Business in Ghana

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Pressure on president to switch on more light

Posted by Business in Ghana on November 27, 2012

By William Wallis and Xan Rice, FT.com

A decade of rapid economic expansion on the back of high oil prices and a boom in services has delivered greater prosperity and confidence to parts of Nigeria’s south – notably Lagos, the commercial capital, and more recently the oil-producing Niger delta from where Mr Jonathan hails.

But the development of the mainly Muslim north has been left trailing dangerously, at the same time as the region’s elites are smarting from a loss of political power. It is not entirely coincidental that an Islamist insurgency has taken root, its rank and file peopled by young men with little hope of finding jobs.

Conventional wisdom has it that the country will struggle to turn the corner in a more balanced and stable way if it fails to resolve the greatest impediment to growth and investment: electricity shortages. Last-minute vacillation by the government has nevertheless come close to stalling the privatisation programme on which hopes rest following the failure of past multibillion-dollar attempts to improve supplies via state investment.

In the epicentre of Nigerian deal making – the Abuja Hilton – successful bidders expecting to take over power plants and distribution networks went in a short space of time from celebrating breakfast over champagne to staring disconsolately into their coffee. Mr Jonathan’s decision in mid November to revoke a transmission management contract perplexed the experts, unnerved the bankrollers and caused dismay. The president saw his mistake – caused by turf wars among officials – and back pedalled again last week. But the confusion had already reinforced the impression of an administration inclined to set off in the right direction only to shoot itself in the foot.

The muddle has added to a more pervasive mood of uncertainty about the direction in which Nigeria is heading: forwards in the fast lane where it could overtake South Africa as the continent’s largest economy; backwards to political turmoil and conflict; or stumbling along somewhere in between.

Mr Jonathan is liked – his provincial roots, good humour and humility give him the touch of the common man. But to listen to fractious political and business leaders, he is not universally respected. In a country more accustomed to ruthless generals, there is concern that he lacks backbone.

Moreover, the former state governor has depended on the same patronage system that he claims to be fighting. Some reformers and activists believe he is too compromised to drive through meaningful change.

It is not only electricity at stake. Investment worth tens of billions of dollars in the 2.4m barrels a day oil industry has stalled pending the passage of long delayed legislation aimed at improving efficiency and delivering greater returns.

Meanwhile, the theft of oil in the Niger delta has reached unprecedented levels, with criminal networks stealing upwards of 150,000 b/d worth more than $7bn annually. The perception that corruption is waxing has been reinforced, ironically, by the greater transparency Mr Jonathan has begun to bring to murkier sectors of the economy.

A series of investigations into the petroleum industry has shone a light on billions of dollars in losses caused by mismanagement and fraud.

“Unless we get a government in place that can squarely face corruption and punish it at all levels, we can’t see the end of this situation,” says General Muhammadu Buhari, the ascetic former military ruler who has run two failed bids to win presidential elections.

Yet there are signs of progress. Partly as a result of optimism over power reform – and the prospect of this unleashing Nigeria’s industrial potential and cutting dramatically the cost of doing business – Standard & Poor’s, the rating agency, upgraded the country this month.

The upgrade still leaves the sovereign rating three notches below investment grade. But as Ngozi Okonjo-Iweala, the combative finance minister and coordinator of economic policy, notes, downgrading has been the norm for many countries riding through current global economic turmoil.

Since last year’s fiscally profligate election, Nigeria has begun to rebuild foreign reserves, increase savings above the budgeted price of oil and marginally improve the proportion of state revenues available for capital investment.

Banking reforms initiated after the 2008 crash have also delivered more solid foundations, and telecoms is still booming a decade after it was liberalised. A forthcoming report by the International Monetary Fund gives a qualified thumbs up, predicting growth in gross domestic product this year of 6.3 per cent while noting the risks posed by a fall in the world price of oil, on which Nigeria still depends for more than 80 per cent of state revenues.

Impatience with the status quo presents a growing threat. The warning signals have been flashing in multiple ways. One has come from the impoverished northeast, where the Islamist insurgency took root and spread. Another is in the amount of irreverent comment on the web.

This peaked this year when the government tried to remove the fuel subsidy, prompting nationwide protests and strikes. To halt the chaos, it was obliged to restore half of it.

The lifting of the subsidy sparked an eruption of anger because it forced up the price of transport and food. The public also perceived that people in business and political circles were abusing the subsidy removal for their own ends and forcing the poor to pay the cost.

“The government can attempt it again but resistance will still be there so long as people don’t see an improvement in their lives,” says Ahmed Makarfi, who chairs the senate finance committee.

Yet, signs of turmoil have not dissuaded potential investors from seeing Nigeria as an increasingly attractive frontier market, especially when returns elsewhere in the world are slowing.

Store openings by companies such as Shoprite and Walmart’s subsidiary Massmart are growing at 36 per cent a year, according to a recent McKinsey report.

Heineken held its worldwide financial conference in Lagos earlier this month, bringing 60 analysts from all over the world and celebrating a 10 per cent annual growth in Nigerian beer market over a decade.

Heineken cites the country’s demographics as one of the reasons – with 160m people, it is home to one in six Africans.

What some economists see as a demographic dividend, others see as a time bomb already detonating in parts of the country.

Up to 6m people are entering the job market every year and youth unemployment is nearly 40 per cent. Hence the urgent need to create conditions for Nigeria to become more productive. This and other difficulties are far from straightforward, for, if successful, reforms will chip away the patronage on which the political system depends.

“In terms of tangible results he [Mr Jonathan] hasn’t done well but if you look nine months forward, power is working and the Petroleum Industry bill is passed, things will be looking a lot better,” says Bismarck Rewane, a Lagos-based financial analyst.

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