Previous Quarterly Editions
Expropriation Risk: 57 55 59 63 Political Violence Risk: 62 62 63 63 Terrorism Risk: 75 75 75 75 Exchange Transfer and Trade Sanction Risk: 59 57 57 61 Sovereign Default Risk: 50 50 52 56
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Nigeria’s economy was fragile even before the effects of the COVID-19 pandemic gathered momentum, with annual growth of 2% in 2019 marking little advance on 2018. But when China drastically curtailed its consumption of oil in February 2020 as it shut down manufacturing and commercial operations to contain the spread of the virus, Nigeria was one of the first to feel the impact in terms of weakening oil prices. As producers failed to agree on production cuts to support prices, prices collapsed in March 2020 to hit a brief low of 25 USD a barrel. Nigeria’s budget for 2020 had assumed a price of 57 USD a barrel, coupled with an average daily production target of 2.18 million barrels. By March 2020, the government was working on the assumption of an oil price of around 30 USD and a daily production average of just 1.7 million barrels, leading it to make an initial cut of 5 billion USD from planned spending of 34 billion USD. Unlike less oil-dependent countries, the government must meet the surge in demand for virus-related public spending with substantially less revenue than expected. President Buhari’s Economic Advisory Council warned in March 2020 that, regardless of the impact of the virus, the pace of the country’s economic growth was too slow to match population growth. At the same time, the rising deficit and the high cost of debt servicing, together with a depreciating currency and a new cycle of inflation, are also putting massive strain on public finances. Add the economic consequences of COVID-19 on the manufacturing sector and employment, and a deep recession appears inevitable. Nigeria only imposed a two-week lockdown for Lagos state, which includes its largest city, and the capital Abuja, towards the end of March 2020, ordering civil servants to work from home and preventing public gatherings. The virus crisis is happening as the country is still dealing with the consequences of President Buhari’s decision in late 2019 to close the country’s borders, ostensibly to combat the smuggling of commodities such as rice. However, the move was widely seen by other members of the Economic Community of West African States (ECOWAS) as a protectionist measure to stimulate domestic food production. Nigeria has long utilised protectionist measures, arguing that neighbours such as Benin and Ghana act as conduits for countries like Brazil, Thailand, and the EU to dump cheap commodities into Nigeria. The move was popular with the domestic farm sector but quickly led to higher prices, while angering neighbouring countries as they pursue the African Union’s initiative for an African Continental Free Trade Area (AfCFTA).
Reports that the Buhari administration is planning to completely redraft the Petroleum Industry Bill (PIB) has alarmed foreign investors in the sector, who have been waiting ten years for this legislation to reach the statute book. The chance of passage this year was already receding before the impact of the virus. Passing the PIB should have been the top priority for the Buhari administration when it took office in 2015, and its failure to enact the new legislation after five years is the single biggest factor holding up investment in the hydrocarbons sector. Meanwhile, the latest point of contention between the major oil companies and the government has been over the unilateral fiscal terms that the government imposed last year on production sharing contracts.
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The army is clearly overstretched as it continues to fight the Islamic insurgency in the north-east of the country while trying to quell sectarian violence between Christian farmers and Muslim pastoralists in the Middle Belt. As such, it may not be in a position to answer a call from the authorities in Abuja if the country experiences a strong reaction to food shortages or sudden price spikes. Nigeria spends over 22 billion USD a year on importing food, much of which could theoretically be grown locally. But as became evident during President Buhari’s ill-advised land border closures last year, any interruption in supply cannot be immediately made up from increased local production. If the cost of food is pushed up by distribution as well as production problems just as virus-related unemployment reduces household income, then the possibility of widespread protests will also increase.
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Public discontent is growing at the government’s failure to protect the north from Boko Haram and the Middle Belt from increasingly deadly clashes between herdsmen and farmers over pasture. One index of global terrorism, released at the end of 2019, showed that Nigeria is the world’s third most dangerous country, behind only Afghanistan and Iraq. More than 30,000 civilians and security personnel have been killed during Nigeria’s Islamic insurgency, which has also displaced some three million people in the region, according to UN figures. The government’s inability to bring a decisive end to the Islamist threat despite several declarations of victory is increasingly being held against Buhari’s administration. Nigeria’s Catholic bishops led a public demonstration in Abuja to protest at the government’s ineffectiveness in March 2020, the same month in which more than 50 people were killed by Boko Haram militants in Kaduna state.
On March 20 (2020), the central bank quietly devalued its official exchange rate by 17.6% against the USD, describing the move as only an adjustment. Nigeria earns 90% of its foreign exchange earnings from oil exports, and as both prices and exports continue to fall, the impact on the naira was inevitable. But the move also marked a shift in the bank’s priority from protecting the naira to protecting its foreign reserves. A further round of inflation is now expected, on top of the inflationary spike caused by the rise in food prices due to last year’s border closures. The central bank has made available 135 million USD to provide credit for small and medium-sized businesses.
At the start of April 2020, the government sought loans totalling 6.9 billion USD from the IMF (3.4 billion), the World Bank (2.5 billion) and the African Development Bank (1 billion). It also sought, in concert with other African countries, a moratorium on debt servicing payments to these institutions for this year and next. Abuja had already announced the postponement of its planned 3.3-billion-dollar Eurobond, which was meant to be part of a 22.7 billion USD spending package for vital infrastructure projects. Fitch cut the country’s rating further at the start of April 2020, citing the expected return to recession, and this will make accessing commercial markets even more expensive. International reserves have already fallen by 20% to 35 billion USD since their recent peak in June 2019.
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