NIGERIA will be 57 years on October 31 2017; what is your assessment of the country’s performance in terms of use of statistics for policy making and economic planning.
Nigeria has come a long way. We are a much stronger and bigger country than we were in 1960. There are a lot of positives and there are also a lot of negatives. There are things that have not changed, but I think in general the economy has moved strongly than it did at independence. However, that is not to say that there are no challenges. Things are getting better, because there are some things that were not in existence then that are available now and those things have improved our livelihood as well. This I think is a positive development. So, it is worth celebrating.
In terms of statistics, it depends on the one in question. There are some that show the economy has done very well in terms of growth. There are some that show the economy has not done well in terms of quality and sharing of that growth, unemployment and so on. So it depends on the statistics you are looking at. Some are very good. Some are bad and some are exactly the same.
What is your general assessment of the economy over the years up till recent times?
Our heavy dependence on a mono product (oil ) for foreign exchange earnings has certainly not served the economy well over the years, and this calls for an urgent need to diversify the economy from oil.
Following several years of strong growth, the Nigeria economy started slowing down mid-2014 and eventually entered recession in second quarter 2016. Firstly this is not the first time the Nigerian economy is witnessing a recession. It has happened at least twice since 1980s: first in 1984 and again in 1991.
Traditional economic theory expects boom and bust cycles so nothing unique here and every country experiences both at different times. However, it is what you do during the boom period that will help withstand the bust cycles.
Therefore prudent economic managers should expect good and bad times and adequately prepare for fluctuations in the business cycle. I’ll go back to this later.
Most people have rightly pointed to the drop in oil prices from 2014 to be the immediate trigger of the recession, but a more fundamental issue has to do with what I believe is the dysfunctional nature of the Nigerian economy, on the basis in which we had posted very strong growth in the past. This structure has existed since the 1984 recession. Was still there in 1991 and still exists today.
Our inability to break this unsustainable economic structure is what makes us vulnerable when such economic bust cycles hit and I guess Einstein will refer to us as insane since we keep repeating the same mistakes and doing the same things every time and seem surprised when the same results occur.
There should therefore not be any strong surprise to anybody following the data, just as there shouldn’t have been much surprise we exited when we did, as the data showed things were also getting better from Q3 2016 though still negative.
The problem is often that our economic managers don’t take data seriously because if they did, the decline could have been corrected and the recession prevented or at least its impact reduced or if getting into recession was inevitable, the duration could have been shortened.
If anything, I think the initial reaction was one of panic as soon as the negative effects hit, forcing the introduction of policies that may have hit confidence, worsened business calculations and exacerbated things even further.
We know that in recent years, the Nigerian economy has experienced (and to an extent is still experiencing) several significant shocks: from commodity shocks to political instability, to security challenges, disease outbreak to the ongoing economic recession and exit from recovery.
What do you mean by Nigeria’s unsustainable economic structure?
A simple way of explaining the structure of the Nigeria economy is to think of a house built on foundation of three pillars. Typically, we say the economy can be divided into two: An oil economy which accounts for nine per cent and a non-oil economy which accounts for the remaining 91 per cent. In reality, however, there are three.
First, an oil sector that contributes about nine per cent to the Nigerian economy today, but from which 80 per cent of total Nigerian government revenue for development and 95 per cent of foreign exchange is derived. This makes government revenue unstable and vulnerable to earnings instability. It also means the importation of all we need and our attractiveness to foreign investors is also dependent on this single commodity that is relatively small and unimportant with respect to the whole economy, but nevertheless critical for growth and development.
Second, the economy has an import significant consumption-driven, non-oil sector. The sector again relies on the oil sector, via foreign exchange remittances from the oil sector and other capital inflows which also depend largely on the fortunes of the oil sector, to finance the imports of intermediate/finished goods and imported services to meet domestic demand. Such domestic demands are those of manufacturing, real estate public admin, trade construction, financial services, among others.
This sector contributes 52 per cent to the economy. Our economic growth of the past was essentially driven by consumption – which is a good thing given our large market – but only if consumption is driven by local production of goods and services can the benefits be localised. All we were doing instead in the past was boosting our economy and growing by consuming imported goods and services, thereby aiding production and employment in other countries.
Even the few goods and services produced locally were dependent on imported inputs to survive. Due to inadequate power supply in the past, the economy relied on imported diesel and petrol and aviation fuel to power our industries and other sectors. Our oil wealth in the past was used to develop and sustain a culture of buying imported goods many of which had local substitutes. And as long as oil prices were high, we could keep growing our non-oil economy and creating jobs and this is what Nigeria continued to do for years.
The third foundation of the three pillars is an Investment-driven, non-oil sector that does not rely principally on the oil sector or on foreign exchange remittances. They are: agriculture, arts entertainment, administration and support services and some other kinds of manufacturing. This third pillar essentially harnesses local inputs of raw materials, intermediate goods and domestic labour as factors of production to meet domestic demand as well as exports. This all-important pillar however forms only about 39 per cent of the Nigerian economy. Moreover, it wasn’t substantially strengthened during the periods of high oil prices and high growth as investment to Gross Domestic Product (GDP) actually remained flat during the period.
What is the implication of all this? It means, in reality, the Nigerian economy was 61per cent directly and indirectly dependent on oil which means we have essentially been building our house on one pillar supported by two other shaky but more dominant pillars that we did not have control of. Oil is largely external so Nigeria is essentially only in control of 39 per cent of its economy which is heavily dependent on issues of security, ease of business, weather and (good or bad) policy decisions.
The strength of those two other pillars or 61pillers of our economy was dependent on unpredictable and unstable international oil prices and on peace and order in the Niger Delta. Obviously as long the main oil sector pillar remained firm, our house continued to stand. But once that pillar became unstable, shaken by the developments in the global economy that are beyond our control, the house was prone to collapse.
So our economy has been growing as a result of consumption which accounts for the largest share of GDP and consumption dependent on imported products which are dependent on the availability of foreign exchange reserves linked to the oil price and oil production.
We have established that we have a dysfunctional economic structure that needs to change and we will be vulnerable to these same shocks till that change comes.
It is quite clear that whatever happens in the oil sector will have a significant effect on the country’s GDP. Thus, when oil prices collapsed in mid-2014 from over $100 per barrel in June to less than $50 by January 2015, the exposure of the economy guaranteed that that effect would be widely felt, and this is essentially the primary origin of the recession
Firstly, Nigeria did not significantly save: Secondly, not only did we not save, but Nigeria did not significantly invest either. Rather, Nigeria continued to consume, especially imported goods and services.
Now, Nigeria has certainly had a number of oil booms which led to strong growth in the past. There are prudent and imprudent ways to use oil revenue and windfalls. Other countries have successfully managed their oil revenues, but unfortunately ours has not been the case.
What are prudent ways of spending oil windfall to sustain growth? What do smart economies do especially ones with such a high dependence on a single commodity?
Ideally, during periods of unusually high oil prices and robust oil production, prudent oil producing counties should do four things: they pay off their debts and save for a rainy day; they invest in their domestic capacity to produce; they consume less imports and more locally-made products and export the rest; they invest the windfall in infrastructure and on projects that will yield sustainable development.
This is important because, oil and gas are non-renewable or wasting natural resources and as such oil revenues will one day end when our last oil well dries up and our gas reserves are finally exhausted or when the world shifts from their use to alternative energy sources as is happening already.
But what did we do as a country?
Firstly, Nigeria did not significantly save: Between 2007 and 2015, the savings in the excess crude account reduced from $20 billion to less than $2 billion. Not only was the entire additional windfall from oil spent, even what was already existing in the account was spent and on consumption. Our recurrent budgets kept rising without any commensurate rise in capital budgets. We established more agencies, increased recurrent costs of running government and so on. Assuming instead we had chosen to save the windfall, our foreign reserves from my estimates, may have risen to $60-65 billion today rather than about $25-$28billion that we had when oil prices crashed, and which was insufficient to maintain the import-based growth model we had been operating under.
If we had saved in the excess crude account, it is likely that we will have been able to fund most of the N1.85 trillion 2016 capital budget instead of relying on local and domestic borrowing which hasn’t fully materialized and which is one reason recovery from recession is slower today. Such savings would have also made it easier for us to fund critical counterpart funding commitments such as the Lagos-Kano Railway: Kano-Kaduna segment or the Mambilla Hydro-electric Power Project among others.
Secondly, not only did we not save, but Nigeria did not significantly invest either: Gross Capital Formation which is used to gauge the level of public and private investment remained more of less flat during the boom years from 2007 to 2015 indicating that Nigeria was not prioritizing investments in critical infrastructure. There was no substantial growth in investment to GDP ratio despite the fact that revenues were rising. The performance of Federal Government capital budget for example declined during the period from over N1 trillion in 2011 to about N370 billion in 2015. At the same time, Joint Venture Cash Calls which constitute government’s contribution to developing future oil and gas resources kept falling.
Thirdly, even though the nature of our exports was quite evidently unsustainable, still imports continued to increase. We did not pay off our domestic debt. As I mentioned earlier, local industry was virtually non-existent, and huge part of the foreign exchange earnings was used to import subsidized petroleum products, which account for nearly 70per cent of total imports in the first quarter of 2017 (Motor spirit plus Gas oil).
The percentage of the federal budget dedicated to recurrent expenditure kept rising. The allocation of foreign exchange to pay school fees and medical bills abroad rose just as the amount of foreign exchange to import food kept rising. Large local producers continued to rely on imported raw materials instead of sourcing material locally.
The outcome was that by the time the bubble bust, we had nothing in reserves, we had no other source of government revenue, and we had no investments to fall back on. Countries that inadequately prepare for periodic economic downturns suffer for much longer than they ought to. The consequence of relying on an unsustainable economic structure and ignoring what the data was saying is the reality that surviving in contemporary Nigeria remains a challenge for many. The current climate has forced all economic agents (households, firms, government) to re-allocate our consumption expenditure in the face of lower output, rising prices, lower real wages and rising unemployment. So our slowing economy hit contraction that lasted 15 months. Moreover, we know that inequality has remained a thorny issue across the country and the recession may have worsened it further as a result of inflationary pressure on household income. Across several States, debt levels have been on the increase with many unable to meet salary obligations in time, and being forced to even slash workers’ pay.
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