Nigeria risks Sri Lanka’s fate as economy creaks
Nigeria, Africa’s most populous nation, risks suffering the same fate as Sri Lanka as the lack of reforms in several sectors continues to put a lid on economic growth.
In Colombo, the capital of Sri Lanka, cooking gas cylinder is scarce, prices are out of control and social unrest has spilled onto the streets.
The economic crisis in Sri Lanka is spiralling into a humanitarian emergency as millions of people face acute shortages of food, fuel, cooking gas and medicine, the International Federation of Red Cross and Red Crescent warned on Friday.
“We need international support now to help hundreds of thousands of people pull their lives back together. It’s going to be a long, tough road for people to rebuild and get their lives back on track,” Sri Lanka’s Red Cross Secretary General, Mahesh Gunasekara, said.
But Sri Lanka’s economic woes did not just start overnight. It is the result of several years of a political crisis that has snowballed into financial crises and severe shortages of food, fuel, electricity, and medicine.
Sri Lanka’s experience
Most Sri Lankans blame the Rajapaksas – a powerful political dynasty that once held the presidency, the prime minister’s office as well as the finance, interior, and defence portfolios for mishandling the economy.
Since he assumed office in 2019, President Gotabaya Rajapaksa has overseen a series of populist policies that read like a checklist on how to kick-start an economic meltdown.
Shortly after his election, Rajapaksa followed through on a campaign promise to make sweeping tax cuts, disregarding expert advice and depleting the state’s coffers.
Analysts say massive infrastructure projects undertaken with Chinese investment made the strategically located Indian Ocean Island nation a textbook case for economists warning of a “Chinese debt trap”.
With the president’s nephew serving as agriculture minister, the government then implemented a blanket ban on chemical fertilisers, decimating Sri Lanka’s critical agricultural sector.
As foreign reserves plummeted, the government was unable to pay for food imports – including the national staple of a country that was self-sufficient in rice-growing before the fertiliser ban.
When the pandemic struck, experts and opposition politicians urged the government to begin bailout talks with the International Monetary Fund (IMF).
The Rajapaksa administration, however, held its ground, waiting for a post-pandemic recovery of the tourism sector until a new finance minister, appointed in April, finally sought the IMF’s help.
“Sri Lanka is bankrupt,” the country’s Prime Minister Ranil Wickremesinghe said last Tuesday.
Wickremesinghe told lawmakers that negotiations with the IMF to revive the country’s “collapsed” economy are “difficult,” because the South Asian nation of 22 million has entered the talks as a bankrupt country, rather than a developing one.
“We are now participating in the negotiations as a bankrupt country. Therefore, we have to face a more difficult and complicated situation than previous negotiations,” he said in parliament.
Sri Lanka’s inflation hit a record high of 45.3 percent in May, according to the latest government figures. Meanwhile, food prices in May leapt 58 percent from a year earlier, while transport costs jumped 76.7 percent. For many middle-class families, vegetables such as cabbage, cauliflower and carrots are now considered luxury food items.
In several major cities, including Sri Lanka’s commercial capital, Colombo, hundreds continue to queue for hours to buy fuel, sometimes clashing with police and the military as they wait. Schools have been suspended and fuel has been limited to essential services.
President Rajapaksa tweeted last Wednesday that he had sought assistance from Russian President Vladimir Putin and requested “an offer of credit support to import fuel.”
Nigeria’s experience
Like Sri Lanka, Nigeria is also unrecognisable from the country that was forecast in 2015 to be the first African country to hit a GDP of $1 trillion.
Opeyemi Agbaje, CEO of RTC Advisory Services Ltd, said Nigeria could be at risk of having Sri Lanka’s economic crisis if the debt service-to-revenue ratio is used as an economic index for growth.
Findings by BusinessDay showed that Federal Government spent N4.22 trillion on debt servicing in 2021, increasing by 29.3 percent compared to the N3.27 trillion spent in the previous year.
This means that Nigeria spent about 96 percent of its revenue on servicing debt obligations in 2021, compared to 81.1 percent in 2020.
Muda Yusuf, the immediate past director-general of Lagos Chamber of Commerce and Industry, believes that despite Nigeria’s macro-economic challenges, the country may not get to Sri Lanka’s current economic crisis.
“This is because Nigeria is an oil-producing country which it exports to earn foreign exchange,” Muda added. “Although it is not meeting its expected oil production capacity.”
Africa’s biggest economy has slipped into two recessions since President Muhammadu Buhari came to power in 2015, and insecurity has worsened, with killings and kidnappings on the rise. Foreign investments have plunged and the naira has tumbled.
“Nigeria lost $1.8 billion every year between 2010 and 2019 due to tariff evasion arising from protectionist measures,” the World Bank said in the June edition of its Nigeria Development Update.
The World Bank noted that these policies, which restrict imports, have led to a loss in revenue, an increase in consumer prices, an increase in the cost of production, constraining domestic firms’ competitiveness, and limiting their potential to export to regional and global markets.
Nigerians have had to bear the brunt of an economy stuck in a rot. With businesses groaning from rising production costs, which have worsened this year amid spiralling inflation, job creation has suffered and unemployment ballooned.
While it would appear that the economy has improved in the last one year after an exit from recession and six straight quarters of growth culminating in a 3.11 percent growth in the first quarter of 2022, most of it is elusive, according to multiple interviews with businesses and individuals.
The economy’s recent recovery is eluding the vast majority of Nigeria’s 200 million people because it has not been able to reduce poverty or lead to the creation of sufficient jobs.
“One thing that is clear to any discerning person is that the next president must find a way to increase revenues and cut out wasteful spending,” Taiwo Oyedele, an economist, who is also a partner and head of tax and regulatory services at PWC Nigeria, said.