Global Economic Realities: The challenges in Nigeria.

A presentation to Nigerian Economics Students’ Association at Obafemi Awolowo University.

INTRODUCTION

It is a great honour to be invited to the prestigious Obafemi Awolowo University for this presentation to the Nigerian Economics Students Association. My first visit to this iconic University was in 2007 and I was told when you are asked to address students, you need to prostrate in greeting first. I will like to know: is this still the tradition?

Should I dobale now or after the presentation?

Because I don’t want to be on the wrong side of the Great Ife students: one of Nigeria’s most assertive student bodies, who carry their alma mater with enormous pride. Actually, I nearly missed attending this University. I was offered the choice to study Agricultural Engineering here in 2002, which I rejected.

Forgive me; a naive me wanted to be in Electrical/Electronics Engineering by all means. Look where I ended up — as a data analyst & economist who will likely have a farm on the side in the nearest future. I should have just stuck with the Agricultural Engineering degree. So, I am grateful for the invitation of the organization for these reasons. Also, my immediate younger brother was once contested for President of the Nigerian Economics Students Association (NESA) OAU Chapter and if you connect the dots, you will see this is an utmost privilege for me to be here before you. Thank you.

I have decided that rather than a Powerpoint Presentation, kindly allow me crave your indulgence as I speak at length on the topic “Global Economic Realities: The challenges in Nigeria.”

Let us begin

Nigeria has always been referred a “mere geographical expression” by those who harp on this simple phrase written in 1947 by the Late Obafemi Awolowo, who this University is named after.

Truly, looking at the multiple crises that pervade this country, with insurgency raging from the North, subtle silence in the Niger Delta and the current agitation of the Biafra separatists, we may be tempted to ask if truly we are a nation. In this country where about 90% of foreign exchange comes from less than a twentieth of its geographical space, can we truly call this a federation?

Is this not just an association of feudal, post-colonial lords sharing oil proceeds at the gunpoint? Everyone familiar with history will remember than in this same country governed by loose provinces — North, West, East and later Mid-West — all were locked in a competitive battle for progress, education, sound health and industrialization.

We started well

In the sixties, each region had products — palm oil, leather, groundnut, cocoa, rubber — which sustained their economic prosperity. Skyscrapers were built, this same hallowed University began during the era of S.L Akintola as Premier of the Western Region in 1962 who imagined this place we stand in now as a frontier to strengthen the ideological push for a better Western Region. The great institution was not seeded with oil money.

Then Oloibiri happened. Then we found out that the lifecycle of this great nation can’t be complete without discussing oil. Then we noticed that when oil responds to international swings, our economy and public finances are severely affected.

We found easy oil and since we prioritised the lure of oil above all else, we have not been immune from the crisis that commodity suffers. Since Nigeria reverted to a unitary form of government, we have mainly run this nation on the back of the vagaries of the oil markets.

Right into the early to mid-seventies when the Arab crisis translated into an oil boom for Nigeria, we expanded the civil service, opened up import channels for the most basic items, hosted frivolous events and disbursed the legendary “Udoji pay.”

When the marketed contracted in the late seventies to early eighties, we did not relent on our journey to austerity. Politicians continued on the path of profligacy, expanding trade deficit, weakening the currency gradually delaying salaries by months.

Oil booms but same story

According to respected public speaker, Dr Obiageli Ezekwesili, Nigeria has witnessed six notable oil booms: in 1972, 1978, 1990, 1999, 2005, 2011. Records show Nigeria has earned over $600bn from oil since 1959 but yet, we remain a country with power generation less than a tenth of South Africa’s capacity, a budget less than that of the New York Fire Service Department, while our oil revenue is less than Apple’s appstore earnings.

This is the Nigeria that we got; one once full of promise as the star of the African continent but languishing in the league of the poor, thanks to mismanagement, poor vision and misplaced priorities. This is how TIME magazine described Nigeria at independence “when Nigeria’s 40 million people got their independence, the free population of Black Africa jumped 50%. Backed by such numbers, Nigeria’s sober voice urging the steady, cautious way to prosperity and national greatness seems destined to exert ever-rising influence in emergent Africa.”

55 years later, Nigeria can boast of the largest economy in Africa but also houses the fourht largest number of poor people in the world. Nigeria stands 159th on the UNDP Human Development Indicators Index with income per capita less than $3,000. However, that average statistic does not tell the full story as Nigeria has over 112m people steeped in poverty striving to make ends meet, while there is so much opulence on the other side, induced by unfair use of resources. According to CBN data, between 1999 and 2014, Nigeria has earned $690bn (N96tn) as Federally Collected Revenues. Despite these large sums of funds that might thrill you, Nigeria did not fully meet any of the 8 MDGs goals, based on the data tracked by the World Bank. It is pathetic that once oil prices dip, we are always looking for help.

Diversified Economy, Mono-product public finances

It is very important to note that Nigeria is the 23th largest economy and its solely viewed through the prism of oil but we have a diversified economy with huge financial. communications and entertainment sectors. In the 70s, the Nigerian government revenue reflected that non-oil economy accounted for 73.7% of total government revenue. We have seen reverse as oil sector accounts for 10.8% of the economy and contributes the largest share of public revenues.

As seen, Nigeria cannot stabilize the oil markets, as its production figures and reserves are relatively low, compared to other nations such as Saudi Arabia, the UAE and Canada. Other African countries, like Angola, are also competing fiercely with Nigeria for a portion of global oil sales. It is worth noting that Nigeria has recently experienced unsold cargoes, which obviously delays oil receipts.

The looming crisis

According to US Billionaire Warren Buffet “Only when the tide goes out do you discover who’s been swimming naked.” We might not have fully noticed the gravity of our crisis when oil was $110 per barrel and easy oil money made it effortless to waste public resources.

Now that the tide is out, as seen in 1984, 1999 and 2008, we are swimming naked, groping for cover. In the years of the oil price binge, rather than savings, we saw an expansion of our recurrent expenditure to 82% of the budget, with bogus allowances for the political elite. We have spent less than N2tn on REAL capital expenditure in the last five years. It is no wonder why we cannot scale up infrastructure because when we look at the numbers, we think that Nigeria is a rich country but if you share Nigeria’s federal revenue with every citizen it comes to N47,965 per person.

Let us get it right. Nigeria is not a rich country and unfortunately amid revenue inadequacy, we have been so wasteful. Our government owns the third largest fleet in West Africa, we spend billions on fraudulent subsidy (up to N2tn in 2001) and with the revelation of the security contracts, we can see truly our leaders have hugely discounted this country’s progress. We repeatedly forget the fact that: “sitting on top of Oil and Gas reserves is a temporary stroke of luck, like winning a lottery ticket. Once spent it is over.”

We gained oil, we lost taxes

While we have discussed the critical issues with our lazy attitude with oil money, we must not forget the main issues that brought us here. We must not forget that the symptom of a commodity-driven economy such as ours is that it creates an enclave economy. Such an economy is wholly divergent from the progress of the entire society and is susceptible to remaining closed, unless the political leadership pushes for inclusion. How many jobs can one oil industry create? In the current approach of exporting crude, it creates less than 50,000 direct jobs. Why should a sector that accounts for less than 10.8% of the GDP account for over 70% of public revenues in years past? What happened to the ability of government to receive optimal take from the remaining 86%? As discussed before, because we found oil the easy way, we lost the opportunity to appropriate taxes from other sectors and strengthen these sectors to bear wealth.

The pernicious effect of oil is shown in the fact that we have regressed as a nation in our tax collection mechanisms. Therefore, we continued to repress our ability to collect taxes, now our tax to GDP stands at 4.6%. Since collecting taxes raises more concern for accountability and means we put in more work, compared to the drill-and-pay nature of oil, Nigerian leaders kept up the short term idea of sharing oil proceeds, widely referred to as the “Feeding bottle federalism.”

The debilitating effect is that while we were focused on extracting oil beneath the subsoil, we lost the opportunity to entrench a formal tax collection system above ground. In the end, while average African countries have tax to GDP ratios of 15%, Nigeria does sub-5%. We can see the structural issues that already undermine the Nigerian economy.

According to BudgIT research “Average VAT revenue collected by the EU countries amounted to 21% of total general government revenue in 2013. Denmark (VAT rates at 25%) draws the highest amount of resources, with VAT accounting for 10% of GDP.

Spain lies at the opposite end of the spectrum, with VAT rates at 21% in turn constituting 5.8% of GDP. If the Nigerian government were to achieve what Spain did with VAT in 2013, the projected revenue from VAT should have been N4.872tn, not the N795.6bn we celebrated in 2013.”

I have been asked to stay on the challenges and the critical crisis Nigeria faces which mainly concerns the structural defect of the economy. Ladies and Gentlemen, it is no news that oil prices have dipped from over $110 per barrel to less than a third — $30 per barrel and the serial poor choices we are making is worsening the situation. Since precisely 88% of Nigerian foreign exchange earned as at 2014 is from oil, it is already clear that when the oil industry faces a slump, there will be immediate fiscal and monetary constraints.

States feeling the strain

The fiscal constraints are the reduced take in taxes and income from the oil industry that has disturbing effect on the economy and public finances. In June 2014, monthly FAAC allocations reached N756bn but since November 2015, this has nearly halved to N369bn. As you know, many States are suffering severe strain and cannot meet basic obligations like paying salaries. We are witnesses that in this State, doctors are on strike and workers were not paid for months.

According to BudgIT Research, 18 states cannot pay wages with Osun State holding the last position. Even the Federal Government took loans last year to meet its obligations to workers. Now, imagine this: if States struggle to pay salaries, how do we expect them to invest capital funds to build infrastructure and social spending that improves society? This is the first challenge that we currently face. Despite states owning fertile lands, able workforces and solid minerals in commercial quantity, they have become accustomed to a crippling dependence on petrodollars, hence their fiscal vulnerability. Some, like Osun State, through poor economic choices in raising debts, have also shortened their future revenues. With bondholders and other creditors first deducting what is owed to them, the States have have a dire future, given falling oil revenue allocations. Despite the Federal Government spending over N800bn on rescheduling debts and settlement of salaries, the States are still not wholly free from needing help.

The Federal Government, considering its capacity to borrow as a sovereign entity has expanded debts from N7.5tn in 2010 to N12tn in 2015. Most of the debt raised has been used to fund recurrent items. Nigeria’s projected 2016 deficit keeps expanding, to a record N2.2tn and new debts to used to fund the budget are currently at N1.845tn. The crisis is already evolving and despite Nigeria’s debt to GDP at 12% — an abysmally low figure- its debt service to revenue ratio (the percentage of revenue used to service debts) is at 35%. This means the FG is currently using N35 out of every N100 it makes as revenue to service debts. Currently, the federal government seems to be immune from the crisis but if it does not increase the underlying revenue, it will continue to raise debts at record yields as investor confidence dips.

The monetary angle to this crisis is the current challenge in the foreign exchange markets. About 90% of Nigeria’s foreign exchange income is tied to oil revenue and the tumble in prices to the $30 per barrel mark has slowed down forex earnings from this commodity from $20bn in Q3 2014 to $11.6bn in Q3 2015. While we experienced the oil boom, Nigeria failed to do four things that were needed to leapfrog it into the league of prosperous nations.

Three things we did wrong

Firstly, Nigeria had a money elite who only acquired illegitimate wealth during this oil boom. We are aware — as either victims or perpetrators — of the dislocation that corruption causes a society. When oil revenues should have reached record highs, state-assisted product theft and vandalization of pipelines decimated Nigeria’s income. If you add the outdated oil contracts, opacity of revenue flows, poor metering of exported products and other factors that discount revenue, you will see that Nigeria has repeatedly failed to maximise its moment of high oil prices with gargantuan leakages. Rather than cash in on the opportunity to save as we did in 2008, which left Nigeria with over $15bn in its Excess Crude Account and raised external reserves to over $60bn, Nigerian leaders put their hands into the public trough and currently, it lies nearly empty. The Excess Crude Accounts balance holds a shameful balance of $2.2bn and our Sovereign Wealth Fund, at $2bn, barely exists, compared to peer African countries like Algeria with a SWF value of $50bn. Now the boom is no more, it has emerged that we have been swimming naked.

Secondly, Nigeria in a prodigal manner frittered its foreign exchange mainly by importing finished oil products such as PMS known as petrol. Nigerian billionaire, Tony Elumelu, has been in the forefront on the Africapitalism idea — that African countries cannot progress if they don’t explore the entire value chain of their natural resources. We are witnesses of the folly of having crude oil but importing its finished products to meet local demands. As at September 2015, Nigeria spent 35% of its foreign exchange on importing fuel. If we had working refineries, supported by private and public investments this would be unnecessary. Just imagine if we had visionary leadership who prioritised the need for local refining to conserve our forex, we could have been exploiting the entire value-chain and birth associated petrochemical industries that has immense capacity to create jobs. When the government decided to yank oil subsidies, which led to widespread social unrest in 2012, it was without a coherent plan of entire deregulation of the industry. There was a plan by the NNPC to build three greenfield refineries which never happened. Alhaji Aliko Dangote, with a 650,000 capacity refinery coming up in 2018, seems like a plausible reason to expect better results when fuel subsidies are stopped.

Thirdly, and most disturbing, is this: Nigeria failed to diversify public revenues. Let us not make a mistake that Nigeria’s economy is not diversified. It is government revenue that has relied heavily on the mono-product. We could have moved on post-Independence, post-Oloibiri and continued to build huge chocolate factories, rubber industries, paper industry considering our forest reserves or become a continental manufacturing hub, given our population size. We have failed to reinvent growth poles with the economy more service-driven rather than a push for a real (manufacturing) economy which contributes less than 4% to GDP. We could have been the fulcrum of technology, building multinationals or even small and efficient enterprises like Germany’s Mittelstand. Had we done this, we would not be held captive to oil price movements. Nigeria has mouthed diversification for years, but the necessary structures to wean States from oil and also foster a collaborative approach are still missing. There is still no landmark support structure by the Federal Government to incentivise States to expand their tax earnings.

An alphabet of solutions

Now, the Central Bank is suffering great challenges providing dollars to legitimate business as the forex earnings from oil have dipped. So far, CBN Governor Godwin Emefiele has imposed controls, drawing up a list of items that cannot be imported with officially-sourced foreign currency.. So far, the Central Bank was only able to meet a tenth of orders for Forex, with demand rising to $61bn for Q3 while supply to banks and other licensed operators stood at $6bn, ultimately fuelling the parallel “black” market.

The disparity in the official exchange rate and parallel ‘black’ market has risen to over 50%, but CBN insists it will not officially devalue the currency. This tough grip on the exchange rate is already hurting real GDP growth; down to 2.84% as at Q3 2015 from 6.23% in Q4 2015.

The wider picture is that investor appetite remains tamed from pre-election levels, with foreign investors facing uncertain risks of significant devaluation and the withdrawal of funds from emerging markets due to the symbolic raise in dollar rates by Federal Reserve Bank.

The Central Bank has responded by looking inwards, clearly utilizing monetary easing to spike credit growth in our country. It reduced the benchmark interest rate to 11% and lending controls on deposits from 31% to 20% in 2015, specifically targeting lending towards manufacturing and infrastructure. As direct recipients of this tortuous route preferred by the CBN — which slows down inflows from portfolio and FDI components — citizens and investors have voiced their unease at how long these controls will continue without greater socio-economic consequences for Nigeria.

Those of us within the country’s borders know how hard it is to move money, while our fellow citizens abroad are just as financially restricted.

For the foreseeable future, Nigeria is faced with three uneasy choices. The first is to continue this selective supply of dollars to the Nigerian system, which is hurting growth, slowing down forex supply from non-oil sources and also decimating importers’ ability to access FX for imports and meet production deadlines. The drawback is that already, the foreign reserves being “rationed” are on a slump and at $29bn, will soon hit the reserve adequacy prescription of at least six months’ cover for imports — $27bn.

Secondly, we might also adjust the “price” of its currency, since its supply cannot match forex demand. This devaluation, as awaited by foreign portfolio and direct investors might ease the outlook on the Naira. However, just like other analysts have done, I am sure some of the economists here will wonder: at what point will the “fair value” of naira be determined? This option, which the government has decided not to take for months may move from optional to imperative if the external reserves continue their downward slide.

The final option left for President Buhari is to float the currency, allowing market sentiments to determine the exchange rate. The current “managed float system” which pegs the official rate at N197 to $1 has allowed variance at the parallel market, creating opportunities for round tripping. Allowing a float might raise the currency value beyond unimaginable levels, raising the cost of household items, energy and thereby causing inflation. Such massive devaluation will also raise the cost of imports for fuel, which accounted for 35.7% of Forex imports utilization for as at Q3 2015. In Nigeria’s political economy, that seems unthinkable till it becomes expedient.

While it is unclear what move will appeal to the authorities, what is clear is that the current approach is not working, and coupled with current statements from political leaders on monetary policies, it is glaring is that the independence of the CBN is steadily been eroded. It is my prayer that of all these options, let it not be that the government is waiting for a miracle — a sudden jump in oil prices that steadies foreign exchange inflows.

Because this is no miracle, but the same scenario which enabled Nigeria to wallow in fiscal irresponsibility thus far.

Facing the Reality

The global economic reality that we are currently observing is that capital is flowing out of emerging countries that were once frontiers of growth. The BRIC mythology is being gradually debunked, with China’s stock market facing a severe hit in 2015. South Africa is facing a currency value slump and Brazil, rattled with corruption scandals is taking such a massive hit that The Economist predicts a lost decade in view. These global challenges are compounded with a commodity glut of excess oil, occasioned with the rise of shale oil in the US, and OPEC’s inability to make drastic cuts. There is also the lifting of sanctions in Iran and the rise of autonomous sources of oil in the Middle East. The reality is there is an oversupply of the oil in the global market and therefore prices are expected to keep slipping. A price of $20 has been predicted, the worst price ever seen since 2003.

It means Nigeria and Nigerians have to wake up. Like the proverbial spoilt child, we will have to stop relying on the “Daddy” called Crude, and work other streams of our economy to earn more income.

The world has always lived through spurts of boom and bust. As a nation, Nigeria lived through these cycles without seeing the big picture.Therefore, Nigeria is at that cliff where rational but uneasy choices lie ahead. A most important need is to rigorously seek creative means to expand government revenues at all levels. If we keep taking the shortcuts of debt most especially for social programs, we will miss the point. We will keep adding burdens to future generations and run into fiscal crisis in the near term. We need self-liquidating debts, investments that can span a longer-term future and have the potential to create jobs or expand revenue. We need to see raising public revenues through a broadening of the tax base but also enforce accountability across all levels. We are at a point that Nigeria needs to combine visionary leadership with ruthless efficiency. We need leaders who see the austere period that now lie ahead. We can truly make this nation great but it starts with fresh choices we make now.

As the future Economists who will undoubtedly be at the helm of affairs of this country at federal, State or local government levels in the years to come, I implore you never to forget the current State of the economy. The skills you acquire today will be needed more than ever. I ask that you ensure our great country is never brought to its knees by an over-dependence on oil laced with gross mismanagement. We need a Nigeria with a new narrative, powered by intellect, crafting products, exported to the world. We are already late, our time is ticking.

Thank you

Additional Reading

Options and Possibilities for Government Revenue Growth and Efficiency, BudgIT Publication

http://www.theguardian.com/global-development/2016/jan/07/nigeria-naira-devaluation-central-bank-currency-crisis

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