The Nigerian economy in the last few years has been going through some turbulence. A country that recorded an average GDP growth of 6.5 per cent, one of the highest in the world less than a decade ago, is now projected to grow at about 2.3 per cent in 2016.
The implication is that per capita income growth may actually be negative with significant consequence on poverty, socio-economic welfare and employment.
Not only GDP, other economic indicators have been on the southward trend with overall economic outlook generally negative.
It was just one year ago that Nigerians were filled with hope and positive sentiments about the future with the inauguration of a new regime with promise of change.
It is true that the current government cannot be blamed entirely for all the present socio-economic crises, some were inherited like the effects of nauseating stories we are regularly regaled with about the massive looting of the economy under the past regime.
Over the years, we had built an economic system that thrived on grafts and corruption. Some of the problems were exogenous, like the depressed world oil prices. However, blaming the past is not the solution and, increasingly, fewer people are buying the excuses of laying the blame for the present economic paralysis on the failures of the past regime.
A government is elected to solve problems and improve the lives of its people. No excuse is good enough to justify non-performance. President Barack Obama, when he was elected in 2008, met the US economy on arguably its worst state since the Great Depression. Similarly, Prime Minister David Cameron of the UK inherited an economy that was almost prostrate.
However, instead of holding the present a hostage of the past, both leaders faced their countries’ economic problems with credible and vigorous economic reform programmes that have succeeded in turning their economies around. We all expect the same from the present Nigerian administration.
The buck cannot be passed to anyone else. It is true that many countries in the world are currently going through a tough patch. However, many of these countries have also put in place economically sound and cohesive policies to tackle the economic challenges. We cannot conveniently say this about Nigeria. In fact, it is sometimes difficult to see a body of coherent fiscal and monetary policies that has been put in place to address the myriads of economic challenges confronting the country.
The nation’s economic challenges are quite formidable: poverty is almost at an all time high, unemployment rate is high and rising, industrial production at best is stagnant, infrastructure are in terrible state across the country; a plethora of bad roads, poor electricity supply and telecommunication efficiency has fallen as drop rates have increased due to the impact of energy on the operations of the telecommunication sector. The banking sector is in a tight fix, in spite of claims to the contrary, inflation is in the double digit and there are fears that it may increase, the parallel market premium remains high in spite of the belated and incomplete reforms of the foreign exchange market. The capital market faces its own challenges, insecurity of life and property is rife; the various sectors of the economy are challenged and are in various state of survival mode. The government has admitted that the 2016 budget will not be fully implemented due to sharp decline in revenue. Many states of the federation are technically insolvent, owing their workers several months’ salaries. Consequently, economic activities have collapsed in many states as the multiplier effects of non-payment of workers’ salaries spread through the labyrinth of the economies of the affected states. The Federal Government is also borrowing to finance its budget, mainly recurrent expenditure, thereby crowding out private sector borrowing. Net foreign capital inflows have slowed down, including remittances that few years ago were a major source of foreign capital inflow into Nigeria. All of these are compounded by inherited economic and political governance problems. Nigeria retains low ranking on competitiveness index, the doing business index, economic freedom index, governance index, and major other global ranking indices. Nigeria is now classified as a failing state.
However, the government may be gradually losing its sympathy within and outside the country. While most people still applaud the government for its anti-corruption stance, and the attempts to bring those who have betrayed the public trust to justice, a lot of people are also concerned about the slow pace of reforms, and weak demonstrable resolve in tackling the economy’s myriad challenges.
The recent smooth transition in Britain after the Brexit vote is a major lesson of how a government should work. As Prime Minister David Cameron stepped down and Theresa May was appointed the new Prime Minister, one cannot but be amazed at the pace and efficiency of the political transition, as well as the independence and strength of various institutions of government. The new Prime Minister announced key ministerial appointments within 24 hours. In our case, it took about six months. In addition, ministerial appointments in the UK were based on credibility, records of performance and expectations of positive contributions to governance. The national interest was prioritized above friendships, personal connections, ethnic and religious considerations.
The new Prime Minister also clearly and boldly articulated the direction her government would be taking. The public perception is that of a government that is competent and dynamic. This is the same thing we wish for Nigeria. In the past one year, Nigerians have been left to wonder on what is the dominant economic paradigm guiding public policies. Instead, economic agents have experienced inconsistent policy pronouncements, reversals and conflicting policies.
Recently, the International Monetary Fund (IMF) warned that the Nigerian economic growth rate may shrink further and that inflation remains a potential problem. While we do not need the IMF to tell us the state of our economy, as we are already living through the very tough economic environment and see the despondency and hopelessness on the faces of average Nigerians, yet as a globally respected institution, the warning is a clear wake-up call on the government to set its priority right.
We are going to suggest a few options to address some of the macroeconomic and sectoral challenges facing the Nigerian economy.
Inflation has to be addressed urgently and frontally. However, it is important to properly understand the underlying driver of the current high rate of inflation. It is majorly caused by supply factors – high costs of production driven by high costs of foreign exchange, high costs of production, high costs of transportation and marketing, high costs of credit and multiple taxation, among others. Now that government funds are no longer with the deposit banks, increase in monetary policy rate will increase interest rates and further worsen adverse selection problem and prospects of loan defaults by banks.
The IMF representative was quite right when he said that addressing the energy problem is important to resolving the Nigerian economic problem. The energy problem here includes power and the oil and gas challenges that the country is currently confronted with. Public power supply has been epileptic. The volatility of electricity supply is very high, giving rise to uncertainty of supply and high marginal costs of power outages when they occur. The ongoing attacks on gas pipelines by the Niger Delta Avengers have added to the power supply crisis. Businesses operating in Nigeria, whatever the scale of their operations often have to spend huge capital to invest in private power supply. With the controlled deregulation of the petroleum downstream sector the prices of diesel and gasoline have gone up thereby increasing production costs significantly.
However, the power sector needs a different policy approach. Over reliance on gas is putting our energy security in jeopardy. The country needs a robust mix of energy sources for electricity production. Moving in this direction is not just the responsibility of the government alone, but by tweaking policies to provide appropriate incentives to the private sector and entrepreneurs, greater number of Nigerians can be made to participate in electricity supply, in a public private partnership framework. We do not have to rely on gas or large hydro and other mega size projects alone, small and micro scale projects also can be encouraged that will ensure rapid diffusion of power solutions to greater number of people. We can use our rivers, sun, wind, and other primary energy sources to increase electricity supply. We can learn from what happens in other countries. This approach requires close collaboration with other stakeholders in the tertiary institutions, research institutes and the business sector. Nigeria is so much endowed with natural sources of energy and we can as well benefit from recent advances in science, technology and innovation to solve power problems. The privatization of PHCN assets in 2013 must be reviewed with a view to ensuring that the problems confronting the sectors are discussed with all stakeholders and resolved once and for all. Power generation must be turned into an attractive business.
Agriculture holds a very important key to our economic development. A lot of right noises are being made, but the fundamental problems are not being addressed aggressively, and in our view, in an orderly prioritized manner. Long term problems such as the huge influence of climate in production, poor and inadequate storage facilities to allow for smoothening of production process, low yield input due partly to weak linkage between research and agricultural practices, outdated agricultural implements that are still largely crude, rudimentary and unattractive to the younger generation, lack of credit, high risk ratio of the sector, poor state of infrastructure between the production and market centres, among others. Again, there must be a systemic and systematic approach to address these issues through the entire value chain. Appropriate tweaking of policies to de-risk the sector, provide incentives to all the players, open up the rural areas through good road and railway networks to link up the production centres in the rural areas and the consumption centres in the urban areas, support irrigation to delink the effects of climate on agriculture, encourage privately managed storage facilities and provide marketing support to reduce income volatility, reintroduce a well coordinated modern and efficient extension services and more importantly, application of science, technology and innovation (STI) to the sector through proper coordination among the government, academic and the private sector will transform the agricultural sector, reduce food insecurity, food import bills and productively engage our teeming unemployed youths.
The manufacturing side is also another important supply side issue that we need to address to make the Nigerian economy rebound and become a fledging 21st century economy. The manufacturing sector has significant backward and forward linkages with the rest of the economy. A robust and competitive manufacturing sector will enhance productivity, increase value addition, generate more government revenue through taxation, help diversify exports and reduce import dependency of the economy. The employment coefficient of the manufacturing sector is very high. Yet, Nigeria has one of the lowest manufacturing-GDP ratios in the world. We will not develop a competitive manufacturing sector except we develop a robust set of integrated, reinforcing economic and non-economic policies that create the right incentives for existing and potential entrants to the sector. We must look at the entire components of competitiveness index and the Doing Business Index and put in place policies to address those areas where our deficiencies are so obvious.
Our trade and exchange rate policies, income policies, monetary and fiscal policies must be seen to be coherent, transparent and intelligible to key economic agents – domestic and foreign. The body language of the President, the pedigree and caliber of his appointees must be in sync and the quality of government policies must align with one of the orthodox bodies of modern economic development policies. Economic laws, as simple as they look, are powerful forces that any economy or government no matter how well intentioned ignores at its own perils.
It is obvious that we must diversify the Nigerian economy. It should not however be the often refrain of diversification away from the petroleum sector. With our huge energy endowments, an efficient and effective diversification must involve both vertical and horizontal diversification. The weak integration of the petroleum sector with the rest of the economy should be addressed. A situation where petroleum accounts for over 95 per cent of export earnings, over 70 per cent of government revenue and less than 16 per cent of the GDP shows the weakness of our economic structure. There are over 6,000 products that can be obtained from petroleum, whereas we focus on less than 10 products. Again the role of STI in wealth maximization from petroleum resources cannot be overemphasized.
The fact is that the government must demonstrate to Nigerians that they are on top of the current economic challenges. There is need to reduce economic uncertainties. Every modern developed economy tries to avoid economic governance uncertainties by pre-announcing or providing criteria under which intervention or policy changes will take place so that economic agents are not ambushed and to ensure that investment risks can be minimized. The Nigerian government needs a coherent policy document in the mould of the NEEDS document in which economic objectives, strategies and policies are clearly defined.
There is urgent need to address the technical insolvency of many of the states by formulating a clear support and exit strategies to bail out the states, reduce the very high unemployment and poverty rates, bridge the gap between the two sets of ruling exchange rates, bring down inflation and interest rates, address the security of public and private petroleum assets, especially in the Niger Delta, address the concerns of those who feel marginalized under the present system of governance and build an inclusive economy.
The short to medium term outlook of the economy is not very bright. The downsides include the continuous operations of militants in the Niger Delta that continue to attack petroleum infrastructure, depriving the economy of badly needed revenue and foreign exchange to finance its budget and to defend the naira respectively. The oversupply of oil in the global market will continue to render the oil market soft as price will continue to operate within the $45 – $55 band. Although this is higher than the $38 on which the 2016 budget is predicated, the decline in crude oil production has amplified the effects of oil price shocks on the Nigerian economy. Suddenly in Africa, Nigeria is now the second largest crude oil producer behind Angola. The more these attacks continue, the greater the risks and uncertainties that oil producers face in operating in the Niger Delta region and the lower government earns under the present oil fiscal regime.
There also seems to be no clearly visible powerful voice in the government that is coordinating government response to the tepid economic situation. There is a perception that the government reacts rather than lead the process of economic transformation. Whatever it is, after the long battle with the budget, the expectation is that the government machinery will be working at top speed to deliver on the budget promises. Little seems to be happening and the slow pace to tackle the serious economic problem continues.
The weakness of the power sector remains a major source of concern. Efforts by the electricity distribution companies (DISCOs) to get a hike in their tariffs have so far failed due to resistance from consumer groups, the National Assembly and the recent judicial pronouncement. Most of the DISCOs are weak and are struggling to stay afloat. Again, we expect a more dynamic and proactive leadership to provide a way out of the brittle state of the power sector.
Finally, and perhaps most important in our view, the nation is in urgent need of economic leadership by the APC government.
Professor Adenikinju is Director, Centre for Petroleum, Energy Economics and Law, University of Ibadan.