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Reform Fatigue Is Undermining Economic Performance 

In many countries that have embarked on economic reform, empirical evidence shows that policy fatigue sets in after two years. The most notable examples of fatigue syndrome include Britain under Margaret Thatcher, Myanmar, and Moldova in Eastern Europe. Policy makers will most likely offer the citizens palliatives to calm the restiveness of the populace. Also, in some cases, the leaders succumb to political pressure and begin to reverse some of the reforms.

Nigeria is exactly two years into the sweeping reform of 2023. The populace is getting restive and uncomfortable with the unintended consequences of the policies. The federal and state governments are holding the line but are showing some signs of economic backsliding.

The most evident reversal of the reform is in the aviation sector. Nigeria has 33 airports, of which only four are viable. Whilst it is normal for state-owned airlines to be privatized, we are now witnessing an obsession of the state government with building new airports and establishing airlines. Richard Branson once said, “If you want to be a Millionaire, start with a billion dollars and launch a new airline”.

Airlines are cash guzzlers 

Nigeria is twice the size of California. It has 33 airports, whilst the state of California has only 25 airports. California, a state in the U.S, has the fourth-largest GDP in the world ($4.1 trillion), 16x the size of Nigeria’s GDP at approximately $243 billion. Income per capita in Nigeria stands at roughly $1,000, compared to $88,000 in California.

The aviation industry’s thirst for capital is insatiable, and its returns are miserable. That is why many state governments are attractive for investment in airlines, airports, and MRO (maintenance, repair, and overhaul) facilities. At last count, no less than four state governments have established airlines, whilst three states have constructed airports. The amusing part is that one of the states that invested ₦53 billion in building an airport receives a paltry ₦100 million a year as a return on investment from the concessionaire. The return on investment is a miserly 0.19%. Even if that state bought FGN T/Bills for the sum, it would yield over 60x its current yield. What is more shocking is that this airport is within 200km of other airports.

There is no economic imperative for this suboptimal use of scarce resources. Therefore, just as the removal of subsidies has reduced consumers’ disposable income, it has handed these sums to state governments that are spending like sheikhs or barbarians at the gate.

The solution to Nigeria’s aviation paradox is to adopt concessioning. Capital expenditure and airport maintenance should be the responsibility of the concessionaire, not the government. This would leave the government with more funds to allocate to core priorities, such as health and education. This would also reduce the federal and state governments’ suboptimal use of resources.

In the entire continent of Africa, only two airlines are profitable: Ethiopian Airlines and Kenya Airways. In Nigeria, unaudited figures indicate that Ibom Air is reported to have achieved a ₦6.8 billion profit in 2024.

New GDP numbers ($243bn) are authentic but not flattering

The NBS released new GDP data, which shows that Nigeria remains the 4th largest economy in Africa and the 40th largest in the world. The growth of 3.13% in Q1 is above the global average (3.0%). We expect the growth in Q2 to be 3.36% or higher, surpassing the growth rate in Q1. One of the significant growth catalysts is the oil refining sector, which is driven by massive investments and production from the Dangote Refinery. Oil refining contracted by 14.67% in 2024 and is expected to achieve a growth rate exceeding 20%. Another interesting indicator is the expectation that inflation will taper towards 20% in Q4.

It’s not yet Uhuru

Whilst 9 of the macro indicators are positive, there are some downside risks. The most significant risk is the possibility of a sharp decline in oil prices. Goldman Sachs is projecting Brent at $62pb. If this happens, inflation and the exchange rate will come under immense pressure. The stock market has been getting ahead of itself, with stock prices turning into an asset bubble. At current earnings multiples, a correction is almost inevitable next quarter. As we always say, “buy on the rumour and sell on the news”. The Nigerian economy is gradually recovering, but has a long way to go.

In this edition of the LBS Breakfast Session, Bismarck Rewane and the FDC think tank unpack all the crucial indicators and explain the impact on your investment, consumption and savings functions.