* Beyond the immediate concerns of containing the spread of COVID-19, Nigeria’s greatest challenge — a fiscal crisis of historic proportions — is beginning to unfold.
-By Matthew T. Page
As virus-related deaths peak and lockdowns begin to ease elsewhere, Nigeria’s COVID-19 crisis appears to be intensifying. Infections are still increasing rapidly amid claims many deaths are going unreported, and the testing and treatment capacity remains minimal as a government-led scramble to revitalise a long-neglected health sector does not appear to be forthcoming.
But despite these immediate and urgent concerns, Nigeria’s greatest COVID-related challenge—a fiscal crisis of historic proportions—is just beginning to unfold.
Triggered by the global economic depression and prospective long-term slump in crude oil prices caused by the coronavirus pandemic, this external shock could not have come at a worse time for a country yet to bounce back from the recession of five years ago.
Years of GDP growth lower than its population growth rate has left its citizens poorer per capita, and even the Excess Crude Account — Nigeria’s ‘rainy day fund’ — has dwindled to an all-time low of just $72 million.
Lower remittances from Nigeria’s hardworking diaspora is another warning. These typically account for 6% of GDP but dropped by half in February as the world’s major economies entered lockdown. Now the IMF estimates — perhaps too conservatively — that Nigeria’s economy will contract by 3.4% this year and the bruised and battered naira currency is facing increasing downward pressure which could overwhelm government efforts to stave off devaluation.
*Government about to go broke
Nigeria’s public finances entered the crisis in an already precarious state. Oil income directly accounts for roughly half of federal government revenues but, rather than choosing to limit habitual borrowing and wasteful spending, federal and state leaders have long acted as if a crude oil price boom would someday rescue public finances.
But oil prices now face a prolonged, coronavirus-induced crash. The price of Nigeria’s high-quality crude oil Bonny Light has fallen to $12 per barrel, well below the $23 cost of producing a barrel of crude oil in Nigeria, which is among the highest in the world. And Nigeria has minimal capacity to store any crude oil it is unable to sell to international markets. The government is about to go broke.
Fiscal challenges facing Nigeria’s 36 states are even starker. One governor recently warned states may get little or no ‘allocation’ — their monthly share of the country’s petroleum revenues — in June. With the states being collectively more than $23.6 billion in debt, this could force many to the brink of bankruptcy, and expenditures are being slashed already in anticipation — Akwa Ibom state recently cut its 2020 budget by almost 40%.
Most states generate paltry tax revenues and depend on this allocation to operate month-to-month. However top state officials, known for lavish lifestylesand love of ‘patronage politics’, show no sign of becoming less spendthrift. In Nasarawa state, legislators recently took delivery of new luxury vehicles even though state hospitals are dilapidatedand possess no ventilators.
States have also amassed unsustainably large recurring obligations such as salaries, debt servicing costs, and pension contributions. They have depended on the allocation to cover these ballooning costs and imprudently borrowed rather than cutting their overheads to cover the rest. As allocations shrink, and perhaps even disappear temporarily, some states could become insolvent.
Nigeria’s fiscal federalism means that if states do go bankrupt — as some did in 2015 — the cash-strapped federal government will have to clean up the mess caused by decades of financial mismanagement by self-serving state officials.
The fallout from these sub-national fiscal implosions could worsen poverty, unemployment and insecurity, as well as degrade basic public services and infrastructure. Already seen as the world’s ‘poverty capital’, Nigeria is home to about 15% of the world’s poor, with this anticipated to increase to around 30% by 2030. And recent research by Oxfam also indicates income inequality is exceptionally high.
Looking beyond the immediate consequences of this ‘fiscal flu’, the effects of coronavirus will test Nigeria’s resilience in several ways. Nigeria’s post-1999 elite political consensus, based on dividing up the ‘national cake’ (oil revenues), may founder. The country’s sprawling constellation of federal and state ministries, departments and agencies may shrink out of financial necessity, rather than deliberate reform. Wasteful ‘white elephants’ such as the country’s three space agencies or remote, state-built airports may become unaffordable.
Looming financial meltdown will also impact Nigeria’s longer-term security and stability. The accelerated decline in government capacity it brings will increase competition for land, water and local political control. Security agencies are unprepared to weather either a pandemic or a cash crunch.
As budgets evaporate for Nigeria’s underpaid, overstretched and poorly-led security personnel, insurgents, criminals and other violence entrepreneurs can take advantage. Recently the ‘One Million Boys’ gang challenged police in Lagos by attempting a spate of arm robberies and threatening residents across the city. And the army still struggles to contain Boko Haram, more than a decade into an insurgency that has devastated north-east Nigeria.
As revenues dry up, the Nigerian government must rethink its business-as-usual approach to governance. Monitoring how the Nigerian government spends emergency loans and international assistance, such as a recent $3.4 billion loan by the IMF, is critical.
COVID-19 and its stark fiscal consequences will further diminish Nigeria’s already fading resilience against slow-motion threats such as population growth, deepening poverty and the effects of climate change. It is possible Nigeria’s ‘shock absorbers’ — political, economic and social characteristics that have helped the country muddle through — are about to face their toughest test yet.