A double strike
Mar 12th 2009 | LAGOS
From The Economist print edition
Africa’s second-largest economy has home-grown problems, too
STAND on the beachfront of Lagos, Nigeria’s commercial capital, and a puzzling scene emerges from the tropical haze: a stately line of container ships, each at anchor, queuing to enter the harbour. Despite the global slump, congestion is not letting up, says the director of the company that runs the privatised port. The number of inbound containers has doubled in the past three years; so far in 2009 there has been no decline. Such is the crush in Lagos that getting cargo from ship to port to lorry still takes an average of six weeks.
Such blockages are nothing to celebrate. But they indicate how 140m-odd Nigerians, despite being battered by a sharp fall in oil revenues and by an equally painful 20% devaluation of their currency, the naira, remain hungry for imports. Retailers tell a similar story. Coca-Cola plans to serve Nigerians over 2 billion bottles of sugary drinks this year, as it did last year. Procter & Gamble, which sells nappies, washing powder and so on, reports some slackening growth but still expects the young and fast-growing population to push up consumer demand in the next few years. Mobile-phone companies, notably MTN, which dominates the local market, are even more gung-ho. They continue to brag about healthy sales of handsets and new armies of subscribers, though the rising costs of imported equipment cut into profits; Nigeria now has some 64m lines, up from a handful a decade ago.
Anecdotally, at least, businessmen’s bullishness seems so far to be borne out. Good hotels in Lagos still charge astronomical rates, building sites are crowded and vendors throng the city streets as ever; bootleg DVDs of Barack Obama’s inauguration are particularly popular.
But like many poor countries (see article), Nigeria has not escaped the global storm. It relies heavily on oil and gas exports, which provide more than 95% of all foreign-exchange earnings and most of the government’s revenue. Both have been thumped by the tumbling price of crude, now at about $40 a barrel, more than $100 less than at last year’s peak. With nothing else to export—all those containers leave empty—Nigeria is especially vulnerable to volatile oil prices.
Capital which washed merrily into the economy a year or two ago is flowing the other way. Most of it had served the hydrocarbon industry but some foreign investors, notably Americans, had started to see Nigeria as an emerging market; braver ones were tempted by its stockmarket. No longer. A property bubble has popped; the Nigerian Stock Exchange has tumbled by around 40% from its peak. Speculators and local banks are painfully out of pocket.
No wonder the federal government is starting to sound worried. On March 10th President Umaru Yar’Adua at last signed into law a much-delayed expansionary budget, with spending for 2009 at $21.2 billion, a lot more than in early drafts. The newish finance minister, Mansur Muhtar, recently admitted to a meeting of businessmen in Lagos that he saw a “very gloomy picture in the short and medium term”.
Nigeria, along with Africa as a whole, should be spared outright recession. Chukwuma Soludo, the central bank’s governor, says he still expects sub-Saharan Africa’s economies to grow by roughly 3% this year. Nigeria, he reckons, should muster more than that, though not the 6%-plus of recent years. That would barely match the rate of population growth, but if those figures are right Nigeria will be doing better than most and should avoid the acute pain of previous commodity-price busts, as in the 1980s, when the government could not pay civil servants and political instability ensued.
Nigeria is also in better shape to deal with a slowdown because of some decent macro-economic reforms. Inflation, food aside, is quite low. The government has paid off sizeable debts or been relieved of them. It also has ample foreign-exchange reserves and has ferreted away $20 billion in a fund called the Excess Crude Account, which will help cushion public finances from the downturn. On the other hand, raising cash is getting harder: Mr Muhtar has just postponed plans to sell $500m of bonds on the international market.
Trouble at home
Yet even if the global crisis has not hit Nigeria as hard as elsewhere, it is exposing some unresolved problems at home. Take the banking system, which Mr Soludo says would have collapsed months ago but for an early round of government-driven consolidation. He calls the banks “shock absorbers” for the economy. But they look increasingly wobbly. Despite claims that they are well capitalised, with generous capital ratios of 22% said to be typical, they have all but stopped lending to each other or to local firms, especially smaller ones.
Critics say the banks are frozen because many are dangerously exposed to the stockmarket slump, after rashly securing a large portion of their loans with now almost worthless equities. Without government support, some banks would almost certainly fail. None trusts the others.
Oil and gas production, the economy’s mainstay, is also in bad shape. Long Africa’s biggest producer, Nigeria last year ceded the top spot to Angola. Production is dropping, in part, because militants in and off the Niger Delta kidnap workers and scare away oil firms. A new pipeline built to export gas to Ghana, Togo and Benin should have opened in January but lies empty. Talk of spending $12 billion to build another pipeline running 4,400km north across the Sahara to send gas via Algeria to Europe sounds fanciful. A sizeable share of local gas is simply flared off at source.
Meanwhile, Nigeria still cannot keep its own lights on. Manufacturers, who account for a feeble 3-4% of GDP but at least create some jobs, grumble that they must rely entirely on costly diesel generators. Power cuts are common. It has long been obvious what should be done: existing turbines lack supplies of gas, transmission cables should be rolled out, more power stations must be built. Successive governments have let power generation dwindle, yet none has let private contractors act instead. Shortly before leaving office the previous president, Olusegun Obasanjo, passed a law ordering the privatisation of some power stations. But Mr Yar’Adua quickly reversed this, saying he was worried about corruption.
A rare bright spot is agriculture. Nigeria’s lands are fertile; water, at least in the south, is plentiful. A fertiliser plant has been privatised and is supposed to start supplying farmers. Local food and tobacco prices remain high compared with world prices, which should give farmers good incentives. One day—who knows?—goods may once again flow out of Lagos harbour as well as into it.
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