Bola Tinubu, the incoming President of Nigeria, will be confronted with significant economic hurdles including sluggish growth, mounting debt, and declining oil production. However, before he can address these pressing issues, he must garner public support for difficult decisions.
The citizens of Africa's largest economy are grappling with a challenging economic landscape, marked by protectionist policies and interventions in foreign currency markets that have unsettled investors.
A decade ago, Nigeria's attempt to reduce costly fuel subsidies sparked widespread public protests, forcing the government to abandon the initiative. Tinubu, a member of President Muhammadu Buhari's All Progressives Congress, played a crucial role in propelling Buhari to power in 2015.
Now, businesses, international investors, and citizens are hopeful that Tinubu, drawing from his experience as the former governor of Lagos state, can revive Nigeria's struggling economy and effectively tackle its most formidable challenges.
A Burdened Economy: Nigeria's debt has surged by nearly 60% since 2015, reaching $103 billion last year, according to the Debt Management Office. This growth outpaces the expansion of the country's GDP, and the government has cautioned that when off-book loans from the central bank are included, the debt could soar to 77 trillion naira ($167 billion).
Although Nigeria's debt-to-GDP ratio stands at a modest 23.2% compared to oil producer Angola's 60%, experts express concerns about the proportion of revenue required to service the debt.
In January, rating agency Moody's downgraded Nigeria, citing these figures. Some calculations indicate that debt servicing costs exceeded revenue last year.
Gregory Smith, an emerging markets fund manager at M&G Investments, highlighted Nigeria's “shockingly low levels of government revenue,” which raises questions about its capacity to stimulate growth through spending.
Increasing tax collection, according to Smith, will be a critical task for Tinubu.
Oil Theft and Subsidies: Revenue challenges stem, in part, from extensive and organized theft, which led to the lowest oil output in over 30 years. Oil and gas traditionally contribute to half of Nigeria's budget and 90% of its foreign exchange. Ongoing theft, insufficient investment, and industrial disputes hamper production.
Furthermore, crippling fuel subsidies deplete the remaining revenue from oil sales. Fitch Ratings estimates that the implicit petrol subsidy cost the government approximately 2.4% of GDP in foregone revenue. Experts emphasize that reining in the subsidy and increasing oil output are crucial.
Yvette Babb, a representative of fund manager William Blair, noted that the market is primarily focused on two key factors: foreign exchange policies and the removal of fuel subsidies, as well as broader changes at the Central Bank of Nigeria (CBN).
Buhari's administration established a complex system of official and parallel exchange rates to support the struggling naira. Additionally, a lengthy list of items was banned from using foreign exchange from the central bank. Businesses assert that widespread shortages of dollars are crippling, while investors claim that difficulties in repatriating funds have stifled investment.
Smith and Babb argue that investing in naira bonds and the local market has become virtually impossible as a result.
Government data indicates that foreign direct investment plummeted from $2.2 billion in 2014, the year before Buhari assumed office, to $468 million last year.
Challenging Reforms: Convincing Nigerians to accept painful reforms hinges on demonstrating that these measures will improve their lives, and this will be a formidable task.
Inflation has reached nearly a two-decade high, eroding savings and salaries. Unemployment stands at a record 33%, leading to a significant brain drain.
Furthermore, Tinubu's 8.79 million votes represent the fewest won by a Nigerian president since the country returned to democracy in 1999, limiting the goodwill towards him.
Yvette Babb suggests that Tinubu may need to showcase his ability to deliver tangible benefits to the Nigerian people before attempting to eliminate fuel subsidies, which clearly reduce the cost of living for a large portion of the population. She also notes that allowing the naira to weaken “comes at a cost.”
As Tinubu assumes the presidency, he faces an arduous journey of steering Nigeria's economy towards stability and growth while gaining the trust and support of the Nigerian people.
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