By Dan Steinbock

As Nigeria’s economy is contracting, domestic and global headwinds ensure that downside risks will escalate. Without aggressive economic moves and harsh security measures, the economy could face a disastrous free fall.

In 2015, government deficit soared to almost 4 percent of GDP and exports fell 40 percent, which led to a current account deficit of 2.4 percent of GDP. Unsurprisingly, foreign portfolio inflows froze as investors fled, with reserves falling to $28 billion at year-end 2015.

After mid-June 2016, the devalued naira plunged almost 30 percent to a record 282 per dollar as policymakers relaxed currency curbs, due to the looming recession. Since then, naira has fallen another 12 percent to 315 per dollar (while trading at 370 per dollar earlier). Devaluation is expected to go some way in alleviating foreign exchange shortage, but challenges to business activity will prevail and consumer confidence has been penalized.

Last year, Nigeria’s growth was more than halved to 2.7 percent. In the first quarter, the GDP contracted 0.4 percent. Recently, the International Monetary Fund (IMF) cut the country’s 2016 GDP growth forecast to -1.8 percent; the lowest in three decades.

As global prospects are diminishing, post-Brexit tensions will increase and the fall could witness new shocks in global markets, there is worse ahead.

The eclipse of oil security

While the non-oil sector encompasses some 90 percent of the economy, the oil sector continues to fuel the GDP. As a result, the plunge of oil prices demolished fiscal and external accounts causing government revenues to plunge to less than 8 percent of the GDP in 2015. In the coming months, oil prices that remain relatively low will continue to penalize growth as monetary and fiscal policy tightens and public investment will contract.

In turn, higher rates – such as the CBN’s recent rate hike to 14 percent, a 10-year high – will weigh on credit and consumption, dampening the non-oil economy. While Governor Godwin Emefiele expects rate hike to encourage savings and investment, inflation is running at 16.5 percent as the cost of food and gasoline is surging, which renders CBN’s rates negative in real terms.

The future of oil is now intertwined with the future of security. Nigeria must tackle not just Boko Haram, but Al Qaeda. Nigerian jihadists were first financed by Osama bin Laden already in 2003, while its members were trained in Sahel in 2006 alongside al-Qaeda with which it now shares regional and international links. As a result,

Nigeria’s northeast is suffering from a huge humanitarian crisis as more than half a million people are in urgent need of food, shelter and medical care.

Security is also compromised in the oil-rich southeast, thanks to the Niger Delta Avengers. In turn, longstanding grievances are exemplified by the reborn Biafra independence movement, which waged war against the central government from 1967 to 1970. These pressures toward regional fragmentation call for harsh security responses in the near-term but smart diplomatic cooperation in the medium-term.

Nevertheless, the battle to contain terror and separatism will keep defense spending rising, which is likely to detract from investment that should be focused on Nigeria’s economic development.

Failed governments, failed international organizations

Critics blame President Buhari’s economic policies. Yet, the current government does not shoulder responsibility for the secular challenges that have piled up in the past 15 years during the terms of President Goodluck Jonathan (2010-2015), Umaru Musa Yar’Adua (2007-2010) and Olusegun Obasanjo (1999-2007).

Like other struggling energy exporters that now suffer from excessive reliance on oil and gas, Nigeria did not diversify its industrial structure in time when the oil prices were still booming. Despite the rhetoric of competitiveness, entrepreneurship, rule of law and strong defense, the governments were too complacent, neglected small and medium-size enterprises that are the key to inclusive growth, benefited from corruption and ignored security challenges.

Instead, nation’s public assets were stashed by crony capitalism, often with tacit acquiescence by international interests. In terms of GDP per capita, as adjusted to inflation, Nigeria ranks 123rd in the world. Yet, between 2004 and 2013, it was among the top-10 developing countries that suffered the greatest illicit financial flows; about $18 billion, according to Global Financial Integrity.

Consequently, Nigeria faces now huge downside risks, which have been grossly underestimated by international multilateral organizations, including the IMF whose downside risk projections have been far too optimistic. Today, these organizations are cutting growth forecasts, but inadequately. Nigeria is a textbook case.

In its report on Nigerian economy last March, the IMF still projected Nigeria’s 2016 GDP growth at 2.3 percent. In July – only four months later – the projection was cut to -1.8 percent.

Moderate decimal revisions are typical to quarterly revisions. However, deviations of more than 4 percentage points reflect inexcusable gross negligence.

Toward accelerated modernization

Internationally, the U.S. Fed’s rate hike delays have ensured a timeout for emerging economies. Conversely, a faster-than-anticipated Fed exit would mean further capital outflows, shrinking asset prices and deeper devaluation in Nigeria.

In these dire circumstances, the Buhari administration has no alternative but to push bold and aggressive initiatives. Recently, the African Development Bank approved $56 billion to scale up industrialization in Nigeria and other countries in the coming decade. In the medium-term, industrialization must have the key role as the catalyst of Nigerian development and job-creation. To succeed, it should be coupled with complementary enablers, including policy support, favorable business environment, access to capital and markets and competitive entrepreneurship.

In these efforts, Nigeria’s cooperation with China, as reflected by Minister Udoma’s recent visit in Beijing, has potential to provide substantial project financing at low interest rates. These accelerated efforts to develop Nigerian infrastructure were initiated by President Buhari’s state visit to China last April. The key role belongs to Nigerian railway modernization projects that have potential to unify fragmented markets and to boost accelerated national development. Moreover, Buhari’s efforts to rehabilitate northeast and the proposed Export Processing Zones (EPZ) hope to attract Chinese investors and companies.

In the coming months, the Buhari administration must protect fiscal sustainability by any means necessary, even as it must reduce external imbalances and reinforce the resiliency of the banking sector. Most importantly, it must force the execution of structural reforms for sustained and inclusive growth.

As the global economic prospects will continue to deteriorate, the time to accelerate policy responses is now. The worst is still ahead.

About the Author

Dan Steinbock is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore). For more, see www.differencegroup.net

This commentary was published by BusinessDay Nigeria on August 1, 2016