Nigeria’s diversification efforts have been patchy, with successive governments promising to reduce the country’s reliance on oil by boosting other sectors. Still, oil currently makes up 90% of Nigeria’s foreign earnings and the country remains vulnerable to price shocks. Oil production is not expected to go much beyond 2m barrels per day and with price fluctuations, the margin to save money into the country’s coffers is tight. President Muhammadu Buhari’s Economic Recovery and Growth Plan launched in March 2017 plans to reduce the dependence on crude. However, it will take more than one presidential term, or two, to change the country’s 60-year reliance on the ‘black gold’.
Shrugging off recession
Battered by a crash in oil prices and with militant activity in the oil-producing Niger Delta negatively impacting production, Nigeria in 2016 slipped into recession for the first time in two decades. While the country returned to positive figures in February 2017 due to a rebound in oil price and production, the non-oil and non-agriculture sectors have continued to decline as the country keeps grappling with the lingering effects of the oil-price slump. Meanwhile, bumper budgets have not translated into capital expenditure needed to boost infrastructure to alleviate choking points to the country’s economy. As President Buhari gears up for a campaign season in a bid to clinch a second term, there are several areas he is likely to pledge improvement on. The diversification of the economy away from oil will be among the top five. Facing anaemic economic growth, the current administration will also have to enact some “fiscal prudence and sound housekeeping” according to Buhari. Meanwhile, his primary opponent – Atiku Abubakar, running on the People’s Democratic Party (PDP) ticket – will naturally detract from the president’s track record to date and try and coax the electorate with an apparently business-friendly approach. Despite pledges by both candidates, Nigeria’s recovery is still tightly tethered to the oil price.
Private sector involvement
On paper, there appears to be a greater commitment to private sector involvement in state-owned enterprises and a drive to encourage private investment in capital projects. The government says it will open investment in oil and non-oil assets to both domestic and foreign investors, given its pressing need for revenues. For the international investor, there are ample opportunities. Local banks, exposed by their reliance on the oil market, are already stretched by non-performing loans and are unwilling to lend to Nigerian companies for such ventures, improving foreign investors’ visibility.
The government privatisation drive primarily focuses on the oil, aviation and infrastructure sectors. However, the government’s continued involvement in assets on offer is likely to complicate matters for prospective investors. For example, a proposed reduction in the government’s stake in oil joint ventures in the next three years, as well as other oil and non-oil assets, is intended to raise much-needed cash. Government equity is to be reduced in refineries and other downstream subsidiaries, such as pipelines and depots. The government will want to retain at least some financial stake in most assets which will complicate negotiations between potential investors and the government, regulators, unions and existing private sector companies. Private sector investment decisions are also likely to be complicated by concerns over the levels of debt carried by some of the assets proposed for sale, which will require extensive due diligence. While there is opportunity, investors will be required to weigh up their appetite for risk in what are long-term investments.
Dodging the tax man
If Buhari wins a second term, he is likely to try and build on the tax reform gains made during his first term. Nigeria has the lowest ratio of tax revenue to Gross Domestic Product (GDP) in sub-Saharan Africa. According to the IMF, the ratio stands at around 6%, compared with 27% in South Africa. Efforts to increase compliance with tax reforms have seen limited success. A brief tax amnesty that allowed evaders immunity from prosecution, tax audit, interest, waivers and penalties providing they declared previously undisclosed assets on income from 2011 to 2016 collected just USD 83m as of June. Nigeria’s commercial capital, Lagos, has generated some cash by widening the tax base through taxing previously informal enterprises including danfo (minibus) drivers although this has courted a barrage of criticism by those who believe it should be high-net-worth individuals who should be under the tax man’s spotlight.
There are 130,000 high-profile individuals that have been identified for further investigation, according to the Joint Tax Board, established to implement tax reforms and collection. Meanwhile, the board is in the process of securing court orders for corporate organisations that have not filed tax accounts for around USD 55bn. It will take the government several years to modernise its tax collection system and build a reliable database of eligible tax payers. During this time, regulatory risks are likely to increase for businesses as the government looks to diversify away from its dependence on oil.
Meanwhile, regulatory agencies such as the Federal Inland Revenue Service (FIRS), the National Agency for Food and Drug Administration and Control (NAFDAC) and other bodies that issue licences for businesses are likely to take a more aggressive, and at times unpredictable, approach to levying fines for non-compliance. The government and the Joint Tax Board have intimated that they will also clamp down on tax evasion strategies including the transfer of assets overseas, the use of offshore companies in tax havens to secure assets, and the registration of assets in nominee names. The president’s critics charge that his penchant for using anti-graft bodies to go after opponents will result in a very targeted clamp-down.
For Buhari, it is a delicate balance. Heading towards a presidential election, Buhari cannot afford to alienate well-heeled party supporters particularly as the opposition have a sizeable war chest for their campaign
Maritime
President Buhari has also earmarked maritime as the cornerstone of his diversification campaign. Rotimi Amaechi, Minister of Transportation said in an address in August that “it is time to focus on the blue economy...including fisheries, aquaculture, tourism, transport, ship-building, energy, bio-prospecting, under-water mining.” Key to unlocking the country’s blue economy potential is the country’s ports. Reforms in this area have been below expectations according to the Lagos Business Chamber of Commerce (LCCI) in October. Onerous red-tape, delays and ‘facilitation’ fees extracted by the multiple agencies operating illegally at ports add to the already high cost of doing business in the country. Nigeria loses about USD 19bn from chokepoints to the country’s main gateway, according to the LCCI, translating to about 5% of GDP. Nigeria’s main port, Apapa, has traffic jams of over ten kilometres. Once you are in, it can take nearly three weeks to clear imports. Control Risks’ clients complain that the cost of importing goods has drastically risen in the past two years, with the increase inevitably being passed onto the consumer. With inflation remaining in double-digits, President Buhari would do well to try and fix this key bottleneck which is piling up cost on basics such as washing powder and soap.
Reducing dependence on oil
Diversifying the economy away from its economic mainstay, oil, has been the aim of successive governments. It will likely remain a key election promise as Buhari enters in the campaign foray. While oil will be key to bringing in the country’s foreign exchange, the country’s GDP is primarily driven by services and agriculture with the non-oil sector representing over 90% of it, according to the National Bureau of Statistics. However, until a Nigerian president can get the country’s industry going again and increase manufacturing capacity to drive down oil’s chunk of exports, Nigeria’s diversification efforts will drag.