Adeola Adenikinju, a Professor of Economics, is the Director, Centre for Petroleum, Energy Economics and Law, University of Ibadan, Ibadan. In this interview by SULAIMON OLANREWAJU, he speaks on growing the economy and averting another recession. Excerpts:
The Central Bank of Nigeria (CBN) warned recently that unless the economy is properly managed, the country may head again to recession. What do you think the FG should do about retuning the economy?
Nigeria has recovered from the 2016 recession that brought significant challenges to the economy, when the economy contracted by 1.62 per cent. Government’s efforts and the deft moves by the CBN undoubtedly helped the economy to recover and to avoid a double dip into recession since then. Growth has remained positive since 2017, albeit very weak. Current estimate is that real GDP would grow by about 2.2 per cent in 2019, up from 1.93 per cent in 2018.
There is no doubt that this growth rate is weak and it is not sufficient to impact significantly on unemployment and poverty challenges the country is facing. It is also too fragile to protect the country against significant external shocks if any should occur.
It is good that President Muhammadu Buhari has constituted his cabinet. It is also good that he retained the Minister of Finance, which will allow for policy continuity. However, it is the collective responsibility of the economic team to come with bold initiatives to give the economy the needed impetus. We are not where we should be as a nation. We must align fiscal and monetary policies to drive macroeconomic goals of boosting economic growth and employment generation.
The ERGP ends in 2020, it is important to have another medium term economic plan that will give directions to the economy and coordinate the activities of public, private and foreign investors. This is important to foster efficient allocation of resources.
The management of the economy seems to rely more on monetary policies than fiscal policies. How healthy is this?
You are right. We need coordination between monetary and fiscal policies to ensure that economic growth is maximized. It has been shown theoretically and empirically that fiscal policy in particular is more effective in stimulating growth, employment generation and directing medium to long term resource allocation. Monetary policy is more effective in the short run to provide liquidity needed to support growth. It is true that the CBN has used unconventional monetary policy in recent years in order to support economic growth. This is within the dual mandates of the CBN, to provide monetary and price stability and support economic growth. Central banks all over the world have adopted various measures to support fiscal authorities in order to meet current global challenges.
Yet, if looked at critically, CBN interventions have direct and indirect effects on price and exchange rate stability. The restrictions of the 43+ products from access to official foreign exchange, the Anchor Borrowers’ Programme, the establishment of National Micro Finance Bank, concessionary lendings to the real sector of the economy, and other efforts to boost lending to economic agents are designed, first, to reduce demand for foreign exchange, second, expand local production by reducing supply and access to market constraints and boost domestic demand. The final impacts of these intentions are to ensure exchange rate stability, reduce costs of productions and lower domestic prices, with indirect effects on economic growth and employment generation, which the country badly needs.
The CBN is nursing the idea of bank recapitalization. What’s your view?
I think we should wait for the CBN to make its position known. The CBN has been working to provide banking and financial stability. Nigerians can now sleep without being afraid that their savings in the banking sector will disappear the following money. I expect that appropriate policies to further strengthen the banking system would be made when the need arises. There are lessons to learn from the past bank recapitalization in the country and from other countries. These experiences and reality on ground, hopefully will guide the CBN, whenever it announces its decisions on recapitalization.
The office of the Finance Minister has been merged with that of the Budget and National Planning. How do you see this?
My view here is that government must have learnt from experiences of the past four years. While it merged, Finance, Budget and National Planning Ministries, it separated Power from Works and Housing. I believe that the fusion has its merits. It will allow for coordination of finance, budget and economic planning policies and programmes. The two ministries are related. Merging them would reduce power contestation between the ministers. It will also allow the annual budget to reflect not just short term finance issues but also longer term economic development goals.
However, it is important that the Minister of Finance appreciates the importance of longer term economic planning issues. Finance deals with short term revenue and expenditure issues, while economic planning requires how to change the structure and move the economy towards a future desired state. Reconciling short term priorities with longer term goal is a major issue that the country would make.
I believe in economic planning. It has helped us in the past and we need it now. I only hope that it would continue to be emphasized even in the new ministry.
In President Buhari’s first term, he harped on diversification of the economy, but not much was actually achieved in that regard. Do you think that should still be his focus?
The country cannot run away from diversification of the economy. We have a monocultural economy, driven by a commodity that is inherently volatile. Dependence on this single commodity has accentuated the exposure of the economy to external fluctuations. Volatilities in the global market is easily propagated to the domestic economy. It also did not allow for integration of sectors within the economy. I also see diversification in a broader perspective than just switching from oil to other sectors of the economy. I have always advocated for vertical and horizontal diversification. By horizontal diversification I mean increasing the value chain of the oil and gas sector in Nigeria. We should deepen
the integration of the oil and gas sector with the rest of the economy. It should no longer be acceptable to only emphasize the revenue generating capacity of oil and gas, and not their value addition. We can make over 200 individual products from oil and gas that are capable of creating employment, output and income effects of the sector in the Nigerian economy. We should no longer be content with just exporting our crude oil and import refined products while our refineries are in a state of comatose.
The debt profile is rising. What are the implications?
This is one of the urgent current challenges we are facing as a country. On the face of it, using conventional ratio of debt/GDP, we would easily conclude that Nigeria is in a good state relative to other countries. However, this measure or indicator is deceptive. It does not indicate the capacity of the country to finance the debt. This is a function of revenue base of the government. So if we look at the rate of growth of debt in recent years, or the share of debt servicing in government budget, then we should be concerned. The low revenue base of the country makes meeting our debt obligations quite challenging and it also impacts negatively on the ability of government to make needed infrastructural expenditures to boost growth and employment.
There are talks about the government reversing the privatization of the DisCos. What is your view?
I don’t think it is advisable to reverse the privatization of the DisCos. Nobody is happy with the position we are in today. Are there problems with the electricity market? The answer is unequivocal yes. There is a need to understand the current problem in the sector and find ways to fundamentally address these challenges. Remember that the government still retains 40 per cent of the shareholding of the DisCos. This is a substantial share that should give government some leverage within the DisCos. We cannot go back to government ownership, as it is the failure of government that brought us to this new situation of replacing the government with private players. The question I often ask is what about the privatisation contract that stipulated the rights and obligations of the stakeholders? What are the penalties for infractions?
If government were to reverse the privatisation and repossess the companies, this would be costly in financial and non-financial terms. We also cannot rule out legal challenges. Perhaps more importantly is its impact on credibility of government. The market may no longer trust the government, and may not be sure that future government would also not reverse legal contract that it willingly enters into. How to retain market trust in the government future privatization process will be a major hurdle the government would have to climb
What should the government do to widen the revenue base?
Our revenue/GDP ratio is one of the lowest in the world or even among comparative countries. Non-oil revenue is largely dependent on the state of the economy. Non-oil revenue is dependent on the level of domestic economic activities. When the economy is down, non-oil revenue is also likely to be dragged down. Hence policies that boost economic activities and employment are the best means of widening the revenue base. We can also explore taxing luxury goods as well as property taxes, especially on those above certain thresholds to protect the poor. Attempts should also be made to close existing tax loopholes.
Nigeria is said to have the highest number of poor people on earth. What should the government do?
We need growth, high rate of economic growth and consistently over a fairly long period. Countries like China and India, that were able to move millions of their citizens out of poverty were able to generate growth at double- digit or close to double-digit growth on a very consistent basis.
Drivers of growth and employment in most countries are the micro, small and medium enterprises. We must provide incentives for SMEs to survive and flourish. Our policies must reinforce each other to create an environment that promotes entrepreneurship and growth. We should not, on the altar of raising revenues, create multiple taxes or impose high fees and charges on small enterprises such that they find it difficult to survive. The other day, a woman came to my office and was sharing her experiences with me on how the high costs of getting registration with NAFDAC had made her to stop her small business and sack over eight workers she employed. While agencies like NAFDAC are necessary to safeguard public good, their activities should not be a barrier to genuine small operators. Such operators should be able to get relief such that costs for registration is borne by a separate agency of government. High costs can stop production or drive people to the shadow market
Issue of security has to be addressed. No meaningful economic activity can take place in an environment of insecurity. Infrastructure, access to credit and other forms of support are important to ensure that investment can be made in a predictive environment that help to unleash entrepreneurial skills and drive innovation.
What can the government do about the rising youth unemployment?
This is like a time bomb. Unemployment rose from about 13 per cent in 2010 to over 23 per cent in 2018. Over same period, youth unemployment has risen significantly. We are already seeing the consequences of this all around us. We must do everything necessary to give our youths the skills to turn them into productive segment of the economy. Rather than some of our leaders and those holding national wealth in trust for Nigerians taking our resources to buy assets in other countries, or investing in non-productive assets at home, they will do themselves and this country a lot of good if they can invest these resources in businesses that generate employment. Government at all levels must walk the talk of patronizing made in Nigeria goods and services. We must invest in our people, their education and health to have a vibrant and productive youth population. Youth unemployment is a national emergency that deserves urgent attention of government and non-state actors.