What is President Buhari’s economic legacy?

Many Nigerians will remember him as the president that killed the naira, a well-earned reputation considering the currency has lost more than half of its value during his tenure.

But President Buhari also holds the dubious honour of being the only Nigerian Head of State to lead the country into two separate recessions (2016 & 2020) since official records began in 1983.

And how can we ignore Nigeria’s unemployment? An administration that promised to create 15 million jobs in its 2017 Economic Recovery & Growth Plan now presides over a country with a 33% unemployment rate, where just one in three young people are in a full-time job.
 

Let me throw another hat into the ring: fiscal indiscipline.

When President Buhari settled into his new role at the end of 2015, Nigeria was at a fiscal crossroads as the global oil price crash forced policymakers to rethink their approach to managing the country’s finances. The government even passed a supplementary budget mid-way through 2015 just to tide things over.

Nigeria’s accounts did not look good. We were committing nearly 40% of annual spending to government salaries and pensions, leaving just 13% of 2015 spending for capital expenditure (capex). Furthermore, the budget deficit had grown to 1.6% of GDP, up from 0.6% just two years prior, and Nigeria was spending more and more to service its debt—38% of government revenues went to debt servicing in 2015, compared to 14% in 2010.

But there were enough reasons to be hopeful. Even at 1.6%, the deficit-GDP ratio was well within the 3% threshold in the fiscal sustainability plan, and most of Nigeria’s debt was domestic. Amid all of this, Nigeria had room to borrow as national debt was equivalent to just 13% of GDP, way off the international guidance of 56% for emerging economies.

At the time, Ghana’s debt was nearly 55% of its GDP. But borrowing would be unnecessary if policymakers played their cards right. A lax attitude to tax collection had left Nigeria with one of the lowest tax-GDP ratios in the world, meaning there was lots of room to grow non-oil revenues.
 

Fast-forward seven years and the Buhari administration has delivered a crash course on how to bankrupt a country.
 

How did we get here?

It is harder than it looks to bankrupt a country. So, today’s article pays homage to the masterful execution we have witnessed in the last seven years. To all aspiring policymakers, here is how you bankrupt a nation in 9 steps.

Rule #1: Piss off the Niger Delta boys

After a record oil output of 2.5 million barrels per day (mb/d) in 2005, Nigeria’s daily oil production fell to just over 2 million by 2009 due to a spate of militant attacks in the Niger Delta. President Yar’Adua introduced an amnesty program that paid a stipend to repentant militants. The program was controversial, but it worked—oil production rebounded to 2.4 mb/d in 2011.

When he came into power in 2015, President Buhari purportedly reneged on the amnesty agreed, with reports of mounting unpaid allowances. This decision birthed the Niger Delta Avengers (NDA) and similar groups that waged war on oil infrastructure in the region.

Their biggest coup was taking down the Trans-Forcados export terminal, which they bombed in February 2016, costing Nigeria nearly 300,000 barrels of oil daily. From 2.16 mb/d in the last quarter of 2015, Nigeria’s oil production dropped to 1.61 mb/d in the third quarter of 2016, reaching a multi-year low of 1.5 mb/d in August 2016.

As global oil prices were also depressed at the time, Nigeria recorded its worst oil revenue performance in decades. The Federal government earned just ₦697 billion from oil, a third of what it earned two years prior (₦1.98 trillion). As a result, Nigeria’s fiscal deficit crossed ₦2 trillion for the first time.

By 2017, the government had reinstated the amnesty program—but this won’t be the last time we shot ourselves in the foot with oil production.

Rule #2 Hike interest rates, then borrow heavily locally

With oil revenues depressed in 2016, the government had two options: restrain spending through an austerity program or attempt to reflate the economy through aggressive spending. Policymakers opted for the latter and set about borrowing to fund their ambitious spending program.

At the time, the CBN was in the early days of its ill-fated attempts to prevent the naira from depreciating and had hiked interest rates to attract foreign investment and boost the local supply of dollars. In 2016, Nigeria’s 5-year bonds were selling at interest rates above 15%.

This was bad news for the fiscal authorities keen to borrow from the local bond market. The situation created a rift in Nigerian economic policy, with the Minister of Finance publicly asking the CBN to lower interest rates to reduce the government’s borrowing costs. Intent on protecting the naira, the CBN ignored. Undeterred, the government borrowed at high interest rates, leading to a steep rise in domestic debt repayments. Domestic debt servicing costs nearly doubled between 2015 and 2018.
 

Rule #3: Pick the most expensive foreign debt and feast on it

Remember how we said one of the reasons for hope in late 2015 was that Nigeria had very little external debt liabilities? Well, the government saw that and decided to change it.

From 2017 onwards, Nigeria embarked on an unprecedented Eurobond spree—the most expensive type of external debt, increasing Nigeria’s external debt liabilities from $10.7 billion in 2015 to $38.4 billion in 2021.

If the 2022 trend persists till year-end, Nigeria will have over ₦1 trillion in interest payments for external debts for the first time. Exactly ten years ago, we paid less than ₦50 billion.
 

Rule #4: Spend recklessly

You go broke when you make questionable spending decisions, and Nigeria has made many of those. Despite all the issues with raising revenues and getting cheap debt, the Nigerian government maintained a simple mantra: spend, spend, spend.

By the end of 2021, the government had disbursed ₦12 trillion from its budget, three times what it spent in 2010.
 

It would help if all this spending were productive, but most of it is not. The share of government expenditure that went to capital expenditure in 2021 (24%) was very similar to the 2010 value (22%). And while the government would point to a declining contribution of personnel costs (from 63% in 2010 to 37% in 2021), this can be attributed to an increased allocation to debt repayments, from just 10% in 2010 to 43% in the first four months of 2022.
 

If there is anything that screams bankruptcy, it is committing almost half of your spending to pay off old debts.

Rule #5: Fail to build alternative revenue sources

When the government embarked on its aggressive spending plan, it knew it could no longer rely on oil revenues as in the old days. To account for this, it laid out ambitious strategies to boost non-oil revenues (remember Nigeria’s low tax-GDP ratio?). Alas, none have paid off.

Do not be deceived by the fact that non-oil sources now contribute more to the government budget than oil. That is a symptom of rock-bottom oil revenues (see Rule #8).

Also, do not be deceived by the nominal rise in Nigeria’s non-oil revenues. They have almost doubled from ₦819 billion in 2016 to ₦1.7 trillion in 2021. But non-oil revenues are extracted from the economy. The larger the economy, the higher non-oil revenues (taxes, duties, etc.) ought to be, even without any intervention from policymakers. This is relevant because the size of Nigeria’s economy has been bloated by inflation, so any analysis of non-oil revenues should account for this (hence some countries are exploring inflation-adjusted taxes). When we do so, the picture is bleak: non-oil revenues have been static in real terms.
 

The chart above reflects the government’s failure to sustainably diversify its revenues away from oil and encourage Nigerians to pay taxes. How do you bankrupt an oil-dependent economy? Cripple its oil sector, then fail to find a good alternative.

Rule #6: Emulate Zimbabwe

As the government ran out of borrowing sources—even Nigeria must be somewhat wary of Eurobonds—it turned to its trusted ally: the CBN. In the last five years, the government has increasingly turned to the central bank to plug the hole in its financial accounts. This is “easy” money as the fiscal authorities technically do not need permission for this (the annual budget and all borrowing plans must be approved by the National Assembly), but it comes at a high price. Some estimates suggest the Federal Government is paying an annual interest rate above 15% on this CBN debt.

This move is arguably the most reckless as it is akin to giving a heavily indebted man access to an unlimited overdraft facility.

The numbers are startling. In 2010, the government gave the CBN ₦10 billion in interest payments. By 2021, those interest payments had ballooned to ₦1.2 trillion, more than the government’s entire 2015 debt servicing bill.
 

Rule #7: Stick to a losing strategy

Halfway through Shakespeare’s Macbeth, the eponymous protagonist rebukes any suggestion that he should abandon his murderous crusade and relinquish his hold on the Scottish throne. “I am in blood stepped in so far that, should I wade no more, returning were as tedious as go o'er,” he tells his wife, exposing a flaw that would prove his undoing: not knowing when to quit.

Likewise, Nigeria’s leaders were given many opportunities to abandon their flawed fiscal strategy, most notably in 2020, when the coronavirus pandemic decimated already-weak revenues and the country’s debt-servicing ratio hit 100% for the first time. Rather than rein in spending and acquiesce to the IMF’s demands (in return for cheap loans), the government ploughed ahead like Macbeth, announcing larger and larger budgets.

Like Macbeth, the result was inevitable—the budget deficit grew from ₦881 billion (1% of GDP) in 2014 to ₦7.3 trillion (4.2% of GDP) in 2021, above the 3% legal limit in the 2007 Fiscal Responsibility Act. If the 2022 trend continues, Nigeria’s fiscal deficit will hit ₦9.2 trillion at the end of the year, larger than the cumulative deficit from 2010 to 2016. Incredibly, between January and April 2022, the government spent three times more than it earned.
 

Rule #8: Steal the nest of the golden goose

We thought 2016 (see Rule #1) was the nadir, but Nigeria has found a new bottom in the last 12 months as official oil production has dropped to levels not seen since the 1970s. There is no single source of truth for oil production data in Nigeria, but all the numbers are low. Data from the National Bureau of Statistics (chart below) shows that oil production fell to 1.43 mb/d in the second quarter of 2022, lower even than the 2016 trough and the worst days of the coronavirus pandemic.
 

Organisation of Petroleum Exporting Countries (OPEC) data, which doesn’t include crude oil condensates (roughly 200,000 barrels a day) is even grimmer. OPEC has two estimates for each member country: secondary sources and direct communication from the relevant ministries. OPEC’s estimate of Nigeria’s oil production in August based on direct communication was 972,000 barrels a day.

Nigeria, a country that once produced 2.5 million barrels a day, is now producing less than 1 million!
 

Historically the largest oil producer in Africa, Nigeria is now 4th, behind Angola, Algeria, and Libya. And the latter’s oil industry has been at the centre of a decade-long bloody political tussle following Gaddafi’s death.

You do not have to be an energy expert to suspect foul play. Unlike in 2009 and 2016, vandalism and militancy are not to blame. Rather, the most probable cause is plain old theft, but at an industrial scale.

This has clear revenue implications for Nigeria.

The federal government earned less from oil in 2021 than in 2010. If the 2022 trend persists, the federal government will receive just ₦856 billion from oil.

These figures are even worse when you remember that oil prices have averaged above $100 per barrel in 2022 (compared to $45 in 2016), and the naira has depreciated 37% since 2016 and 62% since 2010. 

When we account for these price changes, the government’s oil earnings are less than a fifth of what they were in 2010 and less than a third of their 2015 value.
 

Rule #9: Set your successor up for failure

To bankrupt an economy, you need to do more than mismanage finances when you are in power. You need a coup de grâce. Perhaps crippling your successor. If this sounds harsh, a glance at the numbers in the 2023-2025 Medium-Term Expenditure Framework (MTEF) will convince you otherwise. The chart below shows the government’s projected deficit from now till 2025.
 

There are three key things to know about these numbers. The first is that these are the numbers for the subsidy reform scenario. So, even if we assume the government will get rid of expensive fuel subsidies, its budget deficit will still run into tens of trillions of naira. Remember, the budget deficit was less than ₦1 trillion in 2014.

The second thing to note about these projections is that they would keep the Federal Government above the 3% deficit-GDP threshold in the Fiscal Responsibility Act. If all goes to plan, the government will keep breaking our fiscal laws until 2025.

The final thing to note is that the actual numbers will be much worse than these projections. History tells us that this is almost certain to happen as, in the last five years, the actual budget deficit has been higher than the projected deficit. Incredibly, the cumulative budget deficit from 2017 to 2021 was nearly 50% higher than projected.

As bad as these plans are, reality will be much worse.

Quick advice for whoever emerges victorious at the 2023 General Elections: Do the opposite of all these rules, and Nigeria may just have a future.