The week ahead – Great power, great responsibility

Sunday, the Economic Community of West African States (ECOWAS) announced a one-week ultimatum for coup plotters in Niger to hand over power to the democratically elected government or risk using force. The United States of America also stated that they are solidly behind President Bola Tinubu’s efforts to restore democracy in the Niger Republic, Secretary of States Antony J. Blinken has said. However, the junta that seized power in Niger has detained three more senior politicians from the ousted government, their party said, in defiance of international calls to restore democratic rule.

The buildup of coup situations in West Africa is troubling because it undermines democracy and stability in the region. In recent years, several coups have happened in West Africa (Mali, Guinea and Burkina Faso). These coups have led to instability and insecurity and have made it difficult for these countries to address pressing challenges such as poverty, corruption and terrorism. ECOWAS’ one-week ultimatum to the soldiers is at variance with the African Union’s 15-day ultimatum. In the matchup between regional and subregional forces, attention has rightly focused on the subregion’s body’s (ECOWAS) activities largely because its members are in the direct line of fire. First, it shows the lack of coordination between the AU’s constituent blocs. Second, it reflects the remote causes of the paralysis that the continent exhibits when facing such existential crises. Third, it displays the continued rivalry between Nigeria and South Africa, whose differences continue to shape policy adoption on the continent. We can say that America’s endorsement of ECOWAS’ position either continues its policy of direct disengagement over its weariness from the fallout from the Arab Spring or gives Pax Nigeriana a new lease of life. Nigeria’s numerous and obfuscating security crises have kept it largely away from foreign adventures. As things stand, the coupists’ defiance of international pressure directs attention towards an armed confrontation between a Nigeria-led regional force and Niger’s army. Indication from the juntas in Bamako and Ouagadougou to enter into an armed conflict on Niger’s side makes such intervention precarious. If the planned military action goes ahead, it will leave profound consequences for all involved. A refugee crisis in Niger will exacerbate social problems in Nigeria, Mali and Chad and offset a new migrant wave to Europe from the Algeria-Niger border. It will further worsen the insecurity problems, economic weakness and lead to the death of innocent civilians. Additionally, such chaos would be heavily exploited by the armed groups who operate in the Timbuktu Triangle and the Sahel. As with the war in Libya, an influx of arms will simply aggravate insecurity in the region. Perhaps, this might spell the end of ECOWAS as we know it. However, the old fault lines and rivalry between Anglophone and Francophone West Africa are resurfacing: the France-backed Anglophones are about to take military action against a collection of Francophone countries. This is unprecedented because France has been fingered in the division, thereby stunting the growth of Anglo-Franco cooperation in the region. Also, it has always been seen as the driver of Francophone countries’ rejection of Anglophone countries and animosity towards the English speakers in ECOWAS. West Africa (and Africa) is changing in so many ways, driven mostly by demographic politics. However, even the most unprecedented changes cannot escape the most basic principle of geopolitics: no permanent friends, no permanent enemies—just permanent interests. And the more things change, the more they remain the same. Hence, we were happy to see Nigeria’s last military head of state, Abdulsalami Abubakar, lead a team that included the Sultan of Sokoto to Niamey. We are behind ECOWAS adopting a more persuasive approach instead of a military one to address this crisis. This approach holds greater potential of reinstating democracy in Niger and aligns better with ECOWAS’ enduring commitment to regional stability and security. We hope that cooler heads prevail.

Ghana’s government said it had roughly halved this year’s economic growth forecast and saw higher inflation and a primary deficit, whereas it was hoping for a surplus previously. Finance Minister Ken Ofori-Atta also disclosed during a mid-year budget review in parliament that last year’s budget deficit was 11.8 percent of GDP, almost double the target of 6.3 percent. Ofori-Atta told lawmakers that the government saw the economy growing 1.5 percent in 2023 versus 2.8 percent previously, reflecting fiscal consolidation measures and difficult global conditions. The Finance Ministry now sees headline inflation of 31.3 percent at the end of the year, compared with a projection of 18.9 percent when the 2023 budget was first presented in November 2022.

Ghana’s economy is facing significant challenges and may not be able to handle a growth rate as high as 2.8% this year. Despite Finance Minister Ken Ofori-Atta initially stating that there would be no need for a supplementary budget, mounting fiscal pressures have forced him to cut expenditures by approximately $2 billion. The projected economic downturn in Ghana has led to the revision of key economic indicators. End-period inflation is now expected to reach 31.3%, significantly higher than the earlier projection of 18.9%. Additionally, the balance of payment burden is expected to worsen as Gross International Reserves may only cover about 0.8 months of imports. This downward revision in projected growth for 2023 is attributed to a general slowdown in all three sectors of the economy, influenced by factors such as the fiscal consolidation plan under the three-year IMF-supported programme and challenging global conditions. Nevertheless, the Finance Minister remains hopeful, projecting that the overall GDP growth will rebound to 2.8%, 4.7% and 4.9% in 2024, 2025 and 2026, respectively. The government aims to develop an enhanced Growth Strategy that encourages private domestic and foreign investments to stimulate growth and create job opportunities. On the fiscal side, talks between the government and creditors regarding external debt restructuring have not progressed beyond the assurance stage, leaving uncertainties. Additionally, the announcement of what appears to be another Domestic Debt Exchange Programme (DDEP) has raised concerns amongst investors who were initially excluded from the programme. Five groups, including Pension Funds and Independent Power Producers (IPP), have been called to the negotiation table for a fresh round of debt restructuring talks. While IPPs have declined any debt rework talks, organised labour is open to engaging with Ken Ofori-Atta and his team. The government aims to address a debt burden of approximately $5 billion they owe these two groups. Trade unions have doubts about the projected economic expansion, pointing to the continuous depreciation of the cedi against the dollar, rising inflation and import costs as potential factors that could hinder the government’s medium-term plans under the IMF Extended Credit Facility programme. Although the economy is expected to expand over the next three years, the debt-to-GDP ratio is anticipated to remain above 88%, according to the IMF.

The Economic Intelligence Unit (EIU) has predicted in its latest report that it believes the Nigerian government will go back to a system with more control over the exchange rate to try and stop the Naira from losing its value much further. The EIU pointed out that the Central Bank of Nigeria (CBN) needs more experience handling a flexible exchange rate system, and the need to control rapidly increasing inflation will become more acute over time. Meanwhile, on 31 August, President Bola Tinubu announced that Nigeria has been able to save over ₦1 trillion by removing petrol subsidies.

Firstly, the reality is that almost no currency in existence is solely floating or fixed. Most central banks intervene in the exchange rate mechanism whenever they deem necessary. In Nigeria’s case, the CBN’s ability to intervene is constrained by the level of foreign exchange reserves. In recent years, $40 billion appears to be a benchmark that indicates how bullish the CBN’s intervention can be. Nigeria’s external reserves opened the year at about $37 billion but had dropped to about $34 billion as of July 2023. Many analysts suggest that the CBN is currently constrained in its ability to defend the Naira, hence the reason why the Naira has devalued in the official window in recent weeks. However, with the removal of petrol subsidies and the end of the high FX demand season of July–September, there is an increased likelihood that the downward slide in the foreign reserves will change how the Naira could strengthen against the US Dollar towards the end of the year. Secondly, moving towards a fixed exchange rate system could be economically disadvantageous for Nigeria, especially considering the significant amount the Central Bank has spent in the past to maintain such a system. The fixed exchange rate restricts the Naira’s flexibility to adjust to market fluctuations and economic changes, which may hinder the country’s ability to respond effectively to external shocks. The continuous intervention required to defend the fixed rate could deplete the Central Bank’s foreign currency reserves and take away resources that could be used for other critical developmental purposes, such as infrastructure improvements or social programmes. On Mr Tinubu’s claim that the government saved ₦1 trillion from the removal of subsidies, there is only one thing to say—it is a deceptive narrative. The true context is this: since 2017, the NNPC has withheld monies that should have gone into the pork barrel for sharing by the three tiers of government for subsidies and other sundry expenses. Unchecked by anyone, including the National Assembly, the company even took out of the government’s oil tax proceeds and dividends from the Nigeria Liquified Natural Gas Company to run two parallel subsidies or “under-recovery” schemes. When Nigeria’s oil proceeds dropped, the state-owned oil company found it hard to raise enough money to fulfil financial commitments on the fields it has licences in, absorb losses from underselling petrol and kerosene and still add some pork to the less-than-half-full barrel. In response to the shortfall and the unprofitability of the NNPC to its money-earning course, the government borrowed from the central bank, the domestic market, and foreign bilateral and multilateral lenders. Much of the borrowings contravened section 12 of the Fiscal Responsibility Act, which asks the government not to borrow for things that would not yield income. By the last full year of the Buhari administration, the government had borrowed so much, and the cost of borrowing was very expensive, so the government put a stop to the ability of the NNPC to withhold money in the name of subsidy. That full stop was a ₦3.36 trillion budget that should cover for under-recoveries for six months in 2023. In its last Medium Term Expenditure Framework and Fiscal Strategy paper, the government said that if it did not take that action, the 2023 budget would not contain capital expenditure for its Ministries, Departments and Agencies. The only money the finance ministry reasoned the government would have, if the subsidy were not removed, would be those tied to grants — ₦1.7+ trillion. That weighs less than the expected half-year subsidy withholding by the NNPC. The government cannot treat the absence of a subsidy as part of its savings because it collects less than enough from its income sources, even without the subsidy. Food for thought: the NNPC currently owes the oil marketers it has been swapping petrol with roughly $3 billion, and it is expected to finish clearing the debt by October. For context, NNPC says it earned profit after tax of ₦674 billion ($1.6 billion) based on a ₦410 rate from the approved budget exchange rate in 2021. We, therefore, wonder whether Tinubu’s much-touted savings brag is as substantial as it might have been given a bit more accountability and transparency.

62 percent of small businesses in Nigeria earn a median monthly revenue lower than ₦300,000 ($341), while 47 percent earn lower than ₦200,000. This is according to a report published by the Financial Access Initiative (FAI) Research Centre of New York University in partnership with the National Bureau of Statistics and the Lagos Business School. The report, which got its findings from 161 firms across three states, Enugu, Lagos and Kaduna, was conducted for 12 months between August 2021 and August 2022.

There are too many negatives to take from this report, but one stands out — Nigeria is an unpredictable environment to do business in. While unpredictability is a fact of life, many businesses try to build resilience by depending on a financial institution that can keep them going in tough times until they can bounce back. Unfortunately, if business owners try that with Nigeria’s financial institutions, they will be out of business. As we reported in our last weekly editorial, Nigeria’s banking industry’s maximum prime lending rate is pushing on 30%. In a climate where credit ratings are uncommon, and harassment is a loan recovery tool, few businesses have the network and collateral strength to rely on a market that charges usury in double digits. In the NYU-NBS-LBS consortium report, only 3% could ask for loans to deal with the country’s business volatility. 48% of the surveyed businesses depended more on savings. This is not different from what business owners and traders told SBM when we studied the effects of the left-field Naira redesign policy. If business proprietors were not putting their hands into personal funds or savings, they were renegotiating supply contracts that they may pay later — probably with penalties. When a business is always checking into hospital or strapped to a barely functional life support, its staff are the first to be dismissed, often without pay, before the few assets accrued in its lifetime are disposed off to pay creditors. It is unsurprising that more than 30% of businesses SBM surveyed said they had to lay off staff members in the six weeks of Naira scarcity. The challenges small businesses have to put up with are countless. For repeated emphasis, let’s just choose one — volatility in energy costs. Nigeria has stopped subsidising petrol, allowing market forces to determine the price. Businesses are now without cover from the burp in the Chinese economy or US market. Russia and Ukraine have been the game changers. In the diesel market, where demand and supply have ruled since 2009, a litre of the fuel was ₦288.09 as of the end of 2021. In June 2023, it was ₦815.83, a swing of more than ₦500 in 18 months. Prices appear to be coming down but not fast enough. Despite being Africa’s largest economy, Nigerians’ low purchasing capacity is worrisome.