In early June, Niger Delta militants – under the banner of a newly-formed group, the Niger Delta Avengers (NDA) – blew up two oil wells owned and operated by Chevron. The attack is the latest in a new phase of an ongoing insurgency in the oil-rich region (see the map above).

Figure 1 – Unplanned crude oil outages in Nigeria. Source: US EIA.

Former president Mr. Jonathan had staved off the insurrection by entering into a settlement with rebel groups in 2009. Militants agreed to lay down arms in exchange for an amnesty programme and handsome payoffs. Stability has proven fragile, however. Following president Buhari’s decision to phase out the programme, acts of sabotage by the NDA and other groups have resumed. They have hit the country’s oil production hard, reportedly leading to a reduction in output from around 2 million barrels a day to around 1.4 m/b (see Figure 1) [1]. Coupled with falls in production in war-torn Libya, Canada and Venezuela, Nigeria’s declining output is contributing to the recent oil price rally.

Table 1 – Nigeria, selected economic indicators 2010-16. Source: IMF.

Troubles in the Niger Delta are exacerbating problems with the country's hydrocarbon industry. Mr Buhari was elected with a mandate to curb mismanagement and corruption in the industry and to oversee a process of deregulation. Yet the government’s actions so far have yielded mixed results. Mr. Buhari has sacked the management of state-owned oil company NNPC in June last year, following reports that $16bn in oil revenues had been siphoned away from the Treasury [2]. Talks of an overhaul of NNPC, however, have stalled. So have discussions around the country’s new Petroleum Industry Bill, which has been in writing for over nine years. The lack of a clear institutional framework and uncertainty surrounding the fiscal terms that may be imposed under the new bill are slowing down foreign investment in both exploration and production. Meanwhile, Nigeria’s gas reserves – Africa’s largest – remain broadly untapped.

It is not clear whether an end to the insurrection and, with it, a return to last year’s production levels may be expected soon. This has worrying implications for a country where oil provides around 70% of government revenues and over 90% of export earnings. Together with lower oil prices, acts of sabotage in the Niger Delta are putting Nigeria’s public finances under increasing strain. Yet whereas governments in other oil-dependent countries – most notably in the Gulf – are pursuing strategies of fiscal consolidation, Nigeria's executive has just unveiled a strategy of aggressive public spending. The 2016 federal budget – approved in mid-May – devotes 30% of the government’s spending plan to capital expenditure. This is about ₦1.8tn ($9bn), a 223% increase relative to the 2015 budget. As a result, according to official figures, the federal government’s deficit – currently at 3% of GDP ($15bn) – will reach ₦6tn ($30bn) by end-2016.

The government plans to invest heavily in upgrading the country’s road infrastructure and expanding electricity supply (see Figure 2 below) – two critical bottlenecks hampering the competitiveness of Nigeria-based manufacturers. The budget also offers an insight into Mr. Buhari’s strategy for the Niger Delta. The state-controlled Niger Delta Development Commission (NDDC) has seen an increase in the funds at its disposal. The lack of transparency surrounding the Commission’s activities makes it difficult to ascertain the cabinet’s intentions in this area. As in the past, NDDC funds might simply end up being used as a source of patronage rather than for development purposes. The increase in allocation to the Defence Ministry, on the other hand, is in line with the President’s stated aim of crushing the insurgency. Critics, however, point out that the Niger Delta assaults are driven by a mix of greed and deep-seated grievances, which will need to be addressed if normality is to be restored. The continued threat posed by jihadist group Boko Haram in Nigeria’s northeast is another reason behind the increase in defence spending. 

Figure 2 – Budget allocations to selected federal ministries [3], 2015-2016. Source: Federal Government of Nigeria (appropriation bills).

The government’s plan is clearly ambitious. Doubts remain, however, regarding its sustainability and longer-term implications. Particularly worrisome is the claim that domestic production of 2.2 million barrels per day can be sustained. An unrealistic assumption even in normal times (see Figure 3 below), it is even more so in the current, highly volatile environment. As such, it is likely that the public deficit will plunge further into negative territory by end-year.

Nigeria’s government aims at filling the gap by tapping into domestic and international debt markets. Both are costly options, however, forcing the government to look for other avenues. A $6bn loan from China is forthcoming [4]. Further resources will come from cuts in federal expenditure on social services provision – health and education in particular. In other areas the government is either unwilling to take action, or unlikely to do so. An increase in revenues from corporate income tax (among the world’s highest) and VAT, which the government hopes will help fund the deficit, seems hardly attainable. Last year, tax revenue fell short of target [5]. If the past budget is any indication, it may spell bad news for the country. 

Figure 3 – Nigeria’s oil production 2015-16, assumptions vs. reality. Source: OPEC, June 2016 Monthly Oil Market Report.

As to the general macroeconomic situation, Nigeria still has a relatively low debt-to-GDP ratio. The government’s plan to bring forward long-overdue investment in infrastructure may help stimulate growth – provided the money is spent wisely. If followed through, the recent announcement of a reduction in fuel subsidies will bring relief to the country’s public finances.

The government’s security strategy, however, is surrounded by more uncertainty. Boko Haram is currently present across the Lake Chad region, with cells operating in Nigeria, Cameroon and Chad. A major regional force, its highly decentralised structure and broad objectives will make negotiations unlikely for the time being. Niger Delta insurgents, on the other hand, have sat at the table before. The 2009 amnesty programme succeeded in bringing an earlier generation of rebel leaders into the political fold, yet it did little to address local grievances. Military action may not yield the expected results. The army has not been able to defeat the insurgency a decade ago, and it is unclear whether it may be able to do so now. A resumption of hostilities will also put the hydrocarbon sector at greater risk at a time when maintaining a stable level of output is of critical importance. 

Faced with the prospect of sluggish growth, internal unrest and a difficult oil price environment, Nigeria’s cabinet seems willing to take up the fight in all directions. The months ahead will be key in determining whether it will be up to such challenges.

Michele Delera, Junior Consultant at UNIDO

[1] See here.

[2] See here.

[3] The Ministry for Works, Power and Housing was created in mid-2015 by aggregating three different, previously independent ministries. For the 2013-15 period, the graph reports their cumulative budgets. Budget allocations to the Ministry for the Niger Delta include funds that are statutorily devoted to the Niger Delta Development Commission (NDDC).

[4] See here.

[5] See here.