Q4 2018 New Markets Investor

Q3 2016
Nigeria yields under pressure
to devalue the Naira
A year ago, Muhammad Buhari made
waves by becoming the President and
leader of the first opposition party in
Nigeria to win a general election against
a governing party. To many Nigerians,
President Buhari was a symbol of hope
and change. To many potential investors,
such changes presented hope but also
uncertainty in the face of a new direction
in economic policies. President Buhari’s
election came at a time when change
was needed but also at a time when a
bold and fastidious governing body was
required to overcome the falling fuel
prices and the Boko Haram insurgency.
President Buhari’s first year has certainly
been challenging but so have the past
few years for many Nigerians who’s
hopes are set on his actions.
With oil prices plummeting to unthinkable
lows, the new government was faced
with financial difficulty. The decision by
the government to stop providing fuel
subsidies may surely reduce pressure in
some respects but the pressure will arise
in another form. The price for one litre
of gas increased by 80%. Such a sharp
rise in prices may cause a detrimental
effect as many major cities and corporations
in the economy are dependent on
the price of fuel. The decision, however,
has been applauded by various experts,
with Marc Lucassen, head of the Delegation
of Germany Industry and Trade
in Nigeria, citing that subsidising oil
imports would send the wrong signal.
It is believed that in the long-term, this
decision will incentivise the significant
research and development required for
Nigeria’s businesses and refineries to
be more energy efficient. As a result of
the potential wake-up call, greater steps
could be taken for the oil giant to refine
more of its own oil. Further, the funds
that could be used for the subsidies could
be spent on other sectors of the economy
that may benefit the country more than
what critics have described as a waste
of trillions of Naira on an unsustainable
measure. President Buhari’s appointment
of new leadership to the National Petroleum
Company (NNPC) may help make
the transitions necessary for a new era in
Nigerian energy.
The anti-corruption efforts of President
Buhari shine light on what could be a
new beginning for the Nigerian government.
As long as corruption is embedded
in the system, the cost of governance will
continue to remain high. A report by the
Sahara Reporters in 2012 found that it
costs Nigerians $8.3 billion to pay the
salaries of those in politics. In 2012, $7.4
was to be spent on developing infrastructure,
but only half of this was spent
towards its development. To put this into
perspective, it meant that for every dollar
spent on infrastructure development in
Nigeria, two dollars are spent on salaries
of those in politics.
Corruption and high governance costs
are the major factors that are hindering
economic development in Nigeria.
Wealth distribution in the country is unequal,
as money that has been invested,
does not benefit the poorer members of
the population. There were 15,849 HN-
WIs in Nigeria in 2015, who collectively
held US$102 billion in wealth.
Great leadership is needed to eradicate
these issues of corruption and until this
is done, we won’t see ‘real’ economic
development in Nigeria. Massive efforts
have been made by President Buhari
to collaborate with foreign countries to
return over $150 billion in stolen state
wealth. This along with many efforts to
arrest government officials may be the
beginning of a significant culture shift
that will encourage both foreign investors
and investors within the country.
With such a shift, the culture of business
and the obstacles to business may
reduce significantly in the future, making
business cheaper and more viable for
potential investors.
The adoption by the new government of
zero-based budgeting may also be applauded.
In contrast to the former system
of budgeting which only required the
justification of increases or decreases to
the prior period budget, the new system
allows for greater emphasis on attention
to detail and more thorough judgement
of budgets, with needs and costs being
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linked and greater focus on infrastructure
development, social needs, manufacturing,
and job creation.
The security fears that once brought
significant doubt as to the competence of
Nigeria’s officials, have been reduced in
some respects, with some of the Chibok
girls being found and more than 800
hostages being rescued from Boko Haram
who have lost ground and strategic
position in their attempts to enforce their
ideology. With fears reducing over Boko
Haram, more thoughts can be made on
what should be done with the economic
potential that Northern Nigeria presents.
While President Buhari has lifted hopes,
many challenges are still ahead. The
cracks are starting to show: Nigeria’s
currency, the naira, is the world’s worst
performing this year.
Nigeria had pegged the naira to the dollar
for decades, adjusting the exchange rate
according to international supply and demand.
To keep the rate fixed, the central