Capital Economics assesses policies of Nigeria’s main presidential hopefuls

London-based Capital Economics has assessed the economic policies proposed by the key candidates ahead of February’s presidential election.

The economic research firm, in the first instalment of its Election Watch series, noted that the three main presidential hopefuls are Bola Tinubu of the ruling All Progressives Congress (APC), Atiku Abubakar of the Peoples Democratic Party (PDP) – the main opposition – and Peter Obi of the Labour Party (LP).

“The elections offer a chance to depart from unorthodox policymaking under the outgoing administration – especially if opposition candidates Atiku Abubakar or Peter Obi prevail over the ruling party’s Bola Tinubu – but we would caution that a complete and economically painless turnaround is unlikely,” the Emerging Markets Economist, Virág Fórizs, said.

“In what is traditionally a two-horse race, Mr. Obi has emerged as a credible third party force with polls putting him in the lead (albeit large shares of those surveyed were undecided or did not respond).”

Capital Economics said with the Labour Party’s campaign far less established or well-funded compared to that of the APC or the PDP, Obi probably still faces an uphill battle. 

“In any case, the state-level criterion to secure the presidency makes a runoff more likely in a more crowded electoral field, which would extend the period of uncertainty about the direction of economic policy in Nigeria,” it said.   

The firm said any new government will inherit an economy in tatters after nearly a decade of ‘Buharinomics’ as well as the shock of the pandemic. 

It said the outgoing government, by and large, maintained signature policies including protectionism, a loose fiscal stance and an artificially strong naira even as the oil-dependent economy has confronted extensive periods of low oil prices.

Fórizs said, “These unorthodox policies have been underpinned by an increasingly distortive cocktail of import restrictions, capital controls and deficit monetisation. And despite passing long-delayed oil sector reforms, the key industry has struggled to attract much-needed investment in a deteriorating business environment, dampening oil production. Low oil output and ‘Buharinomics’ policies curtailed Nigeria’s ability to benefit from elevated oil prices in 2022.

“The data are telling. GDP growth averaged 1.3% per annum throughout the Buhari administration compared to the 6.5% average over the preceding eight-year period. And despite picking up in November, oil production – at 1.16mn bpd – remained near a recent 50-year low. Meanwhile, the currency is trading over 35% weaker in the black market compared to the official exchange rate. And relatedly, inflation reached a 17-year high of 21.4% y/y in November.”

Capital Economics noted that the key presidential candidates diverge on how best to address Nigeria’s mounting economic challenges. 

It said, “By and large, the ruling APC party’s Bola Tinubu offers continuity. Campaign promises – like maintaining support for import substitution measures – reflect interventionist policymaking. And Mr. Tinubu envisages the oil sector to remain the cornerstone of the economy, with a production target of 3.0mn bpd by 2030. With peak oil demand not far off, raising output to such a degree is likely to prove overly ambitious.

“We suspect that a proposed shift in budget planning would mean looser fiscal policy and wider budget deficits over the coming years with financing from the central bank not off the table.”

The firm said deficit monetisation and a potentially rapid accumulation of public debt could ignite investor concerns, even if costly fuel subsidies are phased out as per APC campaign promises.

It said, “A Tinubu administration’s foreign exchange policy settings are unlikely to stray far from the existing FX regime. While the ruling party candidate pledged to review and better optimise the multiple exchange rate system, there’s an underlying preference for a strong and stable naira. Largely sticking with the current setup would force the central bank to keep distortive and inflationary FX measures in place.

“Overall, we think that a Tinubu presidency would boost short-term growth at the cost of persistently high inflation and increased disruptions in the economy. And leaving underlying structural problems unaddressed would keep Nigeria’s long-term prospects subdued. Continuing to throw fiscal caution to the wind would also push brewing debt problems to boiling point.”

Capital Economics said that under the hood, the pro-business campaign of the opposition PDP’s Atiku Abubakar is somewhat half-hearted, adding, “Private sector-led economic liberalisation and diversification form central themes of the PDP’s manifesto.”

“But the oil industry would remain key, as illustrated by even bolder output goals (of 5.0mn bpd by 2030) than the APC set out. And the FX policy proposals don’t seem as ambitious as many might expect from a pro-market candidate; the PDP appears to be open to retaining two exchange rates.”

It said Abubakar’s vow to embrace fiscal prudence would, however, be a radical shift. 

The firm said, “But the pledge to remove fuel subsidies within the first 100 days of taking office is largely in line with current government plans for instance. And comments about considering reprofiling or restructuring Nigeria’s public debt will be alarming for investors, if pursued or even merely hinted at.        

“All in all, with an Abubakar administration scaling back distortionary policies, the economy would take a hit in the near term with inflation, in particular, set to jump. But even without a full swing to orthodoxy, significant moves in that direction would remove critical growth constraints, especially in the longer term. That is likely notwithstanding our view that the timeline and extent of diversification efforts might slip.”

Capital Economics described the Labour Party candidate as the wildcard of the race. 

It said, “Like the PDP’s presidential hopeful, Mr. Obi is a proponent of liberal economic policies and diversification. The Labour Party is campaigning on eliminating fuel subsidies and on scrapping Nigeria’s multiple exchange rate system with the latter marking the most pro-market position among the key candidates.

“That said, Mr. Obi’s fiscal policy stance would probably limit growth, at least in the near term. The proposal to balance the budget at a time of high debt service costs and revenue measures that are likely to take time to yield results could leave little fiscal space for non-interest spending.”

The firm said with an Obi administration more decisively embracing pro-market policies and fiscal policy providing less of a cushion, short-term economic pain would likely exceed disruptions under an Abubakar government. “On the flip side, we would expect Nigeria’s long-term growth prospects to be brighter.”

“The upshot is that, from an economic standpoint, the polls offer a choice between marginal steps away from growth-sapping policies and a more meaningful shift towards pro-market reforms that could unlock Nigeria’s economic potential down the line but involve near-term economic pain,” Fórizs said. 

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