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Country Report On Nigeria By Economist Intelligence Unit Predicts Tough Times Ahead

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The Economist Intelligence Unit in its latest report released on Tuesday foretold that there would be unceasing conflict in the north-east, particularly in Borno state, between the military and two Islamist terrorist groups, Boko Haram and the Islamic State of West Africa Province, which will consolidate forces to some extent after the death of Boko Haram’s leader in mid-2021.

 

It stated further that President Muhammadu Buhari’s government would be unable to regain full dominion over the north-east, especially as more recently Boko Haram has expanded into central Nigeria, not far from the capital, Abuja.

 

Read the full reports and forecast below…

 

Political and economic outlook

 

Nigeria is the joint-largest economy in Sub-Saharan Africa, a global oil exporter and OPEC member. Hydrocarbons make up about 50% of government revenue and more than 80% of export receipts, but agriculture and services dwarf industry in their contribution to GDP. Instability is chronic in some areas, and inflation and unemployment accentuate the problem. The government will halt its pro-market reform agenda to avoid aggravating the situation, with long-term implications for critical inputs such as electricity supply.

The government aims to roll out coronavirus vaccines to 70% of the population by end-2022, but tight global supply, widespread anti-vaccine sentiment, instability and a lack of pharmaceutical storage facilities mean that mass inoculation will take far longer.

Protectionist economic policy will be used in an attempt to support local industry. The methods employed, in particular by the Central Bank of Nigeria, will contribute to macroeconomic imbalances, notably high inflation and periodic hard-currency shortages.

Near-term economic growth will be muted by high inflation and unemployment, and low nominal wage growth and consumption. Monetary policy will tighten from 2022.

A current-account deficit in 2021 and low short-term interest rates will cause the naira to be devalued. The Economist Intelligence Unit expects the balance to turn to a surplus in 2022, and the naira will remain fairly stable until 2025, when we expect another devaluation.

A policy of diversifying the economy away from oil and reducing imports through protectionism will be pursued. An Africa-wide free-trade agreement (to which Nigeria is a signatory) means that this strategy will have to be accelerated.

 

Key changes since June 2nd

We have upgraded our economic growth projection for 2021, from 1.2% to 1.5%, to reflect the probability of stronger investment and an improving global economic picture.

Expected Eurobond issuances (totalling up to US$3bn) in 2021 will bolster foreign reserves, and we have therefore moderated our forecast for depreciation of the naira. We now expect the currency to end 2021 at N419:US$1, instead of N422:US$1 previously.

Reflecting recent data, our current-account deficit projection for 2021 has been increased marginally from 1.1% of GDP to 1.3% of GDP. The surplus in 2022-24 has been lessened to 0.6% of GDP, with a balanced account in 2025.

The month ahead

July 17th—Inflation data for June: Annual inflation fell again in May, marking the second consecutive month of disinflation. We expect another drop in June as a high base for comparison and crops from the latest harvest cause a slowdown in growth of food prices, the weightiest (more than 50%) category of the consumer price index.

 

Outlook for 2021-25 Political stability

The Economist Intelligence Unit expects the president, Muhammadu Buhari, to remain in power until his second (and final) term expires in 2023, but the security situation in many parts of Nigeria is in a state of continuous deterioration. The president will be under immense pressure to stabilise Nigeria, but myriad security threats will prove unmanageable, with the military and police overstretched and unable to tackle simultaneous security crises.

Emergencies will be triaged, with military resources deployed to whichever is considered the most pressing. There will be unceasing conflict in the north-east, particularly in Borno state, between the military and two Islamist terrorist groups, Boko Haram and the Islamic State of West Africa Province, which will consolidate forces to some extent after the death of Boko Haram’s leader in mid-2021. The government will be unable to regain full dominion over the north-east, and more recently Boko Haram has expanded into central Nigeria, not far from the capital, Abuja. Although central Nigeria—an agricultural heartland—has for several years been affected by violent conflict between farmers and herdsmen over land and water resources, it is newer territory for Boko Haram. Our belief is that Nigeria’s federal government will nonetheless be able to assert control over “core” regions, such as Abuja, and other areas of economic or political importance, at the expense of “periphery” regions that have been mired in conflict for many years. This system is resilient enough to keep the government in power, but will leave many parts of Nigeria highly dysfunctional. Security challenges will be pronounced in numerous areas of the country, with unrest in the south-east attributed to Biafran secessionist groups and a broader surge in kidnappings by organised criminal networks. Banditry and violent crime will remain pervasive, and other areas of Nigeria could begin to resemble the north-east as, in essence, “no-go” zones. Neglect of the periphery could eventually reach an implosion-point for overall stability, but we do not expect this within the 2021-25 forecast period.

The near- to medium-term outlook is made more uncertain by the scars of recession in 2020 and by

rising unemployment (at about 33%—one of the highest levels in the world) and poverty.

Declining living standards arguably prolonged protests over police brutality that broke out in cities across southern Nigeria in October 2020. The risk of fresh bouts of protest will be elevated in the near term by a ban on Twitter, a social media platform, which was enforced in June and can be viewed as an attempt by the government to gag public opinion at a time of mounting censure over governance failings, notably deepening instability. The risk of internet regulation being a precursor to wider authoritarianism is low—the state is too frail to depart extensively from the democratic social contract. As a restoration of petrol and electricity subsidies in 2021 (temporarily reduced in 2020) has demonstrated, the Buhari administration is inclined towards concession- making, and is expected to capitulate on any issue that leads to major protests.

 

 

Election watch

The next national elections are due in 2023. In the most recent presidential election, in 2019, the candidates of both main parties were from the north, and custom dictates that the candidates in 2023 will be from the south. This should lead to an improvement on the abysmally low turnout in 2019 in the south, which is a stronghold of the main opposition party, the People’s Democratic Party (PDP). Frustration with high prices, declining living standards and perpetual instability will be directed at the ruling party, the All Progressives Congress, giving the PDP a winning edge.

 

International relations

Nigeria will remain a major player in Africa, given its size, but its economic policy choices will skew towards protectionism and, for reasons of incompatibility, will lean away from internationalism. Land borders that were closed to goods since late 2019 have reopened, but Nigeria’s approach to encouraging regional trade will be minimalist, beyond its obligations under the African Continental Free Trade Agreement (AfCTFA). The trade pact compels Nigeria to eliminate 97% of tariff lines over the next five to ten years. This deadline will not be met zealously, given high prices in Nigeria and declining external competitiveness for industries that could otherwise benefit from regional market access.

 

Policy trends

Nigeria’s government and the Central Bank of Nigeria (CBN) will aggressively promote local industry, but some elements of policy are contradictory and will contribute to macroeconomic imbalances. A notable example will be management of the naira. Bans on foreign-exchange access for imports of certain manufactures and agricultural goods (covering some 50 items) are being enforced to protect local industry and support the currency, but have some important flaws. Most notably, restrictions are elevating inflation and undermining the managed currency regime through sustained real effective exchange-rate (REER) appreciation. Despite this, currency restrictions are expected to last throughout the forecast period, with import substitution (and compression) being central to the CBN’s exchange-rate strategy, as opposed to balancing the external account by encouraging non-oil exports.

 

Faced with hard-currency shortages in 2020, the CBN allowed a backlog of foreign-exchange orders from investors and importers to accumulate. Because of currency controls and these de facto capital controls, there is a wide spread between the official (NAFEX) and parallel-market exchange rates. As currency restrictions are expected to remain for the long-term, the shift towards a market-clearing official exchange rate is not expected in 2021-25, and the CBN is adamant that a fully flexible naira would lead to an overshoot and an inflationary spiral. A pattern of rigidity by the CBN when encountering hard-currency shortages (as in 2020) will have a long- term impact on confidence, and partly explains our projection that foreign direct investment (FDI) will equal 1% of GDP or less throughout 2021-25.

Over time, the contradiction between protectionism and the AfCFTA’s principles will grow increasingly conspicuous, but we do not expect an immediate change in strategy given that non- tariff barriers will be phased out over several years. Developing local manufacturing and agriculture is likely to be viewed as a means of preparing for the eventual elimination of tariffs, with currency controls expected to play a role in hastening the process. However, an infrastructure deficit, REER appreciation and instability in agricultural heartlands mean that Nigeria will struggle to acquire new comparative advantages in 2021-25, leaving the fiscal and external accounts and the naira exposed to oil price swings.

 

Price controls will be another important area of economic policy. Astonishing strides towards the deregulation of petrol and electricity pricing were made in 2020, but backsliding on the goal of reaching market prices has already begun following public opposition. We do not expect the sustained electricity price increases needed for the power sector to become financially sound: tariffs remain regulated de jure, and the political willpower for permanent cost-reflexivity is lacking. Undersupply of electricity is consequently expected to be an impediment to industrialisation.

A lasting reinstatement of petrol price subsidies is made unlikely by the new Petroleum Industry Bill (PIB) expected to pass in late 2021. The legislation is intended to streamline sector-wide regulation and in the process create a new, profit-oriented national oil company, NNPC Limited, which by definition cannot subsidise the retail market. The downstream industry should become commercially viable from this reorganisation of the sector, allowing Nigeria to wean itself off petrol imports, with a new 650,000-barrel/day refinery near Lagos expected to come on-stream in 2022.

 

The PIB will also make fiscal terms clearer for multinationals, and is being revised to protect

investment—particularly offshore—by lowering proposed royalty rates and taxes. However, as oil

majors reassess their operations in an industry push towards decarbonisation, Nigeria is a prime

candidate for divestment—being uncompetitive for onshore production as a result of theft,

vandalism and sabotage. As neither domestic oil companies nor NNPC Limited would match the investing power of outgoing multinationals, Nigeria is not expected to reach the level of oil output registered during the 2011-14 commodity super-cycle over 2021-25

 

Fiscal policy

We expect the public finances to stay in deficit in 2021-25. Crude oil receipts make up more than 50% of the federal government’s retained income, and an average global oil price of US$63.8/barrel in 2021-25 will be insufficient to balance the budget.

The federal government’s tax take is among the world’s lowest, undermined by widespread evasion and a large informal sector. The PIB is likely to be balanced between the interests of the Treasury and investors, and so not deliver a considerable increase in revenue. Consequently, value-added tax (VAT, currently at 7.5%) is likely to be used as a means of repairing the public finances. We expect three equal VAT rate increases, taking the rate to 15% by 2025. The first is expected in 2022, prior to the next elections but seemingly inevitable given a rising debt burden, with further rises in 2024 and 2025. Even then we expect fiscal revenue to peak at just 5% of GDP in 2024, which also assumes no fuel subsidies (costs for which are deducted from revenue) beyond 2022.

Set against this, high debt-servicing costs, a large public wage bill and the purchase of coronavirus vaccines will elevate expenditure. Capital investment will be emphasised to compensate for the disappearance of petrol subsidies once the PIB is enacted (which is expected in late 2021). The government justified price deregulation by promising to invest the savings in infrastructure and will face pressure to match rhetoric with action.

Overall, we expect the fiscal deficit to narrow to 3.3% of GDP in 2021 (from 3.7% of GDP in 2020) as international oil prices rise. VAT rate increases and rising oil prices will push down the deficit to 2.6% of GDP in 2023-24, but a decline in average global oil prices in 2025 will cause the shortfall to widen to 3% of GDP in that year. The government has raised its public debt limit to 40% of GDP to incorporate higher budget shortfalls over the medium term and to accommodate securitisation of CBN deficit-financing as long-term debt. We expect public debt to reach only 35.4% of GDP

in 2025.

 

 

Monetary policy

The CBN will fail to keep inflation below a target ceiling of 9%, and its policy decisions are likely to remain erratic. Since a 100-basis-point cut to 11.5% in 2020 the policy rate has been kept steady. Inflation is high year on year, at 17.9% in May, but the rate has edged down from a decadal high in March. The current strategy is to boost the supply side of the economy and thereby control inflation. We believe that this is misguided; high inflation will frustrate an economic recovery, and issues such as inadequate public infrastructure, hard-currency shortages and rampant instability need to be addressed before the supply side can substantially contribute to moderating the price level. Enduring high inflation is expected to compel the CBN to raise interest rates in 2022 as the economy becomes more resilient. Monetary easing will resume only in 2024, when inflation has fallen appreciably.

 

Economic growth

The rollout of vaccines: global and regional

assumptions

 

The Economist Intelligence Unit forecasts that global GDP will rebound by 5.3% in 2021 (up from a previous forecast of 5.2%). This revision stems from small upward adjustments to our forecasts for France, Italy, Spain, the UK, Brazil, Mexico and South Africa. The sharp rebound will boost global GDP back to its pre-coronavirus level in late 2021. However, the pace of recovery will vary greatly across regions. Asia and North America will recover the fastest, with real GDP back to pre- coronavirus levels as early as this year. The recovery will take longer in Europe, Latin America, and the Middle East and Africa region, stretching into 2022. The rollout of coronavirus vaccines will influence economic prospects this year and beyond. However, production constraints mean that global immunisation timelines will stretch beyond 2023 in many developing countries. The slow pace of vaccine distribution will weigh on the global recovery and create opportunities for variants to emerge that may prove resistant to current vaccines.

Governments’ unprecedented fiscal responses to the coronavirus pandemic have led to a sharp increase in public debt in developed and developing economies. Rising debt/GDP ratios have alarmed fiscal hawks, but debt servicing remains modest in advanced economies, suggesting that the debt outlook is sustainable. However, a prolonged spike in inflation (not our core forecast) represents a risk to the global recovery. In such a scenario, central banks would probably tighten monetary policy prematurely, prompting a dangerous increase in debt-servicing costs.

The pace of the rollout of coronavirus vaccines will be particularly slow in many Sub-Saharan African countries, which face daunting production, distribution, storage and other challenges. Nigeria will ultimately rely on low-cost and easy-to-store vaccines, and the first to arrive was almost 4m doses of the Oxford University-AstraZeneca (UK/Sweden) vaccine in early March. Some 2.7m inoculations had been administered by late June. The strategy is to fully vaccinate 2m frontline workers first, and the milestone of over 2m doses given indicates that enough of this cohort were willing to take a first dose, and so are highly likely to receive a second and complete the inoculation process in line with the programme’s goals. The vaccines were procured via the COVAX Facility for developing countries, which is led by the World Health Organisation (WHO) and Gavi, a global vaccine alliance. Another batch of 4m doses is scheduled to arrive by August 2021. The government claims to have arranged orders for 84m doses of the AstraZeneca and Johnson & Johnson (US) vaccines, which could provide coverage for up to 20% of Nigerians. Tight global production and high demand has left only a fraction of this actually available so far. A G7 pledge to donate up to 1bn doses to the developing world by 2022 could free up supply to a limited extent for Nigeria, but the government hopes to procure enough doses to cover 40% of the population in 2021, rising to 70%—the estimated threshold for herd immunity—by end­2022. Insecurity, healthcare infrastructure gaps, global supply issues (notwithstanding the G7 pledge), financing constraints and widespread anti-vaccine sentiment make the 40% target overoptimistic, even in the medium to long term. Slow delivery, distribution and uptake of vaccines have advantages regarding mutations; edits to vaccine formulae are likely to be finalised by late 2021, and by the time Nigeria is able to procure doses, the vaccine could be better able to counter mutations in the virus. However, herd immunity is likely to be highly difficult to attain, especially without supplementary lockdowns that Nigeria cannot afford for any prolonged period. It could be several years before the Nigerian population is fully inoculated.

 

 

Economic growth

The economy is expected to grow by 1.5% in 2021 as the impact of lockdown in 2020 fades, but high inflation will impede improvements in business sentiment and dampen real purchasing power amid high unemployment (at more than one-third of the labour force) and low wage growth. A deep trade imbalance and low local interest rates will meanwhile contribute to foreign-exchange scarcity and further undermine macroeconomic stability. Oil export volumes will rise slightly, however, as quotas agreed by OPEC+ (comprising OPEC and a group of non-OPEC countries) are relaxed.

The CBN is expected to tighten monetary policy from 2022, circumscribing the nascent economic recovery, but the exchange rate should stabilise and cause inflation to ease, firming up household buying power. As non-business financial penetration is low, private consumption will recover in the second half of 2021-25 alongside disinflation even as interest rates rise. New refining capacity is expected to come on stream in earnest, boosting net exports (with some output for the regional market and Nigeria’s import dependency for fuel falling). Crude oil exports are also expected to grow as prices rise, again supporting the naira. As refinery output continues to ramp up, inflation falls and real spending power recovers, growth will pick up to an annual average of 3.8% in 2023- 24. However, these rates of growth are well below potential. High interest rates, low FDI, high unemployment, pervasive instability in agricultural regions and infrastructure deficiencies, particularly regarding stable power supply, will restrict dynamism. A more challenging year is forecast for 2025 as international oil prices fall, the naira is devalued and inflation rises, with growth slipping to 1.7%.

 

Inflation

We expect inflation to have peaked in the first quarter and to average 17.3% in 2021, with increases in both core and non-core levels over 2020. Foreign-exchange restrictions on various imported goods, including staple foods, and currency movements are cost-push factors, but base effects will reduce domestic food prices in the latter half of the year. Assuming that the exchange rate stabilises and the CBN tightens monetary policy, we expect annual inflation to begin to fall from 2022 to an average of 10% in 2024. Foreign-exchange controls on imported goods, conflict in the Middle Belt—Nigeria’s breadbasket—and an eventual return to market­pricing for fuel will prevent faster disinflation. Cur-rency devaluation in 2025 will cause the average rate to increase again, to 12.5%.

 

Exchange rates

Nigeria now uses the NAFEX as an official rate, ending the use of the CBN window. The NAFEX rate, which was established in 2017, is more flexible than the defunct CBN rate but is nonetheless tightly managed, as demonstrated by a late-June parallel rate of about N500:US$1 versus N410:US$1 for the NAFEX—a spread that has been widening since mid­May. Foreign reserves have been in decline since a brief rise in early April, indicating a net outflow on current transactions despite firmer oil prices, while capital inflows have not recovered from the legacy of de facto capital controls in 2020. REER appreciation is engendering the external imbalance and, in the CBN’s defence of reserves, we expect the naira to end 2021 at N419:US$1. Following this we expect the current account to return to surplus in 2022-25, allowing the CBN to keep the exchange rate broadly stable. Increasing currency misalignment means that REER appreciation will continue and, with oil prices expected to slide again in 2025, another devaluation is expected in that year, to N485:US$1 (a level required to stabilise the REER).

 

Forecasting the naira

The Economist Intelligence Unit began forecasting the Nigerian autonomous foreign-exchange fixing (NAFEX) rate from March 2021, following the government’s adoption of that rate for official transactions. In the interests of continuity, data in previous periods will be for the official exchange rate before its merger with the NAFEX rate.

 

External sector

World oil prices are expected to stay relatively high up to 2023, at an average of US$67.5/b. In the near term, however, REER appreciation will create deep trade and service deficits by promoting imports, and we expect a third consecutive year of current­account shortfall—equal to 1.1% of GDP in 2021. This will turn to a surplus averaging 0.6% in 2022-24 as new refining capacity becomes available (lowering petrol import volumes and increasing exports), OPEC+ quotas are relaxed and world oil prices continue rising. A trade surplus resulting from these factors will more than offset a large ongoing shortfall on the services account (driven by continued REER appreciation) and a primary income deficit caused by profit repatriation by multinationals in the oil sector as world crude prices rise. Remittances from the large Nigerian diaspora should also recover to pre-pandemic levels, encouraged by exchange-rate incentives introduced by the CBN in early 2021. The current account will then turn to balance in 2025 as falling oil prices push down export earnings. The deficit in 2021 will be financed largely by debt, with investment inflows limited by a dysfunctional foreign-exchange market.

 

Basic data Land area

923,773 sq km

Population

201m (2019 IMF actual)

Main towns

 

Population in millions (2012 World Gazetteer estimates): Lagos: 10.4 (a)

Ibadan: 5.5

Benin: 2.6

Kano: 2.4

Port Harcourt: 2.3

Abuja: 1.6

(a) There are large variations in estimates of the size of Lagos and other cities in Nigeria, reflecting the weakness of population statistics in general and failure to agree over city boundaries

Climate

Tropical; with a long wet season in the south, particularly the south-east, and a shorter wet season in the north

Weather in Lagos (altitude 3 metres)

Hottest month, March, 26­32°C; coolest month, August, 23­28°C; driest month, December, 25 mm

average rainfall; wettest month, June, 460 mm average rainfall

Languages

English (official), Hausa, Yoruba and Ibo; many other local languages are widely spoken

Measures

Metric system

Currency

Naira (N) = 100 kobo; N433.7:US$1 (2020 average; official rate)

Time

One hour ahead of GMT

Public holidays

New Year’s Day; Good Friday; Easter Monday; Worker’s Day (May 1st); Democracy Day (May 29th); Eid al-Fitr; Eid al-Adha; Independence Day (October 1st); Mawlid al-Nabi; Christmas

 

Political structure Official name

Federal Republic of Nigeria

 

Form of state

Federal republic, comprising 36 states and the Federal Capital Territory (FCT, Abuja)

 

Legal system

Based on English common law

 

National legislature

National Assembly, comprising the 109-seat Senate (the upper house) and the 360-seat House of Representatives (the lower house); both are elected by universal suffrage for four-year terms

 

National elections

The most recent elections were held in February 2019; the incumbent president, Muhammadu Buhari, won a second term in office and the ruling All Progressives Congress (APC) secured a majority in the lower and upper houses. The next elections will be held in 2023

 

Head of state

President, elected by universal suffrage to serve a four-year term

 

State government

State governors and state houses of assembly

 

National government

Federal Executive Council, which is chaired by the president

 

Main political parties

The APC, a merger between the All Nigeria People’s Party (ANPP), the All Progressives Grand Alliance (APGA) and the Congress for Progressive Change (CPC); the People’s Democratic Party, which ruled from 1999 until its defeat by the APC in 2015

 

Key ministers

President, petroleum minister: Muhammadu Buhari Vice-president: Yemi Osinbajo

Agriculture & rural development: Sabo Nanono Budget & national planning: Zainab Ahmed Defence: Bashir Salihi Magashi

Education: Adamu Adamu

Environment: Muhammad Mahmood

Foreign affairs: Gregory Onyeama

Health: Osagie Ehanire

Industry, trade & investment: Richard Adeniyi Adebayo Information & culture: Lai Mohammed

Interior: Rauf Aregbesola

Justice: Abubakar Malami

Labour & employment: Chris Ngige

Niger Delta: Usani Uguru

Power: Saleh Mamman

Solid minerals: Kayode Fayemi

Transport: Rotimi Amaechi

Youth & sports: Sunday Dare

Central bank governor

Godwin Emefiele

 

Recent analysis

Generated on July 20th 2021

 

The following articles have been written in response to events occurring since our most recent forecast was released, and indicate how we expect these events to affect our next forecast.

 

Politics

Forecast updates

Togo jails pirates in maritime crackdown

July 12, 2021: Political stability

 

Event

On July 6th nine pirates were sentenced to prison in Togo’s first ever trial for piracy offences in the Gulf of Guinea.

 

Analysis

The jail sentences were handed down by a judge in the Togolese capital, Lomé, and ranged from

12 to 20 years. Fines of up to CFAfr50m (about US$90,000) were also imposed. The men, seven Nigerians, one Togolese and one Ghanaian national, were involved in an attack on a Benin-owned tanker operating under the Togolese flag in the Gulf of Guinea in May 2019. One other Togolese was acquitted; the Ghanaian national was sentenced in absentia and is considered a fugitive from justice.

The attack took place in Togo’s territorial waters, meaning that the country’s Penal Code applied to the case. Article 1,068 in the code stipulates a maximum penalty of up to 20 years in jail for individuals who seize a ship and do harm to persons and goods. However, despite the verdict, multiple jurisdictions and the weak law enforcement capabilities of many littoral states in the Gulf mean that many pirates manage to evade justice; the regional centre of piracy in the Gulf is south- western Nigeria, and with Nigeria now increasing efforts to police its territorial waters, we expect smaller states like Togo to see an increase in attacks as pirates shift their activities into less well policed parts of the Gulf in 2021-22.

This verdict is intended as a public signal that Togo is serious about fighting piracy, in the hope that this may protect the reputation of the port of Lomé, one of the mainstays of the economy.

Other actors are also calling on local states to do more to fight piracy in the Gulf; in an appeal launched last May the International Maritime Organisation, a UN agency, called for better co- ordination and collaboration in the fight against piracy and also mentioned the drafting of anti- piracy legislation, which implies that current local legislation is inadequate in many states. As for physical protection, only Ghana appears to have put some measures in place at the port of Tema (including video surveillance); the Ghanaian navy has also received training from the US and Italy.

Impact on the forecast

We still expect threats against shipping to remain high in the Gulf of Guinea in 2021-22, despite the efforts of states outside of Nigeria to tackle the problem.

 

Economy

Forecast updates

Nigeria’s budget envisages tight yet wasteful fiscal policy

July 5, 2021: Fiscal policy outlook

Event

Nigeria’s federal government plans a budget of N13.98trn (US$34.1bn) in 2022, up by 2.9% from 2021, according to the 2022-2024 Medium-Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP), presented by the budget and national planning minister, Zainab Ahmed.

 

Analysis

The medium-term plan amounts to a steep drop in real government spending. Budgets outturns have rarely been close to initial plan for many years, but policy is clearly slanted towards austerity, with the expenditure/GDP ratio declining from an estimated 8% in 2021 in the MTEF/FSP, to 7.6% in 2022, as a result of cuts to the capital budget of just under N760bn, thereby allowing the recurrent budget to increase for items such as personnel costs. In essence, fiscal policy has been discarded as a means of spurring an economic recovery, instead focusing on political priorities. Ms Ahmed highlighted this by claiming that her ministry wants to end a costly domestic fuel subsidy, but noted that scrapping the support is unpopular. The subsidy is slated at N900bn in 2022. Another item that crowds out other spending is a rise in the giant debt-service bill, amounting to about a quarter of federal spending.

Revenue in 2022 is forecast at N8.4trn, assuming a conservative global oil price of US$57/barrel. This equates revenue to 4.5% of GDP, slightly less than 4.7% in the 2021 budget, but official revenue projections are often wildly inaccurate. In January-May 2021 federal government revenue was 44.6% short of the budgeted level, largely because of shortfalls in hydrocarbons revenue. As we expect a higher average Brent crude price in 2022 (US$71/b) and greater productivity within OPEC, we expect the revenue/GDP ratio to rise on the outturn for 2021. In nominal terms, this will still be below the MTEF/FSP’s projection, however.

The plan expects a deficit of N5.6trn (slightly more than in the 2021 budget), equal to 3.1% of GDP, up from 3.9% of GDP estimated in 2021. For 2021 the deficit could be significantly higher than this, however, following a N896bn supplementary budget submitted by the executive to better equip the military and to purchase Covid-19 vaccines. The request is likely to be approved by lawmakers keen to contain a spate of violence plaguing different parts of the country.

 

Impact on the forecast

Based on our oil price forecast, we expect a deficit of 3.1% of GDP in 2022, which will be revised up to account for high recurrent spending and a lower expected nominal revenue outturn

 

OPEC+ abandons oil output policy talks amid Saudi-UAE spat

July 6, 2021: External sector

 

Event

On July 5th the OPEC+ alliance (comprising OPEC and a Russian-led group of non-OPEC producers) indefinitely suspended their talks on collective production policy, after the UAE rejected a proposed deal.

 

Analysis

As the benchmark Brent oil price was at a near three-year high of above US$75/barrel when delegates convened on July 1st, an agreement to substantially ease the unprecedented cuts imposed in May 2020, in response to a Covid-19 -induced collapse in global demand, was widely expected. As has been typical under the evolving deal, Saudi Arabia was the chief proponent of caution, while Russia, with a lower budgetary breakeven price, characteristically prioritised increasing output. The outlines of an agreement had reportedly been reached for output to rise by 400,000 barrels/day (b/d) in August-December (raising the collective ceiling by 5% by end-2021). However, the proposal was blocked by the UAE’s refusal to extend the framework of the collaboration from April to December 2022, without an increase in the benchmark used to calculate its output quota, on the grounds of its substantial new capacity of 4.1m b/d, compared with its ceiling of 2.7m b/d, leaving proportionally more potential production shut in than other members.

In an uncharacteristically public explanation of the UAE’s negotiating position, on July 4th the Emirati energy and infrastructure minister, Suhail Mohammed al-Mazrouei, insisted that the two issues should be decoupled, and a decision on the duration of the overall deal should be postponed, while criticising as “unfair and unsustainable” its 3.2m-b/d reference output. Saudi Arabia (the de facto OPEC leader and the chief architect of the proposed interim agreement) outlined its own stance on the same day, when its energy minister, Abdel-Aziz bin Salman al- Saud, deemed the two components inseparable. The position coheres with the kingdom’s more bearish inclinations and desire to gradually increase its output to a pre-pandemic level in order to meet rising global demand. The disagreement between the two countries is expected to remain as financial needs to support diversification plans intensify in the medium term.

 

Impact on the forecast

Our expectation is that a compromise deal will ultimately be reached later in July in order to gradually ease production restraints from August. However, crude oil prices are likely to remain above the US$60-US$70/b range that we had previously expected in July as market uncertainty persists. As a result, we will revise up our full-year Brent price forecast to US$69/b in 2021 (from US$66/b previously).

Oil prices hit three-year high on OPEC indecision

July 7, 2021: International assumptions

 

Event

The price of dated Brent Blend, the international benchmark, has held above US$75/barrel since

July 1st—the highest level since October 2018.

 

Analysis

The OPEC+ alliance, led by Saudi Arabia and Russia, was widely expected to announce a gradual increase in its oil supplies at its July 1st meeting. However, the deal proposed by Saudi Arabia— to increase collective production gradually by 2m b/d between August and December 2021 and to extend the supply­cut agreement until end­2022—was rejected by the UAE. Talks were abandoned on July 5th, with no planned date to resume them.

This new element of uncertainty has driven oil prices higher—Brent crude prices rose steadily

from just over US$75/b on June 30th to more than US$77/b on July 6th. This market reaction  suggests that investors expect that, having failed to reach an agreement, OPEC+ members will maintain their current production levels in the near term. This would reduce oil stockpiles more sharply than we currently expect as demand continues to recover.

 

However, we still expect OPEC+ to reach a deal to increase production gradually between August

and December—albeit after several days, if not weeks, of uncertainty. Ultimately, OPEC+ members

appear to be aligned on the need to increase supplies by about 2m b/d by the end of the year. Failing to do so would drive oil prices higher in the near term, which would actually work against OPEC+’s broader goals by fuelling a spike in inflation (which would dampen demand for more costly oil) and potentially encouraging hesitant US shale companies to increase their output more noticeably.

US crude oil production remained flat in the first half of 2021—despite a steady rise in drilling—as

oil majors focused on boosting their profitability and pivoting to renewable energy investments. A further surge in prices, however, could quickly bring more of this frozen capacity online. Currently OPEC+ producers have more power to shape oil supplies and prices than they have had in decades. If member countries continue to pull in opposite directions, that influence could quickly break down.

 

Impact on the forecast

We will raise our forecast for Brent crude prices from US$66/b to about US$69/b for full-year 2021, reflecting a temporary surge in prices in the third quarter. We maintain our view that prices will ease back to an average of about US$70/b in the fourth quarter as OPEC+ production increases. However, risks to this forecast, both upside and downside, have increased.

Chinese steel prices buoyant despite seasonal dip in demand

July 7, 2021: International assumptions

 

Event

Prices of hot rolled coil steel from China, a benchmark for global steel prices, have remained surprisingly bullish since June, despite easing demand and construction activity in China.

 

Analysis

Prices of steel in China only fell by 4% in June, despite a more significant slowdown in construction activity due to the onset of the monsoon season, resulting in lower demand for rebar and hot rolled coils. For one, the government’s efforts to curb production by closing smaller steel mills and pushing others to move to electric arc furnaces have helped to keep a floor under prices. Speculation regarding a possible supply crunch fuelled by a rise in safety inspections due to the centenary celebrations of China’s Communist Party also supported prices in June. There is added speculation that further substantial cuts to steel production may now be delayed owing to the current market conditions, which may push prices back up if the government does follow through.

 

International demand for Chinese steel rose in the first half of 2021 as the global economic recovery got under way. This boosted Chinese steel output to 374.6m tonnes in the first four months of the year—a rise of 16% year on year. Steel exports rose by about 30% over the same period. We expect global demand to remain resilient in the second half of 2021 and that mills will continue production—albeit with new restrictions in place—to cater to international demand rather than an already oversupplied domestic market.

Prices of iron ore, a vital steel-making ingredient, gained nearly 40% in April-May, largely supported by the steel production boom in China, which consumes 70% of all seaborne iron ore. However, prices reversed sharply in mid-May following claims by China’s government that the broad rally in commodities prices was unwarranted and actions taken to dampen market speculation. We believe that ore prices have passed their peak and will continue to ease in the second half of 2021 as Chinese steel production falls in the winter months.

 

Impact on the forecast

In the short term we expect export prices of Chinese hot rolled coil (the steel price series that we forecast) to remain supported by the ongoing recovery in global demand, contrary to the recent dip in prices on the domestic market. We now expect steel prices to average just over US$742.5 in the second half of the year, bringing the 2021 full­year average to US$774—a rise of nearly 60% year on year

 

Final obstacle to passage of Nigerian oil bill remains

July 12, 2021: Policy trends

Event

Local community groups in the oil-producing Niger Delta have rejected the Petroleum Industry Bill (PIB) passed by parliament.

 

Analysis

Community trusts are demanding a larger share of oil wealth than provided by the PIB passed by the two chambers of parliament on July 1st. The Senate approved a clause requiring oil companies to pay 3% of their annual operating expenditure into host community development trusts, and the House of Representatives agreed 5%. Community leaders are insisting on a 10% share.

Oil majors already consider the PIB’s fiscal regime to be tilted too far in favour of the government and warn that it could deter investment. Reconciling the oil majors’ position with the needs of a government that is strapped for revenue (albeit conscious of Nigeria’s need to remain competitive) and communities in the Delta that have encountered environmental degradation as a result of oil extraction is near impossible, and explains why Nigeria has failed to revise fiscal terms for oil since 2008. On July 5th the head of the Nigerian National Petroleum Corporation, Mele Kyari, urged parliament to cut back the allocation for host communities to 2.5%, warning that too large a share would drive large producers out of Nigeria. But the government cannot dismiss the demands of local trusts without creating new complications. Militant groups demanding local control of mineral resources in the Delta have caused major disruption to oil production in the past. In late June the Niger Delta Avengers, a militant group that carried out attacks against oil installations in 2016, threatened to resume attacks if local communities do not get a sufficient slice of oil wealth.

It seems likely that the risk of unrest will be viewed as one worth taking. Oil majors are already in the process of divesting from Nigerian assets as part of de-carbonisation plans, and uncertainty over fiscal terms could encourage a flight to other oil-producing countries. Fully aware of this, the two chambers and the executive are likely to settle on a local community oil wealth share that is well below the communities’ demands.

 

Impact on the forecast

We continue to expect the PIB to pass in 2021. The local community stance will be considered in our next report, but generally aligns with our view that instability in the oil-producing south will impede investment even with the bill being passed, and that oil production (excluding condensate) in 2025 will be about 250,000 barrels/day lower than in 2014.

MEA chart of the week: export boom and bust in 2021-25

July 16, 2021: External sector

The Economist Intelligence Unit expects strong growth in world commodity prices in both 2021 and 2022, notably for industrial metals, precious metals and energy—the top exports for the

Middle East and Africa (MEA). Most of the major commodity producers in MEA are expected to enjoy rapid growth in export earnings over this period, surpassing 30% year on year for the majority of MEA oil exporters.

 Country Report July 2021 www.eiu.com © Economist Intelligence Unit Limited 2021

The bounce-back from commodity price lows in 2020 is expected to peter out in 2023 for industrial raw materials, smoothing the export growth curve in many African countries. The resulting slower export growth is attributable to low investment in extraction during 2020 and shallow productivity gains over the forecast period. World crude oil prices will slide in 2023, but OPEC+ production quotas will have been lifted by this time, meaning most of the cartel’s producers will enjoy another year of export growth as oil output and prices rise.

From 2024 we expect prices for key MEA export commodities to enter a more extensive downtrend as the impact of fiscal stimulus in advanced markets fades and global economic growth retreats from a post-pandemic mini-boom. Again highlighting limited productivity, by 2025 much of the MEA region will be experiencing negative export growth as prices soften.

 

Nigeria aims to put 36 state assets in private hands

July 19, 2021: Fiscal policy outlook

 

Event

Nigeria’s privatisation agency, the Bureau of Public Enterprises (BPE), plans to privatise 36 state- owned assets in 2021.

Analysis

The agency aims to raise N493.4bn (US$1.2bn) from selling or concessioning the assets, which include power-generation plants and free-trade zones. The objectives of privatisation are to generate cash for the government and in the process reduce operational inefficiencies and improve productivity through private investment. Such a large wave of privatisations is testament to significant shortfalls in oil and non-oil earnings. In the first five months of 2021, fiscal revenue was 44.6% below official budget projections, and spending on infrastructure was well below target. However, the BPE has a poor record of implementing its privatisation schedule. The director-general of the BPE, Alex Okoh, said that, since its creation in 1999, the bureau has generated more than N1trn (US$2.4bn) from the sale, commercialisation and concession of

234 public assets. But many of the transactions occurred in the early years of Nigeria’s privatisation programme. Little progress has been made in the past decade. For the three years to 2020, the federal Ministry of Finance reported zero privatisation proceeds even though revenue from sales had been expected in each year.

Policymakers, who in 2019 announced a plan to reduce government equity in existing joint ventures with multinational oil companies to 40% from an average of 57.5%, undoubtedly want the benefits of privatisation. But the authorities have been impeded by various obstacles to relinquishing ownership and control of public assets. It is doubtful whether the BPE will achieve its 2021 target. Not only has half the year already passed, but an erratic regulatory environment for private-sector participation in public utilities (for example owing to price controls), questionable valuations of assets, sizeable liabilities held by the enterprises, litigation entanglements and public opposition to the sale of strategic state assets are all deterrents. So although there may be a renewed push to divest from loss-making public enterprises as a means of alleviating fiscal pressures, privatisation receipts will not compensate for an abysmally low tax take or an over-dependence on oil revenue. Because of this, we continue to expect upcoming budgets to include new taxes or increases to existing taxes, in particular value-added tax (VAT).

Impact on the forecast

We continue to expect a VAT hike to 15%, a revenue measure that appears unavoidable considering persistent budget deficits. However, we continue to expect fiscal deficits in 2021-25, averaging 2.9% of GDP a year.

 

Analysis

Africa’s 5G rollout gathers pace

July 8, 2021

The Covid-19 pandemic has accelerated 5G licensing, deployment and testing, which could  make 2021 an inflection point that sees many more 5G networks go live in the year ahead. South Africa is leading the charge, but other major telecommunications markets in Africa are keen to fast-track their ambitions and will contribute to a larger pool of 5G services in late 2021 and 2022.

5G commercial services will grow quickly throughout our forecast period (2021-25), but service availability will remain concentrated in key urban centres of major markets, and smaller high penetration markets.

We expect most countries in Africa to remain focused on improving 3G and 4G networks to reduce enormous usage and coverage gaps to expand mobile internet markets and set the foundation for much more widespread 5G commercial services from 2025 onwards.

The 5G era formally began in Africa in 2018-19 with the launch of limited 5G commercial services in Lesotho in 2018 and then South Africa in 2019. The Covid-19 pandemic has fast-tracked spectrum licensing, hardware deployment and network testing across the region, but only a handful of countries have joined the Southern Africans with a successful launch of 5G commercial services.

Ongoing investment could make 2021 an inflection point between network readiness and availability of 5G on the continent, and consumers in many more city locations across Africa are likely to have access to 5G commercial services by 2025. Nevertheless, 5G coverage will touch only a fragment of the content by 2025 and a great deal of policy focus and industry strategy will remain centred on the upgrade and expansion of 3G and 4G networks to improve mobile internet access to reduce large usage and coverage gaps and build a stronger foundation for the broader switch to 5G by 2030.

 

South Africa leads the 5G charge

Four countries in Africa had successfully launched commercial 5G services by June 2021: South Africa, Kenya, Seychelles and Togo. South Africa is leading the way with the launch and expansion of commercial 5G services, which currently involves three separate mobile operators. Rain launched a standalone 5G network—a completely independent 5G service without any interaction with the existing 4G core—in Cape Town in late 2019. Subsequently, Vodacom and MTN launched 5G services in mid-2020 as the government reacted to concerns over internet access and service levels during the early stages of the Covid-19 pandemic to fast-track licensing rounds; both networks use non-standalone deployment that enhances existing 4G networks to provide higher data bandwidth and more reliable connectivity rather than new dedicated 5G infrastructure. To date, 5G services in South Africa are largely focused on Johannesburg and Pretoria, and to a lesser extent Cape Town and Durban, but network operators have ambitious plans to enhance existing services and extend coverage to more locations in the years ahead.

Kenya became the first country in East Africa to launch 5G services when Safaricom launched a year-long commercial trial of 5G services in March 2021. Safaricom is running the commercial trial in the capital, Nairobi, and three other locations but expects to expand its commercial network to nine locations over the next 12 months. Togo became the first country in West Africa to launch 5G commercial services when Togocom announced the start of its 5G network in the capital city, Lomé, in November 2020. Seychelles launched its 5G network in mid­2020 and followed up with the offer of commercial services to end-users in July 2021. A fifth country, Madagascar, launched a 5G network in mid-2020 but the telecoms regulator quickly instructed the operator, Telma, to put its plans on hold and has suspended commercial services since then.

 

New wave of 5G launches on the horizon

Telecoms companies in another 12 to 15 African states have deployed or are deploying 5G networks, running network tests and trials, and edging closer to the launch of 5G commercial services. This creates the prospect of a major second wave of 5G launches in the years ahead and includes countries such as Algeria, Angola, Cameroon, Congo-Brazzaville, Egypt, Gabon, Mauritius, Morocco, Nigeria, Senegal, Tunisia and Uganda. Some of these countries could see commercial services launched in some locations before the end of 2021 and more will see commercial launch in 2022. In addition, other African countries with the highest levels of mobile broadband penetration will be loath to miss the boat and will push hard to deploy, test and launch 5G networks; these include Botswana, Cabo Verde, Côte d’Ivoire, The Gambia, Ghana and Mali, which all have mobile broadband subscriptions far in excess of 100 per 100 inhabitants.

Nigeria is by far the largest telecoms market in Africa, which reflects its enormous population and major urban centres, and the country aspires to join the likes of South Africa and Kenya at the vanguard of the 5G rollout. The Nigerian authorities have accelerated plans to roll out 5G commercial services. In May the Nigerian Communications Commission, the telecoms regulator, and Nigerian Communications Satellite, a satellite communications provider, signed a Memorandum of Understanding (MoU) for the use of C-band spectrum to boost 5G services in Nigeria. And in June the regulator began a review of telecoms licensing processes to prepare the groundwork for subsequent 5G licensing rounds and allocations. Crucially, in May the Nigerian Senate decided to approve future deployment of 5G networks following the conclusion of a parliamentary investigation, and the industry may push for the launch of commercial services in 2022.

 

Large Chinese technology footprint

The Chinese companies Huawei and ZTE Corporation, the Swedish company Ericsson and the Finish company Nokia are the major players engaged in network development and deployment across Africa. China is successfully leveraging its dominance of existing mobile telecoms infrastructure in Africa and the lure of its Belt and Road Initiative to promote the adoption of Chinese-made 5G across the continent. Huawei is believed to have built about 70% of Africa’s 4G networks and, unlike most countries in western Europe and North America, African states on the whole have avoided calls to impose restrictions, apply bans or formally decide not to use Huawei 5G technology and services.

Huawei is involved in almost all countries that have deployed (or are deploying) and are testing 5G networks, as well as the few countries that have successfully launched 5G commercial services. Chinese technology will play a crucial role in upgrading and expanding existing 4G networks, establishing 5G infrastructure and boosting mobile broadband access. The latter will be supported by the dominance of Chinese handset producers in African markets, which have the potential to make smartphone devices more affordable and widely used. Chinese companies already offer affordable prices and tailored products to African markets that provide a clear competitive edge. Transsion and Huawei, together with Xiaomi, Oppo and a few other minor players, provide more than two-thirds of registered smartphones and an even larger share of feature phones in Africa.

A dominant and expanding handset presence is just one part of China’s strategy for the telecoms sector in Africa, which has and will continue to drive the rapid spread of mobile data and voice services across the region. In addition, Chinese companies have taken a proactive role in establishing IT hubs and data centres across Africa to help to boost the information and communications technology (ICT) industry and the availability of digital content to further support demand for high-speed and reliable mobile internet access, as well as mobile devices.

 

Enormous mobile internet potential across technologies

Africa has witnessed a rapid uptake of mobile internet services over the past ten years, although

the continent retains enormous usage and coverage gaps—the former relates to individuals who live within reach of a mobile broadband network but do not use mobile internet services, while the latter relates to individuals who do not live within the footprint of a mobile broadband network.

For instance, the Global mobile Suppliers Association (GSA) estimates that mobile internet subscribers in Sub-Saharan Africa grew by a compound annual growth rate (CAGR) of 18% from 2014-19 and the total number of mobile internet users reached 270m in 2019, which represented a total population penetration rate of 26%. This meant that the region still had an enormous usage gap of about 520m people (or 49% of the population of Sub-Saharan Africa) and a coverage gap 270m people (or 25% of the population) in 2019. The International Telecommunication Union (ITU) reported in April 2021 (Digital trends in Africa 2021: Information and communication technology trends and developments in the Africa region 2017-2020) that just over 88% of the African population was living within reach of a mobile-phone signal in 2020, about 77% was living within reach of 3G services and 44% was living within reach of long-term evolution (LTE) mobile broadband services.

The GSA expects the number of mobile internet users to reach about 475m in 2025, which would represent a CAGR of 10% in 2020-25 and push the mobile internet penetration rate to almost 40% in 2025. However, the vast majority of these connections will be through 3G and 4G technology along with more numerous and larger pockets of 5G connectivity. As far as 5G is concerned, the GSMA, another market intelligence provider, forecast in late 2020 that there would be 45m mobile 5G connections in Sub-Saharan Africa by 2025, equivalent to just over 3% of total mobile connections.

Many countries will focus on improving 3G and 4G networks to reduce the usage and coverage gaps to expand mobile internet markets, especially as there remains great scope to broaden these services. Plans to roll out 5G will make steady progress in the years ahead, but much of the focus among policymakers and the mobile industry will continue to be directed towards building the 3G and 4G market in Africa through to 2025. Africa still retains enormous potential for 3G and 4G services, while building up 4G networks is viewed as a crucial stepping-stone towards the digital transformation of African economies and ultimately the commercial launch of 5G.

 

High hopes for the transformative effects of 5G

 

The drive towards the adoption of 5G will take time, but the natural progression to this level of technology is not in doubt given not only the underlying driving factors surrounding ongoing investment to boost infrastructure and the supply of services, but also growing end-user demand among individuals, businesses and governments for the benefits that 5G will bring. As 5G is progressively rolled out, the technology will play a pivotal role in the digital transformation of African economies in the decade ahead and particularly from 2025 onwards.

Among the potential benefits there are high hopes that 5G will provide enhanced internet access for many more homes and businesses; ease network congestion in major urban centres; improve efficiency and productivity in key sectors (including agriculture, commerce, extractives, manufacturing, logistics and financial services); encourage the growth of Africa’s technology hubs and ICT industry; enhance the resilience of regional value chains and improve global value-chain integration; and create new markets for goods and services with end-consumers.

 

ECOWAS delays launch of West African single currency 

July 16, 2021

 

Although the eight members of the West African CFA franc bloc, the Union économique et monétaire ouest­africaine (UEMOA), are pressing ahead with the next stage of their currency reform, all 15 West African countries in the Economic Community of West African States (ECOWAS)—which includes UEMOA—have agreed to postpone the targeted launch date for the eco, their planned region-wide common currency, to 2027, when the economic backdrop may be more favourable. This gives them time to sort out the basics for a transition to a monetary union, but the idea will founder without considerable willpower.

ECOWAS’s leaders decided on the postponement to 2027 during their summit in Accra, Ghana’s capital, in late June. The original launch date for the new currency was in 2020, but few of the political, economic and technical issues had been dealt with, even before the Covid-19 pandemic forced a delay.

The broad political context for a common currency gives grounds for optimism that it will continue to be pursued. ECOWAS member states have demonstrated a readiness to pool sovereignty, for example through a common external tariff, rules permitting the free movement of labour, the creation of a shared regime of cross-border electricity trading and the incipient introduction of an ECOWAS passport.

The bloc also has a well-developed culture of shared action on tackling other regional challenges such as security and political crises and food supply and climate change problems. The eco was designed to develop this further, to overcome trade barriers and unlock regional potential. It is a step towards integration that would dwarf anything preceding it. There are two main questions over the likelihood of the project going ahead. First, will there be sufficient willpower on the part of governments to push it through; and second, will macroeconomic convergence be possible ahead of the launch.

 

CFA Franc Zone: the eco’s main proponents may become ambivalent

 

The eight ECOWAS states that use the CFA franc (comprising UEOMA) had been spearheading the eco project up to 2020, when it was supposed to launch, and were already itching for monetary reform as a way of decoupling financially from France, the former colonial power. France guarantees the CFA franc’s peg to the euro (at a rate of CFAfr653:€1) and in return traditionally has a veto on the bloc’s currency management board and has required half of UEOMA’s foreign reserves to be deposited in France. This was regarded by some within UEOMA as a throwback to colonial times and an anachronistic tool for ongoing control. Without having to adopt the eco, UEOMA has already taken major steps towards decoupling. The French representative on the currency union board has already stepped down, and in mid-2021 the Banque de France (the French central bank) transferred €5bn (US£5.9bn) back to the Banque centrale des Etats de l’Afrique de l’ouest (BCEAO), the UEOMA central bank, based in Dakar, Senegal’s capital. Therefore public opposition to the CFA franc (and so pressure to create the eco) may diminish without having to take on the added risks associated with the creation of a new, ECOWAS-wide currency.

 

Non-UEOMA aversion to the eco as it was

ECOWAS countries that use their own currencies were put off joining the eco prior to its postponement in no small part by Nigerian policy towards regional trade. As the bloc’s largest economy, with the biggest population in Africa, the Nigerian market is the obvious prize of a common currency. But the administration of the president, Muhammadu Buhari, and the Central Bank of Nigeria (CBN) instinctively tilt towards nationalist and protectionist policies. Foreign- exchange restrictions on imports are a basic tool used by the CBN to support the Nigerian currency, the naira, and supplementing this was a unilateral closure of Nigeria’s land borders between late 2019 and early 2021, which caused enormous disruption in Benin and Niger.

(For Nigeria the impact was less significant, as a large proportion of the country’s trade is with partners outside of ECOWAS.) In addition, there is generally a contrast between the CBN—which embraces unorthodox policies such as selective credit controls as part of a development agenda— and the monetary philosophy of the BCEAO, which (mainly because of the CFA franc’s peg) is more closely aligned with the classical role of the European Central Bank.

With Nigeria’s government previously unwilling to liberalise economic policy and embrace the eco, other non-UEOMA countries were disincentivised from ceding their own monetary sovereignty. Prior to its delay to 2027, it appeared as if the eight members of UEMOA would pursue the project alone, making the eco little more than a rebrand of the CFA franc.

 

Added time might help, or strip the eco of its value

 

A new launch date gives UEOMA time to complete reforms to distance the CFA franc from France before embarking on the eco project. The way the new currency had been promoted previously created divisions within ECOWAS, with non-UEOMA countries sensing that the eco would mean them joining a rebranded CFA franc (and a currency peg), rather than an entirely new monetary arrangement. The Ivorian president, Alassane Ouattara, who as a former deputy managing director of the IMF had been entrusted with managing the eco project by fellow heads of state, tried to assuage such concerns, pointing out that in a second phase (once the CFA franc had been replaced) the eco would evolve into a new currency in more than just name, and that the CFA franc’s peg would be replaced by a currency basket as other, non UEOMA members gradually joined.

 

Guinea and Nigeria were not convinced and, when the coronavirus pandemic broke out, the debate was paused. A new launch date gives UEOMA enough time to finish its own currency reform process with France before restructuring the eco as a currency basket.

 

For advocates of the eco, another benefit of more time to the launch is that ECOWAS will have to reduce trade barriers under the African Continental Free-Trade Area (AfCTFA). Over the next 5- 10 years, signatories (including Nigeria) will be eliminating tariffs on 90% of goods. Naturally, the process is going to undermine the CBN’s policy of indirectly managing the exchange rate through trade restrictions. It is possibly with this in mind that UEOMA countries have decided on a 2027 launch date, although, much like UEOMA having achieved a degree of decoupling from France without need of the eco, the AfCFTA’s implementation may obviate the need for a new currency as well.

 

Convergence criteria a potential stumbling block

Even if non-UEOMA states warm to the notion of a shared currency as the AfCTFA advances (and UOEMA states do not lose interest in the idea), convergence criteria are a separate challenge to be overcome. In January 2021 leaders within ECOWAS decided to retain convergence criteria for a common currency that were initially adopted in the early 2000s. They include a fiscal deficit no greater than 3% .

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