Recent developments in the economy once more bring to the fore the need to take actions that would wean the economy from excessive reliance on crude oil earnings for survival as well as address the structural imbalances in the country, writes Obinna Chima
The Nigerian economy is currently in a bad shape. This is visible in the dire picture of the country’s statistics.
No doubt, the disruption caused by the COVID-19 and the significant drop in the price of crude oil worsened the situation in the country.
Indeed, recent data from the National Bureau of Statistics showed that Nigeria’s real Gross Domestic Product contracted for the second consecutive quarter by 3.62 per cent in the third quarter of the year, compared to a growth of -6.10 per cent, which showed that the country had entered its second economic recession in five years.
This is at a time when poverty and unemployment in the country have continued to rise and are visible in the rising level of social vices in the country as well as recent activities of hoodlums after the peaceful protest against police brutality was hijacked.
In fact, the World Bank in its Nigeria Development Update (NDU) released last week, captured the situation in Nigeria.
The Washington-based institution in the NDU predicted that in the next three years, an average Nigerian could see a reversal of decades of economic growth and the country could enter its deepest recession since the 1980s.
It noted that the pandemic was disproportionately affecting the poor and most vulnerable, women in particular, adding that in the absence of measures to mitigate the impact of the crisis, the number of poor could increase by 15 to 20 million by 2022.
“Food insecurity has increased substantially and economic precarity is on the rise because unemployed workers have migrated to the low-productivity agricultural sector,” it noted.
The NDU acknowledged measures taken by the government since April, including the efforts to harmonise exchange rates, introduce a market-based pricing mechanism for gasoline, adjust electricity tariffs to more cost-reflective levels, and reduce non-essential expenditures and redirect resources towards the COVID-19 response.
The bank, however, said the forecast could be avoided if progress in the current reforms could be sustained and the right mix of policy measures is implemented.
The World Bank report titled: “Rising to the Challenge: Nigeria’s COVID response,” took stock on the recently implemented reforms and proposes policy options to mitigate the impact of COVID-19 and foster a resilient, sustainable and inclusive recovery.
It projected that the Nigerian economy could shrink up to four per cent in 2020, following the twin shocks of COVID-19 and low oil prices. The pace of recovery in 2021 and beyond remains highly uncertain and subject to the pace of reforms, the report stated.
On its part, the International Monetary Fund (IMF), last week, also delivered a gloomy verdict on the Nigerian economy for 2020, declaring that the nation’s economic outlook is challenging.
The multilateral institution in its latest 2020 Article IV Consultation with Nigeria, said the country’s economy was buffeted from side to side by a cocktail of issues including the uncertainty over the COVID-19 pandemic, low oil prices, capital outflows and balance of payment challenges.
The IMF noted that the COVID-19 global pandemic was exacting a heavy toll on the Nigerian economy, which was already experiencing falling per capita income and double-digit inflation, with limited buffers and structural bottlenecks.
“Low oil prices and sharp capital outflows have significantly increased balance of payments (BOP) pressures and, together with the pandemic-related lockdown, have led to a large output contraction and increased unemployment,” it added.
In its estimation, the IMF said supply shortages have pushed up headline inflation to a 30-month high.
The IMF report, which acknowledged the efforts of the Central Bank of Nigeria (CBN) to rein in inflation, however, maintained that despite an expected easing of food prices, inflation is projected to remain in double-digits and above the CBN’s target range.
“Following a significant decline in revenue collections – from levels that were already among the lowest in the world – fiscal deficits are projected to remain elevated in the medium term,” the report stated.
Recognising various policy measures put in place by the federal government, the Bretton Wood Institution still believes there is need to put in place more broad market reforms in order to address the pressing balance of payment pressures in Nigeria.
The report stated: “The authorities have also taken courageous steps to remove costly and untargeted subsidies in the power sector, which were largely benefiting better-off households. But more needs to be done.
“Major policy adjustments embracing broad market and exchange rate reforms are needed to address recurrent BOP pressures and raise the medium-term growth path.
“A durable solution to Nigeria’s recurrent BOP problems requires recalibrating exchange rate policies to reduce BOP risks, instill market confidence and facilitate private sector planning. The adjustments in the official exchange rate made earlier this year are steps in the right direction and the mission recommended a multi-step transition to a more unified exchange rate regime, with a market-based, flexible exchange rate.
“Significant revenue mobilisation, including through tax policy and administration improvements, is required to create space for higher social spending and reduce fiscal risks and debt vulnerabilities.”
In its NDU, the World Bank recommended policy options in five areas to help mitigate the effects of the crisis and support Nigeria’s recovery.
These include managing the domestic spread of COVID-19 until a vaccine is available for distribution; enhancing macroeconomic management to boost investor confidence; safeguarding and mobilising revenues; re-prioritising public spending to protect critical development expenditures, and supporting economic activity and access to basic services and providing relief for poor and vulnerable communities.
World Bank Country Director for Nigeria, Shubham Chaudhuri, stressed that “Nigeria is at a critical historical juncture, with a choice to make. Nigeria can choose to break decisively from business-as-usual, and rise to its considerable potential by sustaining the bold reforms that have been taken thus far and going even further and with an even greater sense of urgency to promote faster and more inclusive economic growth.
According to him, the country has, “essentially been floating in the last four decades and cannot continue like that. This crisis is like a wakeup call. This country has a lot of potential and can be a giant on the global space.”
On his part, World Bank Lead Economist for Nigeria and co-author of the report, Marco Hernandez said: “Nigeria can build on its reform momentum to contain the spread of COVID-19, stimulate the economy and enable the private sector to be the engine of growth and job creation. It can also redirect public spending from subsidies that benefit the rich towards investments in Nigeria’s people and youth in particular and lay foundations for a strong recovery to help make progress towards lifting 100 million people out of poverty.”
Need to Address Systemic Challenges
In his contribution during the launch of the NDU, Kaduna State Governor, Mr. Nasir El-Rufai, said there was need to carry out an honest assessment of the present situation and work towards addressing the systemic challenges facing the country.
According to him, one of such challenges is devolution of power, saying the federal government needs to reduce its over-reach.
“The federal government is trying to do too much. Even the funding of security, it is impossible to do that now unless you reduce spending on other ministries and agencies. The idea of the CBN going into everything has to be addressed,” he said.
He expressed concern about the country’s rising domestic debt, saying something should be done about domestic debt management in the country.
“It is getting out of control and we are getting to our debt ceiling as far as liquidity is concerned. To pretend that our debt to GDP is low is not the best,” El-Rufai said.
“I think we can do more in terms of tax collection and there is need for sanction. I think it is a travesty to say that in Nigeria, as at 2018, just about 20 people in the whole country pay more than N20 million as income tax; something should be done about that.
“I don’t think the states and the federal government are doing enough to target people that are rich and to get them to just pay the right amount of minimal tax. Finally, I think we need to re-introduce the aggressive implementation of the cash-less policy to reduce the amount of cash in circulation. When you do that, you make corruption very difficult.
“I think we need to aggressively move towards being a cash-less society and let us license as many mobile money operators as possible to drive financial inclusion. That will help in formalising the informal sector. Even the micro business operator has a phone and if we can get a bank account tied to that, it will enhance financial inclusion and enable us to identify Nigerians wherever they reside,” the Kaduna State governor said.
Reforming Local Government System
Also, the Governor of Kwara, Mr. Abdulrahman Abdulrazaq, while sharing perspective from his state, stressed the need for civil service reforms across the country.
According to Abdulrazaq, funding the civil service basically takes away all the resources in his state. He explained that after the payment of civil servants salaries, “we have nothing less for anything.”
“So, that why you see some state governments resorting to taking loans in trying to invest in capital infrastructure. In one of the committees set up by the APC, headed by El-Rufai to look at the entire Nigerian political system. It had suggested that we abolish and reform the local government system and put something in place at the state level,” he explained.
He maintained that, the third tier of government was, “dragging down the whole second tier of government.”
“In Kwara, we have not implemented the minimum wage of N30, 000 monthly. We are still on N18, 000, and we are still negotiating. But, I will give an example with the November salary. At the third tier of government, there was a shortfall of N200 million.
“Now, if you implement the new minimum wage, we are looking at about N600 million per month, at that level. And it is not Kwara State alone, it is all over the federation. Kogi State had to borrow N500 million to pay local government workers’ salary in November. Niger State paid only 70 per cent. Now, 30 states have signed on to the new minimum wage, six has not signed. Out of the 30 states that have endorsed it, probably five or six are paying. Others pay in percentages, others pay in grade level and so on.
“Many local governments don’t budget, they just take the money and spend. In some states, the state government has taken over the finances of the local government, which should not be the case. In Kwara State, we do not do that. So, we need to have a structure for local government funding in Nigeria. “There should be a national conference to discuss the future of local government. This because if we don’t do anything, by this time next year, it will collapse financially and we may have to be borrowing money to keep up that system of government,” Abdulrazaq insisted.
In a recent statement, a former Deputy Governor of the Central Bank of Nigeria, Prof. Kingsley Moghalu, stressed that leading inclusive growth for economic transformation in Nigeria now requires far-reaching actions in the political realm.
The former presidential candidate, had argued that no amount of “defensive” approaches to economic management, would adequately reverse the economic crisis and put the country on a path to real development if the underlying issues that had created the weak economic framework are not addressed.
He explained: “Chief among these structural factors is the urgent need for a constitutional restructuring of Nigeria to true federalism. Nigeria’s economy cannot make real progress as long as it is organized on the basis of the 1999 Constitution.
“The existing constitution contains no incentives to economic production that creates wealth, as it centralizes excessive power in the central government. On the contrary, it creates massive incentives for a “sharing” economy based on earnings from crude oil sales, which belong primarily to the Federal Government of Nigeria.
“This in turn creates an embedded incentive to rent-seeking as economic activity, an absence of deep reflection by the political leadership on the nuances of competing economic frameworks as a basis for economic policy, and the commodity dependence that has created frequent economic distress through externally induced oil price shocks.
“Our distress is now further entrenched with extreme levels of foreign borrowing that have essentially mortgaged the future of Nigeria’s youth.”
He stated that while the Covid-19 pandemic and associated lockdowns imposed in the early months of the pandemic contributed significantly to the recession, it shouldn’t be avalid excuse to avoid confronting the more important causative factor of the longstanding, weak fundamentals of the Nigerian economy.
He noted that, “our economy was distressed long before Covid-19, as demonstrated by the recession of 2016-2017 and the fragile recovery.”
According to Moghalu, the federal government’s already-weak fiscal position left it unprepared and unable to support its citizens adequately during the Covid-19 pandemic.
“While South Africa’s government announced a $26 billion fiscal stimulus package in April 2020 in response to the pandemic, the Nigerian government’s budgetary response was N500 billion ($1.3 billion) and Central Bank of Nigeria intervention funds of N1 trillion ($3 billion).
“This fiscal and monetary-authority response was grossly inadequate to meet the magnitude of the challenge, and, in my estimation, at least 95 per cent of the 100 million Nigerians living in extreme poverty did not receive any support from the government during the lockdowns and the pandemic more generally. This indicates extremely weak state capacity.
Cutting Cost of Governance
Also speaking at a recent forum in Lagos, Senior Partner OAL and former President of the Nigerian Bar Association (NBA), Dr. Olisa Agbakoba, advised the federal government to embrace fiscal responsibility by reducing its cost of governance.
He also advised the government to sell off some of its assets that have not been generated revenue for the country. He argued that the federal government had continuously intervened in businesses it shouldn’t, saying by privatising most of its dwindling assets, over N30 trillion could be raised to fund essential infrastructure, thereby reducing governments borrowing to fund its budget.
The Senior Advocate of Nigeria explained: “It is one of the principles of fiscal responsibility for the government to say, ‘we are shrinking out of business.’ Look at the four refineries, they are just there doing nothing when they can be sold. “Just as a result of the pressure government is feeling it suddenly have put up Afam power station, Omotosho power station and it is going to bring about N500 billion.
“So, you can just see if they think deeper, Ajaokuta for instance, government is still borrowing to put money into Ajaokuta, whereas all they need do is to sell it and the number of businesses that government has across Nigeria can fetch it about N20 trillion to N30 trillion. The government is not in the business of doing business.”
Furthermore, he said at the country’s present debt level which has remained on an upward trajectory, it was pertinent to implement the Oransanye report urgently.
He added: “The government needs to examine its revenue and if the government is now spending N80 out of every N100 for loan, that means the government only has N20 for the public service, health education and all of us. Government has to have a massive fiscal expansion intervention in the economy. It has to look for the money, if it looks for it, it will find it if they shrink.”
“There are some government agencies such as the Ministry of Information which has no place in government. The president has three advisers on media, so it has enough hands. So, you can see the waste in the country? So, the government needs to implement the Oransanye report so it can shrink the workforce and when the workforce is shrunk then the vital statistics can begin to be relevant. The first thing is that there will be money to put into the appropriate sectors.”
He further added: “The problem with politics is that it beclouds economic judgment so I don’t know how far our political leaders are focusing on our economy. I see a distraction and that distraction might be very costly. Nigeria is like a cracked building and the problem with fixing a cracked building is that you are not quite sure what to do.
“On the economic side, the problem I have with Nigeria is that the government has not defined its economic ideology and it is very important that you do that. What is Nigeria’s economic ideology, which is part of the question that the artists will have to answer?”