Action time for Nigeria's government
Nigeria’s government is pressing on with plans to liberalise key parts of the economy. The downstream is a priority
BY LOOSENING the state's grip on key levers, from the exchange rate to the oil industry, Muhammadu Buhari's administration wants to fire up Nigeria's economy.
The economy shrank in real terms by 0.36% in the first quarter of 2016, as over-reliance on oil bit hard. The outlook is slightly better - the African Development Bank forecasts GDP for the year could grow by 3.8% - but neighbours Côte d'Ivoire, Ghana and Senegal are all doing better.
The gravity of the situation has prompted a search for sweeping remedies. State firm Nigerian National Petroleum Corporation (NNPC) said in late June that it had signed provisional agreements worth some $80bn with more than 30 Chinese firms to upgrade the country's hydrocarbons infrastructure, including refineries and pipelines. However, it remains to be seen what short-term impact these deals will have, as the scope of the work and the timetable for implementation remain vague.
Meanwhile, Buhari is speeding up economic reform measures that he may have wanted to introduce more cautiously. Abolishing an artificially high dollar peg for the naira in June produced spectacular results. The currency's value slid more than 30% in its first day of free trade, before a slight recovery. Devaluation should stimulate home-grown industrial production by making imports more expensive. Capital controls were also eased, which should make the country help lure investors. The devaluation should also dampen activity in Nigeria's widely used currency black market, a breeding ground for corruption.
The impact on the spending of major oil companies operating offshore will be limited, as much of their business is done in dollars rather than naira. But those oil exporters that do convert their dollar-denominated income will benefit - some recompense from dramatic income falls due to the low oil price.
Earlier, faced with fuel shortages in some areas, the government cut gasoline subsidies to curb demand. The subsidies were designed to help poor Nigerians, but ended up benefiting inefficient downstream energy companies. Pump prices rose in May by about two-thirds, to around NAR145 ($0.73 then, or $0.50 since devaluation) a litre.
"There is no reason why fuel prices should not be low, even in a fully liberalised market," says Rolake Akinkugbe, head of energy coverage at investment bank FBN Capital in Lagos. "If the infrastructure for transporting and distributing petrol was functioning properly, prices would still be reasonable, especially if Nigeria can produce most of its petroleum products locally."
Fuel retailers are trying to become more competitive, and filling-station chains are likely to buy more of Nigeria's family-owned stations.
One obvious way to keep domestic prices down would be to revive Nigeria's ailing refining sector. Its near-total collapse means one of the world's largest oil producers meets over 90% of its gasoline demand with imports - spending around a third of its foreign exchange reserves doing so.
NNPC has been in talks with Chevron, Total and Eni, among others, about plans to fix four outdated and ill-functioning refineries - two in Port Harcourt (210,000 barrels a day combined), and one each in Kaduna (110,000 b/d) and Warri (125,000 b/d). NNPC reckons it would cost around $0.7bn to get them running at around 90% capacity and is keen to sell all or parts of them. The company has also revoked a number of unused licences to build refineries, hoping to reallocate them to more dynamic investors. Nigerian businessman Aliko Dangote plans to build a $15bn, 0.65m b/d refinery in Lagos, which would meet national demand and leave room for exports.
NNPC has been wooing potential partners to manage pipelines and fuel depots as joint ventures, and the government has been reviving plans to liberalise the power sector.
It has been hamstrung by a partial and largely ineffective attempt by its predecessors to privatise it.
This article is part of an in-depth series on West Africa. Next article: Nigeria: delta of trouble.