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The fall in oil prices hit the Nigerian economy hard. In the boom years, there was a drive to create a “pseudo-middle class”, says Keith Richards, chairman of food producer Promasidor Nigeria. Malls, private schools and hospitals were built and western products imported. At the same time, passive portfolio investments, which generate financial returns but give no management control over a business, soared.
But the country had not invested in infrastructure from which sustainable growth could be built. In August 2014 “the perfect storm of collapsing oil prices” arrived, says Carlos Hardenberg, lead portfolio manager of Templeton Emerging Markets Investment Trust. The naira fell and investors fled.
Little has changed since then. In the second quarter of 2016, foreign direct investment in Nigeria fell by 37 per cent year-on-year, while total capital inflows were down 75.7 per cent, according to Nigeria’s National Bureau of Statistics. The economy contracted 0.4 per cent year-on-year in the first quarter and 2.06 per cent in the second. This recession puts Nigeria’s status as Africa’s largest economy under threat from South Africa and Egypt. Additionally, inflation hit 17.1 per cent in June, the highest rate in more than a decade.
The downturn is mainly linked to the oil price fall, says Elias Papaioannou, professor of economics at London Business School. But other factors have reinforced its effects. A hindrance to investment has been the fixed foreign exchange policy – or peg – implemented in 2015. Nigeria is dependent on the US dollar, the world’s main reserve currency, to export and import globally. Designed to protect the naira and promote non-oil industries, the peg, at 198 naira/$, instead steered the economy towards a period of low growth.
In June the dollar peg was finally lifted. Though still controlled by the central bank, the currency has fluctuated at about 320 naira/$ in the past month. Before this, limits on the flow of foreign exchange into the Nigerian market, with the central bank in charge of allocating it, led to a parallel black market for dollars. Illegal dealers were selling at almost them twice the official rate in February. Most importers, unable to pay their bills, closed. The manufacturing sector was crippled, obtaining just 15 per cent of its required allocation of dollars, Mr Richards says.
“Equity investors were struggling to get their money out,” says Nicolas Jacquier, investment director in emerging markets at Standard Life Investments.
Foreign companies holding dollars in Nigerian accounts could not transfer them out of the country due to regulations bolstering the policy. United Airlines and Iberia stopped flying to Lagos as they could not repatriate up to $1bn of trapped revenues.
Meanwhile, insurgencies in the oil-rich Niger Delta, and by Boko Haram in the north, continued. Second quarter portfolio investment declined 88.8 per cent year-on-year. “Portfolio investors have short time horizons, and will be worried about getting their capital back,” says John Ashbourne, economist at Capital Economics, a consultancy.
The narrowing of the gap between the official and illegal rates since the peg was lifted (see graph) should make investors more disposed to naira-dominated assets, says Mr Ashbourne.
“It’s all about creating and rebuilding confidence,” adds Mr Hardenberg. He expects strong growth if infrastructure and strategic sectors are privatised, the naira is floated and its value determined by foreign exchange markets, and if President Muhammadu Buhari’s anti-corruption agenda is fruitful.
Early in his presidency, Mr Buhari oversaw the restructuring of the historically murky Nigerian National Petroleum Corporation. In February, it unveiled its financial results for the first time in a decade. Last year, he implemented the Treasury Single Account, which puts the balances of ministry, department and agency accounts into one place, making them easier to monitor and limiting opportunities for fraud.
Central to the country’s economic crisis has been overreliance on oil, which accounts for more than 90 per cent of foreign income. What Nigeria needs is a “good and credible recipe on how to diversify the economy away from this”, says Mr Hardenberg.
Reforms are lacking in energy and agriculture, where Nigeria could excel. It is a leading crude oil exporter but imports petrol because it lacks refineries to produce gasoline. But Aliko Dangote, Africa’s richest man, is building a $9bn oil refinery and petrochemical plant, which he hopes will meet the country’s internal demands for fuel.
Hardenberg sees 2016 as an adjustment period, while currency concerns and the insurgency in the Delta are resolved. Subsequently, stabilisation of oil prices and much-needed reforms should restore some confidence. “We expect 4 per cent growth in 2017 and slightly higher growth in 2018,” he said.
