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Nigeria's Buhari question

His 2015 election brought hope for Nigeria's struggling oil-dominated economy. Is the president now part of the problem?

The return of a leader from a period of medical treatment abroad often signals the end of a hiatus in political life—in Nigeria, the reverse seems true.

While 74-year old President Muhammadu Buhari was being treated for an unspecified illness in London for several weeks until early March, his deputy, Yemi Osinbajo, assumed the caretaker role with gusto, injecting some badly needed dynamism into efforts to tackle Nigeria's huge economic and social problems. Now the president is back and things have gone glacial again.

Osinbajo supervised the publication of the Economic Reform and Growth Plan 2017-20 (ERGP), oversaw some modifications to capital controls and took steps to make business easier to do. He also worked hard to bring an end to unrest in the Niger Delta, regularly visiting the region.

While the ERGP, which is intended to persuade lenders that Nigeria is on the road to recovery, was a long-term project sanctioned by Buhari—under pressure from the World Bank—his deputy's more dynamic style was hard to ignore.

That difference was obvious in the troubled Niger Delta, which Osinbajo and other ministers visited several times while Buhari was away. (The president had failed to visit the region in all of the nearly two years he had been in office.) A framework agreement with the Niger Delta Avengers rebel group is reportedly in place, while attacks on oil and gas installations have fallen sharply in recent weeks. Plans to create a development bank focused on the Niger Delta and the installation of "modular" oil refineries in the region to boost income and employment were seemingly well received.

Improved security has contributed to a generally upward trajectory in oil output, as damaged pipelines get repaired and export facilities move back to full production. The government said oil production had fallen by around 200,000 barrels a day in March to just below 1.7m b/d—but the drop could be accounted for by the loss of output from the Bonga field, which was closed for maintenance. Allowing for this—and even for the government's tendency to overstate production (Opec's secondary sources pegged Nigeria's February production at 1.6m b/d)—things have improved compared to last year, when attacks in the Delta often pushed production beneath 1.2m b/d.

2.5m b/d - Government oil production target for 2020

Emmanuel Kachikwu, the deputy petroleum minister, has also been busy while the president, who is also petroleum minister, was away. Kachikwu tried to fast track a new Petroleum Industry Governance Bill (PIGB) through the National Assembly with some success. The bill was to come before the Senate for approval in late April and would become law in subsequent weeks with approval from the House of Representatives too.

"If the bill wins Senate backing, it will be faster than anything of that nature has gone through in the last seven years," says Patrick Smith, editor of newsletter Africa Confidential. He says the narrower scope of the PIGB compared to previous pieces of draft oil and gas legislation has given it a better chance of becoming law.

A previous Petroleum Industry Bill, which embraced a wider range of themes, was held up for years by wrangles among politicians and lawmakers and was eventually abandoned. The PIGB is focused on creating a clear framework for both domestic and foreign investment in the industry and the promotion of greater transparency—the latter with the aim of ending years of endemic corruption that continues to cost the country dear.

"It will be good for the oil companies, which want to see some element of certainty over investment levels, royalties, taxes and so on. Nigeria hasn't seen serious investment for quite a while, in terms of oil production," says Smith.

Still, the PIGB might not reach the statute book as fast as many would like, especially if there is a government reshuffle that downgrades Kachikwu's influence. The former ExxonMobil executive is not universally popular with the president's allies.

Just as problematic, Buhari's return has brought him and his advisors back to the fore, at the expense of the so-called "economic" ministers. The worry now is that the country's economic reform process could stagnate if a sick Buhari becomes even more lethargic and declines to delegate power to others.

Man with a plan?

Many think Buhari won't stand again in presidential elections scheduled for early 2019, or that he might even stand down before then, if his health deteriorates. Nigeria's problems need a leader with much energy.

The oil price and disrupted oil and gas production has taken a heavy toll on the economy. Recession struck in 2016, with real GDP contracting by 1.5%—the first decline for 25 years—while oil and gas GDP collapsed by 13.6%. Annual inflation doubled to 18.6% on the back of electricity and fuel-tariff rises, according to an IMF report in March. A weak naira and monetary conditions that resulted in broad money rising by 19% year-on-year added to the woe. The fiscal deficit worsened despite low capital spending, while the conversion of an external account deficit into a surplus in 2016 reflected a drop in imports in tandem with the decline in oil exports.

The IMF thought liberalisation of the foreign-exchange regime in June 2016 was helpful. But it noted that forex restrictions remain in place and a parallel naira market still exists.

The ERGP plan has brought some reassurance to international markets. In March, S&P Global Ratings affirmed Nigeria's rating at B/B with a stable outlook. That passes for a decent report after the country's recent economic travails.

S&P forecast real GDP growth of 1.5% in 2017 and an average 3.4% growth rate in 2017-20, citing oil-sector improvements and better government budget execution under the ERGP. The IMF sees lower GDP growth of 0.8% in 2017, despite 7.8% in oil and gas GDP.

This year's higher oil price, more stable (and higher) oil production and increased external borrowing by the government should boost Nigeria's foreign currency reserves, which in turn should help the rest of the economy. But S&P still thinks Nigeria will underperform many of its peer economies, given limited infrastructure and energy systems and GDP per capita in 2017 estimated at a low $1,800.

Against this background, the long-awaited publication of the ERGP couldn't come soon enough. Multilateral lenders, including the World Bank, were holding fire on potential financing agreements until it emerged, while private investors were looking for signs that the government had a workable economic plan.

So, will the ERGP do the trick? Well, up to a point. The report outlines plans for private-sector-driven economic diversification and state-driven infrastructure improvements, notably in the under-resourced power sector.

It also signals a continuation of oil-and-gas-sector restructuring that got underway with Buhari's election in 2015 and his appointment of Kachikwu as NNPC managing director. Kachikwu was replaced as managing director by Maikanti Baru in mid-2016, though he remains the state-firm's chairman.

Such moves to separate the leadership of NNPC from the government are intended to draw a line under years of financial mismanagement, during which tens of billions of dollars were misappropriated by both government and NNPC officials, as money flowed freely between both administrations with little accountability.

Oil ambitions

The ERGP implies sweeping reviews of policy affecting the oil and gas sector (upstream and down), including the fiscal regime and the elements of the PIGB.

Under the plan, oil production would rise to 2.2m b/d—or maximum technical capacity—this year and to 2.5 m b/d by 2020. The ERGP envisages export earnings and government revenues jumping by 800bn naira ($2.6bn) a year.

Some of that cash would help overhaul Nigeria's dilapidated refineries, whose inability to process sufficient oil has made Africa's biggest oil producer a net importer of fuel and other refined products.

But there are some doubtful numbers involved. For instance, the ERGP says output last year was 1.8m b/d—at least a fifth above the average reported by groups like the International Energy Agency. The IMF is sceptical too. It doesn't see a return to 2.2m b/d production until 2018.

'Without stronger policies, Nigeria's objectives may not be achieved'—IMF

Other objectives for the oil and gas sector outlined in the ERGP include expanding domestic gas production to meet demand from the power sector and industry, increasing local content in both upstream and downstream activities, and further reform of NNPC.

Wider economic objectives in the plan include 7% economic growth and the reining in of inflation—to below 10% by 2020—by increasing agricultural output, greater investment in power generation and distribution, and transport infrastructure.

Progress in restructuring the hydrocarbons sectors will be closely watched by oil and gas firms still seeking clarification over investment framework for future projects.

The ERGP says the government plans to reduce its stakes in joint-venture oil assets and "significantly reduce" ownership in other oil and non-oil assets. But details on what this will mean in practice is scant.

NNPC does seem destined to take on a facilitating role beyond the oil sector. In late March, chief executive Baru said the company wanted to change from an oil and gas company into an integrated energy organisation with interests in power generation and transmission. The move reflects the government's desperation to beef up power infrastructure unable to cope with growing demand.

So while the ERGP shows the government is thinking hard about Nigeria's problems, its utility depends on execution. Successful Eurobond issues totalling $1.5bn in recent months show, at least, that investors are sufficiently persuaded by the country's prospects (and the bond terms). But now Nigeria and its oft-absent president need to deliver.

Stymied sector: oil output remains well beneath 1.7m b/d Source: Petroleum Economist
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