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Much ado about Nigeria’s economic recovery and growth plan

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Last year, when Africa’s largest economy Nigeria sunk into its worst recession ever, an immediate economic recovery plan was expected from the government in response to the critical situation. Unfortunately the sluggishness that has characterized the President Muhammadu Buhari administration manifested itself again.

A wholesome strategy for charting the way forward did not come until April this year – 4 quarters after official acknowledgement of the recessive status of the economy. In classic Nigerian style, the 4-year Economic Recovery and Growth Plan (ERGP) was launched with much pomp and fanfare. The event was a star-studded one.

The president’s cabinet and anyone you would imagine in the economics and public finance nexus was there. The ERGP had a three-thronged approach supported by enablers and a clear delivery plan which involves restoring growth through Monetary and fiscal stability, external balance, economic growth and diversification; Nigeria Investment in the Nigerian people – Health, education, social inclusion schemes, job creation and youth employment schemes; Building a globally competitive economy by Improving the ease of doing business, investing in infrastructure and promoting digital led growth.

There’s just a little problem. The ERGP is expected to return the growth of the nation’s economy by 2.19 percent in 2017 and 7 percent by the end of the Plan period in 2020– 2 years after the president’s current tenure. For this bogus plan to materialize, Buhari needs to return to office or his party All Progressives Congress (APC) win at the 2018 presidential elections since there’s never a continuity of programs when there is a change of government.

But even under the People’s Democratic Party (PDP) rule between 1999 and 2015, there wasn’t a continuation of program. The President Olusegun Obasanjo government from 1999 had a financial bolstering plan, paying off Nigeria’s foreign debt and saving up nearly $30 billion in Excess Crude Account from oil earnings. But during President Jonathan’s government, the savings were squandered and Nigeria returned to debt. Now, 66 percent of the country’s earnings services foreign debts.

Feyi Fawehinmi, one of Nigeria’s leading economic commentators says it is impossible for the government to achieve 7 percent economic growth by 2020 as planned. On his blog he wrote:

“One of my favourite American economists, Tyler Cowen, recently wrote a book where he complained about how America had become a complacent country. He illustrates this with data showing that in 1962, only 30% of the American government’s spending was spoken for before the fiscal year. By 2014, that number had reached 80% and is getting worse. In other words, all sorts of interest groups and entitlements have claimed so much of government spending in advance that it is very hard for the government to do ‘big things’. Nigeria today is not much different. 66% of current government revenues goes toward servicing debt. Typically, 80% of the government’s budget is spoken for before it is passed by salaries and other recurrent expenditure. The crucial difference is that America has all those roads, bridges, electricity and railways it had built before getting to the point of stasis.”

Nigeria is going to need to do some big and painful things as shock therapy to achieve high growth trajectory again. The alternative is stasis. The most disturbing risk of the ERGP 4-year plan are the very managers of the economic move. Many know the antecedents of Governor of the Central Bank of Nigeria, Godwin Emefiele.

He was Nigeria’s largest loaner Zenith Bank’s MD who was whisked in by the previous government when the then CBN governor Sanusi Lamido blew the whistle of $20 billion theft in government coffers. No one can vouch, except those who recommended him as elections moved close for the Dasuki scandal job, that Godwin was ready for the increasingly complex world of Central Banking.

It is a well-known secret, that Godwin Emefiele held an internal meeting with Zenith Bank staff the weekend after his appointment, weeping for joy. He had never expected he would assume such elevated position and responsibility. Upon election, many expected that Buhari would have had a tea meeting, early on, telling him confidence was lost and he should honourably resign. Instead, he kept him.

When Buhari was going to bring in a fiscal manager, he found Kemi Adeosun, a local state Commissioner of Finance, at a time Nigeria was roaring into a slump.

One would not have expected anything less than a proper Goldman Sachs or hedge fund star, a brilliant academic, ready to put calls across the world. While it was good for Minister of State for Finance to worry on cost of pencils and erasers in government, this is Nigeria for heaven’s sake. For a country the calibre of Nigeria, her Finance Minister’s profile can’t be beneath Okonjo-Iweala, the country’s former Minister of Finance and World Bank MD, or Olusegun Aganga, Oby Ezekwesili, etc.

A lot of people even anticipated that Okey Enelamah (who led Nigeria’s arguable biggest private equity, the African Finance Corporation) would be Finance Minister, but Buhari surprised everyone, sadly. Immediately oil price started tanking low, the eggheads at IMF saw it; they saw the weaknesses in the economy.

There were no savings buffers, poor Niger Delta engagement to firm oil production and the dependence on oil was evident to all. When Christine Lagarde landed, it was clear that she came for serious business.

But Nigerians would prefer to be emotional than face the facts. The economy was quietly sinking but the idea of accepting IMF’s help carried a stigma (you can’t blame the correctional days of Structural Adjustment Program (SAP)). Nigeria’s economic team brought out Powerpoints and thick plans to affirm that all was right.

Christine’s words: “Frankly, given the determination and resilience displayed by the presidency and his team, I don’t see why an IMF programme is going to be needed..” However, Kenya that is not vulnerable to oil shocks put up a standby $1.5bn facility in case of currency shocks. Rather than being honest and accepting the real situation, some people started selling Indian $15bn cash advance to Nigeria and Chinese Yuan support.

The monies that would have changed hands in consultancy would be unbelievable. Seun Onigbinde, CEO of Bill and Melinda Gates Foundation-backed BudgIT and a vocal economic transparency expert suggested that he “would have gone for a $10bn IMF facility—$5bn for currency stability & $5bn for import substitution plan heavily invested in machinery that completes Nigeria’s value chains and industrial parks.

“This government is not honest on the hole we have sunk in or they weren’t smart to see it,” he concludes. Understandably, the government has finally rolled out a recovery plan because investors have affirmed that they won’t borrow Nigeria $30bn if she can’t produce an economic plan. That $30bn has a pile of Chinese money that won’t come in cash but in infrastructure.

If the Chinese build all the railways and roads, plunging the country in deeper debt, will those infrastructure projects generate sufficient revenue to offset them? If Nigeria borrows $30 billion when her current exposure is $24 billion, is the government not heightening the economy’s vulnerability to currency crisis? The challenge here is that current government is in its final lap of governance.

The cacophony for next year is for the elections and placement for politicians. Where is the long term and institutional approach to see this entire plan through? Nigeria won’t be great if government approach is like someone dieting and checking the scale every hour.

There has to be a long term shot to this. Who will do the work? The risk exists – it is that of getting that World Bank cash, Chinese Roads, doubling our foreign debts but the government undoes everything with clueless leadership in another four years. If the government doesn’t institutionalize this, it falters again.

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Nigeria

President Buhari’s Second Term: A chance to provide peace, prosperity, and security?

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Nigerians re-elected President Buhari for another four years in what many have termed – a chance to make amends. In what could be called his third stint at the helm of affairs in Africa’s most populous country, questions about a coherent economic strategy are already being asked. In the last dispensation, protectionist posturing was worsened by a management style perceived to be distant while crucial decisions were delayed.

The economy is set to continue its recovery from the worst recession in its history. Nonetheless, the forecast is for economic growth to remain well below historic averages in the next five years. According to economic survey by Economist Intelligent Unit (EIU), Nigeria’s Gross Domestic Product (GDP) is set to reach $473.5bn in 2019 and rise to $680.9bn by 2022. This prediction will hinge, for the most part, on the current intensity of economic reforms and current rate of investment being sustained.

 

Background of the economy leading to election 2019

The Nigerian economy grew by 1.9% in 2018, an improvement from 0.8% recorded in 2017, with the non-oil sector being the fulcrum for the growth picture. Over the last quarter of 2018, the economy recorded a solid growth of 2.4% – with the expansion in the non-oil space (2.7% YoY) taming the contraction observed in the oil sector (-1.6% YoY). Dissecting the components in the non-oil territory, all subsectors expanded, with the services and Agriculture sector leading the pack. Notably, improvement in the number of active subscribers in ICT subsector coupled with mild support from transport drove the expansion in the services sector (3.8% YoY). Furthermore, while the Agriculture sector improved by 2.5% in Q4 18, it was disappointing compared to its four-year average of 3.8%. On the flipside, the oil sector dived into recessionary waters buoyed by low crude production (-2.6% to 1.91mbpd).

 

Declining Income per Capita

It is important to note that Nigeria has a huge population of over 180million and a population growth rate of 2.6% – higher than the 2018 GDP growth of 1.9%. GDP growth is projected to reach 2.0% and 2.2% in 2019 and 2020 respectively before rising to 3.2% by 2021. This means Nigeria would have had five consecutive years of declining income per capita – from 2016 to 2020. A burgeoning youth population is also unlikely to be matched by job growth, meaning unemployment – at over 40% – is likely to rise even further.

A breakdown of the GDP components show that Nigeria’s gross fixed investment, at $66.5bn, will account for just 14.0% of GDP in 2019. This pales in comparison to that of other notable emerging economies – Brazil (19%), India (27.12%), China (42.86%), and South Africa (18.7%). Majority of countries in the world have gross fixed investment of 18-22%. The EIU goes further to forecast that gross fixed investment in Nigeria will rise by just one basis points to 14.1% ($86.2bn) by 2022.

 

Why does this matter?

The importance of this component of GDP is that it is a clear indicator of the future productive capacity of the economy. The aforementioned basically means that the current and projected rate of investment is simply suboptimal and far below the level required to propel Nigeria to an accelerated growth path. It is incapable of providing Nigeria with the investment impetus that will have the desired multiplier effect on output. Nigeria has also grossly underinvested in its infrastructure. The existing infrastructure gap is estimated at over $300bn and requires 10% of GDP ($37.6bn)/annum over the next 10 years to bridge – an unlikely feat given that  current infrastructure needs are far in excess of current cash flows. Nigeria’s capital budget in 2018 was $7.98bn – 26.6% of total budget and 2.2% of GDP. This compares to 6% of combined GDP of emerging market economies. Nigeria’s share of emerging markets total spend on infrastructure is currently less than 1%.

 

Few options, Tough Choices

Nigeria’s high population growth rate means it must be much more efficient with economic policy. Putting Nigeria on an accelerated path to a free and market driven economy requires making tough game-changing decisions now. It will begin with figuring out how to raise the level of gross fixed investment to levels above and beyond the global average of 18-22%. Investment in the next 3-5 years will depend on policies and incentives.

Galvanizing domestic and international investment will be crucial. This will require a structure that incentivizes private investment considerably more than what is currently obtainable. Achieving this will require significant increases in public investment in infrastructure, in addition to more comprehensive and deep-seated market oriented structural reforms.

 

The Game changing Formula

Raising the level of investment in infrastructure given the government’s current revenue and borrowing constraints requires rethinking ways to attract private sector funding in the form of Public Private Partnerships (PPP). Outright sale and concessions of government assets– airports, seaports, inner city highways and trunk roads– should be a key consideration for policymakers.

Airports concession has the potential to lower the average cost for aviation operators by 50%. The government’s stake in the power distribution companies should be sold to the private sector while the power sector forbearance needs to be dealt with. The rail investment program needs to be accelerated while the road networks to major seaports need to improve.  Another item that is top on the list of reforms is the foreign exchange policy where a movement to currency convertibility with minimal intervention is paramount. Fears of a wild depreciation if the Central Bank of Nigeria lets go of its current policy of a managed float, are greatly exaggerated. The almost insignificant deviation between the parallel and the Investor Exporter Foreign Exchange (IEFX) window – which is closer to market equilibrium than the official rate – supports this fact. There is also the issue of fuel subsidy which has now taken the form of under recovery as the Nigerian National Petroleum Company (NNPC) now fully bears the brunt of the subsidy as the sole importer of Premium Motor Spirit (PMS). Deregulating the downstream sector of the petroleum industry requires the removal of subsidies, which will spur competition, bring about efficiency and increased investment in domestic refining – the lack of which has been a huge drain on Nigeria’s foreign exchange earnings over the years.  Not only is a game changing formula now imperative, it has become inevitable. Nigeria can continue at its current pace of reforms and investment – a recipe for chaos, social and political disintegration; or take drastic measures to raise public and private sector investment to levels that will accelerate productivity and economic growth.

THE ROAD AHEAD

Ending extreme poverty must be a top policy priority for Nigerians and the new government. The country has the capacity to deal effectively with poverty: large endowments of natural resources, especially oil; a young and highly educated population; and many people adept at entrepreneurship and the creation of wealth.

Nevertheless, there are many threats to the creation of wealth. Two of them stand out: widespread corruption and the absence of peace and security in many regions. Corruption, like embezzlement of public funds, has plagued Nigeria since independence. Buhari came to power in 2015 promising to clean up corruption and restore professionalism in the public services. Although he appears to have made significant progress in that fight, his critics say that he only targeted his political opponents and ignored his allies and supporters. Still, many Nigerians give him credit for his efforts and for not illegally amassing wealth for himself. To deal more effectively with corruption, Buhari must now significantly improve openness and transparency in government communication, especially with respect to government procurement programs.

The Buhari government also needs to deal with extremism and other threats to peace and security like Boko Haram and the lawless armed gangs who roam parts of the country kidnapping people and holding them for ransom. This must be done not just through military action but also by providing opportunities for young people, especially in the rural areas, for self-actualization.

Finally, the government must address the issue of lack of basic infrastructure for development: passable roads, adequate and reliable power, water treatment plants (access to clean drinking water is a major problem for most communities), basic health care, affordable housing (especially in urban areas), police protection, and other services that can enhance the ability of citizens to live in peace.

Posterity will judge Buhari and his government by how well they use the opportunity granted to them by Nigerian voters to make peace, security, and prosperity possible for their fellow citizens.

On the economic front, we expect resilience in agriculture sector and a recovery in the oil sector to be the key drivers for growth in non-oil and oil sector accordingly. In the non-oil sector, muted growth in ICT and in turn services as well as weak growth in Manufacturing due to depressed consumer wallet and delay with minimum wage bill, guides to slower growth in the non-oil sector of 1.3% YoY (2018: 2.0% YoY). In the oil space, the additional 200kbpd from the Egina oil field guides the expectation of an expansion in crude production over 2019 (2.06mbpd), albeit capped by OPEC cut. That said, it is expected growth in the oil sector to print at 7.1% (2018: 1.1%). Overall, 2019 growth estimate is forecast to 1.98%, a notch away from 1.93% recorded in 2018. For Q1 19, a slowdown in growth is expected to 1.3% YoY driven by a contraction in the oil sector (-1.1% YoY) and moderation in non-oil sector growth.

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