MUDA YUSUF is the director general of the Lagos Chamber of Commerce and Industry (LCCI) and can unarguably be regarded as the advocate-in-chief of the organised private sector (OPS) in Nigeria. He has participated in various high level public policy advocacy dialogues at both the federal and state levels with the aim of fostering private sector participation in Nigeria’s economic development. He is a champion of an enabling environment for the Nigerian private sector and has a vast knowledge and exposure on business research and policy issues affecting business. He sat down last week with business a.m.’s PHILLIP ISAKPA on the sidewalk of the 10th edition of business a.m. -GTI Finance & Investment Dialogue (FID), where he was guest speaker, to field questions on the state of the economy in an election year and what he projects and wants to see for the economy post elections. Below are excerpts from the meeting. PHOTO CREDIT: JAYEOLA ISAAC
It’s almost four years gone since this government came into power, and we are now in an electioneering season, politicians are saying whatever they will like the electorates to hear; can you give a nutshell assessment of the four years on how the Nigerian economy has behaved under this dispensation?
Well, the four years have been a mixed bag, but to a large extent, it has been driven more by external factors, most especially the few achievements we have recorded. One of the key positives in the four years is that we have been able to regain some level of macroeconomic stability and, when I say macroeconomic stability, I am talking about situations in the economy with respect to things like the exchange rate; for instance, we have been able to get over the challenges of liquidity in the FOREX market, volatility, even though we still have challenges with the issue of multiplicity of rates.
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The GDP, we are back on a positive track in spite of the challenges of recession and all of that, our reserves are fairly comfortable too. But when you talk about the investment climate, it is the investment climate conditions that will drive investment and investment is very key to job creation, to social stability, to revenue creation and general progress of the economy. We haven’t been able to achieve much in terms of ensuring that we have quality investment climate and when we talk about investment climate we will be referring to the status of your infrastructure, we will be talking about the quality of your policies, we will be talking about how consistent your policies are, we will be talking about the quality of your regulatory environment, you know all these are very important when it comes to an investment environment, and unless we get it right with the investment environment, which is shaped largely by policies, regulations and institutions, it will not be easy to attract investment and you need private capital to be able to turn around the economy, so that is where the problem is. The government hasn’t got the resources to power the economy, you need private capital to power the economy and the private capital will not come if we don’t get some key investment climate variables right, that is the problem. So, the capacity to create jobs, the capacity to alleviate poverty, and the capacity to build a socially stable environment has been impaired or impeded by the lack of resources.
Also, one of the critical shortcomings in the past four years is the failure to bring about reforms in the oil and gas sector, although people talk about diversifying the economy, you need money to do that, and the best medium to get money and resources to power the economy is in the oil and gas sector, unfortunately we have not been able to bring about that kind of reform in order to unlock the huge potentials for investment, revenue and jobs in the oil and gas sector. You need to talk to people that are operating in the downstream; they are full of lamentations, same thing with the upstream people. The PIB – we have been on PIB for the past 13 or 15 years, and we have been hoping that under this regime, we will be able to push it through; even the small component of it that we have managed to pass, we have not been able to get it through. So, there is a major issue with policy and some serious issues with the quality of our institutions.
So, there are two types of investment, there are domestic and foreign investments and then globally we expect to have foreign direct investment look into the economy and be attracted by it. Now, with regards to domestic investment, what are the people in the organised private sector telling you about how the economy has really dampened their enthusiasm for investment?
You see when you talk about the business community or the private sector, of course, you can make some general statement, but there are some issues that are sector specific. Even when you have a general perception that the economy is tight, there are still some sectors that are doing well, there are some companies that are doing well even in the contexts of very challenging situations. But generally, talking about domestic investment now, first of all, there are issues with funding because there have been a lot of talk about intervention funds and all of that. Generally, the cost environment as far as funding is concerned is not favourable, those who are talking, talk about 25 percent, 30 percent and it is even much worse for the SMEs. So, the cost of fund is an issue, and then the tenor of funds available in the economy is also an issue, because you want to do a project that is, maybe, five years, 10 years, and these are the project that you often want to look for in the real economy, you don’t have the domestic funds to do that, and the option of using foreign fund is risky, because of exchange rate risks, there are so many companies who haven’t recovered from the sharp depreciation of exchange rate, so funding is a major issue.
There are also issues with our trade policies, of course, we are trying to be protectionist, but sometimes we do not take a realistic view of the economy to properly assess the impact of the trade policies, and when I talk about trade policies I am talking about policies with regards to tariffs, “41 items”, import prohibition, all those issues. It affects businesses in different ways, but my view is we have not done any proper empirical study that could guide how we should approach the issue of trade policy, somebody just wakes up and feels that this and that item should be banned and excluded from the foreign exchange market, it is not supported by a proper empirical study to be able to determine the systemic implication of such policies. Let me give you an example, those in the auto industry, there is a lot of lamentation on the effect of the auto policy on their industry. You know that the whole idea of the auto policy is that we want to become manufacturers of vehicles in Nigeria, and as a result, import duty on vehicles was moved to 70 percent, import duty on used vehicles and others was moved to 35 percent, so if you take the increase in import duty, alongside the depreciation of exchange rate that has taken place in the last three years, you can imagine the implication of that on the cost of vehicles. So for those who are in the business of importing and selling vehicles, it has become a nightmare, because the policy has encouraged more smuggling, diversion of vehicle to the neighbouring countries; the maritime officials who are clearing agents have lost their jobs because a lot of clearing businesses have moved to Benin Republic, some of those who bought the concessions for some of the ports are complaining that at the time they invested in these ports, this was the policy, now they have invested, the policy has come now and has made nonsense of their investment. Five years down the line, I haven’t seen much of “made in Nigeria” vehicles, and yet the cost of vehicles are still so high now; when cost goes up, the demand drops, so the likes of Toyota, Nissan, are having issues. Although some people claim to be assembling vehicles in Nigeria, because there are some very good concessions for those who assemble, but if we interrogate what they are doing, you will just find out that they just buy vehicle from abroad, decouple it, bring it in and call it SKD, bring it here and couple it back. The point I am making is that, with most of these policies, there is no proper thinking through, particularly in the area of trade policy. There is too much of sentiment, too much of emotions about growing what we eat. I mean, I listen to people in the government say that importation of rice has dropped by 90 percent, therefore all these programmes are working and people are now eating Nigerian rice, but you have to reckon with the unofficial imports because there are still a lot of smuggling and all of that, so there is no sufficient emphasis on building a competitive economy. I am not saying that we should just open our borders, but you have to also put in place policies to complement whatever protection you want to do, otherwise you will create an environment where you will aggravate poverty because cost will just increase. It is true that a few businesses will be making money because when you have created an environment of scarcity, whatever rubbish is produced will sell. So, if you use that as a yardstick to measure the success of policy that will be a very wrong approach. I have seen some ministers saying that rice farmers are now marrying more wives and going to hajj, that should not be the yardstick. Yes, it could be part of the measure of success, but it should not be the major yardstick, because the ultimate effect of policy should be the welfare of the people. You can create a monopolistic situation or scarcity situation and the business person will be making money, but you have limited the choices of consumers, increased their prices, and worsened their welfare.
You talked about emotionalism getting into policy environment, people also talk about ambiguity, I have been following the economy for a long time and there is no clarity as to the kind of economy we operate, is it a market-driven economy or a private sector-led economy, what would you advocate as a proper way of looking at the Nigerian economy to move it forward.
The market option is the best for us, and I say that because Nigeria is blessed with a lot of entrepreneurs that can make things happen. I mean you know what Nigerians are doing even outside the country, a market-led economy is the best for us and that is the best way to harness the entrepreneurial energies, innovation and things that you have in this economy.
Secondly, it is preferred because, when you have a weak public sector, when your institutions are weak, the fewer roles you give to the state, the better for your economy, so that is the way to go. Of course, the market cannot solve all problems and that is what leads to what we call market failure, you identify areas of market failure and introduce government interventions in those areas, but area where market can deliver, the government has no business there; but again, sometimes because of some entrenched interest, government has refused to let go of some of these areas where they cannot perform and the private sector has the better capacity to perform.
I think that a market-led system is the best for us. I mean, sometimes, people compare us with China but you cannot compare state institutions here to those of China; so, the quality of your institutions and environment should also dictate the kind of model that you should adopt, just like I said, there will always be market failures but that is why there is government intervention in an economy and that is the way it is in all market economies. You want to support agriculture for instance, you want to support education, support health, support the environment, support small businesses, all these things require government intervention, but the larger part of the economy should be driven by the market.
There has been an absence of the fiscal managers of this economy, and you have seen the Central Bank playing what you will consider a larger role in driving the economy, why does it appear that the government has not been active in playing its fiscal role in this economy?
Well, we have a number of angles to what we can call the fiscal role of government, one is expenditure, the government hasn’t got the resources to intervene effectively in this economy. Look at the budget, by the time you take away the recurrent expenditure and debt service, the revenue is finished, all capital projects are funded by borrowing, and you can only borrow so much especially given our current disposal. So, the government is constrained because of resource limitation.
Secondly, there is no clear economic leader, someone that you can say is giving clear direction to where the economy is going, someone who can coordinate. I mean, some of the things the CBN does are part of the roles of fiscal policy, the CBN is determining who should access forex market and who should not, that is not a monetary policy thing, it is purely a fiscal policy thing, that is why we have a tariff book of what can be imported and what can’t be imported and at what duty, and the tariff book is a 7-year document, and there is a reason for that, to be able to give confidence and reduce uncertainty, but if someone just wakes up and say “you, you and you, you cannot come into the forex market,” your input, your intermediate product, you know, a lot of disruptions, of course, such things generate pockets of winners, which the CBN often celebrates, but nobody is looking at those who are the losers, or those who are the casualties of such policy, but if you had someone actually coordinating, for instance, if the planning ministry had the powers to be able to determine what everybody does in term of trade policy and all that, now somebody is giving a clear direction as to where the economy goes. There was a time I was hosting and I think it was the minister of Agric, who was saying that they want to close the border because of importation of rice, there are a lot of implications of that kind of thing; the Chamber had to raise its voice, you can’t just close the border because of rice, what of other transactions? What happens to those living on the other activities apart from rice? What happens to the border communities? So, there has to be a very good direction, and you do not run the economy based on sentiments and emotions or some simplistic nationalism, things have to be driven by hard facts, and it has to be situated in the context of what will work for the common good of the economy.
We are in January, and the elections are coming up in February/March, and then in May, we expect maybe a new government, whether it is the incumbent or a completely new government, to come into play. If it is this government that is retained, it will be a second term administration with nothing else to lose because it will be completing the final allowable time. Now, what do you think should be set aside, what do you think Nigeria should focus on with regards to the economy, the players within the economy for instance job creation, we have lost a lot of jobs in the last four years and the economy has been shaking, so how can we renew ourselves, so to speak, and if it is a new government that comes in and this one loses, what should we be looking at in terms of managing and running the economy?
You see, it is investors that drive the progress of any economy, so if you have this government returned, it will come with its own challenges because it will imply an endorsement of what this government has been doing and to some of us, especially with regards to managing the economy, we don’t believe it is the best, but unfortunately, matters of elections in Nigeria are not so much about the quality of your policies, or the quality of your institutions, or your capacity to deliver that often determine the outcome, there are many other variables like religion, tribe and all sort of funny things, even dishing out money to people, these are the things, these are the shortcomings of a democratic government in a developing economy and most democratic settings, it is also not easy for people who have the capacity to deliver to be at the driver’s seat, because if you have the capacity but you don’t have the money, it is not easy for you to get there, so you find a situation where those who are entrusted with the power, most times don’t have the capacity to think through those things, and those that have the capacity don’t have the money to get there, that is the dilemma. If the current government returns, we have to continue to step up advocacy, to ensure that we get the government to make its policies, investment friendly, we pick their tax policies and ask how investment friendly is it? We pick the tariff policy, how investment friendly is it? We pick their investment policy, how investment friendly is it? We pick their monetary policy, how investment friendly is it? We have to pick all those policies and see how they impact on domestic investment, portfolio investment, foreign direct investment, consumption, all those things are important to be able to get the best from whichever government, and most importantly, there is a need to reform the oil and gas sector because that is the cash cow, it is unfortunate that we are not getting what we should be getting from that sector.
A lot of has been said about the oil sector over the years and even decades, talking about deregulation, talking about attracting investment, we have gas flares all over the place and we need gas for power, what do you think has been the major challenge, speaking to people in the oil sector, they talk about the environment not being conducive, they talk about government changing policies here and there, but what do you think is the real issue, knowing well that it is the cash cow for now, until we are able to broadly correct the economy?
To a large extent, if you get the PIB in place, it will address most of this issues, because all the talk about how to transform the oil and gas sector and reform it, to a large extent are embedded in the PIB, although there are a few reservations from some investors, but if we are able to push that through and push back the role of government, in terms of government getting directly involved either in upstream or downstream or importing petroleum products, PPMC, petroleum equalization funds, if we are able to clean up all of that, we will see more investment in that sector, and these are things that are known to the government, we have some very good technocrats in government, who know what can be the game changer as far as investment is concerned in the oil and gas sector, but again, there is a challenge of getting the buy-in of the political leadership, there are issues of vested interest in the status quo, you know, people profiting from it and so on. You have a situation where you want to expand the private sector role, and you have people who are proponents of a larger public sector because of what they are getting, if those who are proponents of a larger public sector have more political influence, it will be very difficult to have any reform, so that is what I think has happened to the oil and gas sector.
If we are able to get the PIB through, investors will come in, it is not rocket science, give them some confidence and they will come, we are talking about fiscal terms, regulations, security issues and so on and so forth, if we are able to address that, I think we will see a lot of changes, but again it will require a very strong political will, because there are some entrenched interest that is benefiting from the status quo.
We will look at industrialisation, which many believe Nigeria hasn’t done well in, in terms of being a driver of industrialization; we also talk about manufacturing, which seems to have fizzled out over the years, so, Nigeria is not an industrialised country, Nigeria is not pursuing manufacturing, Nigeria just concentrates on the fact that it exports oil and sits on the dollars that come in. Those two are key, especially in terms of when you are creating jobs, where are we getting it wrong and what can be done to bring back manufacturing to what it was at some point, and even upscale it, and then industrialisation, which is key to building an economy that is resilient against global development?
First of all, it is difficult to industrialise when you do not have infrastructure, I haven’t seen any industrialised economy that doesn’t put infrastructure first, the state of our infrastructure cannot support sustainable industrialisation, that is why those in that sector always clamour for protection because we do not have a competitive industrial sector, largely because of the state of our infrastructure; the way to grow your industrial sector is to build competitiveness in that sector such that the investors in that sector won’t be looking at your domestic market but be looking at the global market, that is the strategy of all industrialised economies, because if you are able to play beyond your local space, you will be able to bring down your cost because you will enjoy economies of scale, the citizen will benefit, shareholders too will benefit, but if you have an industrial sector that is not competitive, then you have to keep talking about how to raise tariffs, how to deny some people access to forex, ban some products, that have been the strategy over the years and it has not worked, it may have worked for a few companies but for the general economy it has not worked because first, it is affecting the cost of the product, secondly, the consumers are paying more, it is affecting poverty, and also affecting growth. Thirdly, it is difficult for SMEs in that space to also survive because the big companies can manage to absorb some shocks and all that, but the SMEs in manufacturing sector won’t find it easy at all, in fact, as an SME going into manufacturing, people wonder, this is why sometimes you can’t blame the banks when they say “this is manufacturing, this is agric, we can’t give you money.” It is a high risk, so we need to deal with those competitiveness issues, particularly with infrastructure; we have funding issues, industrialisation is not just about your own people alone, people can bring their own capital to come and set up here, we have pockets of companies in Africa that are hubs for manufacturing, to sell to other countries, like the auto industry – many of the Japanese cars you see are made in South Africa, and they ship them here, it is a matter of creating the environment. If we create the environment industrialist will come, capitalists will come, you don’t need to teach them what to produce or how to produce it, just create the environment.
Then, we look at funding, do you want to do industrialisation with 25 percent interest rate? It is almost impossible, it is like committing suicide in investment; so those are also macroeconomic issues, because if the government is borrowing at 15 percent, how would you expect the banks to give you money at something that is less than that? Industrialisation is also about focusing on what areas you have competitive advantage, areas in which you can add value, that is what also helps competitiveness, not where you have about 80 percent of your inputs are coming in from outside the country, that is not a sustainable strategy and if you look at the Nigerian Industrial Revolution Plan (NIRP), that is the emphasis, resource-based industrialisation, that is what it is called and that is the way to go. If you look at the resources, it could be human resources, it could be natural resources, but it forms the basis on which you build your industrialisation and it becomes more competitive, of course, complemented with other issues that affect your cost of production.
I have also heard you talk about the size of the Nigerian budget over the years; I have heard you talk about the fact that for the size of this economy, the budget is too small. First of all, the fact that there aren’t enough resources to have a huge budget, but what is being budgeted is small to drive the economy, so you have a contradiction. But I believe that it is possible to create an environment where you can generate enough to support the economy, and the government is not getting it, how do you correct that?
Well, what needs to be done is to grow the revenue base, some efforts are already taking place to improve tax administration and all of that, but the size of your revenue is a function of the size of your investors, it is the investors that will give you money, investors will pay the taxes, if the environment is such that you don’t have investors, where will money come from, and then there will be so much pressure placed on the little investors that we have, tax pressures and the likes; but if you create an environment where you have broadened the scope of investment, both domestic and foreign, economic activities will quicken and you will make more money, that is what is distinguishing Lagos from the other states in the federation, we have more investors here and they have been able to recoup some more IGR, it is a question of encouraging investment and creating an environment for investors to thrive and you will get more revenue in terms of taxes; and then, identify the MDAs that are generating revenue, I believe a lot of them can do better than they are doing now.