Of the major African economies, Nigeria has been hit hardest by the fall in oil prices. For those who remember Nigeria’s economic pressures of the 1980s, this will feel like déjà vu. With its budget deficit expected to double to US$11bn, or nearly 3% of GDP, this year, Nigeria needs dollar liquidity. Achieving long term economic diversification has so far proven a harder task, but in cocoa beans (and other agri-commodities) Nigeria has the ability to do so.
US dollar liquidity
The reduction in value of oil exports has resulted in a scarcity of dollars in Nigeria and other African “petrostates” such as Angola. Nigeria’s dollar reserves are decreasing and Nigerian companies, especially oil producers, are finding it increasingly difficult (and expensive) to access dollars, which is compounded by the depreciation of the Naira.
Oil producers are increasingly seeking dollar liquidity from alternative funding structures such as advance payment / prepayment financings.
Short term solutions
To avoid an IMF bailout, Nigeria has approached the World Bank and the African Development Bank for a US$3.5bn loan. The government has also considered turning to the Eurobond market.
A return to the international debt capital markets would be Nigeria’s first since July 2013, when it raised US$500m of five-year bonds and US$500m of 10-year bonds, at yields of 5.38% and 6.63% respectively. However, the cost of borrowing in dollars has risen. The estimated yields of bonds Nigeria may issue this year is nearer 10%, the level Ghana had to offer to borrow $1bn of 15-year bonds at in 2015.
Reports suggest the higher-than-expected yields may lead Nigeria to instead seek a $2bn loan from China, its biggest trading partner. Nigeria has to date been a major beneficiary of Chinese investment in Africa.
Such debt financings would provide much needed short term dollar liquidity. However, if those forecasting that low oil prices will last into 2017 are correct, a longer term, multi-faceted solution will be required.
Nigeria has been reliant on oil production and export, which accounts for nearly 90% of its dollar revenues. However, before the discovery of oil in Nigeria in 1956, Nigeria was a major exporter of agri-commodities such as palm oil, rubber, timber, ground nuts and cocoa. Since then, the percentage contribution of agriculture to GDP has dropped from 60%+ to 20.3%.
President Buhari has pledged to move the Nigerian economy away from its dependency on oil and to encourage growth in other sectors, particularly agriculture. The need is clear, with the 2016 budget predicting Nigeria will receive just 20% of total revenues from oil, down from up to 70% in recent years.
Of Nigeria’s natural resources, the cocoa sector appears primed to regain its place as a leading foreign exchange earner. The African Export-Import Bank and the Nigerian Export-Import Bank are currently developing a funding programme to help revive the sector as Nigeria’s top non-oil export.
The programme will provide financing to: (i) meet working capital requirements with the aim of increasing production capacity which, at 280,000 metric tons in 2015, was far lower than Nigeria’s neighbours Cote d’Ivoire and Ghana, who produced 1,650,000 metric tons and 800,000 metric tons respectively; and (ii) upgrade existing production facilities and establish new processing and manufacturing facilities. The amount of funding is yet to be confirmed.
Whether Africa’s biggest economy achieves its aim of economic diversification will be closely followed by many in the commodities trading world, not least because of the many new opportunities that such diversification will offer both domestically and internationally.
The Inside Africa Team would like to thank Edward Malcolm, Trainee Solicitor, for his contribution to this blog post.