is the favourite to win, not least because Buhari’s support base in the north is dispersing as Boko Haram continues to grow in strength there.
However, some local analysts believe it could still be a very tight race, which could lead to some market volatility depending on the outcome and whether it is legally contested. In recent days there has also been a few reports saying the elections may be delayed due to insufficient availability of the voting ballots. Stay tuned for more twists and turns.
Nigeria’s problems have been evident for a long time but the oil price collapse comes at a time when Nigeria was actually achieving some progress towards rebalancing its economy away from volatile petro dollars. Growth has been downgraded but still projected to be higher than the emerging market and developing economy average. Government reforms in recent years were starting to bear fruit.
While economic activity in the North East has all but ground to a halt, Lagos is booming. With thriving telecoms, banking and services sectors, it is the centre of a small but growing urban elite and middle class. Growth of the middle class will probably slow if the oil price stays as low as it is for any amount of time, but McKinsey forecasts it to grow to 27 per cent of the population by 2020.
Yet urbanisation has failed to significantly raise incomes and improve living standards for the country as a whole. Some 74 per cent of Nigerians live below the McKinsey Global Institute Empowerment Line which defines what a reasonable standard of living is. Lagos is home to many more of the most poor than the most wealthy.
Maiduguri, a city in the north east Borno province, is about the same distance away from Lagos as Nice from Paris but transport links are poor and dangerous (driving lessons and tests have only recently become mandatory). Boko Haram’s recent attack on the city shows that it outstrips the bounds of government control. Companies are investing in Nigeria but building costs are high (imports of concrete are banned to protect local industries) and poor roads, congestion and a lack of deep water ports makes supply chains long and unreliable.
Whoever wins the election will need to take on Boko Haram urgently. Even if they succeed they will need to contend with the growing demands of the middle class and dissatisfaction from the majority that their lives are not improving. History books are littered with examples of restive middle classes who grew steadily more unsatisfied with the failings of corrupt states – and Nigeria’s institutions do often fail their citizens.
Corruption is rampant throughout society and the sacking of the central bank governor Sanusi in February 2014 sent a clear message that stopping it is not a priority. Meanwhile, a huge and young population is becoming increasingly urbanised, yet often out of work. Creating jobs, improving security and cracking down on corruption would help Nigerians and give international investors the confidence to put money to work. There is much to do for whoever wins the election.
About the author: Â Kevin Daly is Senior Investment Manager at Aberdeen Asset Management, an investment management firm