Nigeria: Only by freeing Nigeria from its dependence on oil can Buhari truly take Africa's giant to the next level

banner-011-1.pngIn his election campaign, Muhammadu Buhari, the incumbent president and head of the All Progressives Congress (APC), ran on a platform promising to “take Nigeria to the next level”. More specifically, he pinpointed “next level agriculture”, “next level power”, “next level industrialization”, “next level tech & creative” and “next level school feeding” as the means to do so—vowing to his fellow Nigerians that “we are all going higher” as a result. After comfortably securing his second term—winning 55.6% of the votes in an election marred by characteristic delays, violence, voter apathy and condemnation by the opposition—Buhari must learn from the mistakes of his first term and immediately turn his attention to the significant challenges facing Nigeria. Particularly, the last five years have been yet another harsh reminder that Africa’s largest economy and most populous country remains fatally overdependent on its oil-related revenues, which still account for around two-thirds of government revenues and nearly 90% of export earnings. If he wishes to follow through on his campaign pledges, the former military general must therefore strive to free Nigeria from its reliance on its oil revenues, while cracking down on corruption and ensuring Nigeria’s institutions are left in better shape than he inherited them.

Giants have nightmares too

Thanks to its vast resources, its large and rapidly growing population, burgeoning consumer class and dynamic film, financial, music, retail and telecommunication sectors, Nigeria’s economy shot past that of its nearest African rival, South Africa, in 2012. Two years later, McKinsey gushed that Nigeria had the potential to achieve annual GDP growth of 7.1%, which could make Nigeria a top-20 economy by 2030. PWC went even further, claiming Nigeria could be a top-10 economy by 2050, bigger than that of Germany, the United Kingdom and France—if only it could harness its potential.

However, after oil prices tanked in 2014-2015, Africa’s largest oil producer reeled in tandem, exacerbated further by protectionist policies implemented by the Buhari administration and an artificially-high naira. A far cry from the 10% annual growth promised by Buhari, Nigeria’s economy contracted in 2016 for the first time in a quarter of a century. Moreover, Nigeria’s stockmarket crashed by almost 50% in dollar terms in just over a year, to languish among the world’s worst performing stock markets; inflation soared to 16.5% in 2017; and the unemployment rate hit 23.1% in Q3 2018, from 9.0% in 2015 when Buhari first took office. This has taken its toll upon the average Nigerian, almost half of whom still live in extreme poverty. Banditry in the oil-rich Niger Delta, the farmer-herdsmen conflict in the country’s Middle Belt—which killed more than that by Boko Haram last year—and the resurgence of Jihadi terrorism add to Buhari’s woes. A rapidly growing young, and underemployed, population will be a serious worry, especially concerning the fight against Boko Haram, who are attempting to create an Islamic caliphate in the northeast of the country. After all, poor, disaffected young males are easy recruits.

Baba Go Faster

With a staggering USD 400 billion estimated to have been stolen from the state coffers between 1960 and 1999 and Nigeria ranking 144th in Transparency International’s Corruption Perceptions Index in 2018, Nigerians are rightly fed up with corruption and his image as an incorruptible figure and promises to continue to crack down on graft and Boko Haram likely clinched it for Buhari. In stark contrast, the People’s Democratic Party candidate, Atiku Abubakar, was plagued by allegations of embezzlement during his time as vice president. Until recently, the billionaire businessman was banned from entering the U.S. due to historic allegations of money laundering and bribery, with a U.S. Senate report accusing one of his wives of helping to smuggle more than USD 40 million of suspicious funds into the country.

The 76-year old president, however, is not famed for his vigor, acquiring the nickname “Baba Go Slow” owing to the sluggish start to his first term. Spending a significant chunk of 2017 in London, undergoing suspected cancer treatment, did no favors to his image as an elderly and frail figure; he even has to frequently deny rumors that he has not in fact died and been replaced by a clone.

Second time around, Buhari has no time to lose. Beyond stamping out corruption, stabilizing the north-east and ensuring an adequate supply of dollars or fixing the country’s complex exchange rate regime, diversifying the economy should be the key priority and encouraging investment in the country’s crumbling infrastructure would be a good place to start.

Nigeria’s pitiful energy production is particularly symbolic of the country’s problems. According to the International Energy Agency, Nigeria, with a population nearing 200 million strong, generated just 30.9 TWh of electricity in 2016, half that of Switzerland which comprises of just 8.5 million people. South Africa and Indonesia, meanwhile, produced almost 250 TWh of electricity that year, which goes some way to explaining why around 40% of Nigerians still lack access to electricity.

The majority of businesses in Nigeria thus rely on expensive diesel generators, which increases the cost of doing business in Nigeria and drags on investment and the country’s productivity. Nigeria’s miserably low tax-to-GDP ratio—largely the consequence of the country’s dependency on oil revenues—should also be targeted for improvement. The weak metric constrains the government’s ability to invest, especially when oil prices drop as they did in 2014-2015.  

Setting up countercyclical measures and running surpluses in the good times would ensure oil windfalls are saved for the inevitable downswings. This would help smoothen government budgets and ensure steady and much-needed investment on infrastructure projects, as well as in other underfunded sectors such as education and health care which lay the foundations for a sustainable, diversified economy. As highlighted by Renaissance Capital, a country struggles to industrialize when adult literacy is lower than 70%; Nigeria’s literacy rate is still well below this level according to UNESCO statistics from 2010 and actually fell over the preceding two decades. The fact that the government allocated just 7.1% of its 2018 government budget to education certainly does not help matters.

Although it is of course easier said than done, the divergence between Nigeria and Indonesia over the past fifty years shows that Nigeria can drag itself to the next level. The two countries have much in common: Both are regional giants with Muslim majorities and large Christian minorities; both share similar histories defined by European colonialism, military dictatorships, corruption and bloody civil wars; and both are big oil producers. However, since 1970, Indonesia has left Nigeria in its wake. Today, GDP per capita in the world’s largest island country is almost double that of its African counterpart, while it is streaks ahead according to nearly every single indicator measuring living standards. Most strikingly, the average Indonesian can expect to reach 69 years of age according to 2016 statistics from the World Bank; meanwhile, the life expectancy of the average Nigerian is a dismal 53 years of age. 

This comparison highlights the importance of sound policymaking, particularly of macroeconomic stabilization. The huge expansion of primary education and poverty alleviation programs which began under the leadership of Sukarno, the first president of Indonesia, and the guidance of the U.S.-educated Indonesian economists, who were nicknamed the “Berkeley mafia”, were of crucial importance to Indonesia’s rapid economic growth during Suharto’s tenure. It also underlines the importance of agency. Nigeria’s fate is now in Nigerian hands and diversifying the economy away from oil and promoting sustainable economic growth will require bold policymaking and a clean break from the protectionist, statist policies of Buhari’s first term. With 40% of its population under the age of 14 and its population projected to overtake that of the United States by 2050, whether Africa’s largest democracy does or not will have far-reaching implications for the region and beyond.

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Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Date: March 27, 2019

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