By Abass Mohammed
The International Monetary Fund (IMF) new sub-Saharan Africa Regional Economic Outlook report presented recently says that Nigeria may be spending 100 per cent of its revenue on debt servicing by 2026. The country currently spends 89 per cent of its presently low revenue on debt which the IMF’s Resident Representative for Nigeria, Ari Aisen, described as ‘an existential issue ‘ for Nigeria.
He pointed out that the country’s inability to take advantage of the current global high oil prices to boost its reserves is due to massive oil production drop, owing to theft, vandalism and others at a time oil price was above $100 per barrel. In fact, the latest data from the Organisation of the Petroleum Export Countries (OPEC) reveals that Nigeria lost its status as Africa’s largest producer of oil due to its production dropping by 195,000 barrel per day, (bpd) to 1.02 million bpd in May 2022.
The Bretton Wood Institution which oversees the stability of the world’s monetary system said “Inflation in Nigeria has reached 17.71 per cent in May this year led by a renewed surge in food prices, exacerbated by the war in Ukraine, raising food security concerns as over 40 per cent of the population live below the poverty line. A recent report on poverty in Nigeria from the World Bank whose goal is to reduce poverty by offering assistance to middle-income and low-income countries, equally says that before the end of 2022, an additional one million Nigerians will fall into poverty, indicating that inflation in Nigeria, already one of the highest in the world before the war in Ukraine will increase further as a result of the rise in global fuel and food prices caused by the war.
Really, the Russian military operation in Ukraine and the subsequent economic sanctions deployed against Russia by the Group of Seven, consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States, and their allies, have opened a new phase in international relations with implications for the global economic order, slowing down activity and increasing price pressures on oil, gas, metals and food.
‘’Together Russia and Ukraine account for 12 per cent of the total food calories traded around the world, and both are critical exporters of key commodities such as wheat (28% of global trade) and sunflower oil (69%), according to the International Food Policy Institute .”
The war has not only heavily disrupted trade flows and supply chain, but caused financial conditions to tighten through weakening of many economies and indirectly via a faster-than-expected tightening of monetary policy in advanced economies. The IMF estimates that the countries sanctioning Russia now make up 64.9 per cent of the world economic production. And by 2027, it projects that number will fall to 58.5 per cent.
China and India together are projected by the IMF to have a larger Gross Domestic Product (GDP) on a purchasing power parity basis by 2040, than the United States and the eight other sanctioning countries combined, along with other emerging market economies such as Brazil, Mexico, Indonesia, and Turkey.
This projection reveals a sudden shift in underlying geopolitical tectonic plates arising from the sanctions earthquake. The danger is that these plates could drift further apart, fragmenting the global economy into blocs with different ideologies, political systems, technology standards, cross border payments, trade systems, and reserve currencies.
Trade could further be complicated given that there are many dimensions of cooperation. Western views on homosexuality could complicate its geopolitics with conservative countries. Nigeria, for example will reportedly be one of the 15 largest economies and Africa’s largest by 2040. It, together with many other Islamic and African countries criminalizes same-sex relations.
China’s rise is a threat to US dominance as these nations will have an alternative for development funds and product exports, especially when China’s authoritarian government wouldn’t require its allies to adopt human rights reforms.
This development could end two centuries of Western global dominance. But today’s united response to Russia could be the West swan song if current economic trends force non-sanctioning powers to create an informal alliance to compete with and displace the West. The US share of global output, and therefore the share of global output it can safely pledge through its official debt instruments, is bound to decline as emerging market economies rise through this alliance.
The Dollar-gold convertibility ended in 1971, and yet the dominance of the dollar has, if anything, increased due to interlocking and self-reinforcing network effects and the unquestioned liquidity and safety of US Treasuries. This self-reinforcing network effects have now come under threat under the current sanctions. With a shrinking share of the world output, the United States cannot indefinitely remain the sole supplier of safe assets to the world.
With the fall in revenue from crude oil exports which accounts for 70 per cent of the country’s Foreign Exchange, the Central bank of Nigeria (CBN) is unable to meet the ever growing demand for dollar by Nigerians. This situation forced the CBN to sign in July 2018, a three year ₦720 billion currency swap deal with the People’s Bank of China to facilitate trade between the two countries and boost its reserves. The agreement is aimed at providing Naira and Yuan liquidity to Chinese and Nigerian businesses respectively, to improve the speed, convenience and volume of transactions between the two countries.
The 2018 agreement expired in April 2021 and was renewed to encourage the use of an alternative trading currency to the US dollar especially as Nigeria imports heavily from China. By that move the country is clearly making its way to be part of the emerging new global economic bloc the Ukraine war-induced sanctions is forcing non-sanctioning countries to form for their economic survival.
Mohammed writes in from Kano.
