With elections looming, Ngozi Okonjo-Iweala’s next year as Nigeria’s finance minster promises to be even more demanding that usual. But she is determined to ensure that the country’s strong macroeconomic performance of recent years and reform agenda do not slip.
Ngozi Okonjo-Iweala has few illusions about how tough the next year will be. Nigeria’s finance minister realises she will be targeted by opposition politicians jostling for power ahead of elections in February 2015 and keen to denounce the government’s economic policies. “It will be brutal,” she tells The Banker in Abuja, Nigeria's capital. “We’re going to see extreme bashing. Somebody has to be the scapegoat.”
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Her international audience is more sympathetic. Nigeria’s strong macroeconomic performance in the past five years has seen its standing abroad rise considerably. Many frontier and emerging market investors crave exposure to the oil-rich west African country’s rapidly growing economy and population of 170 million, by far the largest in Africa. Jim O’Neill, the influential former Goldman Sachs chief economist, has dubbed it, alongside Mexico, Indonesia and Turkey, a MINT – a group whose global significance he believes will only increase.
All eyes on Nigeria
Yet for all the hype, Ms Okonjo-Iweala knows that investors will be watching Nigeria closely to see that its reforms and its fiscal and monetary record do not unravel in the run up to voting.
To help ensure that does not happen, she has proposed a largely conservative budget for 2014. It forecasts a small deficit of 1.9% of gross domestic product (GDP) and is based on a real growth rate of 6.75%, which is slightly below the International Monetary Fund’s estimate. Total spending will be reduced by 7% from 2013 to N4640bn ($28.5bn). Domestic borrowing will fall 3% to N572bn and the government will not tap the Eurobond market as it did in 2013, although it does plan to issue a diaspora bond of between $100m and $200m.
“For 2014, especially since we’re coming up to an election, the top priority is to maintain macro stability and to hold as tight a rein on fiscal [policy] as we can,” says Ms Okonjo-Iweala. “We have proposed a budget that does that.”
Recent history suggests that while Nigeria’s spending might increase as the polls approach, it will exercise far greater constraint than its regional neighbour Ghana, which shocked investors by posting a huge 12% budget deficit when it held elections in 2012. Still, some analysts think it will be different this time and believe that Nigeria’s elections will be the most acrimonious since its transition from military rule to democracy in 1999. Not only is the ruling People’s Democratic Party (PDP) divided over whether the president, Goodluck Jonathan, should stand for another term, but the four biggest opposition groups merged last year to form the All Progressives Congress (APC).
Opposition obstacles
Ms Okonjo-Iweala acknowledges that the environment is heated, but insists it is much the same as before previous elections and downplays the threat of heightened political risk. “It’s no worse,” she says. “It’s just that the politics is more vicious because we now have a large opposition party. The PDP has a challenge that didn’t exist before.”
The APC has vowed to block the 2014 budget until its various demands are met. But Ms Okonjo-Iweala is confident it will be passed before the government is forced to halt spending and with the current parameters in place. “The opposition uses the budget as a means of holding the country down,” she says. “They are playing Tea Party politics. But we’re not budging. We’re not fazed. I’m fairly relaxed about the whole thing.
“Our constitution gives us the right to continue spending up to half of our previous budget, which we reckon would take us up to about June. And since this is a political year, I don’t see people [being] deprived of even one naira.”
Ms Okonjo-Iweala has a solid reputation for improving Nigeria’s fiscal management since she returned home for her second stint as finance minister in 2011, having previously been a managing director at the World Bank in Washington, DC. But some of her main plans have not come to fruition, having been hindered, she says, by the decisions of previous administrations. She has long wanted to boost the proportion of the budget put towards capital projects, as opposed to recurring items such as public wages. Yet recurrent spending will increase from an already hefty 68% of government spending to 74% this year.
She says she had little choice, given that the 2014 budget is the first to incorporate all the pensions related to a big public sector salary hike in 2010. Moreover, with the overall budget being reduced, it was inevitable that the proportion set aside for recurrent spending would rise. “I was aiming for [recurrent spending to total] 65%,” she says. “But we’ve had to reverse it. The simple reason is that the budget base has shrunk and [if we had curbed salaries], there could have been strikes.
“The balance between recurrent and capital expenditure is not good. We need to slim down, close and merge government agencies. The unfortunate thing is that I can’t do much about it. When we looked at which agencies to streamline to save on the bloated bureaucracy, we found that most of them were underpinned by law. Until those laws are repealed, we don’t stand a chance.”
Double-digit dream
Ms Okonjo-Iweala dismisses concerns that the fiscal cuts will hold back Nigeria’s economy. “I know it’s very hard for people to take in, but you can consolidate fiscally while at the same time encouraging growth,” she says. “Let’s not get fixated with [the headline numbers]. It’s not just about money. It’s about spending it efficiently and funnelling investment into areas where there are bottlenecks on growth.”
One of Nigeria’s main constraints is a lack of electricity. It produces barely 4000 megawatts, which is one-tenth of what South Africa, with a population of 51 million, creates. Since 2011, the country’s generation capacity has hardly increased, and tens of millions of Nigerians still lack access to power. But last year 14 state-owned power companies were sold to local and international investors as part of a major privatisation of the sector.
Ms Okonjo-Iweala, who is also co-ordinating minister for the economy, touts this as a key success of the government and proof that its reform agenda is working, even if the effects will only be felt by ordinary Nigerians in the medium term. “The power sector reforms are a top priority,” she says. “Our economy is growing now with so little electricity. Imagine if we had the power supply we needed. We’d be growing, in my estimation, in the high single-digits to low double-digits. That’s what we’re aiming for.”
Mortgage target
In January, the government launched the Nigeria Mortgage Refinance Company (NMRC), which will be loosely based on the US's Fannie Mae and Freddie Mac. One of what Ms Okonjo-Iweala calls the “missing institutions” that Nigeria needs, its purpose is to promote home ownership in the country, which only has about 20,000 mortgages, by providing long-term on-lending facilities to banks.
Ms Okonjo-Iweala says the NMRC, a joint venture between the state and private sector, will help tackle social problems and stimulate the economy. Its debt issuance in the local capital markets will initially be government-guaranteed, but that will change once it has a credit rating and is fully operational. “The scheme is special,” she says. “This mortgage refinance company will channel so much more liquidity into mortgages and the financing of housing. And it will help us deal with social exclusion.
“We’ve never used the housing sector to drive growth before. The NMRC will drive more jobs for carpenters and welders. The cement industry will benefit too. The multiplier effects on the economy will be huge.”
Africa’s number one?
Nigeria could officially become Africa’s largest economy this year, overtaking South Africa, which has an annual output of about $320bn. It is expected to complete a recalculation of its GDP, which currently totals $295bn, in the next few months. This rebasing, its first since 1990, will lead to sectors that have boomed in the past decade, such as telecoms and banking, being given more statistical weighting and likely increase the size of the country's economy by 30% to 60%.
However, for all the kudos that will come with being Africa’s largest economy, the reality will remain that more than half of Nigeria’s people live on less than $2 a day and that despite the recent rapid growth of its non-oil sector, it is overly dependent on the commodity, from which it derives 70% of government revenues and 90% of export earnings.
In recent months, Nigeria has been reminded of its vulnerabilities. Its stock exchange, having climbed 40% in 2013, has dropped sharply and its currency has weakened because of a fall in oil revenues and foreign portfolio inflows slowing as the US has unwound its quantitative easing programme. The Nigerian central bank warned in January that “monetary policy is almost at its limits” in terms of keeping the naira stable.
Nigeria can thus ill-afford to rest on its laurels. Given the situation, Ms Okonjo-Iweala knows that continuing with structural reforms and maintaining fiscal stability are vital.
Some analysts believe that even if the PDP wins the looming elections, Ms Okonjo-Iweala will not be interested in another term as finance minister, a role that is among the most demanding and thankless in Nigerian politics. If they are right, her successor will inherit an economy still blighted by inefficiencies. But it will be one in a far stronger position thanks to the progress made under Ms Okonjo-Iweala.
