Nigeria: Political and business environment risk assessment of Africa’s largest economy

• Weak GDP growth projections, together with double-digit inflation, pressure on the naira and endemic corruption perception explain the high business environment risk.
• Central Bank interventions continue to create macro-economic imbalances.
• Nigeria’s security challenges have been worsening noticeably over the past year.
• The new Petroleum Industry Bill is not expected to substantially raise foreign investments while over time, decarbonisation will be the major challenge.

Short-term political risk in category 5/7

Between 2004 and 2012 Africa’s largest economy experienced its bonanza years, with large current account surpluses. Subsequent oil price volatility and serious production disruption gradually changed the picture of Nigeria’s external balance. In fact, Nigeria’s oil production has declined by nearly half since 2012 as oil producers have been divesting assets due to corruption perception, insecurity and a dysfunctional regulatory environment. The current account balance recorded a deficit in 2019 while large capital flight (mainly oil money) and lower investment inflows have raised further pressure on foreign exchange reserves.  

Since the fall in oil revenues following the Covid-19 crisis in 2020, Nigeria has already devalued the naira three times. Moreover, the CBN (Central Bank of Nigeria) uses interventionist policies to prop up the foreign exchange reserves to assist in keeping the overvalued naira artificially high. Ad hoc foreign exchange regulations are unlikely to narrow the gap between the parallel and official exchange rates. For that to happen, foreign exchange inflows need to improve structurally through a recovery in (oil) export revenues, investment inflows and improved export diversification. With international oil prices on the rise, oil export revenues are set to further recover in the near- to medium term, which should help stabilise the currency. 

In practice, the restricted foreign exchange availability and import regulations (like the list of 41 import items for which the CBN will not provide foreign currency) are resulting in manufacturers being unable to purchase raw materials and equipment from abroad, while external investment in Nigeria has also decreased sharply. As a result, companies often resort to the more expensive parallel market to access dollars for repatriation and to purchase raw materials, adding further upward pressure on inflation. Nigeria traditionally has high inflation levels, which erode living conditions and weaken its external position by raising the debt service burden (in local currency terms) of foreign currency denominated debt.

To help deal with the immediate financing needs related to the Covid-19 crisis, Nigeria secured USD 3.4 billion in IMF emergency financing assistance (RFI) in April 2020 (Nigeria did not participate in the G20 Debt Service Suspension Initiative (DSSI)). According to the CBN, gross foreign exchange reserves reached USD 34 billion at the end of August 2021 (around 4 months of import cover), down from USD 36.4 billion in December 2020. This reflects the continued pressure on liquidity.

Business environment risk in category F/G

Due to the Covid-19 crisis and the drop in international oil prices in 2020, the Nigerian economy shrank by -1.8% last year, which is much better than the deep recession expected at the onset of the pandemic. However, GDP growth is expected to remain rather limited over the coming years, at around 2.5%. GDP per capita has been falling since 2016 and is expected to continue to fall at least in the forthcoming years. The weak business cycle projections, together with double-digit inflation and pressure on the exchange rate, explain the high business environment risk. Corruption perception remains an endemic and deep-rooted problem at all levels of government and a patronage-dominated society. Together with the deficient legal protection, this puts Nigeria’s business environment risk classification in category F on a scale from A (the lowest risk) to G (the highest risk).

MLT political risk in category 6/7

Nigeria’s main strength in terms of its solvency is the low external debt-to-GDP ratio (24% in 2020 or 150% of current account revenue). The debt service burden, on the other hand, was at its highest level since the 1990s in 2020 relative to current account receipts but it is expected to improve along with the anticipated increase in current account receipts. 

Whereas public debt-to-GDP ratio is moderate (less than 35% of GDP in 2020), the major weakness of Nigeria’s public finances is the very low revenue collection level, which has worsened sharply over the years. Today, Nigeria is among the weakest in the world in terms of government revenue collection capacity (about 7% of GDP). This shows that far-reaching policy reforms (especially in the oil sector) are required for public finances to be maintainable over time. In addition, significant arrears are accumulated sporadically on domestic debt, which is a major strain for the Nigerian economy.

Earlier this month, President Buhari signed into law the long-awaited Petroleum Industry Bill (discussed since 2008), a new regulatory framework aiming to modernise Nigeria’s ailing oil industry and tackle falling government revenues and declining foreign exchange reserves. New licences will be issued again for the first time in 18 years to develop marginal oil fields (including in the unstable northeast region), all held by Nigerian companies. The allocation of new licences is expected to provide a boost to the Nigerian economy of about USD 7 billion (1.4% GDP). However, in the short term the law is expected to reduce government revenues as it will cut taxes on profits and it is not expected to substantially raise foreign investments in the petroleum industry as production costs will remain too high while corruption perception, insecurity and poor infrastructure persist. Moreover, the inevitable pollution related to tapping these new fields may affect farming and fishing communities, worsening the insecurity and violence in already highly unstable regions. 

Major risks to watch are related to the fact that Nigeria is deeply split across ethno-religious lines, security crises are numerous and civil protests are spreading against perceived government mismanagement. Also, there is a severe risk of food insecurity in certain parts of the country. Moreover, Nigeria’s economy continues to be highly dependent on oil, exposing it to recurring production tailbacks and volatile international prices, while in the medium/long term global decarbonisation will be an enormous challenge. 

Political violence risk in category 6/7

Numerous security crises are ongoing and the government seems powerless to deal with them. Nigeria’s security challenges have been worsening noticeably over the past year. The fight against the Islamist militancy in the northeast has taken a turn in favour of the insurgents, raising the possibility of a seizure of Borno State’s capital, Maiduguri. The Islamic State West Africa Province (ISWAP) group now dominates the insurgency after its elimination of long-time Boko Haram leader Abubakar Shekau. Regions like Yobe, Borno and Adamawa have effectively become ungoverned and unsecured spaces marked by attacks on military positions, suicide bombings, mass kidnappings and massacres. In the south President Buhari is also facing a sharp increase in kidnappings, associated organised criminality, attacks on oil installations and clashes with the army. In addition, farmer-herdsman violence over land and water access has been worsening in northwest and central regions while levels of latent secessionist sentiment are rising (especially in the Biafra region). The government’s forceful response often has the effect of deepening the emphasis on regional, ethnic and sectarian identity. This increases the risk of conflicts spilling over into actual civil war in some regions featuring self-determination militias.

Endemic corruption, state violence and worsening living conditions have led to mass youth-led protests in the major cities over the past year. These peaceful demonstrations culminated in a violent crackdown in which several unarmed protesters were shot. However, over time Nigeria’s political class might actually be held accountable by the increasingly vocal and engaged youth population, which could eventually have a positive impact on the political system.  

Analyst: Louise Van Cauwenbergh – l.vancauwenbergh@credendo.com