By Charles Okeahalam, AGH Capital
Nigeria is facing a number of difficulties, most notably the absence of security in the north-east of the country where Boko Haram has killed thousands of people. Linked to this atrocity is the equally atrocious low level of civil, social and economic governance. Poor governance is correlated with social instability. It is also influenced by economic inefficiency. Therefore, only a simple or naïve analysis could attempt to wish away cause and effect.
Presidential and state governorship elections which were scheduled to take place in February have now been postponed to March and April respectively. As the elections approach we need to ask: what is the state of the Nigerian economy and what do we have to do to improve it? These are important questions that need to be addressed following the presidential election.
With a GDP of US$ 521bn and a population of approximately 170m, Nigeria is Africa’s largest economy and most populous nation. The decline in oil prices has illustrated that despite claims to the contrary, Nigeria is still primarily a single-sector dependent economy. On average, over the last five years, 74 per cent of government revenue has been derived from oil – in 2011 this was as high as 80 per cent.
The stickiness of oil dependence is a symptom of a general malaise: high levels of corruption which makes transparency very difficult. Thus the 29 per cent decline in the market capitalisation of the Nigerian Stock Exchange and 22 per cent depreciation of the naira over the last four months is more than a response to the oil price and the election. This is the second highest currency depreciation of any of the major oil producing countries – only the Russian rouble has fared worse.
International Monetary Fund (IMF) data indicates that on average Nigeria’s GDP increased by 6.4 per cent over the last five years and grew by 6.8 per cent in 2014. Irrespective of these relatively high GDP growth rates, estimates from the United Nations Human Development Index (HDI) – indicates that on average, the quality of life increased by just 0.98 per year from 0.466 to 0.504 over the 2005 and 2013 period.
This value places Nigeria at 152 out of 187 countries. When the HDI is adjusted for inequality the score declines by 40.3 per cent to 0.300! On average Nigerians have a very poor quality of life and live in an extremely unequal society. This is a not a novel result. However, in keeping with the paradigm of rampant corruption which debilitates economic and social reforms, it is evident that recent relatively high GDP growth has not done much to alleviate this condition. This result is made even more sobering given that the population of Nigeria has increased by almost 11 per cent in the last 6 years.
Absence of transparency is key
So where do we start? Firstly, the general absence of transparency reduces the sense of credibility in the statistics which are published by the government. When allegations are made that there is a deficit of US$20bn in the government accounts and a meaningful probe is not made, then it is not illogical to question the veracity of a whole range of other statistics.
So irrespective of the outcome of the election, there will be a need to clarify this and also to ensure greater transparency in the statistics on which the national accounts are based. The National Bureau of Statistics needs to step up to the plate and convince stakeholders that it is independent and professional. Attempts at economic diversification can only be meaningfully attained if there is real transparency in the process and investors in new sectors derive confidence from relevant policy. This would lead to an increase in the efficiency of all forms of capital and inputs required to attain the diversified and aggregate output objectives.
Secondly, policy needs to be better focused, more realistic and implementable. Many obvious policy steps and initiatives seem to be avoided. Then attempts are made to farm them out to the private sector – as if that is a panacea. Market solutions are optimised by high levels of transparency. The government continues to privatise profits and socialise costs. The private sector is not going to, and indeed should not be expected to, deliver social goods without incentives. Private sector responsibility has limits.
Therefore, and this is the third point; the Nigerian government must take the primary responsibility for the provision of social goods. The fact is that some of the things needed to achieve sustainable economic growth in Nigeria are simple to do – they do not require commission after commission or attempts to get the private sector to achieve them.
They just require decision making by engaged and well considered leadership. For example, the absence of adequate electrical power, a well-capitalised railway, roads and airports continues to be a huge drag on efficiency and hinders the true rate of growth which Nigeria could enjoy. Inadequate infrastructure has increased the required hurdle rate of investment and basically makes a wide range of possible entrepreneurial initiatives very difficult.
Investors seeking compensatory returns for operating in the difficult, but potentially lucrative Nigerian market often gouge consumers and evade taxes to ensure that their businesses are viable. It is difficult to estimate how many simply choose not to invest.
A potential solution
But even here there is a solution. Take the provision of electrical power for example. South Africans will not be comforted by the fact despite the deteriorating performance of the state electricity utility Eskom, on a per capita basis, South Africa produces 35 times the electricity that Nigeria does.
Fellow oil producers also show what can be done with oil revenues. Iran and Venezuela and the UAE produce 24, 33 and 90 times more per capita respectively. This is not the result of low production for a small population. No. In fact on aggregate, electricity generation in UAE which has a population of 9.3m is 4 and half times that of Nigeria.
Therefore one of the first steps to stopping this ridicule would be for the Nigerian government to invest in the power grid, then introduce a robust and efficient energy regulator. It should then dismantle the grid into separate generation companies. Thereafter rather than continue with the unsuccessful graft ridden privatisation program which it is currently trying to implement, the government should invite the private sector to tender for incentive-based operations contracts, or BOT schemes.
In general, the unit grid price of electricity is cheaper than the independent power producer unit price. Accordingly an appropriate pricing and regulatory framework can be easily developed which generally optimises social, economic and investment returns. Likewise for transport infrastructure. The railway investment programme is inadequate and advances in road engineering and road pricing systems indicate that the current policy in which some roads are designated ‘federal’ and others ‘state’ is simply a format for non-delivery, unaccountability and passing the buck.
Imagine how the Nigerian economy would grow if electricity, transport and water infrastructure were supplied. Imagine the jobs that would be created. Imagine what Nigeria would be like.
Fourthly, Nigeria needs to ensure efficiency and control in the utilisation of deficits and debt. Because although the deficit has declined from 5.7 per cent of GDP in 2010 to under 1 per cent of GDP as at end of 2014 over the last quarter, oil prices on which 74 per cent of government revenue is dependent have declined and are likely to be at low levels for a long time. In such circumstances would it be overly pessimistic to set the budget at US$ 50 for the next 2 years, adjust our size to fit our coat and benefit from any surpluses that may arise?
This will require cuts in expenditure at all levels of government. The current system in which evaluation of the national debt burden is disaggregated at state and federal levels opens the opportunity for states to increase the debt levels without commensurate accountability on the use of funds derived from bond issuances. The sum total of national debt and in particular debt obligations to the private sector has mushroomed.
The federal government should not be insouciant to this. IMF statistics suggest that the debt to GDP ratio has increased from 9.2 per cent of GDP in 2010 to 22 per cent in 2014. But how reliable are these figures? Is the Federal government effectively monitoring all the private sector debt arrangements which the states are entering into? My guess is that the true debt to GDP ratio of Nigeria is not that which is stated by the debt management office in the federation accounts.
Finally, Nigeria needs to stay with reforms of the financial sector. In the type of environment described above the financial sector is likely to be fragile. It appears that the Central Bank of Nigeria has deigned to allow the naira to float after realising that given our circumstances the cost of any other policy would be very high. With public sector revenues as precarious as they are currently, an overtly active managed float would be unaffordable.
Accordingly, a key role of the central bank at this time is to put policy pressure on the government to ensure that election motivated expenditure does not lead to significantly greater macroeconomic instability. Therefore as part of exchange rate management, the central bank governor needs to continuously explain to international portfolio investors that the economy is sound.
At the macro- prudential level, there is a need to keep a keen eye on bank stress tests, comparison of on–site monitoring and off-site supervision of banks and careful rule-based impartial risk assessment of the inter-bank window signals. The central bank needs to remember that unlike the majority of Nigerian citizens, markets are not credulous.
Appropriate direct and indirect central bank policy is required at this time. The benefits of the 2004 – 2005 bank consolidation program were compromised by the inadequate bank supervision and system wide monitoring -which led to poor credit policies, high non-performing loans, and increased bank failure. The fact that implementation of the 2009 banking sector reforms started soon after the global crash of 2008 does not mask the uniquely unstable macro-prudential condition of the Nigerian financial system at that time. Given the significant oil price shock of the last quarter we need to be careful that the banks are not in the same condition now. A worrying sign is that some of the key financial sector governance reforms implemented by the central bank over the last five years appear to have been repudiated.
In conclusion, achieving a transparent, fair and credible election is going to be a challenge for Nigeria. Yet it also provides an opportunity to show that the country is mature enough to be taken seriously. It will be necessary for whoever is sworn into office in May to deliver true economic and social development. Key to achieving this will be economic policy based on credible and transparent data, high levels of governance and intolerance for rent-seeking and graft. The absence of transparency is the key problem in Nigeria. Nigeria will continue to face difficulties and will not be a stable state unless this is addressed.
Charles Okeahalam works at AGH Capital in Johannesburg, South Africa.
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