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Nigeria in Recession: What is the way out?

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After months of denial, the Nigerian government through its Minister of Finance Kemi Adeosun, in July, finally announced that the country was officially in recession. The news did not come as a surprise to experts as some had predicted the crisis. The International Monetary Fund (IMF) projected the contraction of the Nigerian economy, cutting the country’s GDP growth forecast from 2.3% in April to –1.8%, the lowest in 29 years.

Minister of Finance, Kemi Adeosun

Sanusi Lamido Sanusi, during his tenure as governor of the Central Bank of Nigeria (CBN) reckoned that the country needed to preserve her balance sheet in order to prepare for any eventuality as she could not afford to keep paying ₦1trillion as subsidy funds to a select few, while heaping huge debt burden on the nation’s finances.

President Muhammadu Buhari

During the debate, he mentioned that a crash in crude oil price under the condition could lead to an economic crisis that would be comparable to Greece’s. “In 2008, the price of oil crashed from $147per barrel to $37per barrel and the only reason this economy continued growing was that we had reserves of $62billion which are now down to $30billion; that was the shock absorber,” he said.

Adding that if oil prices crashed again considering that the external reserves or shock absorber as he called it were depleted, the country would be plunged into a crisis such that salaries would be difficult to pay with inflation rising to about 18%.

This argument was made as far back as 2012. Four years on, crude oil prices have crashed from $114per barrel to as low as $27per barrel in January before rising to about $45per barrel – thereby battering government revenue and this was further affected by a reduction in daily crude oil production to 1.69 million barrels per day (down by 0.42 million barrels per day from the first quarter of 2016) due to the activities of the Niger Delta Avengers with foreign reserve at a meagre $27.86 billion.

The Nigerian economy contracted by about 2.1 percent in the second quarter, while inflation soared to 17.1 percent in July. The decline can be seen in other measures, too. International airlines have pulled out, Nigeria’s second largest commercial air fleet has shut down, industries are closing and 4.5 million people lost their jobs in a year.

President Muhammadu Buhari took office with a huge chunk of goodwill, but he has gradually expended that with his outdated thinking on the economy, open interference in monetary policies of the central bank and poor management of fiscal policies to stimulate the economy.

While capital fled the country, the Nigerian government fed uncertainty with its flipflops on foreign exchange and fiscal policy. The Nigerian currency has been devalued by more than 87 percent in the last year and the shortage of foreign exchange reserves threatens businesses.

Nigeria’s Oil and gas Industry

In Nigeria’s states, there is a grimmer crisis as most of them can’t pay salaries, paralyzing money supply and commerce at the retail end. Well, the prevailing economic crisis has forced the Buhari-led administration to seek drastic measures to salvage the economy.

Sadly, of all possible solutions, the one that’s been considered most and has sparked a national debate is the proposal by Nigerian Economic Council (NEC) and Senate to the president to sell national assets to “build reserves and provide funds for immediate spending” and thus ensure that this recession will be the “shortest” ever. It is hoped that at least $10 billion can be generated from this.

Oluseun Onigbinde, founder of BudgIT, a public budget communication company, and a heartbroken supporter of the Buhari government, lamented on this myopic attitude of the government. “No consideration for Inter-generational equity but just lure for short-termism. No review of public finance structure and lifestyles. Always hunting for the easy way out,” he said.

Mr. Chukwuma Soludo, Former CBN Governor

Former CBN governor Chukwuma Soludo says he is “troubled” by the proposal to sell some valuable national assets. “Sale of assets is the easy short-term option to earn peanuts while ignoring the hard work to earn the sustainable revenue required to move the economy forward,” he stated.

A few leading economic analysts like Feyi Fawehinmi have argued in favour of the sales adding that some Nigerian assets are actually worth nothing hence a sale would be profitable. For example, across the first half of this year, Nigeria’s 3 oil refineries have managed to expend N41 billion on operations to generate N720 million in revenues.

So Fawehinmi concludes: “How much should any normal person pay for the right to lose billions of naira? The correct answer is zero. Sorry Nigerians, those refineries are worth the same thing as those iron pots they use to cook jollof rice for parties.”

So why sell them? Well, the first reason is that it frees the government from being the one making those losses. That money can go towards something else. Secondly, if we can find anyone crazy enough to buy them, we should let that person have a go at trying to make them work.

Maybe they have some ideas on how to cut costs and use technology to increase efficiency. Remember when the government collected $2bn from the privatization of run down power assets? Since then it has put in far more than that amount in bailouts to the industry.

If you sell for zero, there is less reason to bailout the owner in future. But this very type of sale does not achieve the objective of the Nigerian government which is to raise revenue for cash reserves to run its government. The lucrative national asset at the centre of the sale debate is the Nigeria Liquefied Natural Gas (NLNG), a joint venture between Shell, Total, Eni and Nigerian National Petroleum Corporation (NNPC) – the largest shareholder with 49% stake.

The privately well run asset generates $1 billion annually for Nigeria and is expected to fetch $28 billion if sold. The question remains – to sell and get quick cash to solve immediate problems? Or not to sell and determinedly look inwards for long-term sustainable solutions?

TUNDE FOWLER, EXECUTIVE CHAIRMAN, FEDRAL INLAND REVENUE SERVICE

It is good news that the Federal Inland Revenue Service (FIRS) has announced its intention to make 700,000 companies pay tax for the first time and bring 10 million more individuals under the tax net.

From this source, it anticipates an increased revenue of over N1 trillion to N4.8 trillion from taxation. While Nigeria’s non-oil revenue has averaged 3% of GDP over the years (because of its overdependence on easy oil rents for revenue and abandoned tax collection) many African countries without oil average 18-25% of GDP in tax revenue.

Such countries also have a larger informal sector than Nigeria. Several of them are doing close to double digit GDP growth. The tax compliance drive is a good effort, but the bulk of the money is in the informal sector and Nigeria must learn how other African countries capture tax from their informal sectors.

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Nigeria’s economy in 2019: Woes or fortune?

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As 2019 begins with hopes and aspirations, there are expectations from the federal government to better the economy with a view to making it have more meaningful impact on Nigerians. Here are the looks at the key indicators that will characterize the economy and determine its fortunes this year.

The economy appears to have lost its sparkle; its growth has dwindled. And there are palpable fears that the effect of political activities in the lead-up to the general elections, scheduled to commence on February 16, could overshadow whatever gains the economy may muster during this period, thus, compounding its woes. As it stands, the federal government has abandoned the economy for politics and the economy is already bearing the brunt.

After five quarters of recession, which the economy entered in the second quarter of 2016, having plummeted to a gross domestic product (GDP) growth rate of -2.06 per cent, the economy exited the quagmire in the second quarter of 2017 with a GDP growth rate of 0.55 per cent, which was revised upward to 0.72 per cent, according to data from the National Bureau of Statistics.

Then, the economy turned the corner as it grew at 1.40 per cent in the next quarter- that is, the third quarter of the year, and sustained the improvement recording a GDP growth rate of 2.11 per cent in the fourth quarter of the year 2017. However, in the first quarter and second quarter of 2018, the economy reversed the rising streak as evidenced in the slowed growth rates. NBS data showed that the GDP growth rate fell to 1.95 per cent in the first quarter of 2018 from the 2.11 per cent it achieved at the end of 2017. It dropped further to 1.50 per cent in the second quarter.

The agency noted that the clashes between farmers and herdsmen, which took its heavy toll on agriculture, mainly dragged down the growth rate during the quarter under review. Agriculture, being a major component of the non-oil sector was badly affected. However, with improvement in the non-oil sector, the economy received an impetus for growth, which pushed the GDP growth rate to 1.81 per cent. According to NBS, growth in the third quarter was largely helped by the non-oil sector, which contributed 90.62 per cent to the total GDP, while the oil sector contributed 9.38 per cent to growth in the review period. Oil GDP was reported to have contracted by -2.91 per cent compared to -3.95 per cent in second quarter and 23.93 per cent in third quarter 2017.

Despite the improvement in growth rate in the third quarter of 2018, the economy is still experiencing slowdown and was recently put on red alert of slipping into another recession over weak economic growth.

According to the Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, who raised the alarm at a recent Monetary Policy Committee meeting, the economy may be under threat of relapse into a recession, which it recently exited from with fanfare, given the weak economic growth of the second quarter of 2018.

Emefiele also raised concerns about threat to efforts to curb inflation, stabilise exchange rate and build reserves, considering the macroeconomic fundamentals at the period.

The consumer price index, which measures inflation dropped from 11.28 per cent in September 2018 to 11.26 per cent in October 2018 and rose again to 11.28 per cent in November 2018, but when compared with the levels in the corresponding year of 2017, when it dropped from 15.98 per cent in September to 15.91 per cent in October and 15.90 per cent in November, it was not where the monetary authority had envisaged it would be. The apex bank has the onerous task of bringing inflation to its targeted single digit, especially in an election year.

Also, of note as a potential contributor to relapsing the economy into recession, as pointed out by the CBN governor, was the delay in budget implementation. A situation, where three months after presidential assent and about three months to the end of 2018, there was no budget implementation was unhealthy for the economy. According to the apex bank, long years of fiscal policy lag had contributed to the weakness in the economy. Most of the inimical factors identified by Emefiele at that time are still at play.

Given this scenario, as the New Year begins, economic managers have the arduous task of resolving those issues as well as ensuring the economy not only continues to grow, but also record appreciable and inclusive growth. While 2019 is an unusual year, being an election year, more, but critical efforts would be required by handlers to put the economy on a sure footing with a viewing to avoiding a relapse into recession.

The federal government has proposed a budget of N8.83 trillion for the 2019 fiscal year. Nigerians would not accept any excuse for delay in its passage and poor Implementation. The executive and the National Assembly should therefore quickly address the grey areas and harmonize their positions so that the appropriation bill could be passed into law and implemented in earnest.

The budget has been predicated on an oil-price benchmark of $60 per barrel. In recent times, oil prices have been sliding at the international market and currently stood around $54 per barrel. The falling oil prices have been identified as threat to implementation of the budget and as such, the relevant authorities would do well to peg the budget at the most appropriate benchmark.

As part of its strategy to mobilize revenue, the federal government through the ministry of finance, in July 2017, created Voluntary Assets and Income Declaration Scheme (VAIDS), a tax amnesty, which was expected to rein in $1 billion from tax evaders and avoiders. By the end of the scheme, one year later, with only about N30 billion, the proceeds fell short of the government target, but the scheme was able to swell the tax database by five million to 19 million from 14 million. The government is expected to follow up on this initiative as well as intensify the revenue mobilization from more alternative sources than oil and borrowing to fund the budget. As at the end of 2018, the total collection by the Federal Inland Revenue Service was about N7 trillion.

Besides, the federal government is expected to review the power sector transition market policy performance this year after its first five years of implementation.

It is obvious that this present administration led by President Muhammadu Buhari, which is already pre-occupied with politicking ahead of the general elections, would not be able to solve the burgeoning unemployment problem. With unemployed Nigerians now at 20.9 million, having risen by 17.6 million in nine months, one of the major tasks before the incoming administration is to tackle the factors causing unemployment or to put it more aptly, provide employment opportunities in the economy and tame the rising scourge of unemployment.

Besides, Nigerians are anxiously waiting for positive outcomes from the talks, between the Nigeria Labor Congress and federal government over the N30, 000 minimum wage, that have resumed and are expected to be brought to a logical conclusion before the general elections.

 

Experts’ Views on the Economy

But in the view of the Chief Executive Officer of Financial Derivatives Company Ltd, Mr. Bismarck Rewane, political jostling and the elections would becloud the talks on the minimum wage. He also expressed the opinion that political activities and elections would becloud 2019 budget talks by the legislature and the first monetary policy committee (MPC) meeting in the month of January.

Also, in his projections, Director, Union Capita Market Ltd, Mr. Egie Akpata, posited that 2019 would likely be more challenging for the Nigerian economy than 2018.

According to him, most variables which were in the country’s favor last year, but not capitalized on, have reversed. “Oil prices, local interest rates, inflation, stock market indices, political environment and other variables that were positive for most of 2018 are now negative and will remain so for most of 2019.”

On the key areas that are likely to impact the entire economy, Akpata noted that in the aspect of government finances, it was unfortunate that for the federal government, tax revenues could be generated by threat or decree.

“The VAIDS programme fell far short of expectation and so did many other initiatives to diversify government revenues away from oil. These failures are not surprising. Individuals and companies have to be financially buoyant to pay a lot of tax. The reality is that most sectors of the economy are in a recession and profitability has been badly eroded.

“Self-inflicted damage from Apapa ports congestion, inability to solve the power crises, government crowding out the private sector in the debt markets, insecurity in large sections of the country amongst others mean that corporate profitability is unlikely to improve and hence better non-oil revenue for the government will take a while to materialize.”

Akpata added that, the federal and state governments had shown that they were unable to reduce their costs and instead had resorted to massive borrowing, particularly at the federal level.

This borrowing, he pointed out, was almost entirely to fund overheads. “Unfortunately, this produces very high market borrowing rates which very few private companies can afford. As long as the economy continues to have a risk free rate close to 20 per cent, it is unlikely that there will be massive credit to the private sector to drive the investment needed to grow the economy at the required levels.”

“Until there is a political force to stop government simply borrowing to fund overheads, FGN debt will continue to grow at an alarming rate. Since a default is very unlikely, the market will happily give the FGN all the debt it wants to pay its bills today. Repayment is largely a problem for future governments to worry about,” he also submitted.

He argued that the presented 2019 budget showed that “it is business as usual – unrealistic revenue targets, huge borrowing and waste on fuel subsidy. None of these are a positive for government finances,” stating that, the ongoing minimum wage battle with the NLC would likely result in some kind of wage increase, which will put more pressure on government finances.

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