GUEST COLUMNIST BY OLAWALE OLUWO
A trajectory of available statistics suggests that the Nigerian economy may be heading towards a recession. For emphasis, the National Bureau of Statistics (NBS), through its quarterly report on the economy, has revealed that the Gross Domestic Product (GDP) of Nigeria contracted by -0.36% (negative growth) in the first quarter. Recently, the Central Bank of Nigeria (CBN) reported that economic activities declined faster in June, indicating that the Nigerian economy may have entered into recession in the second quarter of 2016 (official data for second quarter performance will provide formal confirmation).
The IMF has forecasted that the Nigerian economy would contract by 1.8%, while the Finance Minister, Mrs Kemi Adeosun, has also confirmed the imminence of a technical recession. In theory, economic recession is a period of temporary or general decline in productive activities, which is typically measured by fall in GDP in two successive quarters. In reality, Nigeria is on the verge of full blown stagflation, a condition of slow economic growth, high unemployment accompanied by rising prices or inflation.
The Present Situation is Dire and Unsustainable
The reasons may not be far-fetched, considering the unwholesome combination of internal and external factors at play. The price effect of the drastic fall in global oil prices, coupled with the drop in export volume from the pipelines bombing campaign of the Niger Delta Avengers, depleted Nigeria’s foreign exchange earnings. The fallout has been the massive devaluation of our currency, increase in unemployment rate, inflationary pressure (at 16.5%), increase in interest rate (the yield on FGN Treasury Bills – risk free instruments – was 21% on 15/08/16!) and general downturn in other economic and social indices. Expectedly, being a mono-cultural economy, the collapse in oil prices has had disastrous impact on governance at all levels, as the Nigerian economy is not insulated from the global economic crises.
Some state governments find it extremely difficult to pay staff salaries and associated pension contributions, with no immediate solution in sight. The nation’s woes is further compounded by growing restiveness and ethnic agitations, among which is the Boko Haram insurgency (which is now abating), the Indigenous People of Biafra (IPoB) agitation for the actualisation of Biafra, and the endless conflict between herdsmen and farmers in various parts of the country, with the attendant implications for agricultural output reduction. Further delay in arresting the present trend could lead to serious political and social instability.
A New Thinking and Approach is Required
Our problems are multi-faceted, covering economic, political and social, and the solution must be multi-dimensional in approach. Clearly, it cannot be business as usual anymore as concerted efforts must now be made to appropriately diagnose the problems and proffer workable solutions in order to avoid plunging our economy into full depression. Pertinent questions must be asked…Where did we go wrong? How did we arrive here? How did we move from one of the fastest growing economy to an economy on the brink of recession? How can we navigate our way out of the present quagmire? And more importantly, how do we comprehensively restructure Nigeria in a way that will support our aspiration for a productive and egalitarian economy, a stable polity, and a fairer society. There is a need for reality check by all tiers of government in Nigeria (Particularly the Federal Government of Nigeria). Perhaps, in the process of conducting a reality check, we might just be able to retrace our steps by embarking on a far reaching and comprehensive restructuring beyond the cosmetic approach that the nation has been accustomed to over the decades.
The reality check by the federal government must start with asking the following questions:
1. Is it realistic to increase the size of the projected federal budget from N4.49 trillion in 2015 to N6.1 trillion in 2016 in the face of dwindling oil price and production cuts from militants’ bombing campaign?
2. Is it realistic to increase budgeted non-oil receipts from N800 billion in 2015 to N1.5 trillion in 2016 without a corresponding structure to drive the increase? Are non-oil earnings capable of 88% elasticity in the face of limited investments and government incentives?
3. Is it realistic to project external sources of financing a N2.3 trillion deficit in the 2016 budget when there is global recession and a downgrade of the country’s rating?
4. Is it realistic to project N1.5 trillion for debt servicing when capital expenditure is a meagre N1.6 trillion.
5. Is it sustainable for the federal government to continue to hold on to over 50% of the revenue of the nation, only to spend it on debt servicing, recurrent expenditure and subsidising the foreign exchange market, the natural gas market, the electricity transmission sector and downstream petroleum sector?
The Problem is Structural!
The direction of the on-going debate on the restructuring of Nigeria has been skewed towards yet another political restructuring. Nigeria, since independence, has undergone series of political restructuring programmes from creation of states at different times, to the complete change in the political system from parliamentary to presidential, to revenue mobilisation and allocation restructuring, and other forms of adjustments that are political in nature. It is as if every government at the federal level wants to conduct its own political/constitutional conference to restructure Nigeria.
The fact that all the political restructuring initiatives to date have not addressed Nigeria’s problems is evidence that the problems are structural (and substantially economic). While the nation has carried out different political reforms, the only period that Nigeria can be said to have had serious economic reforms that had significant effects on the structure of the Nigerian economy were the reforms of 1985 to 1992 that divested government interests in various business concerns; and the reforms of 2002 to 2015 that restructured some of the commanding heights of the economy – banking, insurance, telecommunications, power among others. It is therefore clear that the solution to solving our structural economic problems must commence with the dismantling of the structural rigidities that have held the country down economically for decades.
Over centralisation is stifling
The advent of the military in governance created a highly centralised political and economic system, with enormous power and resources concentrated at the centre. Instead of using the resources to build a solid economic base for Nigeria, a regime of over-bloated federal recurrent expenditure (almost 80% of budget year-on-year, subsidised government owned monopolies (Nitel; Nepa; Nigerian Railway; Nigerian Airways; NNPC; Nigerian Gas Company etc) with huge unfunded pension funds were foisted on the nation. Now that reality has dawned and the federal government’s revenue profile has reduced, the federal government cannot carry on with the existing administrative structure. The time to take the bitter pill is now. Accordingly, the federal government should carry out the following reforms:
1. Prune the existing structure and divest itself of some unwarranted administrative responsibilities.
2. Reduce ministries, merge functions and devolve more responsibilities to states.
3. Hand over intra-state roads to states while keeping only inter-state highways to itself to connect the vast and scattered communities in Nigeria.
4. Give more autonomy to states with respect to control of inland water ways.
5. Hands off control of lottery business in states.
6. Limit the responsibilities of the Ministry of Solid Minerals at the federal level to regulation and cede control of solid minerals to states.
7. Divest itself from involvement in distribution of VAT (sales taxes).
8. Abolish the law that vests all mineral resources under the soil of Nigeria in the federal government. This will allow states to partner with the private sector to exploit mineral resources and pay agreed derivation to the federal government.
9. Review mechanism for administration of PAYEE, to give the states more control.
10. Reduce taxes for companies and entrepreneur.
11. Allow more private sector involvement in the economy.
12. Divest from the natural gas infrastructure of Nigeria (including removal of subsidies) in order to create a competitive gas sector that will attract private investments and support the economy.
13. Divest from the Transmission Company of Nigeria and break the national grid to regional grids. This will allow private sector investments and eliminate the subsidy distortions.
14. Fully deregulate the downstream oil sector.
15. Abolish all forms of subsidy intervention in the foreign exchange market so the market can operate competitively and allocate resources appropriately.
16. Diversify earning capacity of the federal government to increase revenue. Access to increase in revenue may lead to increased government spending, which may alter the recession narratives, provided the right policies prevail without the usual leakages.
For instance, we have an abysmally low level of tax revenue to GDP (estimated at 1.6% in 2012 and currently 7%) compared to other African countries. Ghana’s tax revenue as a percentage of GDP is 14.9%, Kenya – 15.9%, South Africa – 25.5%, Egypt – 12.5% while Nigeria stands at 1.6%
From the available statistics, anything less than 200% increase in tax revenue, in the first instance, will still be sub-optimal. To effectively close the gap in the above table, there is the urgent need to come up with effective tax reforms.
Another low hanging fruit for the diversification of revenue is the natural resources that abound in various states of the federation, this will engender the much desired fiscal federalism and put states in a position to invest in the solid mineral sector.
Kogi State, for instance, has tantalite deposits. Tantalite is used in the electronics industry for capacitors and high power resistors. It is also used to make alloys to increase strength, ductility and corrosion resistance. In the international commodity market, tantalite traded above USD250/kg which has now fallen to USD132/kg compared to crude oil price at below USD50 per barrel. However, this precious metal has remained buried under the ground.
Approximately 70% of our population engages in agricultural production at a subsistence level. The sector could boast of about a quarter of our GDP, yet we have not been able to achieve self-sufficiency in food production. We spend about $11billion importing food each year, including wheat, rice, sugar and fish. A swift correction of this menace is bound to create thousands of jobs, less pressure on our foreign exchange and indeed a positive narrative for our food security. We have no business importing food but rather we should be exporting food to other countries. Furthermore, we must discourage raw export of agricultural produce for value added purposes, which will in turn create jobs and more tax revenue. The menace of herdsmen must be curtailed in order not to deplete capacity in the agricultural sector.
Another key sector that seems to hold the ace for the Nigerian economy is the power sector. Relative stability in electricity supply will go a long way in boosting industrial productions and indeed SMEs, which will ultimately improve our GDP growth and youth employment. However, with less than 4,000MW power generation, Nigeria will need a minimum of $20 billion investments to generate additional 20,000MW. Another $10 billion may be required as investments in the transmission and distribution value chain of the power sector. While the generation and distribution have been privatised, the transmission still remain in the tight grip of the federal government. Beyond mere privatisation, what will ultimately unlock value and attract investors into the sector is full deregulation where states are supported to generate their own power through regional grid transmission structure or off-grid embedded power programmes. Yet, the federal government has continued to artificially fix the price for power as well as the feed stock, thus stifling the emergence of a competitive trading in bulk power where market forces determine price and allocation of power resources.
Still, there is the more fundamental issue of fiscal federalism. Over the years, our practice of fiscal federalism has run parallel to our model of market economy. In a market economy like ours, decisions on production and distribution activities are based on market forces in a free price system (or a guided market dynamics with minimal artificial intervention). However, while we profess a market economy, our practices and procedures largely have the semblance of a centrally planned economy, where government decisions drive most aspects of the country’s economy, particularly the commanding heights that have the greatest multiplier effects. This comes at a very heavy price in form of inefficient allocation of resources and unsustainable pricing system.
The call for restructuring of the country is not entirely new. The National Democratic Conference (NADECO) headed by late Chief Anthony Enahoro called for a Sovereign National Conference in the 90s. The agitation was based on the fact that the 1999 constitution were foisted on the nation by past military regimes. The call gained more ground with the introduction of Sharia law in some parts of the north but was never heeded. Professor Tam David West later joined the fray to canvass for a National Conference to examine pertinent issues confronting the country, which decisions could be put to referendum.
Former Presidents Olusegun Obasanjo and Goodluck Jonathan convened National Conferences, which recommended the retention of a federal system of government, the core element of which shall be a federal (central) government with states as federating units. The conference did not foreclose the issue of a regional government, saying instead that each state that is regionally based should create a self-funding zonal commission to promote economic development, good governance, equity and security in accordance with the constitution of the Federal Republic of Nigeria (as amended).
In recent times, however, the likes of Soyinka and Abubakar Atiku have renewed the call for a restructuring on the basis that the current structure is heavily defective, as it does not provide the enabling environment for growth and progress among the 36 component states of the federation.
Considering the fact that most economic decisions are taken in a political environment, there is also the need to restructure our constitution. The restructuring should focus on devolution of power and resources to the states and local governments while the federal government should concern itself with:
• Security (state policing?)
• Foreign affairs
• Economic wellbeing of Nigerians by implementing sustainable monetary and fiscal policies
• Reduce its share of the financial resources of Nigeria. The country’s current sharing formula gives the federal government 52.68%, states 26.72% and local government councils 20.60%. This has to be reviewed in favour of the states and local governments for sustainable development.
The present structure of governance, where petrodollar money is shared every month encourages no state to develop its resources. It should be noted that before the advent of oil in Nigeria, the various regions were encouraged to invest heavily in commodities like cocoa, groundnuts, coffee, palm oil, etc. But fiscal federalism was sacrificed at the altar of the oil-boom. Nevertheless, no political restructuring can move the nation forward without first dealing with the economic malfunction of the Nigerian fabric. It seems settled that regional autonomy belies the real economic independence for survival of the states. The time has come to refocus the restructuring debate on a workable model that advocates appropriate political and economic reforms that is complementary and reinforcing.
• Oluwo is Lagos State Commissioner for Energy and Mineral Resources
