Africa weekly review: Government purge in Nigeria, fighting in eastern DRC and the IMF’s new credit facility

Nigeria: New ministers and perhaps new initiatives

Since the summer, advisers to President Umaru Musa Yar’Adua have suggested that a reshuffle of the government was imminent and would restore the reforming momentum of the second term of the Obasanjo administration. On 29 October Yar’Adua dismissed 20 ministers or about half the cabinet. The finance and oil ministers remain in their posts. New names are coming although we have our doubts about a resulting full reform agenda.

Ministerial appointments have to be vetted by the Senate, the upper house of the legislature, so we are unlikely to have the names of all the new ministers before next week at the earliest. As to whether the president, known as “Mr Go-Slow”, has a new programme of reforms dusted down and ready for implementation under a dynamic new cast, we are sceptical.

What we can say is that the leaderless departments include the power ministry. The president has castigated his predecessor for the spending of billions of dollars on the power sector to very little benefit, and is in danger of being open to the same criticism himself. Power shortages are among the main growth constraints.

The new government should include the first head of the new Ministry of the Niger Delta. The restoration of peace to the delta without disruptions to oil production and distribution has been beyond governments, both civilian and military, over the past two decades. This will be the focus of our Trusted Judgment next week.

Our mild scepticism about the prospects for real change is based on the labyrinthine networks of alliances and allegiances which limit a head of government’s leeway in forming his administration. The first Obasanjo term (1999-2003) was unremarkable because he had numerous unimpressive ministers foisted upon him following his election. Only in his second term did he get a free hand. Yar’Adua has said he was similarly constrained as governor of Katsina state.

Removal of the NSE’s circuit-breaker

On 28 October, the Nigerian Stock Exchange (NSE) removed the 1 per cent cap on downward daily share price movements, known as the circuit-breaker, and so reversed its measure of 28 August. The cap has been restored to the 5 per cent level which applies to price rises. The announcement predictably unleashed heavy selling pressure over the following three days. It should encourage investors and thus trading volumes. In time, it should return the market to its equilibrium.

The NSE’s move follows the Central Bank of Nigeria (CBN) circular of 2 October, which allowed banks to extend the maturities of loans for equity purchases (Weekly Review, 8 October). The banks are better placed to withstand the removal of the cap now that they can reschedule loans subject to margin calls.

There is still no hard official data on the scale of bank lending for equity purchases and/or secured by shareholdings. One mischievous analyst close to the market told us that senior Nigerian bankers like to quote a figure of 10 per cent (of total loans) because Tunde Limo, CBN deputy governor responsible for financial sector surveillance, recently produced this figure for the sector as a whole.

DRC: Frayed at the edges

The fighting around Goma has prompted fears of a return to civil war in the east. Laurent Nkunda, a prominent rebel leader, has defeated units of the Congolese army, and UN troops are too few to restore peace. The principal casualties, as always, are civilian. Nkunda now wants to negotiate with the government; and his agenda for the talks is said to include China’s role in eastern DRC.

No government of independent Congo has controlled the whole country, the surface area of which is eighty times that of the former colonial power, Belgium. Even President Mobutu Sese Seko contented himself with maintaining order in Kinshasa, the mining provinces and the corridor to the Atlantic coast. This is probably the (unspoken) minimum ambition of the present Kabila government. We developed these arguments in our House View of 10 April (DRC: Viable state, frayed at the edges). The share prices of listed junior miners active in the DRC have plummeted in the global turbulence as liquidity has dried up and risk aversion has soared.

New IMF facility: No obvious takers in Africa

The IMF announced the launch of its new Short-Term Liquidity Facility (SLF) on 29 October. This response to the global financial turmoil is designed for members with a good policy framework in place and access to capital markets yet who are still in need of external financing due to factors largely beyond their control. An example would be a country which has seen huge pressure on its currency as a result of the exit of short-term capital.

The Fund facilities announced this week for Ukraine and Hungary are stand-by credits: these are longer-term credits (24 months in the case of Ukraine), and have financing as well as policy adjustment elements. The Fund will send missions to the borrowing countries at set points during the term of the credits to monitor compliance with policy and performance criteria.

By contrast, the SLF will be quick-disbursing and front-loaded. Conditionality would be minimal because the eligible borrowers have a strong policy framework. The borrowers would have access of up to 500 per cent of their IMF quota denominated in the Fund’s currency, the special drawing right.

Substantial funds available

These loans would be significant. If we take the three largest economies in Africa, South Africa could borrow about US$14 billion under the SLF, Nigeria US$13 billion and Egypt US$7 billion.

A comparable Fund initiative, the Contingent Credit Line launched in April 1999, did not find any takers. There was not a meltdown at the time, and possible borrowers feared that drawing on the credit would send a negative signal to private investors. Today borrowers can be less choosy but in our view the SLF is unlikely to find takers in Africa.

Disbursements under the facility will have a maturity of three months although the borrower can make three separate drawings per year. The terms, however, do not allow for the possibility that the external conditions driving governments with good policy frameworks into the arms of the Fund will clear within three months.

South Africa conceivably a candidate

The three leading African economies pass the framework test and would probably be eligible for drawings under the SLF. South Africa has a well-known vulnerability which may appear to make it a candidate for the facility. Its financing of a stubbornly high current account deficit depends largely on net portfolio inflows. Many such investors have exited the market, creating pressure on the currency. Moreover, a strong fiscal record and low public debt ratios together make South Africa a good credit risk.

However, the government would be very reluctant to borrow from the Fund for political reasons, and would prefer to “tough it out” until investor sentiment turns positive again. Also, in the present market conditions it is benefiting from the remaining controls on offshore investment by domestic institutions.

The cushion of FDI in Nigeria and Egypt

Nigeria’s principal weakness is the fluctuating crude oil price. The creation of the Excess Crude Account and other reforms have strengthened the policy framework and given the authorities some protection from the global turmoil. The currency has sold off slightly but Nigeria attracts sizeable inflows from direct investment in both the oil and non-oil sectors.

Egypt is vulnerable to the downturn in global demand, and can expect a fall in foreign-exchange earnings from tourism, the Suez Canal, remittances and exports of goods. Its current account is set to slip back into deficit this financial year (2008/09) but it, too, attracts substantial direct investment.

Many of the low-income African countries also pass what we call the Fund’s framework test for SLF eligibility. They have enjoyed debt relief on a scale to leave them with very attractive indebtedness ratios. Yet their access to capital markets has dried up in the turmoil, along with market liquidity. It will return but after the major emerging markets, and the three-month maturity in the terms of the SLF could prove an insuperable challenge.

Recent research reports:

Nigeria Quarterly: The non-oil economy is robust despite falling crude prices
Time for the presidency to show leadership and direction.

South Africa Quarterly: Policy continuity until the elections
Strong public investment staves off recession.

Sudan: Potential rewards for the patient investor
Ultimate recovery hinges on several complicated political variables

With best regards,

Gregory Kronsten
Director, Africa Research
Trusted Sources