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Nigeria – Reasons to expect some policy liberalisation

Structural factors, recent news and upcoming events give reason to believe that Nigeria is about to take a liberal turn on policy. The most important structural factors are the catastrophic state of public finances and the naira’s unsustainable strength on the official currency market. Important recent news has included President Muhammadu Buhari’s sacking of the governing bodies of a number of federal agencies and parastatals, and the recommendations of Ahmed Joda’s transition committee. And the main event is the president’s recent visit to the US, and his meetings with top US officials in Washington.

Since Mr Buhari took power at the end of May, there have been many disappointing revelations about the rate at which the treasury was depleted in the final months of the People’s Democratic Party (PDP) government. Accusations and excuses are still flying to and fro between the PDP and Mr Buhari’s incoming All Progressives Congress (APC), but it is clear that massive amounts were paid out of the Excess Crude Account in the last months of the PDP government, and that the fiscal situation is not fantastic. A ‘transition committee’ headed by Ahmed Joda has been planning for policy under Mr Buhari, and from recent reports it is clear that the committee has been advising the new president to dismantle remaining subsidy programmes and to take other measures to reduce expenditure and increase income – including the privatisation of four fuel refineries. The Joda commission has also reportedly advised Mr Buhari to consider a public-private partnership arrangement for the management of six domestic airlines that owe money to the Asset Management Corporation of Nigeria (AMCON).

Keeping the naira stable through unconventional measures resulting in tight forex liquidity conditions has put further strain on public finances – also on foreign reserves – and most economists see a devaluation as inevitable. NKC’s current baseline scenario predicts a gradual liberalisation of forex restrictions during Q4 and that the naira will only be devalued in a step-wise manner, possibly in increments in the region of 8% – 10%. Under the leadership of the Central Bank of Nigeria’s (CBN) current governor, Godwin Emefiele, policy statements have emphasised the CBN’s determination to prop up the naira, and it should be considered that a devaluation would have a serious inflationary effect and hurt Nigerians’ living standards. But, given the difficulties that importers are having in obtaining funds and the constant drain on reserves (which are being replenished at a much slower rate than usual because of the lower oil price), we think the possibility exists that the executive may interfere.

Mr Emefiele’s term is supposed to run until 2019, and he can only be sacked on a two-thirds vote in the Senate. Mr Buhari’s APC does not have such a majority, and it is unlikely to get the approval of enough PDP members to pass such a motion in the current confrontational climate in Parliament. There is a precedent to suspend the governor without sacking him: the former president, Goodluck Jonathan, suspended Mr Emefiele’s predecessor at the CBN, Sanusi Lamido Sanusi, four months before the end of his term. Such a suspension may be illegal, however (the Federal High Court referred the case brought to it to the Industrial Court, but Mr Sanusi did not pursue it).

We do not think Mr Emefiele will be removed from office, but even if he is not, the CBN is not statutorily independent – the 1991 Central Bank of Nigeria Decree stipulates that “The President after due consideration may, in writing, direct the Bank as to the monetary and banking policy pursued or intended to be pursued and the directive shall be binding on the Board.” Such a hijacking of the operations of a semi-autonomous government institution would be perfectly in line with some of Mr Buhari’s other recent actions. On Thursday, July 16, his spokesman said that the president had dissolved the governing boards of federal parastatals, agencies and institutions.

Until the boards are reconstituted, the managers of these organisations will “refer all matters requiring the attention of their boards to the president,” in the words of the statement. This means that the presidency has assumed executive control of all these important bodies, and there has been no indication of when, or even whether, the boards will be replaced. The managing board of the Nigeria National Petroleum Corporation (NNPC) was dismissed by decree in the same way on June 26.

Yet another reason to think that Mr Buhari can, and will, overhaul policy by liberalising it is his visit to the US. The president arrived in America on Sunday, July 19, and had a number of high-profile meetings, of which the most important was the one with US President Barack Obama on Monday, July 20. Mr Buhari also met Vice President Joe Biden and Chairman of the Joint Chiefs of Staff Martin Dempsey, with whom he discussed military and defence co-operation. Most of the commentary on Mr Buhari’s visit to Washington has been about security issues, but for the purposes of this analysis we are more interested in some of his other meetings: with Treasury Secretary Jack Lew, Commerce Secretary Penny Pritzker, and the US Chamber of Commerce and Corporate Council for Africa.

The US government invariably tries to impose liberal economic policy on its trade partners, and part of its function is to find profitable investment opportunities for US capital and business. We are fairly confident that US officials pursued this line of discussion with Mr Buhari, and that his co-operation on these matters will be required to obtain American help on counterinsurgency operations and the recovery of stolen assets hidden in the US. There are other reasons to think that the new president’s relationship with Washington will be more collegial than his predecessor’s, most notably the fact that Washington indicated its intention to “do more” on military co-operation immediately after Mr Buhari was elected.

We expect that Mr Buhari be looking to America for arms supplies, in contrast to Mr Jonathan, who tended to make such purchases in Russia, Belarus and other Eastern European nations outside the North Atlantic Treaty Organisation (NATO) orbit. On the visit Mr Buhari obtained a pledge from the World Bank to lend Nigeria $2.1bn for reconstruction in the north-east; a very helpful promise.

Before the election that Mr Buhari won to become president, it was apparent that the US wanted him to win. US pressure may have been instrumental in persuading Mr Jonathan to step down without a fuss, perhaps in exchange for a promise that he would not be prosecuted in future, which made Mr Buhari’s takeover smoother than it might have been. For this reason, too, the US probably has some leverage with which to shape the new president’s thinking on economic policy.

For all the reasons above, we expect some movements in the direction of policy liberalisation in Nigeria in the coming months. We think the naira will be devalued before end-2015, notwithstanding Mr Emefiele’s policy stance to date, with a staggered devaluation process being implemented to avoid the harsh price shock that would result from a one-time move. We think subsidies will be lifted, and that a number of privatisations will be done, especially in the downstream petroleum sector. Salaries in parastatals and some other government departments will be slashed, although the presidency does not have the power to make big cuts where they would make the most difference – in the salaries and wages of the massive legislative branch.

We think some action will be taken on corruption, but not to a degree that would seriously change the operating environment that multinationals have gotten used to. Some lower-level functionaries may be prosecuted and their US assets seized, and this will boost Mr Buhari’s standing at home.

The measures, especially the lifting of subsidies and the devaluation of the currency, will hurt Nigerians’ spending power and will tend to depress final consumption demand. The impact of a devaluation of the naira on inflation may be mitigated to an extent if the gap between the official and parallel market exchange rates narrows significantly – for this to happen, the naira would have to be devalued by a large enough margin to see foreign investment interest return and forex liquidity improve.

It is impossible to predict social consequences. We think Mr Buhari retains enough political capital to push through the changes, but some symbolic cuts in government salaries, and some prosecutions of corrupt PDP officials, would help to reduce popular anger – we believe the president may opt to push for more serious reforms such as phasing out fuel subsidies and devaluing the naira only after these smaller gains have been realised.

By François Conradie, Political Analyst at NKC African Economics

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