Buhari may surprise with bold stimulus to jumpstart Nigeria growth

Nigeria’s  in-coming president, Muhammadu Buhari, may consider  embarking on fiscal and monetary stimulus that could help boost growth rates to near double digit, in Africa’s largest economy.

The biggest challenge for the Buhari administration will be reconciling campaign promises which include the construction of 3,000km of superhighways, including service trunks and building of up to 4,800km of modern railway lines, with crude oil prices that have slumped some 50 percent in the past year.

This may be where prospects of a large stimulus could emerge, as Bola Tinubu, a former governor of Lagos, and a leader of Buhari’s All Progressives Congress (APC), espoused in a recent piece.

“I espouse a countercyclical fiscal policy. This policy entails expansionary deficit spending at the federal level. The spending must be aimed at public works infrastructural projects that are needed in any event as a foundational prerequisite for economic growth,” Tinubu said in a January 26 piece.

“As with the fiscal expansion needed to pull nations out of the Great Depression, Nigeria must engage in similar fiscal expansion to thwart the impending down-spin caused by faltering oil prices. If we take the path of austerity, the contraction may intensify to the point where the downward momentum plunges us into a recession, otherwise avoidable,” Tinubu said.

Nigeria, which is Africa’s largest crude producer, derives 90 percent of its export earnings and 70 percent of government revenue from oil.

The International Monetary Fund (IMF) predicts growth of 4.8 percent this year, down from 6.3 percent in 2014.

The 2015 budget proposal by the outgoing Goodluck Jonathan administration, which is currently before Federal legislators, puts capital expenditure at N387 billion, a 75 percent cut from the N1.55 trillion appropriated for 2014.

“It’s a great idea … and borrowing costs are relatively low … given how long it takes projects to get going, it may start to lift growth in 2016-17. And infrastructure is direly needed,” said Charles Robertson, Renaissance Capital’s global chief economist, in a response to questions on possibilities of Buhari enacting a big stimulus.

Nigeria’s total debt (Federal and States) was only equivalent to 14 percent of GDP in 2014, according to data from the Debt Management Office (DMO), making it easier to increase debt levels to boost spending if needed.

BusinessDay calculates that if a stimulus equivalent to 2.5 percent of GDP were undertaken, it would amount to $10billion or N2 trillion available to be invested in infrastructure or other capital expenditure, such as  housing.

Nigeria could raise two tranches of $5 billion 10 year Eurobonds at less than an 8 percent yield, BusinessDay estimates.

Ivory Coast, with an economy 12 times smaller than Nigeria’s and which defaulted on its debt during a brief 2011 war, sold a $1 billion Eurobond in February, at a yield of 6.625 percent which was four times oversubscribed.

Buhari’s party, the APC, has comfortable majorities in both chambers of the Nigerian assembly, which would make it easier to get authorisation for such borrowing plans.

There may be a need to increase non-oil revenue before Nigeria can comfortably engage in more borrowing, according to Razia Khan, Head of Africa Macro global research, at Standard Chartered Bank, London.   

“Of course, there is still the possibility of seeking concessional borrowing for investment in infrastructure.  This, coupled with a greater sense of inclusion – with more Nigerians sharing in economic prosperity, could drive some growth gains in its own right,” Khan said. 

“In the near term, this may help offset, but not fully compensate for, weaker oil prices.”