Reviving Nigeria’s Shrinking Economy
The condition of the Nigerian economy has preoccupied many Nigerians in the last several months. Hardly was anyone surprised when the National Bureau of Statistics (NBS) released its second quarter 2016 Gross Domestic Product (GDP) numbers that confirmed the economy had shrunk by 2.06%, the second consecutive quarterly drop in GDP. The economy was thus in a recession for the first time in over two decades.
The main driver of the drop in GDP, again not surprisingly, was the oil and gas sector that shrank by 15.6% relative to the first quarter 2016 and by 17.5% year on year. Inflation has also inched up into double figures with September headline inflation at 17.9% according to the NBS. Nigeria is thus suffering from the dreaded stagflation, which is falling output combined with rising prices. I will argue that while the short-term challenges are immense, they provide a unique opportunity to alter Nigeria’s development trajectory for good.
How did we get into this mess? First, the fall in commodity prices depressed oil and gas earnings. Despite progress made since the return to democracy in 1999, Nigeria still relies heavily on oil and gas for its foreign exchange earnings and revenues. For example, it accounted for 93% foreign exchange earnings in 2014 and 70% of government revenues in the same year. According to the Central Bank of Nigeria (CBN), Nigeria exported oil and gas valued at $94 billion in 2011, $91 billion in 2012 and $91 billion in 2013. This dropped to $77 billion in 2014 as oil price began a downward trend and collapsed to $42 billion in 2015. As a result of the drop in oil and gas exports, government revenues fell dramatically and supply of foreign currency declined precipitously with consequences on the balance of payment (BOP) and value of the Naira. Indeed, preliminary data from CBN showed that the BOP was negative at $15.4 billion in 2015, meaning Nigeria imported more than it exported, the first such deficit in over a decade.
Secondly, the failure to save and invest in infrastructure during the oil price boom years especially 2010 to 2013 was damaging. Rather, savings by President Obasanjo’s government were ironically frittered away from 2007 – 2014 despite record high oil prices. The country, thus, found itself with insignificant savings and no fall back to cushion the decline in revenues.
Thirdly, the Boko Haram insurgency and the political tension during the run off to the election between 2014 and 2015 heightened the political risk with negative consequences on investment. Following the change in government in May 2015, the security issues demanded more attention as Nigeria faced an existential crisis. With Boko Haram significantly degraded and peace returning to large swaths of the North, the economy is now the most important issue for the majority of Nigerians.
The solutions to addressing the short run difficulties include various combinations of exchange rate management, monetary and fiscal policies. In the last 24 months, the CBN has tried many measures to manage the Naira exchange rate as the supply of foreign exchange collapsed. The Naira though is still under pressure and the difference between the official rate of about N305 to the dollar and unofficial rate currently at about N450 continues to be large. The CBN also increased the monetary policy rate from 12% to 14% in its July meeting with the aim of attracting foreign flows to help ease the scarcity of foreign exchange. It is still early days for a verdict on whether the measures will have the desired impact. Notwithstanding how difficult the task is, the bank needs to do more to be more convincing. Its dithering and many policy changes and pronouncements during the last two years undermined it, as confidence in its capacity to manage the crisis dropped.
On the fiscal side, the Federal government is pursuing an expansionary policy with a budget of N6.1 trillion in 2016 compared to N4.3 trillion in 2015. There was also more emphasis on capital spending in the 2016 budget compared to prior budgets. Capital expenditure accounted for 30% of the budget in 2016 compared to 14.2% of the budget in 2015. The Implementation of the budget has, however, been hampered by the drop in projected government revenues in the first half of the year. According to the Minister of National Planning, the revenue shortfall was 1.1 trillion Naira or 55% at the end of June. Furthermore, some of the borrowings, especially the foreign ones, have not materialized as we enter the last quarter of the year. The much-awaited social protection program to be funded from government revenues and a World Bank loan is also yet to start.
Determining the optimal mix of the various policies outlined above to deal with stagflation and improve output and consumption is a complex task. The task is made more difficult when the fiscal authorities and the monetary authority (CBN) fail to coordinate their actions to reinforce each other. The CBN itself has acknowledged this anomaly many times, now that the country has found itself in a recession, perhaps the two sides will finally come together to discuss policy options with a view to reinforcing each other.
So what can we do differently going forward?
Increase Budget Allocation and Attention to Agriculture
With only a few exceptions, no country, from Europe to the Americas and Asia achieved developed status without improving agricultural productivity. In a comparative study, by David Henley, of six countries, Nigeria, Kenya and Tanzania in sub-Saharan Africa and Indonesia, Malaysia and Vietnam in South-East Asia, the differences in poverty reduction and growth between the two regions were attributed to the differences in government investment in agriculture and rural development. While the South-East Asian countries invested heavily and consistently for decades in agriculture and rural development, the African countries failed to consistently invest in these areas.
After decades of neglect, the Federal government finally woke up to the importance of agriculture and issued the ‘Agricultural Transformation Agenda’ in 2011 with the goal of reviving the sector. The present Federal Executive Council approved the follow up policy tagged the ‘Agriculture Promotion Policy 2016-2020’ in August 2016. Nevertheless, despite much rhetoric, allocation to agriculture was a miserly 1.3% of the Federal budget in 2016. The Maputo declaration of which Nigeria is a signatory requires nations that are signatories to commit at least 10% of their budgets to agriculture in order to improve food security. While 10% would be difficult to achieve in the short- term, a gradual increase from the 2017 budget and further increases in the next 5 years could see the goal reached. State governments also need to their part by devoting more resources to agriculture than is currently the practice and by collaborating more with the Federal government.
Since agriculture employs the largest number of Nigerians, improving the productivity of farmers represents an opportunity to increase the income of the majority. To transform agriculture requires interventions to improve the entire agriculture value chain: inputs, production, logistics, marketing, processing and packaging, and retailing. This should be the long-term goal. In the short-term, productivity can be enhanced by providing timely access to high quality inputs (seeds, fertilizer) and technology (improved basic tools, research output). The benefits of increased agricultural productivity can be realized more quickly than other reforms and can thus serve as a palliative in the short-term, especially as food price inflation is now a major concern for most Nigerians. Increased agricultural production will also reduce the need for imported food thereby reducing demand for foreign exchange.
In the long-term, improved agricultural productivity could lead to industrialization if the government makes other supporting investments. As farmers become more productive they will be richer, have higher purchasing power for manufactured goods and would be able to save. The higher purchasing power will create the market for manufactured goods and enable entrepreneurs to invest in local manufacturing to serve a bigger market. The savings, in turn, will increase the capital stock in the country with positive consequences on investment and growth.
Nigeria’s quest to diversify its economy is not new as it began with independence in 1960. This was in recognition of the need to diversify the sources of foreign exchange from oil and gas and other primary commodities and the importance of industrialization in overall economic development. In pursuing diversification of the economy, i.e. industrialization, Nigeria adopted state-led Import Substitution Industrialization strategy in the 1960s and 1970s. The 1980s saw the implementation of Structural Adjustment Program (SAP) and the retreat of the government from direct involvement in running businesses. The trend since the new millennium has been towards privatization of government-owned firms and some government support for the private sector. The National Industrial Revolution Plan issued in 2014 is the latest plan. Nevertheless, despite these attempts, export earnings are still dominated by oil and gas. For example, between 2006 to 2014, oil and gas accounted for on average 95.3% of export earnings, agriculture commodities 2.5% and the rest of the economy a mere 2.2%.
Nigerians can thus be excused if they view this latest call for diversifying the economy with skepticism. Why would it be different this time? There are many reasons but I will highlight three:
Low oil and gas price: The low price means the impact of the ‘Dutch disease’ is now less acute. The ‘Dutch disease’ inflicts countries that export mainly natural resources and other primary products causing them to have relatively strong currencies due to the large inflow of foreign exchange following a boom in commodities prices. The strong currency undermines the country’s competitiveness in manufacturing and eventually discouraging it while encouraging imports of manufactured and other goods. The decline in the strength of the Naira, therefore, presents a unique opportunity for Nigeria to become more competitive in manufacturing.
Decline in the contribution of oil and gas to GDP: The contribution of oil and gas to GDP has gradually declined in the last decade indicating that the economy is gradually becoming more diversified. Although oil and gas accounted for 28.2% of GDP in 2004, it accounted for only 13.6% of GDP in 2013 despite record oil prices. This is a good indication of a gradual shift in the economy away from oil and gas, a beneficial outcome of the privatization policy. What is required are further actions to quicken the shift towards manufacturing and non-primary exports.
Democracy: This is the first time since the return to democracy that the economy has fallen into a recession. And Nigerians across the country are demanding actions to address the decline and accountability from elected representatives. The politicians realize they need to take the electorate more seriously otherwise they lose their positions in the next election. Some of the reasons previous development policies failed include the lack of accountability and absence of political will to implement the policies and plans. The pressure to survive in office means the political will to implement the actions required to diversify the economy is now stronger.
An important enabler of economic diversification and industrialization is the infrastructure such as roads, railways, ports, and electricity. The governments at State and Federal level, therefore, need to prioritize capital spending to improve infrastructure. The funds required to transform Nigeria’s infrastructure are significant and thus some form of public-private partnership will be needed to attract additional financing. Furthermore, considering the limited funds available at the start, the industrialization drive could benefit from prioritization of provision of power and good transport links to the various industrial parks across the country. China used this model to transform itself into a manufacturing giant; lessons Nigeria can learn and adapt.
Expanding the Tax Base
According to the NBS, 77 million Nigerians were in the labor force at the end of 2015, but only 10 million are registered taxpayers based on data from the Joint Tax Board. Similarly, only about 9% of all registered companies are registered to pay Company Income Tax (CIT). Furthermore, based on data from Federal Ministry of Finance, non-oil tax revenues to GDP was about 6% in 2014, which is extremely low compared to other middle-income African countries (22%) and emerging countries (20%). Meanwhile, even at peak price, oil and gas contributed 13.6% of GDP in 2013 but contributed 70% of government revenues. This means expanding the tax base has the potential to significantly improve government revenues.
Nonetheless, diversifying the tax base should be done carefully and with sensitivity to the current economic challenge, as taxes are never popular, not even in good times. The challenge is to find ways to encourage more businesses and individuals to settle their taxes without creating financial difficulties for them as they struggle to manage the fallout of low sales and declining income. Simplifying the tax laws and administration to make it easier to file and pay taxes should be given serious thought. Furthermore, consideration should be given to reducing the current 30% corporate income tax (CIT) as it is high and thus encourages non-compliance. Countries as diverse as China, Egypt, Indonesia, South Korea and the United Kingdom have lower CIT. Although this is counter-intuitive, it has worked elsewhere and it has the added benefit of stimulating private sector investment and consumption, something that is presently critically needed.
Strengthening institutions and the civil service
Even if the politicians muster the political will to push for reforms and actions that will diversify the economy and revenue base of the government, they need the civil servants to implement the reforms and policies. Reforms to improve the institutional setup and the civil service began with President Obasanjo. A number of government agencies such as BPE, NCC, CBN, NNPC, DPR and FIRS enjoy some degree of autonomy and much higher salaries compared to the vast majority of the regular civil servants. The remuneration in the regular civil service is poor, leading to low morale, low motivation and poor productivity and substandard service delivery. The poor quality service from the bureaucrats hinders the productivity of individuals and businesses across the country. It is also this same bureaucracy that will implement the policies to diversify and improve the functioning of the economy. It is, therefore, imperative for the government to take the task of building the capacity of public institutions seriously. Short-term reforms that could be implemented quickly include reorientation and training while better remuneration and attracting talent should be long-term goals.
None of the measures discussed above are easy. Economic diversification and development is a long-term process and some of the significant benefits will only manifest years down the line. It was Jean-Claude Juncker, European commission president who said, I paraphrase him, ‘we know what to do to get the Eurozone out of the current economic malaise, but we don’t know how to get re-elected after we have done so’. Therein lies the dilemma for the current APC-led government. The reforms outlined above and others needed to get Nigeria back on track are likely going to be painful. Nevertheless, the APC-led government cannot afford to avoid the task on the grounds that it is difficult, will take a long time and the potential political cost. Avoiding the task could be even more costly as not only could it lose the next election, it could end up in the footnotes of Nigeria’s history. Nigerians gave it the mandate to alter the country’s development trajectory; it should embrace the challenge and lead the change.
Finally, while like most Nigerians I feel the pain and anxiety caused by the adjustment required, I am optimistic about the future. My optimism is borne out of the fact that as someone who grew up in the 1980s and 1990s, I can say without a doubt I have seen worse. While my parents are nostalgic about the good old 70s, I have no such fond memories of 80s and 90s. Nigeria is a far better country now and it is more capable of doing what is needed to make sure the future is more prosperous for all. The successful reforms in the banking and telecommunications sectors and creation of a vibrant pension industry show what can be achieved. A richer future beckons, but that will only happen if we learn the right lessons and actually do something to shape the future such that the next collapse in commodity prices will only be a minor hiccup rather than a national crisis. There will be obstacles and there will be pressures to abandon the reforms along the way but we should not waver. It is by tackling methodically and relentlessly these obstacles that progress can be made and Nigeria’s development trajectory decisively altered.