Nigeria’s economy yet to fully recover from supply-side shock
May 8, 20191.4K views0 comments
- Caused by weak foreign reserves, oil price collapse
- Slow recovery points to fundamental structural challenges
Over the past few weeks, the issues of good governance, particularly how the passage of the 2019 Appropriation Bill into law could help in tackling the increasingly worrisome poverty problem in the country, have continued to enjoy public sector experts’ discourse. ADENIRAN ADEDEJI, PhD, an economic analyst and researcher, in this interview with TOLA AKINMUTIMI, shares his views on the budget and other economic issues critical to enhancing the performance of the nation’s economy. Excerpts:
How would you rate the current fiscal reforms efforts of the Federal Government as they relate to attracting foreign investments into the Nigerian economy in the past three years?
Frankly, I do not think there is any fiscal policy (expenditure, tax and deficit financing) that is aimed at mobilizing foreign investment. Assuming you are referring to the doing business initiatives and National Economic Diplomacy Drive, I will rate them average.
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The barriers to business development have been lowered through this policy. However, domestic and foreign investors still face challenges in doing business in Nigeria. These include, issues of multiple taxation, lack of policy coherence and burdensome and multiple regulatory authorities, among other factors. Industry in Nigeria also lacks competitive edge due to high cost of doing business (most especially electricity and high cost of borrowing). Given these issues, the recent reforms have only drawn attention to the problems. It has done little in terms of improving the situation. It is therefore not surprising that Ghana is now the top investment destination in West Africa. You will recall that not long ago, Nigeria had the highest receipt of FDI in Africa. What has changed is two things. One, global oil market has changed with the emergence of new players with more stable policy environment (Ghana for instance) and shale oil revolution. The law governing oil sector in Nigeria, for instance, is archaic and this can’t inspire more investment. Two, Nigerian macroeconomic fundamentals (growth, inflation and exchange rate) are weak and again do not inspire foreign or domestic investment.
There has been a more aggressive drive to boost non-oil revenue ratio to Gross Domestic Product (GDP) in the past year. What do you think are the ‘missing links’ in the revenue generation agenda that should have improved tax compliance rate generally?
The missing link in tax compliance is poor governance. Let’s face it, nobody likes to pay tax. However, when there is clear evidence of tax revenue being deployed for productive activities, tax payers are more responsive. Essentially, good governance is important bedrock to ensure more compliance. It is also important to reduce the level of informality. By some estimate, 65% of Nigerian GDP is made-up of informal sector. There is no way by which government can tax the informal sector. To bring the actors in this sector into formal sector, government needs to provide incentives such as greater promotion of property right, access to capital, ease of business registration and protection against excessive regulation, among others.
Some analysts have expressed doubt about the feasibility of this year’s oil price benchmark proposed in the Appropriation Bill by the Executive. What is your view on this?
Based on IMF and OPEC forecast, average oil price for 2019 is expected to be between USD60 and 70 per barrel, which is within the set benchmark. On average, the price in the year so far means the benchmark could be achieved or if missed, it will be by a small margin.
However, multiple economic and geopolitical risks can change this prediction. From the economic angle, the success of the USA-China trade talks and whether hard or soft Brexit is achieved will determine the global demand. The geopolitical tensions such as Venezuela crisis, Iran sanction by the US, the crisis in Syria and general Middle East conflicts. If we use historical trend, the combined effect from these developments should still make the USD60 per barrel estimate feasible.
However, the major issue for me is the proposed production level of 2.3mbpd. This is not feasible based on many factors. One, the OPEC push to ensure stable and high oil price means there will be cap on members’ quota which will require production cut. Two, capacity challenges that have plagued the oil sector is yet to abate. It is on record that even 2mpd has not been achieved in the last 10 years. It will therefore require a fundamental structural change to meet the target production level. In summary, the benchmark oil price is achievable but the target production level is not feasible.
Would you say that the gradual economic recovery by the country as exemplified by the relatively growing GDP rate is an indication that the economic diversification agenda of the government is gaining positive traction? If no, what would you say accounts for the modest GDP growth trajectory?
No. The conventional wisdom is that after recession the economy should experience fast-pace growth until the balance growth path is restored. By estimation, Nigeria has the potential to sustain at least 6% growth over long term. The recession is a supply-side shock caused by weak foreign reserves and oil price collapse. The economy has not fully recovered from this shock. The weak/sclerotic growth is majorly due to weak demand from private and public sectors. Public sector is still unable to implement a sustained counter-cyclical policy due to late passage and poor implementation of budget. The prevailing uncertainty and weak growth has curtained private investment. Overall, the gradual economic recovery is a pointer to fundamental structural challenges. Specifically, policy and regulatory environment and the economic fundamentals are not conducive to robust and strong economic growth.
As an economist and research analyst, do you think government is doing enough in data funding given the strategic roles statistical data play in national planning and development?
The statistical agency like the National Bureau of Statistics is grossly underfunded. You will recall recently that the Statistician General had to make public the absence of fund to complete and publish the unemployment statistics for the third quarter of 2018. The major funding source that NBS relies on comes from donors. The national and disaggregated survey like Demographic Health survey, National Education Data Survey, HIV/AIDS Indictor all come from donors, especially World Bank, USAID and DFID. This trend shows we rely more on “trial and error” approach to planning. Also, government in many respects does not collect data on its programmes and policy interventions to assess their impact or shortcoming. This makes it hard to provide and implement evidence-based policy. In essence, government lacks data for strategic planning. Experts and researchers likewise lack data to concretely evaluate problems within the society and proffer solutions. This has made national discourse to lack critical, evidence based and rigorous research and analysis.
Based on this fact, it is not surprising that Nigeria score is declining in recent years in the statistical capacity index by World Bank. In particular, scores on quality of data and coverage have declined over the past decade. This evidence points to challenges emanating from inadequate funding. The way forward is to treat statistical agency as an independence entity with autonomous funding.
Sectoral allocation of funds in yearly budgets indicates that both the national and sub-national governments are not prioritizing key sectors like agriculture, health and education over the years. What do you think is responsible for this and how can the trend be reversed?
The priority sectors going by budget are infrastructure (power, works and housing), followed by security (ministry of defense and interior). Education received 7% of the total budget and health 4%. The number one reason responsible for this is low revenue. Government revenue to GDP in Nigeria is very low, especially non-oil revenue. Low revenue means low budgetary allocation to all sectors. Social sectors are therefore competing with other sectors for the low revenue. For policymakers faced with this dilemma and need to show quick wins, priority for social sectors will be less. Another explanation for low priority to education could be corruption. Allocations to infrastructure are much easier to siphon compared to expenditure on education, health and agriculture.
To reverse the trend, it will be important to increase the overall pie by generating more revenue. This will require increasing tax base and tax administration to generate more revenue. Another solution is earmarking special funding for education and health programmes. Already, there is special funding for education in form of TETFUND, UBEC and the recommended Teacher Education Development Plans (TEDP). It will be good if similar funding and initiatives are developed for health sector. For example, the newly introduced tax on tobacco can be directly earmarked for the health sector. Lastly, more research and awareness activities will be essential to galvanize more public interest to demand for social investment in public expenditure.
Would you say that the subsidy payment regime in the nation’s downstream sector is justifiable given the alleged opacity that characterizes the payments? If no, what do you suggest as the most viable option to government in ending the much vilified payments in yearly budgets?
It is obvious that subsidy payment reduces the needful public investment to social sectors like education, health and agriculture. In 2018, subsidy payment is estimated at USD 3.85 billion. This amount is more than the budgetary allocation to education (capital expenditure) and health sectors (total expenditure) in the same period. Even more, the highest beneficiaries are the rich and middle classes. However, a once-off removal might be harmful to the economy. Also, Nigeria currently lacks good palliative measures to cushion the effect of removal. For example, subsidy removal will affect transport and food prices. However, if there is good public transportation system as well as electricity, the effect of subsidy removal will be minimal.
Government should remove subsidy gradually over the long run. The revenue realized in the initial removal should then be deployed into putting palliatives in place such as effective public transportation and electricity.
Quite painfully, Nigeria is today regarded as one of the most poverty-stricken nations globally even as the latest Corruption Perceptions Index by Transparency International rates the country very low. How do you think Nigeria could be dragged out of these poor trenches through proactive and people-centric policy reforms in the years ahead?
First, poverty is a product of large unemployment or low paid jobs. The data shows 21 million are unemployed and more than 86.9 million are in extreme poverty. This means majority of those working are engaged in vulnerable and precarious employment. There is no single bullet to address these issues. But we can confidently highlight some important steps with potentials to deliver great results. First, we need to address the over regulation of businesses in Nigeria. Mostly, these are unofficial regulations and due to corruption. If business can be protected, they will be able to expand and create more jobs. The recent polices aimed at improving the ease of doing business is positive but not broad enough and obviously lacking momentum at present. Second, a clear industrialization policy is needed. With our huge population and consumption rate, developing manufacturing sector will be crucial to address employment and poverty problems. Manufacturing sector at present contributes less than 10% to the national GDP. Based on experience of countries that have developed, the sector can reach as high as 30% of the GDP. A key advantage of the manufacturing sector is that it can provide massive and decent paying jobs. Our industrial policy at present is oriented towards import substitution. To really address job and poverty issues, it is important to look towards export promotion. Of course, the starting is always from import-substitution approach to export promotion approach. However, a clear policy and incentive structure to drive through this process must be in place and Nigeria currently lacks such policy framework.
Third, creating a stable policy environment for business and clearly defining the role of government. Businesses in Nigeria are affected by inconsistent government policy. Fourth, investment in infrastructure and social sector is the other missing link, especially power. Cost of energy is a major cost component for most firms and this reduces their competitiveness with other countries. Nigeria reluctant to sign the African Continental Free Trade Agreement speaks volume to the weak competitiveness even with African countries.