Policy options for economic recovery
Nigeria is now experiencing its first economic recession in decades. GDP growth in Q2 2016 was -2.06 percent following a decline of 0.36 percent in Q1 implying two consecutive quarters of economic contraction. The oil sector shrunk by 17.48 percent, while non-oil sectors declined by 0.38 percent. All major economic sectors – manufacturing (-3.36 percent), construction (-6.28 percent), trade (-0.03 percent), transport (-5.34 percent), hotels and restaurants (-6.39 percent), finance and insurance (-10.82 percent), real estate (-5.27 percent) and government (-6.13 percent) – are in decline, with the exception of only agriculture (4.53 percent) and telecommunications (1.35 percent) which are still growing marginally.
Causes of economic recession
I identify three broad factors responsible for Nigeria’s recession. Legacy factors include dependence on oil for government revenue (79.8 percent, 75.4 percent and 72.3 percent) and export (FX) income (96.89 percent, 95.2 percent and 95.4 percent) in 2012, 2013 and 2014, respectively. The collapse in oil prices from over $100 per barrel to about $50 recently meant the Nigerian economy would experience serious challenges. This was compounded by low sovereign savings with FX reserves having declined from over $65bn in 2007 to about $30bn by 2015. Political risk associated with the 2015 elections also affected FDI and growth, with corruption also depleting resources and sub-optimising government spending.
Policy factors include a governance vacuum resulting from non-appointment of a cabinet for 7 months in 2015; continuing lack of clarity over economic policy; and wrong policy choices, especially the fixed exchange rate system and failure to “deregulate” downstream petroleum until June 2016. Other major weaknesses include government not articulated a clear strategy for private capital, some policies have weakened the financial sector which is now unable to perform its intermediation role in financing private sector activities optimally and the widespread perception that the current economic cabinet is weak.
The consequence of these policy failures has been low investor and market confidence from both domestic and foreign investors which has impacted FX flows, FDI, domestic investment, capital markets, and economic growth. Particularly debilitating has been the denial and policy incoherence over FX until policy changed in June 2016. An unsustainable fixed exchange rate system resulted in loss of investor confidence, shutdown of FDI and portfolio investment, constrained domestic manufacturing, depleted FX reserves and distorted FX markets characterised by multiple exchange rates. Even now, while remittances are slowly recovering, FDI and portfolio flows remain subdued due to a persistent loss of confidence. While policy has changed towards a flexible FX regime, the continuing ban on 41 items in a supposedly market-based system signals lack of commitment to a market approach, perpetuates multiple exchange rates and reinforces currency devaluation.
In terms of fiscal policy, the budget relies exclusively on borrowing (N2.2 trillion) for fiscal stimulus in the absence of a private capital strategy. This is incongruous given that debt service is already over 25 percent of budget and up to 40 percent of government revenue. Continuing inconsistencies between monetary policy, which has pursued tightening through the Treasury Single Account (TSA) and higher CRR and MPR, and the fiscal stimulus strategy of the executive sub-optimises policy. The big gap in policy appears to be absence of a strategy to leverage and optimise private capital.
Political and security factors have also contributed to the recession. The impact of the Niger-Delta militancy (the economy lost income on appropriately 800,000 barrels of oil from February to June 2016); the impact of herdsmen/farmers conflicts our agriculture production across the county, but particularly in the north central, has also been very negative, as well as continuing, though reportedly reduced impact of Boko Haram’s activity on agricultural output and trade in the North East. The grave issue of internally displaced persons dislocated from their homes, farms and trades in that region also contributed to economic decline.
Policy options for recovery
We have to change our mind-set from a reliance on government borrowing to leveraging options for private capital. Such options include part-sale of (say) 20 percent of government stake in NLNG; fast-tracking incorporated JV strategy for upstream oil JV operations and reduction of government share in them; privatisation and concession of major/regional airports and refineries; embarking on a high-level concerted PPP strategy for infrastructure and raising the profile of ICRC and BPE; deregulation of downstream oil sector with accompanying social intervention in public transportation; and tweaking pension fund investment guidelines to accommodate investment in infrastructure and mortgages. The objective of all these measures should be to raise about $15 billion from asset sales and other sources to shore up foreign reserves to calm investors, discourage currency speculation and stabilise the economy. These actions will also convince markets of government’s commitment to a private sector economy and will stimulate economic activity and improve efficiency.
In terms of monetary policy, it may be necessary for both the executive and CBN to agree on a policy of monetary easing to stimulate the economy and harmonise monetary and fiscal policy until economic recovery is attained. We concede however that monetary easing may have to be preceded by some level of currency stability given the current precarious position of the Naira. With respect to the ban on 41 items, it is important to immediately restore 95HS code items (out of 680HS codes into which the 41 banned items may be categorised) identified by the Manufacturers Association of Nigeria (MAN) as critical raw materials for industry to “Valid for FX” status. Nigeria may also have a calm policy debate over whether it is expedient to obtain a stand-by facility with international monetary institutions to support and stabilise the currency and provide confidence to investors.
We also need strategies to promote exports which should focus on refined petroleum products and petrochemicals, ago-manufacturing and processing, mining, ICT and informal sectors (sports, music, film and entertainment). These require long-term policy certainty guaranteed by policy and law, export incentives such as resumption of the Export Expansion Grant (EEG), full downstream petroleum sector deregulation, export financing initiatives, doing business reforms and the “privatisation” of sport administration.
The National Assembly must also expedite action on identified priority legislation to spur economic growth including Federal Competition and Consumer Protection Bill; Petroleum Industry Bill(s); review of Companies and Allied Matters Act (CAMA) and Investment and Securities Act (ISA); review of Customs and Excise Management Act; Nigeria Railway Authority Bill; National Transport Commission Bill; Nigerian Ports and Harbours Authority Bill; Federal Roads Authority Bill; National Roads Fund Bill; Secured Transactions in Movable Assets Bill; Nigerian Independent Warehouse Regulatory Agency Bill; National Development Bank of Nigeria Bill; and review and expunging the Land Use Act from the constitution.
In my view and based on the evidence, continued domestic borrowing by government is crowding out the private sector and affecting bank and non-bank financial institutions’ deposits, as well as capital markets. The government’s external borrowing plans were not materialising probably due to lack of policy clarity and issues of confidence. It is essential the legislature enacts new PIB(s) as soon as possible to stimulate new investment and boost oil revenue. In terms of taxation, it may be expedient to defer a VAT increase to 10 percent and reduction of corporate tax rate for 18 months. Current policy should focus on expanding the tax net and ensuring effective enforcement as well as an amnesty for non-compliant entities willing to start complying. Government should embrace privatisation and concessions to raise revenue and stimulate economic activity. It is also necessary for the president to constitute the National Procurement Council to improve procurement transparency and value-for-money.
I believe that monetary easing may be required to stimulate firms and households by reducing interest rates and cash reserve requirements, subject to first stabilising the slide in the value of the Naira. This is because current financial sector conditions are impeding private sector activities. It is also necessary to review and fine-tune the operations of the TSA to improve market liquidity and payment efficiency. In addition to easing pension fund investment guidelines to give attention to channelling funding into mortgages and infrastructure, it is necessary to address other issues impeding the mortgage sector including Land Use Act review, commercial courts/divisions, high interest rates and the operation of the National Housing Fund.
In terms of security and politics, government must continue efforts to restore normalcy in the North East and resolve the situation concerning IDPs. Political engagement and security measures to end sabotage of oil infrastructure in the Niger-Delta are also important. I doubt that the issue can be resolved exclusively through force! Government must also signal zero tolerance for herdsmen/farmer clashes in the North Central and across the country.
Given the misery Nigerians are currently undergoing, government must intervene in the social sector. Recommended interventions include low interest rate loans through BOI to transport unions and investors to buy buses with government waiving import duties and charges; support for fertilizer and agronomy for farmers to ensure relative food security; and investments in teacher training, vocational and technical education and school infrastructure. Government may also pursue implementation of its proposed school feeding programme.
Government must also recognise that current economic performance is inextricably linked with issues of policy leadership and confidence. Government should launch a new economic reform programme and signal a bold commitment to investor-friendly economic direction based on attracting private capital from domestic and international investors. Government must also vigorously pursue and implement Doing Business and Investment Climate reforms as it proposes to do and some changes in personnel may be required. The President may also consider appointing a Chief Economic Adviser or Council of Economic Advisors and fill all important vacancies in federal regulatory agencies and MDAs.
Opeyemi Agbaje