Friday Udoh is a gas value chain expert, chattered economist and the chief coordinator, south-south zone of Institute of Chartered Economists of Nigeria (ICEN). He spoke to BEN EGUZOZIE, business a.m.’s Port Harcourt bureau chief, on the socio-economic costs of Nigeria’s awful neglect of its steel and aluminium plants after pumping in billions of dollars, its diversification efforts, formation of regional economic blocs by the states, among others. Excerpts
Recently, it was said that Nigeria looks to slipping back into economic recession later this year or by 2020, given the marginal runs in the economy since the 2017 scrappy exit. Are the fears real or imaginary?
Without mincing words, and going by the prevailing economic indicators in Nigeria, including the Gross Domestic Product (GDP), an important indicator used in
measuring economic performance, productivity and well-being of a country, all point to dwindling fortunes. And as you rightly mentioned, we have been experiencing ‘marginal runs’ since the 2017 exit from recession, which is akin to the ‘boom and bust’ cycle of the commodity market. Given the fact that over 74.94 percent of our earnings is sustained by crude petroleum export, this leaves no one in doubt that Nigeria is in for trouble, going by the ongoing volatility in the international crude prices. If in the first quarter of 2020, we are fortunate to escape slipping into a recession, definitely the second quarter might not be the same. This is notwithstanding the relative economic growth experienced in Q2 2019, which was largely a response to the significant monetary policy position of the Central Bank of Nigeria (CBN) and the forex market regime in operation which provides a relief to the economy from inflationary pressures.
But in specific terms, the economy is facing a growth constraint, though no recession immediately. The country’s economic growth will be constrained and slowed. This will mean that it will increase inflationary rate, but not immediately. We are likely to see an upward drift in the unemployment rate. Weaker economic growth will also drag on the N/$ exchanges. We will see the Naira rising above N359.57 per $1 next year. Similarly, sluggish growth could also have corresponding effect on share market returns.
You mentioned that the country’s principal income earning source is from petroleum, can you expatiate on this, and how does this affect the economy?
Before answering this question, permit me to take you back to what indicator is all about According to OECD (1993), and as reference to this discussion, indicator is “a parameter, or a value derived from parameters pointing to or providing information about the state of a phenomenon/ environment/ area, with a significance extending beyond that already associated with a parameter value.” Going by the fact that petroleum remains a major factor determining Nigeria’s export and trade volume, any international macroeconomic stress and confluence factors affecting world’s major economies leave the crude oil prices tumbling. The current escalated US–China trade war, credit tightening measures in China, macroeconomic stress in Argentina and Turkey, disruptions to the auto sector in Germany and many other overreaching issues are examples.
Reflecting on confluence factors affecting the major economies, and despite the US-China trade deal, the Global GDP forecast might soften between 0.2% and 0.3% against the 3.6 percent 2020 growth projection. This does not sound like much, but if it happens when there’s a broader slowdown; and adding to Nigeria’s worsening economic and security situation, could make matters much worse. Certainly, the undue concentration on petroleum resources as the only source of revenue can increase in downside risks that could potentially exacerbate development challenges in many sectors of the economy, thereby further worsening the security situation in the country.
For instance, when there is a significant drop in either the price of crude oil or drop in global economic output as currently experienced in China, United States of America, among other countries, it directly has a negative impact on the fiscal position of the country. Moreover, as at May 2019, the U.S. crude oil production reached an all-time high of 12.2 million barrels per day (mbpd) over Nigeria’s 1.96 mbpd; and currently exporting at 8.1 Mbpd with inventory increase worth 10.5 percent over May 2018. A push for increase in production and export represents a positive milestone for the country (US) from a mere net importer to exporter of petroleum product.
In related development, the Kremlin government in Russia led by President Vladimir Putin is acceding to the fact that its economic diversification achievement has reached a sustainable altitude; and does not warrant holding back its oil production, which is against the position of Saudi Arabia pressurizing the OPEC to hold onto the production cut agreement over the risk of overflooding the market with crude supplies. This olive branch leaves Saudi Arabia considering investments in multiple projects in Russia might not materialize anywhere to alter Russia government’s stance.
This makes the gloom in the global oil market to further darken rather quickly. Less than few months, the IEA predicted a rather significant supply deficit, though acknowledging cracks in demand. Obviously, things have really gone awry in the global oil market since the last global financial crisis. Going by analysts’ assessments on the future of global oil market outlook, it is described to be at rather dangerously pedestrian likely to leave the market at ugly trajectory. Next year, even if the tension in Iran eases, and if the Venezuelan output fails to rebound, there is a likelihood for a favourable crude oil pricing.
What should the federating states be doing as response to economic recovery?
Notwithstanding, the Federal Government’s proactive steps at economic recovery and growth, the fundamentals call for the federating states to join suit and create what I call Regional Economic Blocs. These would optimize the benefits of underlying economies of scale among the states. Specifically, the states should consciously create Regional Economic blocs through a definitive Regional Economic Development Model (REDM). Notably, identifying resources of comparative advantages for exploitation. The support of the universities is very key here through undertaking researches for development.
What is critical at this point in time, is to optimize information in novel ways to problem-solving, work across diverse groups and remain creative and entrepreneurial. States that key into a regional economic development structure with focused educational policy can create a strong economic backbone that spills into an educational system that provides strong support for synthetic education, applied research and transformation in the financial and other economic sectors.
Our government must be resolute to strengthen the real sector through novel proactive programs and policies, giving the first line attention to capital injection and resolving any hiccups that impede the operations of the existing import-substitution industries; as well as engage in active investment in new manufacturing lines. Again, critical attention must be given to competency in appointments, especially those that will man key positions in government. Also, massive investment in infrastructure is needed to generate employment and more incomes to generate more tax revenues. In times of downturns, taxes automatically slide as incomes dip. These will help to effectively moderate the booms and busts in the economic cycle, increasing aggregate demand to offset the negative impacts of any noted dysfunction in the system.
Do you ascribe to steel and aluminium sectors as better alternatives to Nigeria’s current petroleum agony?
The key question is, how disposed are the governments at different levels to regrow the economy to a sustainable level; more importantly, working to avert the impending economic recession? Government at all levels are seemly connected, as such they have to urgently develop a solid and a complimentary economic blueprint. From the latest release of the National Bureau of Statistics (NBS), Nigeria’s total share in the global oil market has continued to decline, indicative of major oil discoveries and activities elsewhere. Meanwhile, Nigeria’s world market share in non-oil commodities is steadily falling. Although the country’s balance of non-oil products trade remains positive, it is showing signs of a gradual economic recline. Nigeria must look at the best option to improve on the capacity of non-oil sector. What also alarmed most people is that Nigeria has now entered a ‘GDP per capita recession.’ That is, GDP per person in Nigeria went backwards between the last quarter of 2018 and the first quarter of 2019 by -9.75 per cent, with no noticeable possibility of improvement. The cloud is thickening, and the uncertainty is driving in with the increasing risk factors.
Accordingly, steel remains the bedrock of any economy considering a steady growth in demand, and its multiple effects in creating micro and macro upstream and downstream industrial and economic activities that could affect all facets of the economy. Steel is a metal of many lives–highly sought after. Following this is aluminium industry.
Assuming the $10 billion Delta Steel plant at Ovwian-Aladja with 1.3 tons per year; 2.6 and 5.2 million tons per year integrated blast furnace/BOF – producing bars, shapes and medium structural steel and various types of steel products, including heavy plates – was producing optimally today, it would have been adding $2.5 billion to the economy. The plant was built when N/$ exchange was N0.6, with capacity then to produce 1.3 million tons of liquid steel, roll product and billets.
Added to this, is the Aluminium Smelter Company of Nigeria (ALSCON) in Ikot Abasi, Akwa Ibom State which would have been contributing about $577 million to the economy as well. All these would have amounted to $3.07 billion. Others are the Qua Steel Rolling Mill in Eket, Akwa Ibom State, the inland rolling mills in Oshogbo, Jos and Katsina which have either folded up or underutilized, due to high cost of imported billets. Answering your question, I will say yes – steel and aluminium can present better alternatives to petroleum in Nigeria.
What do you think is the economic cost to Nigeria on the continued neglect of these key industries, especially Ajaokuta Steel Plant, Delta Steel Company, Aluminium Smelter Company of Nigeria (ALSCON) and Itakpe-Ajaokuta-Warri rail line constructed to support the plants?
It might not be in this platform, considering the resources to acquire certain data, but investment cost and the interest rate could be easily acquired. The $10 billion Ajaokuta Steel Plant calculated the 13.5 percent CBN interest rate, cost $64 billion in lost output. For the $200 million 36-year old Itakpe-Ajaokuta-Warri rail line principally conceived to support Ajaokuta, National Iron Ore Mining Company (NIOMCO) in Itakpe, and Delta Steel Company, Aladja calculated at 13.5% interest rate amount to $1.2 billion cost to economy. Delta Steel lost $11.1 billion, while the 183 tons per year ALSCON plant, Ikot Abasi built at a cost of $3.2 billion, lost $24.74 billion. Excluding the Qua Steel Rolling Mill, Eket, Akwa Ibom, National Iron Ore Mining Company (NIOMCO), Itakpe, Kogi and the three Inland Mills in Katsina, Oshogbo and Jos, the total cost to Nigeria’s economy stands at $99.9 billion in lost output. This is a significant cost to the country’s GDP.
In terms of employment generation, how many people ought to have been employed in these huge industrial plants?
Ajaokuta Steel plant had capacity to employ over 510,000 Nigerians directly and indirectly; Delta Steel Company was capable of offering over 5,000 direct employments; while ALSCON, Ikot Abasi through its value chain was capable of generating over 61,200 jobs. Conservatively, these three plants could have absorbed 576,200 Nigerians in direct and indirect employments. But here we are today; these jobs are completely lost. By now, the multiplier effect would also led to establishment of ancillary companies that would have employed more people.
How can you correlate the relationship between judiciary, rule of law, trust of Nigerians on government programs giving way to peace and economic prosperity of Nigeria?
Confidence and legitimacy of any government lies on the extent to which each citizen is assured that all are being held to the same legal obligations; and the extent of assurance that they get something back in their compliance to the law. The absence of this has given rise to conflicts, including insurgency experienced around the country today. Similarly, judicial independency and adherence to the rule of law is sine qua non to, and also assumes a generic function representing an important determinant of any country’s economic resuscitation and peaceful co-existence.
What is the way out of this quagmire?
A renegotiation of contracts and direct involvement of government in the resuscitation of the steel and aluminium plants (Ajaokuta, Delta Steel, Oshogbo Rolling Mill, Jos Rolling Mill, NIOMCO). Also, there should be the full implementation of the June 2012 Supreme Court judgment on ALSCON by the Federal Government through the Bureau of Public Enterprises (BPE).
Prior to the nomination and confirmation of the ministers by the Senate last week, I would have been of opinion that ministries such as Petroleum, Mines and Steel and Power should be collapsed into one entity to be called Ministry of Energy and Natural Resources.
Nevertheless, this is overtaken by event. Notwithstanding, my candid advise to the appointee ministers to look further to appointment of individuals with synthesis or call it applied educational background into advisory responsibilities. Such as: Ministry of Foreign Affairs; Ministry of Energy and Natural Resources; Ministry of Science and Technology; Ministry of Environment; Economic and National Planning; Ministry of Transports (Land, Air, Maritime, Railway and Pipeline); Ministry of Justice; Ministry of Health; The Ministry of Industry (part of the Ministry of Steel’s responsibility should be transferred to them in addition to their present responsibility.