Nigeria’s Economic Crisis Deepens

By Peluola Adewale

The Nigerian economy is not yet out of the woods. Though the official report from the third quarter has not been released, nothing suggests we have already seen the worst with the last quarter report. More than anything, it appears that high oil price, the major driver of the growth of the last 16 years, will remain a pipe dream for a longtime. The Chinese economy has continued to experience a slowdown and financial instability while the shale oil technology has come to stay even when the continued low price makes it expensive, a further advancement could help get round such a new challenge.

According to a report released by the Nigerian National Petroleum Corporation (NNPC) on October 11 2015, the revenues from Nigeria’s oil sales “witnessed a sharp decline of more than 67 percent from September 2014, when the receipt was at its peak, to July 2015 with dire consequences to the federation”. The crude oil sales account for over 70 percent of the total country’s revenue and more than 90 percent of its foreign exchange earnings.

Given the rate of the economic contraction, the possibility of recession, technically negative growth in two consecutive quarters, is now on the horizon. The governor of the CBN has already warned. The country’s official GDP growth rate declined from 6.23 per cent in third quarter of 2014 to 5.94 per cent in the fourth of 2014. The growth rate declined to 3.95 per cent in first quarter of 2015 and to 2.35 per cent in second quarter of 2015.

NO FISCAL BUFFER

Even if an immediate recession is averted – which is possible given a relative improvement in electricity supply, the current adequate fuel supply, the settlement of salary arrears of public sector workers and recent release of the much delayed first quarter capital allocation, all of which could combine to increase aggregate demand – the current economic crisis cannot be fundamentally resolved. This crisis is not like what obtained in 2008 which was due to credit crunch and resolved globally with help of China and public spending in the US. Besides, the global succor, Nigeria also had strong buffers to weather the storm. Then, at the outset of that crisis Nigeria had $63bn and $21bn in its foreign reserves and excess crude account respectively. On the contrary now as of late September the country has about $31bn in reserve which is marginally higher than $29.8 billion, the figure as of April which was said could only support 3 months of importation (Vanguard May 4, 2015). There was about $2.2bn excess crude account as of September which is about $4bn short of even the IMF recommendation as the fiscal buffer. This implies that the government has no access to savings to offset the decline in revenue.

It should be however stressed that excess crude account (ECA) purportedly meant for a rainy day or fiscal buffer for a decline in oil revenue is a treasure trove for the looting capitalist ruling elite in and out of the governments at all levels. It is shared between the federal and state governments in addition to statutory monthly allocation without appropriation and with little in term of developmental projects to show for the depletion of the account. According to Premium Times findings, between 2007 and 2014 alone, about $167 billion reportedly accrued to the account which was created in 2004 by Olusegun Obasanjo government (Premium Times July 16, 2015). However, only the $5.5 billion drawn from the account and invested in the National Integrated Power Projects (NIPP) as agreed by federal government and all state governments in 2009 that can be pointed out as the only expenditure with potential benefit to the economy (Federal Ministry of Finance, January 28, 2015). Nevertheless, the last government had started looking for buyers for the NIPP (power plants) most likely at give away prices as obtained with the privatization of the PHCN. And, given the commitment of the Buhari government to the electricity privatization it is not ruled out that the NIPP built with huge public resources will be eventually transferred cheaply to the so-called private investors, who have proved to be unwilling to invest or have limited investible capital, something shown by the soft loans granted by the government to enable them to remain in business, for their super profits.

There was over $9bn in the ECA as of January 2014, while the oil price, which began to decline in July 2014 after being well above $100 for many months, did not start to go below the budget bench mark of $77.5bn until February 2015. Yet the last administration left $2bn in the ECA as both federal and state governments cutting across the two major parties APC and PDP and APGA shared a huge part of the savings apparently to finance 2015 general elections. This also shows why it is not enough to blame the slump in oil revenue for the inability of most state governments to pay salaries and pensions or for the federal government to borrow to pay salaries before the inauguration of the new government as there were adequate resources to meet the obligations to workers and pensioners as well as fulfilling other responsibilities of the governments.

CBN AND DEVALUATION

In reaction to the gloomy state of the reserves, the CBN has banned some 41 items from accessing foreign exchange from banks and BDC along with other restrictions on foreign exchange and thereby stem the slide in the foreign reserve. The alternative is for the CBN to further devalue Naira or allow it to depreciate having already lost about 23 percent of its value since last November. However, as is usual of any crisis of capitalism what it seems to be a solution throws up another crisis if it does not compound the original problem. It is a vicious cycle.

The CBN opted against the third devaluation of naira since the crisis started in order not to trigger further increase in prices of commodities as Nigeria is an import-dependent economy. But according to the Manufacturing Association of Nigeria (MAN), many of the items banned are raw materials essential for their business. Therefore, the affected factories would either close shop with attendant job losses or source for the alternative foreign exchange at much higher cost which will lead to increase in the prices of their products.

Besides, many of the items which could be produced locally are costlier than the imported alternatives as a result of poor infrastructure and high cost of business in Nigeria. In other words, the option not to devalue Naira, which has also got the backing of President Muhammadu Buhari, although appearing to be a lesser evil, cannot prevent high prices of commodities like rice which is a major staple food in Nigeria but affected by the ban.

Besides, apparently applying the capitalist textbook economics the CBN has kept the base interest rate fairly high ostensibly to control the inflation in the face of the previous devaluation of naira. This will keep the already exorbitant cost of credits high with attendant high price of goods and services. In any case, banks hardly loan money to the real sector because it is more lucrative to loan it to government by buying the treasury bills issued by the CBN under the guise of controlling inflation by mopping the so-called excess liquidity. Besides, banks, which are in business essentially to make super profit and not to aid development of the economy, consider it too risky to lend money to the real sector in the face of infrastructural decay.

JP MORGAN AND SPECULATIVE INVESTORS

The option chosen by the CBN has drawn the opprobrium or ire of imperialism and their media who have called for the devaluation of Naira. For instance, the Economist (London) did a scorching and condescending article titled “toothpick alert” to ridicule the action of the CBN which also includes a forex ban on toothpick imports. As aptly put by Henry Boyo, an economist, “what is clear from the article is the overriding message that investors want more Naira depreciation, so that speculative overseas investors can readily expand their portfolio of Nigeria’s listed equity for less dollar values.”

It is in the same vein, JP Morgan, a huge US financial corporation, started to remove Nigeria from its Government Bond Index – Emerging Market (GBI-EM) after the country had baulked its threat to do so if Nigeria did not allow adequate liquidity and free movement in the forex market, a euphemism for a further Naira depreciation. Rather, the CBN introduced an order-based two-way foreign-exchange market to try to stabilize the naira, limit speculation and prevent round-tripping. In other words, the CBN has suspended the application of “free-market economy theory” in the foreign exchange market.

By the end of October when JP Morgan completes the phased removal of Nigeria from its index, $2.8billion worth of foreign holdings of Nigerian government bonds is expected to exit the market. This could appear huge to exit an economy under stress but it is significantly lower than a total of $8.0billion foreign holdings of Nigeria’s local debt (government bonds and treasury bills) that exited the market in September 2014.

The fact is that the majority of the foreign investments are from portfolio investors who gamble on financial assets such as government bonds, treasury bills and stocks because of the high price of crude oil. This is unlike foreign direct investment which means an investment in the productive assets, which cannot be easily liquidated. It also explains why $8.0billion out of $11billion foreign holdings of the local debt could easily be taken out of Nigeria once there was a decline in oil revenue.

So, when the government and its town-crier financial experts gleefully talk about Nigeria as the most preferred investment destination in Africa, it is the hot money that is bet on high oil price that is being celebrated. For instance, between January 2013 and June 2015 over 80% of the capital importation to Nigerian economy put at $47.4bn, according to figures released in August by the National Bureau of Statistics (NBS), was portfolio investment. This explains why the so-called huge investment has not created many jobs. Worse still, in the case of the bonds and treasury bills, the government is borrowing at high cost – Nigeria’s bonds, for instance, have one of the highest yields in the world – without anything to show for it in term of infrastructure development.

Rather, the figure the government annually budgets for servicing this foreign debt as well as domestic ones is usually higher than the combined capital allocations to many critical sectors like education, health care, works, transport and housing. Indeed, the situation is much worse in the 2015 budget where the debt service (N953 billion) is far higher than the entire capital expenditure (N557 billion).

In other words, the ordinary people benefit precious little from the so-called investment. It should be stressed that the parasitic character of the primitive capitalist ruling elite in Nigeria explains why they loot rather than invest huge resources of the country on infrastructure that can stimulate foreign direct investment and domestic productive investment, as against gamblers, speculators and short-time investors, and thereby create mass jobs even on the basis of capitalism.

WHAT IS BUHARI ECONOMIC DIRECTION?

Many economists and commentators believe that Buhari has not yet had an economic direction to guide the country out of this current mess. They have however reduced this to the absence of an economic team or a cabinet. In other words, they are suggesting that once a cabinet or economic team is formed everything will fall in place. But the reality is that the economic thrust of the government is clear. It is neo-liberal capitalism with some dose of statism. Perhaps, this reflects the character of the coalition that brought him to power described by a writer of the Financial Times as hosting “an array of competing ideologies from unreconstructed statists like himself to free market ideologues who given half a chance would even sell of the state oil company and its assets.” (FT, March 31, 2015) So far this has defined the direction of the government.

Apparently, strengthened by the fear of losing his support base among the masses, he has not given half a chance to who “would even sell of the state oil company and its assets.” For instance, despite pressure he has not accepted or supported the call from economists and elements within and outside the government for sale of refineries as well as removal of the so-called oil subsidy.

For an example, Ibe Kachikwu, the Group Managing Director (GMD) of NNPC revealed at an interactive session with journalists in Lagos, “Personally, I will have chosen to sell the refineries, but President Buhari has instructed that they should be fixed.” (The Cable, September 25, 2015). But how far can Buhari sustain his objection to the sale of the refineries is a moot question given the mindset of Kachickwu, a former executive of Exxon Mobil, who may be announced as the Minister of State for Petroleum Resources . He added, “After they are fixed, if they still operate below 60 per cent, then we will know what to do…The 90-day ultimatum for the refineries to be fixed will end in December and Port Harcourt Refinery looks like the only one that will meet the deadline, but we will wait and see what happens at the end of the 90 days.” At present, according to him the average refining performance is 30 per cent which is said not to be profitable.

Buhari seems to be strong on his position against removal of fuel subsidy and the need for an adequate local refinery capacity. He reportedly told the members of Revenue Mobilisation, Allocation and Fiscal Commission (RMAFC) who had apparently suggested to him to remove the subsidy, to come up with more humane proposals to rescue ordinary Nigerians from what he described as the “wicked manipulation” of the country’s oil industry by corrupt operators (Punch, August 26, 2015). He reportedly held that “the escalation of petroleum subsidy payments over recent years was due to the deliberate neglect of the nation’s refineries, oil pipelines and other related infrastructure to allow the importation of petroleum products and corruption to thrive.” (Vanguard, August 26, 2015).

Perhaps fortunately for Buhari the low oil price means that his government would ordinarily make less subsidy payment than the previous government apart from the much-touted measures to tackle corruption in the fuel importation. But the low price also means that on the basis of profit-first contract system there would be limited capital to turn around or rebuild the oil infrastructure in Nigeria.

Besides, some recent signs have shown difficulty or limited commitment to tackle the corruption in oil importation. For instance, the government had first cancelled Offshore Processing Agreements (OPAs) and Crude Oil Swap (COS) deals entered with 43 oil companies and re-awarded the contracts to four companies. However, it later increased the number to 16 which including many of the companies linked with the monumental oil fraud. It is in the same way the Buhari government lifted the ban it had placed on 113 oil vessels linked with oil theft after pressure from some western powers.

However, demonstrating its mixed grill of free market and statism, the government which is against the sales of refineries and fuel subsidy removal has supported fully the electricity privatization and increase in electricity tariff. Though the privatization was started by Jonathan government, it has promised to complete the process including the sale of the transmission company, which at present is under a private management, and the National Integrated Power Plants, the only projects that could be shown for the excess crude account proceeds.

WORKING PEOPLE MUST NOT LET THEIR GUARD DOWN

Though there has been a relative improvement in electricity supply, it has not ended the struggles in communities against the exploitation of consumers with estimated billing and fixed charge. With the support of the government for electricity tariff, it may draw it’s first ire of the masses. However, what the relative improvement in electricity has shown is that there are many communities which are in total darkness or not connected to national grid at all. It is also indicative of a very low industrial base of Nigeria. Indeed, 4,000MW generated by Nigeria, Africa’s most populous country and its biggest economy, is said to be equal to the grid power of Bradford, a post-industrial town of less than 300,000 in the north of England (Economist May 28 2011). Worse still, many of the communities which have not enjoyed any power supply are still being made to pay outrageous bills including the fixed charge as shown by the recent protests of residents of some parts of Oshodi and Agege in Lagos and Aramoko in Ekiti (Punch, October 10, 2015).

The position of the government on electricity privatization and tariff increase also suggests that it could sell off some public assets at the expense of the working people and introduce high charges and fees on service like education and health care. This means that working people must not let their guard down but prepare for a fight back. Indeed, the continued decline in oil price shows that stringent austerity measures cannot be ruled out. For instance, the declining oil revenue has already led to loss of jobs in the construction industry as the government did not release the capital allocation for the first quarter of the year until September. In other words, there has not been capital allocation for the rest three quarters.

The Buhari government is under pressure to begin to implement cuts, either directly or indirectly, because of the fall in oil income. An investment banker, Johnson Chukwu, even described the new government’s policy as “a socialist economic orientation” because it had not removed the fuel subsidy and promised reforms (Vanguard, October 11, 2015). But this government is not pursuing socialist policies because it firmly rests on the capitalist system. This is why it may use the excuse of oil slump to attack the working masses or fail in its obligation to the working people. But as stated in the last edition of this paper, it is not for the labour leaders and workers to show understanding or help resolve the crisis of capitalism. The government should not be allowed to make the working people and the poor pay for the crisis of capitalism. The trade unions and mass organizations must place the demands on the new administration and plan to resist attacks on the working people.

Already in his electoral promise, Buhari said he would use savings that arise from blocking leakages and the proceeds recovered from corruption to fund his party’s social investments programmes in education, health, and safety nets such as free school meals for children, emergency public works for unemployed youth and pensions for the elderly. But many state governments, including those of the APC, have recently increased school fees while some states like Osun which used to implement free school meals for children have cancelled the programme. This shows that Buhari may fail to deliver even on these promises. Therefore, the trade unions and other mass organizations of the working people must be prepared to force Buhari to fulfill his electoral promises while also explaining that a system change, i.e. a break with capitalism, is urgently needed both to guarantee any gains won now and for a viable future for working people.

As part of their agitation and campaigning the NLC and TUC must not shy away from demanding a new national minimum wage as the current one of N18,000 has been rendered untenable by inflation and devaluation of naira.

SOCIALIST ALTERNATIVE

The Buhari government may argue that there are no resources to finance the wage increase and also the promises it had voluntarily made itself, socialists hold that there are resources despite the slump in oil revenue. The trade unions and mass organizations should demand that all the political office holders and top government functionaries are placed on the salary structure of civil servant as well as democratic control of projects and allocations by the elected representatives of the relevant working people. Socialists will also argue that in order to mobilise adequate resources to finance not only living wage and social program but also infrastructure developments the commanding heights of the economy like oil and gas industry, big banks, etc have to be nationalized and placed under democratic control and management of the working people themselves. However, such programmes can only be implemented by a mass working people party and not a party firmly rooted in capitalism like the APC.

At present there is lull in political struggle in the labour movement apparently because of mass illusion or hope in Buhari government. But this will not last forever, socialists and working class activists have to continue to mobilize workers and sustain pressure on the labour leadership to fight for the interests of workers and masses as well as campaign for a mass working people party on a socialist programme. One major lesson, underscored by the victory of Buhari, is the readiness of the working masses to fight and vote a change. If such a mass working peoples’ party identifies with struggles of workers, youth and community people as Buhari inevitable fails to provide the real change, it will serve as the platform to challenge and change the Buhari government. Indeed, the failure of Buhari, despite his widely believed good intention, will spur some change seeking elements to begin to search for a genuine alternative outside capitalism and thereby get attracted to socialist ideas.