Can Tinubu turn the tide? How the incoming president can revitalize Nigeria’s struggling economy

By Charles Mangin, Head of FX Trading at Crown Agents Bank

 

Nigeria’s recent presidential election was won by Bola Tinubu and the All Progressives Congress (APC) party, who secured 36.61% of the vote, defeating rivals Atiku Abubakar and Peter Obi to emerge victorious. Whilst opponents are due to mount legal challenges, it’s almost certain that Tinubu will become president following a swearing in ceremony on May 29th. Once formalities are out the way, the incoming president will be tasked with turning around an increasingly troubled economy, plagued by diminishing foreign currency reserves, absent FDI, and rising inflation. Despite a turbulent outlook, there are valuable tools at Tinubu’s disposal to help turn the tide.

A complex terrain

Tinubu will inherit a West African nation rich in oil & gas, and yet facing increasingly difficult economic circumstances. Financial pressures remain, with a slower growth momentum and oil output creating headwinds for Nigeria’s finances. Annual inflation has been steadily increasing, reaching 21.9% in February, prompting the central bank to hike interest rates to 17.5%. Foreign currency reserves have dropped to 36.7 billion USD, due to declining oil revenues and capital flight amongst other factors. These economic challenges concerned ratings agencies enough to review the market, with Moody’s moving Nigeria from B3 to CAA1 in January and thereby renewing pressure on overseas borrowing capabilities and Eurobonds following the relief rally after October 2022’s lows.

Nigeria has also seen substantial changes in the oil market, including a proposal to remove a popular but costly fuel subsidies policy. In 2022, Nigeria spent nearly $10 billion USD on the subsidy with the aim of keeping fuel affordable for citizens. However, the recent slowdown in oil output means projected future oil and gas revenues may not fully fund fuel subsidy payments, and would further diminish the country’s finances.

Nigeria may go to the IMF for a loan, which will most likely seek to remove the fuel subsidies. Such a move would carry both positive and negative economic implications. Reserves would increase, and there would be more subsidies to be allocated elsewhere. However, it may also cause fuel producers and retailers to pass higher costs onto consumers – a highly challenging political decision for any new administration to make.

Tinubu’s tools

The current situation is far from ideal for the incoming president, but valuable tools remain at Tinubu’s disposal. For example, closing the dual exchange rates system would bring benefits. The system came about initially as a response to plunging crude prices in 2014; instead of devaluing the Naira, the Central Bank opted to implement one rate for government transactions, pegged to the US dollar, and another weaker rate determined by the market for investors and exporters. The policy has been criticised for creating distortions and disincentives in the economy, so its removal could restore much needed clarity and incentivise foreign investment. In his election manifesto, Tinubu did pledge to “carefully review and better optimise” the nation’s system of multiple exchange rates, so his administration may be  willing to make steps in this direction.

Devaluation may also be considered as an approach. Nigerian exports such as crude oil would become more competitive in international markets, leading to real government revenue growth. This would be compounded further in the case of crude, as it’s sold in USD before being converted back to the Nigerian naira, meaning more naira could be derived from the same sales volume. A weaker naira is also more attractive to foreign investors. More foreign capital can lead to greater economic growth and go a long way to addressing the continual decrease of foreign currency reserves.

Returning to fundamentals

Ultimately, the naira exchange rate needs to reflect fundamentals. The naira is mainly traded via the USD, as the dominant ‘King dollar’ remains the primary currency for business in the region. Current FX regulations therefore become one of the key issues the new administration may wish to address in order to build a healthy, liquid, and scalable official market. Until this happens, investors and corporations are likely to remain cautious because the current system makes the flow of funds into/out of the country very limited. What will be scrapped and at what pace is only speculation for now, but these steps are crucial in bringing about a return to fundamentals, encouraging USD to enter the country and reopening up the market to FDI.

Despite Nigeria’s troubles, it’s abundantly clear that Africa’s largest economy presents no shortage of growth potential. There lies a rapidly growing population, rich natural resources, and an extensive agricultural sector. The right policy adjustments can serve as productive steps in addressing the foreign currency, inflationary, and government revenue concerns preventing the Nigerian economy from truly flourishing. Removing these obstacles will lead to an improved environment for Nigerian people and businesses through increased FDI and improved trading conditions, fundamentally kickstarting the Nigerian economy into being the powerhouse it can be.

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