Previous Quarterly Editions
Expropriation Risk: 55 55 57 55 Political Violence Risk: 65 66 62 62 Terrorism Risk: 80 78 75 75 Exchange Transfer and Trade Sanction Risk: 58 58 59 57 Sovereign Default Risk: 50 48 50 50
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President Muhammadu Buhari finally signed the African Comprehensive Free Trade Agreement (AfCFTA) in July. This makes Nigeria one of the last African countries to commit to the agreement, which is intended to unite 1.3 billion people in a 3.4-trillion-dollar economic bloc in order to boost the continent’s economic development. Buhari, long fearful that a free trade regime will result in the dumping of goods on the Nigerian market to undercut local businesses, has finally been convinced that the benefits of AfCFTA will outweigh the risks. As a result, Nigeria will join all but two other African countries in cutting tariffs from 90% to zero in an effort to boost intra-African trade. In 2017, this was worth around 170 billion dollars, just 15% of the continent’s total trade. By removing tariff barriers and reducing non-tariff barriers, the African Union, which has lobbied hard for the agreement, hopes to boost trade and so provide a major stimulus to the continent’s overall economic development. Nigeria is expected to benefit from a fully functioning AfCFTA, but the positive impacts are still some way off. In the meantime, the short-term outlook for the economy remains subdued. The IMF expects growth to be 2.3% this year, before dropping slightly to 2.1% in 2020. Both figures are seriously below the annual growth of 6-8% that Nigeria needs to absorb population growth and boost incomes. But as Buhari settles into his second term, having won re-election in February, no new directions in economic policy look likely. One of the areas most in need of improvement is power generation. On a per capita basis, Nigeria is one of the least electrified countries in the world and this is a major constraint on growth. The national grid collapsed several times during the first half of 2019, underlining the lack of investment in all aspects of generation, transmission and distribution infrastructure since privatisation in 2013. Meanwhile, the struggling education sector and poor literacy rates inhibit the growth of the formal economy. The government’s ability to improve the situation is badly hampered by the cost of servicing its heavy borrowing on local markets following the oil price crash in 2014. In 2018, debt service costs reached 50% of federal revenues, so reducing the government’s ability to invest in the productive infrastructure needed to speed repayment and attract foreign investment.
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After a period of well-publicised tension, relations between the government and MTN, the South African-owned mobile telecoms company with 60 million subscribers in the country, improved in May when MTN listed on the Nigerian Stock Exchange. The listing is part of the settlement of a dispute with the government dating from 2016. In 2018, the company was accused of illegally repatriating some eight billion dollars and presented with a demand for two billion dollars in back taxes. This was widely seen outside the country as an abuse of government power by an administration that resented MTN’s success and it did some damage to the country’s reputation among investors.
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The threat of politically related violence is receding following completion of the presidential and legislative elections earlier this year and a round of gubernatorial elections in July. Instead, attention has re-focused on the worsening sectarian tensions in the country’s Middle Belt between Muslim herders and Christian farmers. The federal government’s Rural Grazing Area initiative, which is designed to help herders become sedentary, was suspended in July following controversy over how the government acquired the land on which they are meant to settle. The conflict arose as a combination of rising population and environmental degradation has been forcing Muslim herders to seek pastures on land owned by Christian farmers. Critics of the government initiative are calling for more community-based solutions to ease tensions. Fears that groups calling for autonomy for the Biafra region might target the elections proved unfounded, although the militancy re-emerging in the Niger Delta region is once again threatening oil output and pushing up production costs.
As he begins his new term, President Buhari is facing renewed calls for more effective government efforts against the Islamist insurgency in the north of the country that has now been going on for a decade. The military has made some progress against Boko Haram. However, the recent growth of the Islamic State West Africa Province (ISWAP), the Islamic State-aligned breakaway faction of Boko Haram that is now the largest IS franchise outside Iraq and Syria, has re-invigorated the conflict. A recent wave of kidnappings does not seem to be linked to terrorist groups but has contributed to waning faith in the capacity of the security forces to deal with the combination of challenges they now face.
The central bank held its benchmark interest rate at 13.5% in July following a cut of 50 basis points in March. Governor Godwin Emefiele insists that the bank will not be hurried into another reduction while inflation continues in double figures, and the annual rate is still above 11%. However, the bank is backing the government’s effort to improve growth by introducing new loan-to-deposit ratios that are intended to encourage an increase in commercial bank lending to individuals and businesses. Buhari’s decision to renew Emefiele’s term as governor in July in spite of persistent presidential criticism of its high interest rate has been welcomed as confirming the bank’s independence. Emefiele thus becomes the country’s first central bank governor to receive a second term since the return of civilian rule in 1999. The official exchange rate continues to overvalue the naira against the dollar but Emefiele appears committed to continuing with the country’s contentious managed float exchange rate.
Official figures put overall government debt at around 19% of GDP at mid-year, slightly better than last year but up from 14% in 2015. Debt servicing costs continue to eat into government income, which continues to fall in relation to GDP. After distributing oil receipts to the 36 states as required by the constitution, the federal government has revenues equivalent to less than 6% of GDP.
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