The federal government must embrace structural reforms to leapfrog economic growth, writes Obinna Chima
Every nation desire rapid economic growth. Faster growth in Gross Domestic Product (GDP) expands the overall size of an economy and strengthens fiscal conditions. It also translates to an increase in the standard of living of the populace as an increase in productivity would typically rub off on the workforce in the country. That is why policy makers are always in pursuit of higher GDP growth rates.
For Nigeria whose GDP used to grow at an average of seven percent prior to the President Muhammadu Buhari’s administration, has continued to totter with growth hovering around two per cent should be discomforting to the federal government
The nation’s GDP slowed to 2.1 per cent in the first quarter of 2019 (Q1, 2019), according to data by the National Bureau of Statistics (NBS). The World Bank Group recently predicted real Gross Domestic Product (GDP) growth rate of 2.1 per cent for Nigeria for 2019, slightly lower than the 2.2 per cent it had predicted for the country same year in a report early this year.
Also, one of leading rating agencies in the country, Moody’s Investors Services predicted GDP growth of 2.3 per cent for Nigeria in 2019. These shows that if the country continues at its current growth rate, which is below its population growth rate of about three per cent per annum, it will be extremely difficult to achieve its fight against the excruciating level of poverty in the country.
Therefore, in order to support the fiscal authorities in addressing this anomaly, the Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, last week unfolded the Bank’s policy direction for the next five-year under his watch, targeting double-digit growth, single-digit inflation, $12 billion non-oil exports by 2023 and raising financial inclusion to 95 percent level.
Some Other 5-year Targets
Emefiele also pledged to retain managed-float exchange rate and announce a bank recapitalisation exercise that would see banks jacking up their capital base above the N25 billion minimum level that one of his predecessors, Prof. Charles Soludo, introduced in 2004.
He also pledged to retain managed-float exchange rate and announce a bank recapitalisation that will see banks jacking up their capital base above the N25 billion minimum level that one of his predecessors, Prof. Charles Soludo, introduced in 2004.
Emefiele, who gave more details of his five-year policy direction, listed CBN priorities over the period to include preservation of domestic macroeconomic and financial stability; fostering the development of a robust payments system infrastructure that will increase access to finance for all Nigerians thereby raising the financial inclusion rate in the country and working with the Deposit Money Banks (DMBs) to improve access to credit for not only small holder farmers and MSMEs but also consumer credit and mortgage facilities for bank customers.
He said henceforth, the CBN intervention support programme would also be extended to the youth population who possess entrepreneurship skills in the creative industry.
He said within the intervening period, the CBN would further encourage banks to direct more focus in supporting the education sector.
According to him, he will strive to grow the external reserves and support efforts at diversifying the economy through the CBN intervention programmes in the agriculture and manufacturing sectors.
He added: “We are confident that when implemented, these measures will help to insulate our economy from potential shocks in the global economy. In my second term in office, part of my pledge, is to work to the best of my abilities in fulfilling these objectives.”
He also disclosed that the apex bank would leverage monetary policy tools in supporting a low inflation environment, while seeking to maintain stability in exchange rate- with a key emphasis on supporting improved GDP growth and greater private sector investment.
He added that decisions by the Monetary Policy Committee on inflation and interest rates would also be dependent on insights generated from data on key economic variables.
Emefiele added that the CBN would seek to broaden financial inclusion by ensuring that at least 95 per cent of all eligible adults have access to financial services by 2024.
In addition, the apex bank would strive to sustain a positive interest rate regime, “to the delight of our important stakeholders.”
The CBN governor said monetary policy measures would be geared towards containing inflationary pressures and supporting improved productivity in the agricultural and manufacturing sectors.
Emefiele also said the CBN would continue to operate a managed-float exchange rate regime in order to reduce the impact which continuous volatility in the exchange rate could have on the economy.
He added that the country remained committed to a free trade regime that is mutually beneficial and particularly aimed at supporting domestic industries and creating jobs on a mass scale for Nigerians while the dynamics of global trade continues to evolve in advanced economies.
He said the CBN would support measures to increase and diversify Nigeria’s exports base and help in shoring up reserves.
“We intend to aggressively implement our N500 billion facility aimed at supporting the growth of our non-oil exports, which will help to improve non-oil export earnings,” he stated.
He said though the goals were onerous and tasking, the CBN would remain committed to fulfilling its mandated objectives of price and exchange rate stability.
He noted that the measures while supporting improved inflows into the country, would also help to stabilise exchange rate and build external reserves.
According to him, emphasis will also be placed on improving speed and efficiency of payment channels, while working to ensure that digital channels are safe and secure as this will help to build confidence in the nation’s payment system.
Emefiele said to improve utilisation rate, the CBN would continue to ensure that payment channels are interoperable, to enable individuals with digital devices to transact across different banks or payment modes.
He said the CBN would further work with NIBSS, banks and Fintechs in developing a regulatory sandbox to “enable us to test financial innovations by Fintechs and banks in a controlled environment, in order to assess its impact on the growth and safety of our financial system.”
The CBN governor said he would boost productivity growth through the provision of improved seedlings, as well as access to finance for rural farmers in the agricultural sector, across 10 different commodities namely rice, maize, cassava, cocoa, tomato, cotton, oil-palm, poultry, fish and livestock/dairy.
Pan-African rating agency, Augusto & Co, in a report had noted that policy makers in Nigeria are faced with “hard choices with no easy way out.”
The firm stated this in a report titled: ‘Buhari Version II (2019—2023): Economic Perspectives.’ The report noted that Nigeria is currently in “a dire fiscal strait and the numbers are quite grim,” adding that despite the positive spin about Nigeria’s benign debt to GDP currently around 20 per cent, interest payments as a percentage of revenue are over 60 per cent.
“Other fiscal indicators also put Nigeria at the bottom of the rung even among sub-Sahara African peers. Nigeria’s five-year average of capital expenditure as a percentage of nominal GDP is a meagre 2.1 per cent which pales in comparison to Angola (seven per cent) and Kenya (7.6 per cent).
“However, with a projected budget deficit of N3.8 trillion in 2019, capital expenditure as a percentage of nominal GDP could decline further to 1.1 per cent this year.
“The implication of this burgeoning deficit is that in 2019, Nigeria will have to borrow to meet its obligatory spendings – interest payments, transfers and payroll – projected at about N5.4 trillion with a revenue of about N4 trillion.
“This implies a cash crunch for capital expenditure. Thus, with this fiscal backdrop, macro reforms that will improve the revenue position of the government and pare back the deficit by cutting spending are nonnegotiable,” the report predicted.
According to Agusto & Co, Buhari in his second term would have to work to raise revenue while also restructuring government spending. This, they noted would require politically unpopular “but inevitable choices.”
For instance, the report pointed out that Nigeria’s current fuel subsidy regime indicates the country may have readopted opaque practises of the past that not only create a huge fiscal hole but a morass as well.
“With subsidy payments probably in the range of N1.2 – N1.3 trillion annually, the country is obviously haemorrhaging especially amidst the steep opportunity costs.
“Buhari will not only have to stop this fiscal haemorrhage but also muster the political will to deregulate the downstream petroleum industry once and for all times,” it added.
It recalled that Buhari’s victory of 2015 was largely greeted with euphoria by a business community expectant of badly needed macro reforms. However, long-term watchers of the president were quite dismissive of his inclinations towards macro-reforms, it stated.
It noted that, “middle of the ground analysts buoyed by some of the bold pro-market reforms in the Economic Recovery Growth Plan (ERGP), had hoped for some form of Damascene moment for the president that would get him to expend some of his political capital on tough and politically unpopular macro reforms.
“The 68 per cent rise in the pump price of petrol to N145 in May 2016 from N86.50 and the feeble response from the oft anti-reformist labour unions had given a bit of hope to these middle of the ground analysts that Buhari did intend to expend some of his political capital to pursue unpopular reforms.
“However, Buhari’s rhetoric on exchange rate policies which may have driven the central bank into adopting a demand management stance on the currency, cleared doubts about the president’s statist economic ideologies. “Without a doubt, the effects of the currency crisis did send Nigeria into its first recession in 25 years,” the report added.
It noted that the calls for adjustment of exchange rates, electricity tariffs and petrol prices, to reflect market fundamentals, were largely ignored by the president.
This, it noted left the country with a burgeoning fiscal deficit.
“The second argument to demonstrate the statist stance of this administration would be the abortion of its own reform programmes.
“For instance, the planned concession of the major international airports in Lagos, Kano, Port Harcourt and Abuja by this administration and the cold trail of the process buttress this argument.”
Continuing, the report stated: “The reform-lite approach of the Buhari administration in the first term implies that it has an extensive to-do list in the second and final term.
“Some of the big issues that will make or mar Buhari’s economic records will be the management of subsidies and other cost unreflective tariffs being stifled by price controls.
“These reforms will require the removal of subsidies on the pump price of petrol, allow market forces to determine the domestic price of natural gas, allow electricity tariffs that enable operators earn margins on their costs and also ensure exchange rates reflect fundamentals.
“These reforms could help stimulate investments across board and unlock economic growth. The Buhari administration will also need to adopt a private sector growth approach.
“Overall, we believe that Nigeria cannot sidestep reforms without severe consequences that could last an entire generation. History beckons on Buhari to prove the naysayers wrong.”
Assessing CBN’s 5-year Target
To the Managing Director, Cowry Assets Management Limited, Mr. Johnson Chukwu, the 5-year policy targets that were outlined by Emefiele are the overall economic targets of the country.
“If you look at each of those things he mentioned – reducing the level of inflation to single digit, increasing the GDP growth rate to double digit, financial inclusion of ninety five percent by 2024 – those should be the basic policies of the federal government in terms of economic development because one of the key challenges is that the economy is growing at a very slow rate.
“There is macroeconomic instability because we have high interest rate, high inflation rate and the capacity to carry out some of these pronouncements would be highly dependent on the policies of the fiscal authorities. Right now, we do not have a Minister of Finance nor a clear vision of what the government economic policy is. With the best of intention the efforts of the CBN to achieve these goals would largely depend on the fiscal authorities,” he explained.
He added: “Let us say for instance they said they were going to encourage mortgage lending and consumer lending; to do that, a lot of things have to be put in place. The per capital earnings of average Nigerians is very low so they cannot afford to properly service a mortgage loan.
“So for CBN to encourage mortgage loans it has to work with the fiscal authorities at the state and federal level to bring down the cost of properties. In that case, you are talking of the government subsidising prices of land and properties so they are cheaper and an average employee can afford to service a mortgage.
“In addition the CBN can introduce a finance initiative to mortgage banks so that they can lend at sub-optimal rates or below market rates. We already have an institution like Nigerian Mortgage Refinancing Company, although unfortunately, we are not seeing its effectiveness presently because it seems like there is a shift in government policy.”
To a former Commissioner of Finance, Lagos State, Mr. Wale Edun, forex supply is one of the factors that causes distortions to the economy.
According to him, the “task is for us to get foreign exchange from anywhere, be it diaspora and everybody bringing back their foreign exchange, because the challenge is always on the supply side. Basically we have to deal with the issue of liquidity in terms of foreign exchange.”
Also, Deji Alli, Managing Director of ARM Investment Managers, noted the impact of the country’s huge infrastructure deficit on economic growth. He also advised the CBN to collaborate with other regulatory agencies to develop policies that can attract long-term equity financing.
“If we can’t attract long-term equity financing, then it is going to be difficult for us to attract foreign investments in any manner,” he said. According to him, the right regulatory framework should be developed for pension fund administrators to commit some portion of the over N9 trillion pension funds to infrastructure development. This, according to him would go a long way in stimulating economic growth.
“Policies have to be in place to create attractive opportunities for the country to move ahead,” Alli added.
On his part, the Vice Chairman, Alpha African Advisory and former Chief Executive Officer of the Asset Management Corporation of Nigeria (AMCON), Mr. Mustafa Chike-Obi, stressed the need for the federal government to implement policies that would enable the country achieve double-digit growth rate.
He reiterate the call for an end to the removal of certain subsidies in the country as well as pay greater attention to security and infrastructure.
On fuel subsidy, he said, “the economy is losing N1.2 trillion per year. Who gets the fuel subsidy? The rich people with six cars are those benefitting from fuel subsidy. The average rich person in Ikoyi is getting approximately 100 times a year fuel subsidy than person in Shomolu in Lagos.”
Chike-Obi added, “everybody deserves to have electricity but you charge electricity based on those who needed it the most in the market price. Most people that uses generator pay N160/Kwh and pays comfortable.
“If you tell these power company that they can sale power at N160/kwh, they will make sure much money that more power will be generated.”
He also expressed concern about Nigeria’s rising debt service ratio, which according to him could be about 70 per cent.
“The problem we have in Nigeria is that we keep problems until they become so big that we have to fix it. I have advocated that we should use inflation to change the minimum wage every year. We can be doing this if we have vision in small step because most of the great things that are done are done with a plan and gradually. We have serious problems in this economy. The problems are that of growth, unemployment and productivity,” the former AMCON boss insisted.
The President of the Dangote Group, Alhaji Aliko Dangote, on his part, described consumer credit as a vital tool for fighting corruption and also an economic growth enabler.
To this end, Dangote urged the CBN and commercial banks in the country to work towards developing consumer credit products so as to encourage low income earners.
“We need to work very hard on consumer lending. It is even going to help the government in fighting corruption especially for the low income earners. If somebody has a paid job and there is consume credit, you can take such credit to buy household equipment and pay for four years. “We must also do mortgage. It will also help in terms of fighting corruption,” he explained.
He, however, said the biggest challenge in the country was implementation.
“How do you have economic growth without power? Without power there can’t be growth. Egypt electricity increased by 10 gigawatts, which is equivalent to 10,000 megawatts, in 18 months.
“But in Nigeria we have been struggling for 18 years without adding 1,000 megawatts and we have spent about three times the amount Egypt spent. Why? So, I think we all need to be concerned about that. I keep saying that when you look at the contributions to the GDP, the government is only about 17 per cent and 80 per cent is private sector,” he added.
Owing to this, he advised private sector operators to remain committed to contributing to the growth of the economy.
“It is only the private sector that can partner with government to create this. It is not difficult but we must drive the process. No foreigner can invest unless we the locals invest in our country.”
He pointed out that smuggling was causing a lot of harm to businesses in the country, citing Nigeria’s porous border as a challenge.
Dangote said there was need to focus on import-substitution.
The Chairman of Zenith Bank Plc, Mr. Jim Ovia, stated that to engender growth, there was need to get all the fundamentals in the economy right.
“No matter the economic theory we propound, if the fundamentals are not right, it definitely cannot work. If we have the fundamentals right, the common man does not want to know whether interest rate is high or low,” Ovia declared.
The founder of ANAP, Mr. Atedo Peterside, noted that monetary policy has its limits. He advised the CBN to ensure that the issue of multiple exchange rate is addressed. He also said there was need to implement policies that would ensure that inflation gradually drops to about five per cent.
Therefore, for Nigeria to achieve double-digit growth in the next five years, the federal government in collaboration with the central bank must ensure that the economy is diversified away from crude oil as its major source of revenue, to agriculture, innovation, manufacturing, services and other activities in the non-oil sector.
This, is what is needed to drive productivity, which would naturally translate to an increase in disposal income and higher investments which impacts GDP growth positively. Clearly, it must do away with the fuel subsidy that has remained a drain on the nation. In addition, policy makers must support investment in education because of its multiplier effects on economic growth in the medium term.