Our budgeting system induces poverty — Utomi

Prof. Pat Utomi is a thoroughbred academic and a distinguished private sector player in Nigeria. He once served as an Economic Adviser to President Sheu Shagari. He was also the Chief Operating Officer of Volkswagen of Nigeria, Vice Chairman of Bank PHB Plc and a Non-Executive Director of Mutual Benefits Assurance Plc. A fellow of the Institute of Management Consultants of Nigeria, he is also a former Director of the Lagos Business School of the Pan-Atlantic University. He has served on the council of the Lagos Chamber of Commerce, The National Council of the Manufacturers Association of Nigeria and the Nigerian Consultative Association (NECA). He has been a scholar-in-residence at the American University in Washington DC and the Harvard Business School. In this interview with WALE AKINSELURE, he speaks on the issue of recession, diversifying and revamping the economy as well as the need to have value-based leadership in the country. Excerpts.

 

The IMF, in its recent forecast, said that the nation’s economy would grow by -1.8 per cent during this year revising an earlier forecast of 2.8 per cent. In this light, the Minister of Finance, Mrs Kemi Adeosun, also said that the nation was in a recession. How did we get here?

Anybody who has just a basic understanding of how economies run would have known that Nigeria was going to be in a recession. We didn’t need an IMF pronouncement to know that. Technically speaking, two quarters back and back of a decline in output is a recession.

How did we get here? The thing that gets blamed a lot is a decline in oil prices. But, let me begin from the basic fact that we have economic cycles. Boom is not forever. You will have boom and then the cycle will come down. But, the question is whether the decline becomes bust. The tendency in public commentaries in Nigeria, from public officials, is to blame it on the decline in price of crude oil. Of course, it is a contributor. But, one of the most painful things about how we manage Nigeria is that the expected takes us by surprise. Oil prices, traditionally, have been very volatile. Throughout the 70s and 80s, Nigeria kept going from boom, bang, to bust because of the volatility of oil prices. I very often tell the story of how my father passed away while I was in graduate school abroad, in the 1980s. And I came home on the back of the Iranian revolution when oil prices went to $40 a barrel for the first time. The whole country was going crazy. We were spending like we invented money. Lagos became the biggest dustbin in the world. Some people were drinking canned soft drinks and canned beer and tossed the can out of their cars as they were going. Champagne became the beverage of choice. I came back home in 1982, when I finished my PhD, and Nigeria was in dire situation. Nigeria could not pay for its imports and lines of credits to Nigerian banks from foreign banks were shut. By 1984, Nigerians were queuing up to buy milk and sugar; they were called essential commodities. So, we have had this history of abandoning projects. Once oil prices go up, we start all kinds of projects; oil prices go down, we abandon the projects, thereby compounding our problems. That is part of reasons why we are where we are.

You will think that a country, like a company or individual, will be a learning organisation, that is, learn from yesterday’s mistakes. From all those volatilities, we were supposed to know that oil prices will come down. So, what you do when oil prices go up is to save, and have a systematic pattern of planning your development. The second thing you should learn is to use oil as leverage to attract other peoples’ savings to come into your country as investment. We never did particularly well in either. The rise of India, China led to a stretch in the peak of the boom era and led to extraordinary amnesia about the fact that the prices will come down. We behaved like oil prices will remain permanently up, therefore, the recklessness with which we spend public resources. So, the impact of this on our thinking was more dangerous than its real impact. Fundamentally, it means that we are not a thoughtful people. When Olusegun Obasanjo became president in 1999, the price of crude oil was $11 per barrel, not $100. We are behaving as if oil prices have always been $100. But, we did not get into this kind of depressed mode in 1999. Of course, it was rising, but it leads to the point that where oil prices is a significant contributor to our finances becoming challenged, how we managed it, the last one year is more responsible for how depressed we are.

You mean the country is gravitating towards depression due to our policy choices in the last one year.

Somehow people do not seem to realise that what policy does is to help manage your economic behaviour so that the outcome will be sustained growth for everybody. Policy makers have not managed to do a good job of educating people of why choices are made. A classic example is this story of devaluation. We are not hearing that people in Russia are starving today as they are in Nigeria because the essence of your currency responding to your foreign earning is so that you don’t continue to behave like nothing had changed. In Nigeria, we said we won’t allow petrol prices to change relative to the price of crude oil, so, our habits continued the way they were. This is not to mention the corruption in the so-called petrol subsidy business. A combination of the massive corruption in that system and our refusal to let our earnings reflect in the pricing of something that comes from abroad created the problem of huge waste in the name of fuel subsidy. We refused to address that. Government set up a transition committee which addressed that and made suggestion of what to do even before the government came into power. For whatever reasons, those pieces of advice were not taken.

When you say we cannot devalue, you are preparing yourself for a devaluation that will hit you in the gut. It happened to us in the 1980s when crude oil prices began to crash. Due to the fact that Nigeria had a blocked currency, that is, the value of the currency is determined at the Central Bank, the variants between our purchasing power parity and our exchange rate created rooms for distortions in our economy. Purchasing power parity is a measure of how much of your currency can produce the same thing as the currency of the country you are dealing with. The Economist Magazine described it as a surrogate measure called the hamburger index. The McDonald’s quarter pounder has the same ingredients everywhere. One asks that how much naira will it take to produce one hamburger in Lagos, Nigeria. That is an idealised representation of what your exchange rate should be. Therefore, exchange rate should orient behaviour in a way that you can begin to produce more when you are more competitive, you earn more, and the quality of life will go up. It is the refusal to follow this discipline, through the years, that has not enabled us to diversify the base of our economy.

Diversification of the economy, since the 1980s, is a refrain in our budget every year but no diversification has taken place. This is because the incentive system based on our purchasing power parity relative to overshooting exchange rate and a number of other factors are responsible for the behaviour of Nigerians. So, we can encourage behaviour in a particular direction. It is not always that the incentives work so fast; sometimes one has lags. So, leadership behaviour can facilitate that. The whole idea of industrial policy in Asia that led to rise of Korea, Malaysia and Indonesia is really a function of leadership behaviour orienting a thrust towards a direction. We watch our agricultural sector disappear before our eyes because all that state governors were interested in is sending their finance commissioners to go to a FAAC meeting and bring back what has been shared from the receipts of crude oil and pay salaries and whatever else meets their fancy.

The progress of Nigeria in the 1950s was because of the creativity of people like Chief Obafemi Awolowo at the sub-national level, not national level. Their creativity led to farm settlements that led to setting up industries. The direction of industrial development in Nigeria began with Chief Awolowo setting out the Ikeja Industrial Estate and then others responding to that competitive thrust. Eastern Nigeria followed immediately with the Aba and Portharcourt industrial estates; Northern Nigeria followed with the Kakuri Industrial Estate and Bompai in Kano. I don’t know how many great initiatives come from sub-national level these days. If we don’t produce, exchange rate would go to N10,000 to $1. The bottom line in our exchange rate is building a competitive economy and building a producing economy. Right now, the truth is that Nigerians have lost understanding of how to produce. For a long time, we have got used to getting something for nothing. Many have developed an entitlement mentality. We need a revolution in thinking, especially as citizens, and then a more responsible leadership that understands where we are and what needs to be done. Right now, we don’t have that.

 

Currently, we are in a period of recession evident in the current hardship, unemployment, poverty, which you have said was bound to happen. But you have noted that the situation has been poorly managed in the past one year and a bad situation has been worsened. What measures should government take to redress this situation?

We need to have short term fire fighting stuff in addition to having medium term and long term thrusts. Yes, there are so many people out of work. You hear people say diversify the base of the economy. Now, the solid minerals sector will be the new area of focus. Solid minerals will not contribute a kobo for the next ten years. It is a left field. In my travels this year, I tried to promote the country, and they tell me that my country is not even ready to even begin to consider mining. There isn’t even data. It has not done the study that will show where what is. People, say, Ah! There is gold in Ilesa, this is there, that is there. Is it commercial? The first thing is to begin to do real serious work to establish what is where and make that information available to mining companies. Then, they will come in. Oh! There are infrastructure issues to where these minerals are located, what kind of planning do we have. We are talking about 10 to 20 years from now before those solid mineral deposits can contribute anything. While planning that, we must ask what do we do today? One of the things to do is to create a certain stimulus in the economy. As government, you have to do a level of deficit budgeting, that is, to put money in the system, provide jobs for very vulnerable citizens.

 

Is the 2016 budget not a veritable tool in stimulating the economy, in terms of pumping money into the economy?

How many people will the money reach and what is the impact? So, planning how you spend the money is itself, work. Nigeria doesn’t mean to make budgets that have consequences for the lives of Nigerians. We just know that there is money coming and we have to allocate it. And so, the budget process seems like just a public relations exercise because the person who makes the budget begins to do something that is not in the budget, the next day.  So, you wonder if we take the budget seriously. I told the Vice President shortly after inauguration that we need to start thinking of a zero based budget. Zero based budget completely discounts all former assumptions. The typical budgeting process is incremental, that is, if for example, we spent N300 billion last year, and inflation is X percent, we adjust our allocations to various agencies baring inflation in mind. I said that is why we are where we are. Let us forget all the assumptions and begin again. Rather than just vote monies to ministries that is spent, let us set goals for each ministry. In the sports ministry for example, let us say our goal for sports is to win two gold medals in a particular sport in the next Olympics. We should then say how much money should be given to the sports ministry to achieve this goal. It becomes the new basis of our assumptions in sports. We should set goals in ministries. When I heard two months later that the 2016 budget would be zero based budgeting, I screamed. I said, it is not possible for us to have zero based budgeting in 2016; it will take at least two years of serious people sitting down to do serious work to do a zero based budget. And you can see what happened to the 2016 budget. So, the budget of its own does not stimulate the economy. It can be a deficit budget determined to put more money into the economy but we have to be careful that we put the money where there will be impact. We need thinking people, serious minded people in leadership positions. Unfortunately, we do not have enough of them in this system. We have to start looking for this kind of persons. One of the sad things about Nigeria is that our politics has become deeply anti-intellectual.

 

The government plans to give N5,000 monthly to some unemployed Nigerians. To what extent does this social intervention programme get Nigerians engaged and take them out of poverty?

I believe in the programme and the Vice President told me on my birthday in February, this year, that I suggested the programme. The idea came to me from Brazil. That is part of the ways Brazil marched its way out of poverty. Brazil was always thought of as a bigger version of Nigeria. A country of great potential that may never attain its potential and people laughed about Brazil until Professor Fernando Henrique Cardoso came up with ideas that transformed Brazil into one of the top six economies in the world. One of the things he did was to use conditional cash transfer to the poorest of the poor to stimulate economic activity. I am a big believer in doing that. Though some give excuses of us not having statistics but let us try something. There are surrogate measures of what you need as input. You leave this money in ministries, directors will steal the money. Give the N5,000 to those poor people but my condition is that they do some service for it. It could be cleaning the street or making the community clean.

 

The CBN has liberalised the foreign exchange market. How do you see this, especially in view of the cascading value of the naira?

Has the foreign exchange market been deregulated? There is still a window. Wherever you have a window, maybe well meaning, in a society like ours, it will be cheap access for the powerful from others who do not have that opportunity. It will affect competitiveness but more importantly, it sends a signal to other players that you can still not trust that system. And because that signal is going out, people who have dollars to bring will still be waiting, and so you don’t get to fund the market enough and that will lead to further depreciation of the naira.

 

The CBN has just raised the lending rate from 12 to 14 per cent. What are the implications of such increase in lending rate given that the economy is in recession?

Who was borrowing anyway? For those who are borrowing, are those things they do creating jobs, growth? There is a sense in which it sounds paradoxical that really in a time of response and we talk about stimulus response, the idea should be to stimulate a journey of interest rates down so that those who borrow can have easier access. But you find that Nigeria is stuck in an awkward dilemma. Many of those accessing loans are the people who may not actually be producing but may use the “cheaper money” they borrow to hit the foreign exchange market and take money out, therefore put more pressure on the market, compounding the vicious cycle in inflation. At the same time, how do those people you want to start out in agriculture, in those areas that will diversify the base of the economy. So, how do they access funds that they can use in this situation to create wealth? There is no easy answer to that. I will be inclined to the creation of funds for priority sectors like manufacturing and agriculture that would obviously have much more lower interest rate. But you cannot get people go into agriculture if they will be borrowing at 14 per cent interest rate or more. So, do we want to tolerate some inflation and stimulate production? I will vote for production even though inflation does a lot of damage.

 

Should there be total ban on importation to help our local production?

This is where leadership matters. Where you have leadership that is really pragmatic and practical, you can use industrial policy with clear timelines to support growth of a sector. Blanket choices will not help us. If we determine today that we want to become the global leader in the production of sesame seeds, for example, I will have no problem in banning the importation of any sesame seed into Nigeria and making machinery for processing sesame seeds completely duty free. But you have to be systematic, take on one sector of the economy you want to grow with clear timelines. But actively look for bright young people in their specific fields and provide the needed conditions for them to meet set targets. We need that kind of focused leadership to grow certain sectors that we want to become dominant in globally.

 

As a result of the recession, companies are closing in their droves. How should government help to arrest this development?

Government should sit and discuss with these companies about what is going on. What is the biggest pressure? They will say some selfish things, but if you are smart enough and have the right people on your team, you will show them what they did not do and what they should do. But we do not have those teams in government. How many people in government understand manufacturing; understand what the issues are both at the political level and at the civil service level? You do not have them. Nigeria has very smart people all over the world, even here in Nigeria. But the way we treat power in Nigeria is like the hunter that hunted down big game. Government is about eating and no one wants to be disturbed when eating the big rat that was hunted down. Government should be about inclusion. Where are the smartest Nigerians in the world? We get them on the business side and on the government side and they have serious robust conversation and people become champions in making those things happen and you will see a transformation take place. But that is not the psychology of Nigerian politics.

 

How soon do you see the country exiting recession?

How soon we exit recession depends on what we do. To the ordinary Nigerian, recession means companies will be folding up; recession means you cannot pay basic bills and cannot eat the kinds of meals that would nourish you properly, diseases will increase because people are not getting enough nourishment, malnutrition will increase. A recession not managed well can lead to a depression; and, in depressions, what you get is mass suicides. We pray we do not get into a depression but we also pray that policy makers do not keep praying that oil prices go up as the basis for improving the polity because if oil prices go up, it will not be sustainable. Nigeria’s oil will run out in the next 30 years and it is over. The bottom line is leadership. This is a time for us to be bold, be ambitious in initiatives. Somehow, something restricts our capacity to boldly engage problems. We need to see champions around many of the areas of challenges.