Index trend
Previous Quarterly Editions
Expropriation risk: 68 68 68 68 ► Political violence risk:66 67 67 66 ►Terrorism risk:82 82 83 85 ►Exchange transfer and trade sanction risk: 73 64 64 64 ►Sovereign default risk:82 82 82 82 ►
Overall Risk Temperature: 75 (High) TREND ►
Special topic: Relationship with the 'global rules-based order'
President Bola Tinubu was inaugurated in May 2023 as Africa’s most populous country faces its most formidable security and economic challenges ever. Tinubu immediately scraped a fuel subsidy that was costing the country $10 billion a year and removed exchange rate restrictions that had inhibited domestic and foreign investment for much of the past decade.
The decision to open up the economy to foreign investment flows is a clear sign that Tinubu embraces the rules-based international order and its emphasis on multiparty democracy, free trade and cross-border investment flows.
Moreover, Tinubu is chairman of the Economic Community of West African States (ECOWAS) — the West African regional trading bloc. He is likely to leverage this position and Nigeria’s power to promote the rules-based international order and help facilitate trade and investment across ECOWAS and the wider African Union.
In concert with other African leaders, Tinubu can be expected to amplify Nigeria and Africa’s voice on the world stage. This includes calling for the reform of global fora such as the United Nations Security Council, the G20 (the African Union was invited to become a permanent member of the G20 in 2023), and the Bretton Woods institutions of the International Monetary Fund and the World Bank. The goal is to make those institutions more supportive of Africa’s much-neglected development needs.
The erosion of the rules-based international order or its unlikely collapse would severely damage Nigeria’s long-term economic prospects. China or Russia alone would be unlikely to satisfy the country’s need for capital and technology transfers.
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Elected on an economic reform platform titled “Renewed Hope,” Tinubu has pledged to boost economic growth to 6% of GDP per year and help revive the country’s flagging oil production. Neither of these laudable goals is ever likely to be realized without a marked upturn in foreign investment flows into the Nigerian economy in general and the oil sector in particular.
Tinubu is acutely conscious that three decades of military dictatorships before the return to civilian rule in 1999 — and their failed protectionist policies — helped cripple Nigeria’s economy. Only by drastically improving the country’s investment climate is Nigeria likely to attract foreign direct investment on the scale needed to bring about a genuine economic revival.
As a result, the ruling All Progressives Congress party is unlikely to embark on any policy initiatives that would inhibit investor confidence. On the contrary, it is likely to put in place a permissive investment climate to help boost investment — particularly in the telecoms and consumer sectors. These sectors hold great potential for growth as Nigeria's population is projected to more than double from 220 million currently to 485 million in the next 50 years.
Nigeria adjusted to Tinubu’s decision to abolish fuel subsidies, which caused prices to triple overnight, without widespread violence as feared. Nevertheless, his reforms will have to deliver visible signs of progress in the short to medium term, as his repeated pleas for “patience” may be increasingly ignored.
During the 2014 – 2022 years under former President Muhammadu Buhari, economic growth averaged 1.4% a year. This was a significant contrast to the 2001 – 2014 years when Nigeria was hailed as one of the world’s fastest-growing economies. Under Buhari, average incomes fell from $3,222 a year to $2,200 a year.
Fuel subsidy and exchange rate reforms have been unpalatable economic medicine, and they have also triggered a fresh inflationary spiral. Inflation reached a three-decade high of nearly 30% in January. Without visible improvement in living conditions, there is a growing risk of violent street protests in Nigeria.
Within days of his inauguration in May, Tinubu promptly replaced the heads of the army and security services with new talent. He instructed them to prioritize improvements in the security environment. Nigeria is still grappling with a 14-year jihadist insurgency in the northeast; violence, criminality and rampant kidnappings in the central and northern regions; renewed separatist unrest in the southeast; and large-scale oil theft in the Niger Delta.
In March, as if to mock Tinubu’s top priority, gunmen kidnapped nearly 300 school children and staff in Kaduna state in the biggest mass abduction since 2021. They demanded 1 billion naira (around $620,000) in ransom.
Earlier this year, the Nigerian National Petroleum Corporation reported shutting down more than 6,000 illegal refineries and disconnecting more than 4,000 illegal connections to its pipeline network in the Delta, in what can only be described as brazen and gargantuan oil theft.
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Nigeria’s economy grew 3.4% in the final quarter of 2023. Government reforms and improved oil output helped boost growth for the year to 2.7%; however, those reforms have also been criticized for exacerbating inflationary pressures, which reached nearly 30% in January.
Oil output rose to 1.5 million barrels per day in 2023, up from an average of 1.3 million barrels the year before. Brent crude reached $85 a barrel in March partly because of recent Ukrainian attacks on Russian oil refining facilities. This raises the prospect of Nigeria receiving a windfall in foreign exchange earnings above the benchmark price set for the 2024 budget.
Tinubu signed off on Nigeria’s 2024 budget, which is valued at 28.77 trillion naira ($34 billion) assuming an exchange rate of 700 naira to the dollar. This has since been revised down to 800 naira to the dollar, which suggests a modest fiscal deficit of 3.9% of GDP.
Nigeria’s budget also set a benchmark price of $77 per barrel and, somewhat optimistically, forecast output of 1.7 million barrels per day for 2024. This target is unlikely to be reached given a wave of disinvestment in the offshore and onshore sectors by international oil companies in recent years.
Nigeria’s national government debt exceeded $106 billion as of September 2023, up from $105 billion the previous quarter. This is the highest ever recorded but still well below Africa’s sovereign mean, according to data published by the debt management office.
Government borrowing has increased steadily over the past two decades, from a low of $17.4 billion in 2006. Yet it still only accounts for 37.4% of GDP, making the risk of sovereign default remote. Abuja will, however, end the practice of using the central bank to fund the deficit and will instead rely solely on market borrowing rather than printing money. The government borrowed some $33 billion from the central bank under Buhari.
Yields on government debt reached record highs in March after the central bank raised the benchmark lending rate by 400 basis points to 22.75% to curb runaway inflation. Investors flocked to buy government debt instruments following the rate rise, which was widely seen as indicating the government’s determination to tame inflation.
