As political leaders struggle to lift the economy out of a prolonged recession caused by a protracted slump in global oil prices, questions surrounding the health of President Muhammadu Buhari, who is only half-way through his four-year term, have introduced yet another source of political risk. Trips out of the country for medical treatment and a request for extended medical leave earlier this year fueled speculation that the presidency has a serious illness, and concerns in that regard were aggravated earlier this month, when Buhari once again left the country for treatment in the UK after missing several Cabinet meetings.

Vice President Yemi Osinbajo has been delegated responsibility for day-to-day governance, and by all accounts, is doing a commendable job. However, the uncertainty surrounding Buhari’s status has contributed to a rising threat of political instability, underscored by APC leader Bolo Tinubu’s very recent warning of coup-plotting among members of the military. The release in mid-May of 82 of the schoolgirls kidnapped by armed extremist Boko Haram forces three years ago provided a rare victory for the government, but the dismal state of the economy, a famine in northern areas controlled by Boko Haram, and the continued destruction of oil infrastructure by aggrieved groups in the south all highlight the potential for an explosion of unrest that is more likely to be realized in the absence of strong, stable leadership.

The heightened risk of instability threatens to undermine the government’s efforts to create a more attractive climate for foreign investment, which include steps to reform a complicated foreign-exchange regime that has contributed to shortages of hard currency to pay for imports. In April, the central bank introduced a foreign-exchange window at which investors can obtain foreign currency at rates set by buyers and sellers. Officials are counting on the reform to facilitate a revival of currency trading without resorting to an inflationary devaluation of the naira. The early evidence points to a narrowing of the official and black-market exchange rates, but rising political risk could trigger a loss of confidence that sends the local currency plummeting in the parallel market.

A combination of low oil prices, production losses resulting from rebel attacks on southern pipelines, and debilitating power shortages resulted in the first annual economic contraction in more than two decades last year, while a devaluation of the currency and chronic shortages of foreign exchange pushed inflation up to an average of 15.7% in 2016.

Expectations that the rise in oil prices would produce a positive year-on-year growth in the first quarter of 2017 were disappointed, as the unexpectedly weak performance of the agricultural sector and a double-digit contraction in the oil sector contributed to a 0.5% decline for the overall economy compared to January–March 2016. The increased availability of hard currency is expected to boost economic activity from the second quarter, and a combination of increased oil revenues and funds obtained by Nigeria’s first venture in the international debt market in four years will enable the government to finance a program of infrastructure investment that will brighten the prospects for a return to positive annual growth this year. However, any recovery will be modest and the risk of setbacks will be high.

 

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