A hotel clerk in Maiduguri counts naira banknotes. The currency’s value has plummeted since 2015 © Bloomberg
Late last year, the Nigerian government announced, to great fanfare, that it would finally remove a petrol subsidy that costs the revenue-strapped country billions of dollars a year.
It would be done by mid-2022, said finance minister Zainab Ahmed, who called the subsidy “unsustainable and economically disingenuous”. She put the annual cost to Nigeria at $7bn.
The announcement came at an event sponsored by the World Bank, one of many international institutions that have been pushing Africa’s biggest economy to abandon the costly, regressive subsidy that keeps fuel at an artificially low N162.5 ($0.40) per litre — among the lowest rates in Africa. Less than two months later, for at least the third time in the past few years, the government backtracked on its pledge.
The minister had once again run ahead of President Muhammadu Buhari. Last month, just before intended protests by labour groups against the plans, senate president Ahmad Lawan told reporters: “I’m happy to inform Nigerians that Mr President never told anyone that the petroleum subsidy should be removed.”
It was a reminder that election season is already upon Africa’s most populous country, which goes to the polls next February to pick Buhari’s replacement. Just over a year ago, the World Bank warned that Nigeria was at a tipping point — its economy at risk of “unravelling” if it did not enact a series of simple but politically unpopular reforms, including moving closer to a market-driven exchange rate, reforming the tax system and ending the fuel subsidy.
However, observers do not expect policymakers to announce any new reforms this year that might spur investment in a largely moribund economy, which is recovering only slowly from the oil price crash brought on by the coronavirus pandemic.
“Unfortunately, it is going to be something of a lost year in terms of getting a great deal more investment,” says Razia Khan, chief economist and head of research for Africa and Middle East at Standard Chartered Bank. “There’s a lot that needs to be done that will influence the medium-term economic path. But the politics are a complicating factor — it’s not clear that the politics will allow for the reforms that are necessary.”
Nigeria’s economic woes have piled up since Buhari was first elected in 2015. The value of the naira has plummeted and growth has been sluggish. Inflation, joblessness and insecurity have soared. The president came into office as the oil price crashed, crippling a country that relies on crude for half of all government revenues and nearly all of its foreign exchange reserves.
Critics say the administration’s response — including propping up the naira through multiple exchange rates and import bans on dozens of products — has exacerbated Nigeria’s problems. Half of Nigerians are under- or unemployed, a figure that rises to two-thirds for young people, who make up the majority of the population. Meanwhile, foreign direct investment into Nigeria regularly trails behind that into Ghana, a country with a population and economy a fraction of the size.
Many businesses complain that they have difficulty obtaining dollars, which hampers their ability to pay foreign lenders and suppliers. Portfolio investors have found themselves in months-long queues at the central bank to repatriate income.
“A higher dollar exchange rate would certainly help,” says Khan. “It would help with economic momentum, and more market-reflected rates would certainly help overcome the weak investment that the country has seen in the recent past.”
The administration has made some important infrastructure investments, and incrementally improved the fiscal picture through a finance law that came into force in 2020. This raised VAT from 5 to 7.5 per cent and widened the tax net.
“There’s a lot of good stuff in the Finance Act — they continue to make incremental progress on tax collection,” says Amaka Anku, Africa head at risk consultancy Eurasia Group. “So, the outlook is not negative — it’s neutral. They’re kind of chugging along really slowly, but in the right direction.”
Last year, the president signed into law a landmark oil sector reform. This was first put forward more than two decades ago.
Topping up at a Lagos petrol station. The government has repeatedly wavered on ending its fuel subsidy © AFP/Getty
The Petroleum Industry Act will commercialise the national oil company — essentially turning it into something more like a private enterprise — and bolster the nascent gas sector. It will simplify and reduce some taxes and royalties, provide more money to the impoverished host communities in the oil-rich Niger Delta and streamline regulation, by creating separate regulatory bodies for upstream and downstream oil operations. Business leaders and economists have long clamoured for the greater certainty this law will bring.
But it also includes a provision dictating that fuel should be sold at market prices — inconvenient given the president’s stance on the petrol subsidy. Last month, oil minister Timipre Sylva set out the government’s solution: amend the law, provided parliament approves, in order to delay removing the subsidy for 18 months, well after the election.
“Nigerian authorities have been resolute in maintaining the pre-pandemic economic policy framework despite external headwinds necessitating a change of tack,” says Jacques Nel, economist at forecasters Oxford Economics Africa. “This unwillingness to reform due to social costs is understandable but not sustainable.”