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Vol 63 No 25

Published 15th December 2022


Grim outlook for the new president

Central Bank of Nigeria governor Emefiele insists that his interest rate hikes are controlling inflation but a new president will face greater challenges

Copyright © Africa Confidential 2022

The Central Bank of Nigeria's monetary policy committee (MPC) faces tough choices as the year-on-year inflation rate has reached 21%. Food price inflation is even higher, at 23.7%. Devastating floods over the past three months have hit agricultural production, making it harder for farmers to get more produce to the market, increasing prices.

After the November hike to 16.5%, CBN governor Godwin Emefiele has cumulatively raised rates by 5% this year, more than any other African central bank except those of Ghana and Egypt.

Emefiele is set to remain a key figure after next year's election. His second term is not due to expire until June 2024 and he is unlikely to be forced from office by Muhammadu Buhari's successor. His CBN is influential due to its controversial 'ways and means' financing of the government, its numerous real-economy lending and other interventions outside a typical central bank policy mandate, and its fractured exchange rate policy.

The foreign exchange policy chaos is illustrated by the massive and increased differential between the official exchange rate (approximately 445 naira to the US dollar) and the parallel market rate (around N750) that domestic businesses and foreign investors increasingly view as the more realistic value of Nigeria's currency.

Despite reduced CBN intervention in the market to prop up the naira, foreign exchange reserves continue to decline. Oil production is down, the receipt of Eurobonds has slumped, and Nigeria will not benefit from a major 2022 influx of IMF Special Drawing Rights (SDRs) like it did last year. The perceptions of dollar shortages only worsen matters, meaning Nigeria struggles to make credit available locally (AC Vol 63 No 23, Spend, spend, spend).

In its latest briefing, the MPC says that sticking to current policies is vital to boost non-oil exports and hence reserves. But it's hard to have confidence in the plans. Nigeria's current growth rate is not raising the living standards of the poorest, let alone making a dent in paying off debts.

Some sense of the problem is visible in recent national growth statistics. While non-oil growth is officially strong, the truth is that agriculture and manufacturing are stagnant. On the plus side, the construction and transportation sectors recently gained momentum. But much of Nigeria's economy remains informal, less accurately tracked by government statisticians, and covers a significant proportion of Nigeria's poorest. 

Nigeria's official unemployment rate remains above 30%. This leaves the political hopefuls with a significant job-creation challenge when they take office in May.

Of the presidential hopefuls, former Vice-President Atiku Abubakar for the People's Democratic Party (PDP) not only promises major privatisations, exchange rate reform, and gradually to remove the fuel subsidy, he also says he is prepared to request Nigeria's creditors agree to 'debt forgiveness or cancellation' and could suggest a 'flexible payment plan' for domestic creditors. His allies say that as Vice-President he greatly assisted President Olusegun Obasanjo (1999-2007) to achieve several debt cancellations, as part of a process that reduced Nigeria's debt stock by around US$30 billion.

Billionaire businessman Bola Tinubu, the candidate for the ruling All Progressives Congress (APC), continues to promise exchange rate reform and to eliminate the costly fuel subsidy. But the former Lagos State governor sends inconsistent messages on Nigeria's debt levels. In recent weeks he has both attacked critics of Buhari's borrowing policies and also claimed that he will carefully control further foreign currency debt.

Tinubu has been making other bold economic statements too. He claims he will push the annual growth rate above 7%, reduce unemployment, double the size of the armed forces and police, and double the size of the economy within 10 years. Members of his team claim oil theft will be reduced tremendously during the first six months of his presidency. His claims need to be set against the fact he has served in the Buhari administration himself.

Whoever wins the Presidency, major tax and other fiscal reforms will be needed, whether revenue-raising, efficiency-increasing, or better prioritisation of expenditures, in conjunction with the central bank.

And, in the longer-term, the risks to Nigeria's finances from future global de-carbonisation loom somewhat closer in the aftermath of COP27, given the need for multibillion dollar financing to increase oil production and boost depleting crude oil reserves.

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