Nigeria: Slow and steady

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The combination of low savings and the recent reinstating of fuel subsidies means Nigeria’s government is looking for way to trim expenditures and raise funds. Despite a small drop in planned expenditures, however, the budget deficit is expected to rise in 2012 to 2.97% of GDP from the 2.77% target rate the government announced in December 2011.

Fiscal policy is a priority for the government this year, but the revision follows the recent decision to reintroduce fuel import subsidies after mass demonstrations were held across the country protesting their elimination, which originally raised the price of petrol to N141 ($0.90) per litre from N65 ($0.40) per litre. The public anger prompted the government to reverse its decision and reinstate part of the subsidies.

The current subsidies will cost the country N888bn ($5.61bn). Of this amount, N309bn ($$1.94bn) will come from money set aside for federal government expenses, while the remainder will come out of the money allocated for state and local governments.

To make up for the shortfall, Nigeria will further tighten spending and use funds from the country’s excess crude account (ECA). The government will reduce total expenditure by nearly N100bn ($634m), bringing the amount to N4.6trn ($28.52bn). At the same time, it plans to increase withdrawals from the ECA to N306.76bn ($1.93bn), a rise of 36%.

The current situation presents challenges for the government. Nigeria’s debt-to-GDP ratio is quite high, and its fiscal savings are low. Savings make up less than 2% of the country’s GDP, while the median for oil-exporting countries is 67%.The government is also in need of major infrastructural upgrades, and President Goodluck Jonathan has already pledged to increase capital project spending to 28% of the budget in 2012 from 26% in 2011.

Fiscal savings are important for oil-producing countries to provide protection from shocks in the price of oil. Nigeria relies greatly on oil revenues to cover the costs of the country’s administration, as well as to fund major development projects. The bulk of the government’s revenue (80%) and of foreign-currency income (95%) comes from oil.

The government has taken measures, however, to address the concerns over the country’s low savings. Beyond this year’s planned N100bn ($6.29m) cut on expenditures, which will affect administration, training and transport, the government is looking towards further reductions in the long term.

“In the 2013 budget we will be looking at closing agencies,” said Ngozi Okonjo-Iweala, the minister of finance. “At the moment we are cutting out all the soft things, all the excess.”

Nigeria’s administrators are also looking to its own pockets to trim the budgetary fat. On January 7, President Jonathan announced a 25% salary cut for elected officials. Additionally, he called for all foreign trips taken by politicians to be minimised as much as possible, and for the size of the delegations on such trips to be significantly reduced.

The country has also sought to bring in greater revenue through the sale of bonds. At its first debt auction of 2012, held on January 25, Nigeria raised N89.76bn ($564.94m). Its second debt auction on February 29 saw it issue N70bn ($443m) in sovereign bonds. These bonds will mature in 2019 and 2022, respectively.

Despite the widening deficit, with increased oil production and rising consumer spending, growth prospects for the country still look promising. The country posted GDP growth of 7.68% in the fourth quarter of 2011, the highest of any African country and, of those economies who have published fourth-quarter data thus far, behind only Mongolia and China worldwide. With plans in place to alter the country’s GDP base year from 1990 to 2008, Nigeria could surpass South Africa as early as 2014, according to Russia’s Renaissance Capital. The International Monetary Fund predicts that by 2016, Nigeria’s economy will reach $400bn.

Crucially, one of the primary drivers for the high growth came from outside of the country’s dominant hydrocarbons sector, with telecommunications posting impressive figures. Overall, Nigeria’s non-oil growth increased by 9.07%. “The sources of output growth are broadening and accelerating, retail trade is vibrant and its financial markets are deepening,” Andrea Masia and Michael Kafe, analysts at Morgan Stanley, wrote in December 2011, when the group added Nigerian cement, consumer and bank shares to its frontier-market portfolio.

The country’s overall performance has had a relatively limited impact on the country’s most vulnerable populations, but Nigeria is certainly on the right track in cutting excess spending and looking for ways to raise revenue. Provided the price of oil remains relatively constant this year, the country should move closer to fiscal stability but it will have to grapple with popular unrest and an obstinate poverty rate.

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