By Nasir Aminu
J2022 is the last government year with 12 full months. This is the year this administration is expected to deliver the bulk of its parting gift — legacies — before dutifully handing over next year. The general public is struggling with persistent inflation. Businesses are struggling to survive. The government continues to hesitate on policies. From a macroeconomic point of view, the first half of the year is gloomy.
On the global stage, Nigeria has become more integrated and dependent on international economies, making the country open to global shocks. For example, soaring global energy prices are weakening the Nigerian economy more than ever. This is because Nigeria is an import dependent economy in every way; the country borrows much more to finance its expenses and its socio-economic problems make the environment less favorable to the prosperity of economic activities.
Nigeria lacks energy supply – a key input for the production of goods and services. The country’s electricity transmission and distribution network – the national grid – has collapsed for the sixth time since the start of the year. This means that there is a persistent power outage for businesses and they have to use backup generators as their primary power source. Of course, the equipment requires diesel and other fuels to operate.
Nigeria continues to import refined petroleum for local consumption as refineries remain dysfunctional. The total annual import of petroleum products is around $28 billion from countries like the Netherlands, Benin, India and France. The country imports half of its cooking gas from the United States, Equatorial Guinea, Belgium and Argentina, among others.
Energy retailers are exploiting the global energy price shock by raising the prices of cooking gas and diesel at the pump. The government followed suit to raise petrol prices, but in a phased fashion, with little justification. A few pundits have raised eyebrows on the issue, and protests over rising prices and regional fairness are expected. As energy costs soar in Nigeria, manufacturers warn of rising commodity prices and impending job losses. Private transport owners have announced a 25% increase in fares for commercial rides on interstate routes.
Firms are navigating through a dramatic increase in overall input prices. Energy prices keep rising, transport costs between and within states are rising, there is an insufficient supply of foreign currencies and the naira is in freefall. Manufacturers warn of rising product prices and impending job losses. The Central Bank of Nigeria increased the cost of borrowing by 1% to curb rising inflation. These high business expenses are passed on to end consumers, which pushes retail price inflation upwards.
The Dangote refinery can adequately supply the domestic market if it starts operating as planned. Businesses will be relieved, as petrol, diesel and cooking gas would be cheaper. The country will be less exposed to global energy price shocks and we will start to worry about food security. The export of cheap crude oil and the import of expensive refined petroleum products for consumption, albeit at a subsidized rate, will end. But I don’t expect the Dangote refinery to start operating under the Buhari administration – meaning fuel subsidy payments will continue – as the World Bank expects Nigeria to spend $6 trillion naira. on the fuel subsidy in 2022.
The discussion of removing fuel subsidies has come up several times this year, and the government continues to waver on the subject. The fuel subsidy has its costs and benefits. Minimizing the impact of rising world oil prices on Nigerians has been the tenet of the subsidy since its inception in the 1970s. Indecision over which stance to take on fuel subsidies creates further uncertainty economic. Economic activities continue to slow down and are reflected in the country’s source of income.
The 2022 first quarter earnings report shows that the country got more revenue from businesses than from crude oil. However, corporate tax revenue decreased compared to the previous year. So, when considering Nigeria income, one cannot help but think that there are a few shortcuts to earning an income. The country has used all unconventional fiscal and monetary policy coupons to stabilize its economy.
The consequence of printing money, of monetary policy, to finance deficits is obvious: higher inflation. In June 2022, the inflation rate – 18.6% – is at its highest level for 65 months. The interest rate was raised to curb rising inflation as the government sold bonds to reduce the money in circulation. However, demand for bonds in July is weak, indicating that investors are less attracted to lending money in Nigeria. Tightening market liquidity becomes difficult due to widening negative real bond yield. If the trend continues, the government will struggle to implement its high deficit budget of about 6 trillion naira.
The conventional policy is for the government to develop its sectors, and facilitate and coordinate an enabling environment for economic activity to generate more tax revenue. However, as this will be next to impossible, the last option is to wait for help from multilateral agencies like the IMF/World Bank. And if it does not materialize, the dreaded trap of another recession will only intensify.
Therefore, the new government must understand this precarious situation. They should negotiate with the electorate on a short-term political approach to avoid further economic chaos.
Dr. Aminu is a lecturer at Cardiff Metropolitan University
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