Is Nigeria the New Venezuela?
Gasoline subsidies, multiple exchange rates, declining oil production… It’s all too familiar.
Nigeria is the most populous country in Africa and its largest oil exporter. It’s a big player in regional politics and it’s looking a lot like Venezuela, the failed South American petrostate that evaporated 80% of its GDP amid a self-inflicted hyperinflation and lost 7 million inhabitants to emigration (20% of its population). The two countries have obvious political, cultural, linguistic and religious differences, but the economic parallels are staggering.
Like in Venezuela, oil and gas is the main driver of the economy in Nigeria. It’s around 8% of GDP, 50% of fiscal revenue and 75% of exports. Oil is at the heart of Nigeria’s economic development strategy. Given the strategic importance of the industry, you’d expect the state-owned oil company NNPC to run like clockwork, to be a bastion of technocracy free from political meddling. It is not.
Instead, mismanagement of Nigeria's oil industry has led to a sustained decline in the country’s crude output. Nigeria produced a respectable 2.5 million barrels of oil per day in 2010, but these days, it only manages to pump oil out of the ground at half that rate.
The decline of the industry has various causes, but the main culprits are long-standing underinvestment in pipeline security (which has led to massive oil theft, as much as 200,000 barrels per day), sustained underinvestment in drilling and maintenance (which saves cash in the short run but reduces medium-term output), and a broken FX system and costly domestic gasoline subsidy.
Until very recently, NNPC operated with extremely limited transparency, which weakened incentives for efficient operations. It only published audited financial statements for the first time in 2020 despite being founded in 1977. For decades, NNPC was also both the sector’s regulator and an operating company alongside multinational joint venture partners, posing serious conflicts of interest that undermined trust in the sector.
This should all sound familiar. In 2002, Venezuela’s Hugo Chavez fired 19,000 employees from the national oil company PDVSA and appointed political hacks as replacements. Over the next two decades, PDVSA was politically captured, deprofessionalized, mismanaged and corrupted, leading to a collapse in output from three million barrels per day in 2000 to under a million barrels today.
Like Venezuela’s PDVSA, Nigeria’s NNPC was squeezed dry of cash to fund a costly subsidy to gasoline, which sells for about half the international price in Nigeria. There are 210 million Nigerians but only 35 million vehicles in the country, meaning only the relatively rich enjoy this subsidy. The pro-rich policy costs an estimated 1% of GDP, more than the national budget for education or health.
Gasoline is so cheap in Nigeria it’s smuggled out of the country in large quantities into Togo, Ghana, Chad and Cameroon and resold at international prices. Worse yet, Nigeria doesn’t even produce the gasoline it gives away at half price. Nigeria imports its gasoline, because the country doesn’t have the capacity to refine it from the crude it pumps out of the ground at home.
This should again sound familiar. For years, Venezuela has also imported gasoline from Iran and elsewhere because its refineries stopped working, and the regime has continued to subsidize gasoline, largely to the benefit of the rich and smugglers that resell the gas across the border in Colombia.
Like in Venezuela, Nigeria also finances budget deficits that result from its misguided policies with central bank money printing. Nigeria has been pumping out base money with gusto since at least 2015, financing about 2% of GDP in government spending each year.
Predictably, this has led to major consumer price inflation and pressure on the exchange rate. Prices are rising by over 20% per year and the local currency, the Naira, has slumped in value against the dollar.
In Venezuela, unbridled growth in the money supply to finance deficits eventually led to hyperinflation, but not before the government tried to contain inflation and FX depreciation with a deeply dysfunctional foreign exchange system.
Foreign Exchange System
Like in Venezuela, Nigeria’s central bank also sells dollars at arbitrary, subsidized rates rather than at a free-floating price that equates supply and demand and clears the market for foreign currency.
In theory, by subsidizing dollars, Nigeria’s government subsidizes imported goods, which should translate to lower prices on store shelves and curb inflation. But in practice, this FX system is a cesspool of corruption that mostly lines the pockets of well-connected elites.
Like in Venezuela, Nigeria’s central bank basically sells $100 bills for $50 through the FX subsidy, so demand for dollars at the subsidized rate is literally infinite. There are endless would-be importers (ghost companies) that apply for cheap dollars that exist for the sole purpose of extracting money from the government. They fake documents to prove their ‘need’ for imports and then ship empty containers to Lagos and simply keep the subsidized dollars.
The ‘companies’ that end up getting the FX handout are mostly the ones that know the right people and bribe the right people, not legitimate businesses that need foreign currency to import machines and parts to produce goods and create jobs. Worse yet, many of the country’s entrepreneurs spend their days figuring out how to game the FX system rather than creating new goods and services that are valuable to society.
In the end, Nigeria’s scarce petro-dollars and scarce entrepreneurial capital are allocated extremely inefficiently. This also happened in Venezuela for two decades and it was a major contributor to the hollowing out of the country's few non-oil industries, like agriculture and manufacturing.
Black Market FX
Nigeria’s oil industry only produces so many dollars, so all the legitimate companies and people with a genuine need for foreign currency have to buy on the semi-legal black market, where the price is determined by ‘animal spirits,’ by free-floating supply and demand.
When oil prices drop or the government announces a new set of bad policies, the Naira-dollar rate instantly shoots up and depreciates. Shortly after, businesses begin to re-price their products to reflect the lower value of the Naira, leading to inflation. As such, the black market FX rate is intensely political, a real-time referendum on the economy and the government.
But rather than addressing the causes of the Naira’s depreciation, the government instead tries to ban information sources that report its slide on the black market. Most recently, Nigeria’s central bank targeted AbokiFX.com, a prominent website that lists the Naira-dollar rate daily and threatened to jail its owner after accusing him of economic sabotage, a criminal offense. AbokiFX has stopped publishing the black market rate.
This should sound oddly familiar, because like in Nigeria, Venezuela also banned its own black market rate reference Dolartoday.com in an absurd attempt to win the ‘economic war’ against imagined enemies and ‘contain’ the depreciation of the local currency, rather than just ditching unsustainable economic policies.
Unlike Venezuela, Nigeria is a somewhat functional democracy, and presidential elections are scheduled for this February.
All the leading candidates appear to think that the current economic policy framework of pro-rich subsidies and FX giveaways is unsustainable and that major reforms are needed. And all leading candidates appear to support the Petroleum Industry Bill signed in 2021 that modernized the oil sector and unbundled NNPC into separate regulatory and operating entities.
Let’s hope it’s not just talk, because doubling down on improvisation and heterodoxy leads nowhere good. Just look at Venezuela, where prices shot up 37% in the month of December alone…