Prepared for Free Article on 17/05/2022 at 14:35. Authorized users may download, save, and print articles for their own use, but may not further disseminate these articles in their electronic form without express written permission from Africa Confidential / Asempa Limited. Contact email@example.com.
Economic stagnation and rising prices are eroding the regional alliances at the heart of Buhari’s government
Arguments over the response to the country's worst recession for 25 years are threatening to split the governing All Progressives' Congress. The APC is a fragile alliance between the conservative political establishment in the north and big business interests in the south which unseated the People's Democratic Party (PDP) in 2015.
The party's chief electoral asset, President Muhammadu Buhari, who brought in a block of over twelve million votes from the north, faces growing criticism for the delayed response to the country's economic woes. Businessmen in Lagos who are close to Bola Tinubu, the redoubtable political godfather and the APC's Chairman in the south-west, complain that Buhari gives priority to fighting corruption and to economic nationalism over the need for urgent measures to revive the economy.
At the heart of the crisis are the twin effects of crashing world oil prices, which fell by over a third to US$30 a barrel at the start of the year, and fresh attacks by militant groups in the Niger Delta which shut down almost half of the country's production of 2.2 mn. barrels per day (AC Vol 57 No 19, No oil, no money, no deal). Now that oil prices are higher and production is up, after a meeting between Buhari and Delta leaders on 1 November businesses are stepping up pressure on the government, lobbying for the Central Bank of Nigeria to relax its controls on the foreign exchange market.
In the Buhari era, the Lagos-based banks and oil companies that prospered under President Goodluck Jonathan, often thanks to lax regulation and generous state patronage, are struggling with mounting debts and operating losses. They have laid off tens of thousands of workers, which has added to the unpopularity of the government at the centre. Many Lagos banks and oil companies also face wide-ranging investigations into their political deals with the last government. Having flirted with the APC briefly, they are now looking for other political partners.
Some talk of Tinubu as a politician who would lead a new party which could address their grievances and could negotiate an alliance with other regions. Political insiders say that he is in contact with the APC's arch-enemies, such as Ayo Fayose, the fiery Governor of Ekiti State (the only state in the south-west controlled by the opposition PDP) and Buhari's most prominent critic.
Much of Tinubu's kudos comes from his ability to put together deals between the teams of rival politicians in the south-west, then to have become a national figure helping to deliver Buhari's victory last year.
Questions over Tinubu's political intentions are complicating the organisation of the government in Lagos. Much will depend on the able Vice-President, Yemi Osinbajo, who was Attorney General in Lagos State when Tinubu was Governor.
The initial regular meetings between Osinbajo and Buhari have dwindled to occasional encounters. Debates over policy and initiatives are taking far too long to resolve. There are big differences of personality and political style. Buhari's kinsman and advisor from Katsina, Mamman Daura, and the Chief of Staff, Abba Kyari, have known and worked with Buhari for four decades, and share a common scepticism towards neo-liberal economics and political bling in Nigeria (AC Vol 57 No 21, Buhari's kitchen cabinet).
The fiscal stimulus set out in this year's budget has failed to materialise, as project approval delays and a failure to raise external debt to fund it have pushed plans for capital investment into 2017 at the earliest.
Finance is desperately needed for the modernisation of farming and agro-processing industries. Likewise, Buhari's promised diversification of the economy from its still chronic dependence on oil export revenue requires some bold investors and more certainty on policy.
All of those plans depend on a reliable electricity industry but the government's piecemeal privatisation of the power sector has been hit by three obstacles: major shortages of gas for the power stations; legal battles over policy and inconsistent tariffs; managerial and financial failures in the privatised power distribution companies. So dysfunctional are the distribution companies that the cement billionaire Aliko Dangote has called for them to be renationalised and then for their assets to be auctioned to seriously wealthy companies and individuals, such as himself (AC Vol 57 No 13, A new deal in the East). Currently, there is about 13,000 megawatts of installed power generation capacity but the distribution companies are selling just over 3,000 MW.
Likewise, plans for a federal road- and house-building programme have been held up by shortages of finance. Although the Buhari government envisaged a radical shift towards capital investment and cuts in recurrent and state salary costs, revenue shortfalls have held them back. Billions of dollars of emergency finding have been allocated simply to keep the government machinery ticking over, particularly in the 36 state governments. That's very frustrating for Babatunde Fashola, who heads a super-ministry in Abuja in charge of Power, Works and Housing.
Companies complain that foreign exchange policy, for which Central Bank Governor Godwin Emefiele is mainly responsible, is the biggest constraint. Under pressure to abandon the pegged exchange rate of N199=$1, Emefiele announced in June a free market for foreign exchange by the banks. Yet the Central Bank kept most of Nigeria's dollars from oil exports out of that market: it allocated the rest on a discretionary basis at an arbitrary rate of $1=N305. This forces all but the most favoured companies and individuals to buy foreign currency through unofficial sources, at rates over $1=N450.
None of the $6 bn. of external loans budgeted this year to plug the fiscal deficit have been raised. Local borrowing through Treasury Bills and government bonds – which incur much higher interest rates – has almost reached the limit set by the Debt Management Office. That means most of the investment in infrastructure, key to the planned fiscal stimulus, cannot be funded till next year. The capital expenditure set out last month in a medium term expenditure programme (2016-2018) is due to be funded in part by $30 bn. of new external loans. The Treasury sent this plan for approval by the National Assembly, which has sounded alarms over rising debts.
Despite such debt worries, companies argue that the government has no choice but to borrow overseas. Economists at the Financial Derivatives Company and FBN Capital say that attempts to revive the economy through adjustments to monetary policy have failed and they back a debt-funded fiscal stimulus.
Finance Minister Kemi Adeosun says the proposed $30 bn. raised offshore would be a mixture of World Bank and African Development Bank loans, China Eximbank credits and Eurobond issues. There is also much talk of a batch of mega-loans from Qatar, linked to oil and gas investment.
The proposed $1 bn. Eurobond has yet to be floated and market conditions have moved against Nigeria after the United States' elections. One reason for the delays, say insiders, was infighting among Nigerian banks for the lucrative mandate to act as local advisor to work with the international banks on the issue.
Adeosun says she is delaying the proposed $2.5 bn. loan from the World Bank until 2017. This seems to reflect some differences over policies and priorities. So far, the government has rejected out of hand any loan from the IMF, which would come with much tougher conditions and rigorous monitoring mechanisms. Akinwumi Adesina, President of the African Development Bank and a Nigerian former Agriculture Minister, has promised a budgetary support loan of $1 bn., which will be subject to the as yet unpublished conditions agreed with the World Bank. For President Buhari, whose first term in office was overshadowed by a commodity price crash and a massive foreign debt overhang, the sense of déjà vu must be palpable.
Groundhog day in the banking halls
At first sight, Central Bank Governor Godwin Emefiele looks like a diffident provincial bank manager yet he has proved to be an improbable survivor under President Muhammadu Buhari's government (AC Vol 56 No 20, At last a cabinet, and now for the policies). Appointed by ex-President Goodluck Jonathan, he was held responsible for at least some of the financial chaos and bizarre contracts in the final year of that government. To sack Emefiele would require Buhari and the All Progressives' Congress to muster a two-thirds majority in the Senate.
The Economic and Financial Crimes Commission has looked at Emefiele's role as it investigates some of President Jonathan's most contentious deals, we hear. Nevertheless, Emefiele remains in his seat at the Central Bank of Nigeria (CBN) and insistent that he has always maintained banking standards of the highest integrity.
The critics keep coming. Now Emefiele is accused of defending the currency, the naira, a policy which has won him favour with Buhari at Aso Rock, but in ways that heavily reward his old colleagues at Zenith Bank, which he previously headed. He denies that as well and produces multiple tables of foreign exchange allocations as proof of financial transparency.
Emefiele's next challenge – forestalling a full-scale banking crisis – could prove even more demanding than teleguiding the foreign exchange market. Fears of a banking crash are growing. Although almost all the banks have met the capital ratios required by the CBN and insist that their bad loans are no more than 4% of their total loan book, some Lagos bankers say the real extent of loan defaults is much higher and likely to get worse.
The main cause is the US dollar loans to Nigerian oil and gas companies which bought upstream assets from the multinationals when the oil price was more than double its current level. Now these companies are struggling to maintain production and to pay their bills. Nigerian banks borrowed the dollars from overseas banks, a serious risk if their oil company clients default.
Similar problems face the privatised electricity companies which bought power stations and distribution infrastructure from the state-owned power company. Their loans are mainly in dollars whilst their revenue is entirely in naira, which has fallen sharply against the dollar, while their operations are far from profitable.
The CBN has ordered commercial banks to cut back on lending and their cash reserves have shrunk over the past 18 months. This is mainly because the government imposed a Single Treasury Account held at the Central Bank. This means that all revenue that ministries receive have to be transferred to the Bank and not dispersed around a multitude of commercial bank accounts, a practice which produced super-profits for some of Nigeria's biggest banks with minimal risk and effort.
All these benefits are gone under the new order and corporate customers are getting into more trouble as the economy slows. The last time the government intervened and recapitalised failed banks was in 2009, when the CBN had a Governor, Sanusi Lamido Sanusi, who enjoyed the full confidence of the financial markets and its own finances were healthy. The current Governor lacks such respect and the government can ill-afford a bailout. Even if Emefiele and the banks avoid such an emergency, the loss of tax revenue from the much weakened banking sector is adding to the Treasury's fiscal shortfall.
Copyright © Africa Confidential 2022