Beyond Recession: Towards A Resilient Economy.
Distinguished Ladies and Gentlemen,
As part of their 14th Daily Trust Dialogue, the management of Daily Trust requested a presentation from me on “BEYOND RECESSION: TOWARDS A RESILIENT ECONOMY”. My focus will be on “Towards a resilient economy”, because virtually all the actions and policies that are required to help build a resilient economy are the exact same ones that will naturally take Nigeria well beyond today’s economic recession and unto a path of rapid and sustainable economic growth. If you aim for the skies you might end up at the ceiling. Likewise, if you do what is necessary to achieve rapid economic growth, then the chances are that you will at least attain modest growth, even where some plans fail.
My honest summation is that, even if we start today to embrace holistic, creative, sincere and reform-minded economic policies, the “animal spirits” that these measures unleash will harness the creative and entrepreneurial energies of our people once again and quickly place us firmly on the path of sustained rapid and inclusive growth.
The Federal Government of Nigeria (FGN) is doing some things right, such as the effort to curb overhead expenditures and to be more frugal than past administrations, but then they are also doing many things wrong. There is a reluctance to completely break from the past and embrace significant economic reforms, even when our present predicament clearly warrants same. If we do not act now or if we do not act quickly, we may find our economy needlessly mired in a hopeless situation where the citizenry might not witness an increase in income per capita (living standards) for 6 to 8 years.
The search for an economic policy direction must end now because we are facing an economic crisis. A crisis is an inflection point. It is that point when multiple outcomes become possible. When you superimpose our demanding political calendar, which requires Presidential elections in a little over two years, it becomes clear that 2017 represents the last full calendar year that this administration has within which it must embrace major economic reforms, if we expect to still attain many of the more palatable economic outcomes. It is no use arguing over who or what caused the economic recession (-2% growth) and high inflation rate (over 18.5% p.a.) that we are currently facing; far better to focus on what we need to do to get us out of this sorry state.
There are several units within the FGN that are carrying out meaningful but disparate actions that solve many fringe economic problems. Various actors appear to be working in “silos” solving fringe problems. What appears to be still missing is a bold, holistic and audacious effort to harmonize fiscal, monetary, exchange rate, trade and macro-prudential policies in a bold and concerted manner. Very few people want to take on the “big gorilla” in the room. They prefer to scratch around the fringes or work in silos, whilst almost accepting a 0.1% growth target as the achievement to celebrate because it might signify the end of a “so called technical recession”. That is why the impact of the FGN’s Economic Management Team is not being felt. A corollary of this proposition is that many people are simply minding their own business. Because they fear for their jobs, they are not interested in tackling their colleagues whose actions are negating and/or eliminating the most positive outcomes that the Government owes the electorate. Meanwhile, the populace is yearning for transformative economic changes.
I know that there are those who will criticize me for saying that the FGN’s economic policy direction remains unclear. My response to them is that the most significant economic reforms embraced so far by FGN came about rather reluctantly i.e. by FGN hanging on to an untenable position until it eventually disentangled itself or got overpowered by its own internal contradictions. We saw this with petrol prices and also the devaluation of the naira. When these “reforms” came, they arrived in the form of half-measures. Thus, we stopped short of both petrol price deregulation and opted instead for a limited price fix that was clearly unsustainable. We equally stopped short of adopting truly market-determined exchange rates and instead embraced a “fudge” that spewed widely divergent multiple exchange rates. Half measures typically bring some pain, but often fail (as in this case) to yield any lasting gain.
Determined to help force through the required soul-searching by FGN’s Economic Management Team, the rest of this paper will discuss ELEVEN major policy actions/inactions which the FGN and the ruling political party should consider. My approach is holistic. I am aware that some of these measures might require a bipartisan consensus. We must shake off the indolent mindset that leads us to believe that all Constitutional changes are taboo. Or the mindset that shirks any economic action that is out of the ordinary. Accordingly, I seek to draw attention to the following eleven items:-
1) The Central Bank of Nigeria should accept that it’s foreign exchange and demand management policies have failed. The more restrictions they have placed on forex repatriation the less likely it has become that badly needed forex inflows from portfolio investors, foreign direct investors and Nigerians will pick up. CBN has inadvertently created a siege mentality, thereby making privileged access to its forex allocations, which are reserved largely for the politically well-connected, the best investment game in town. Furthermore, the directive to banks to allocate 60% of forex to manufacturers who account for only 10% of GDP has exacerbated an already bad supply situation. 40% is much too small to accommodate the rest of the economy and so all other sectors have been crippled, including the Service sector which accounts for over 50% of GDP. This has unleashed panic thereby sending the parallel market to the high heavens. Forex inflows disappeared partly because of the uncertainty surrounding the ability to repatriate interest/dividends through an overly restrictive 40% window. There is nothing magical about 60% or 40%. It has no “scientific” basis. Meanwhile it has huge adverse distortionary implications on the supply side. The end result has been our mind-boggling and widely divergent multiple exchange rates which have spooked investors who have taken fright and also taken flight. Sadly, we have effectively “shot ourselves in the foot” by taking unsustainable actions that crippled both forex inflows and the Service sector, whilst favouring even those manufacturers who own “zombie” industries that are horribly import-dependent;
2) Linked to 1) above is the failure to reach some accommodation with Niger Delta militants. Three previous administrations (the preceding three) ended up brokering peace deals. A failure by FGN to broker a peace deal has cost the nation over $6 billion per annum. Dithering over amnesty payments promised by a previous administration was ill-advised because Government is a continuum. The FGN should urgently pursue high-powered negotiations which should be brokered by persons with a healthy track record in this activity and the ancillary pipeline protection business. In the longer term, I favour a constitutional amendment that reserves a one per cent royalty payment to immediate host communities on ALL mining and mineral producing activity (including limestone, oil, precious stones etc.). Communities will then be well incentivized to keep production activity going. This will give them some significant “skin in the game”, which is preferable to a long-term reliance on amnesty payments which constitute a moral hazard. A 13% derivation payment to a possibly “unaccountable and distant” State 14th Daily Trust Dialogue – Thursday 19th January 2017 2 Governor is not anywhere as effective as a 1% royalty payment to a host community;
3) We should simultaneously embark upon some asset sales which improve long-term efficiency and will yield foreign currency. I argued in my 01 October, 2016 published Letter to my Countrymen that the Federal Government share of the major Oil Joint Ventures (IOCs) should be sold down to 40% or no more than 49%. This would represent a replica of the highly successful Nigeria LNG (NLNG) model that provides a healthy dividend stream for the Government. If it is good for NLNG, then it should be good for the IOCs too. I envisage that the main obstacle here will be our value-destructive NNPC who might be reluctant to become a minority shareholder (40-49%). The secret behind NLNG’s success is that NNPC was “reduced” to taking a minority shareholding in this world-class investment project. Asset sales can yield $15-20 billion over the course of the next two years if planned carefully;
4) We urgently need to deregulate the entire downstream petroleum sector and also privatise NNPC’s three refineries + depots and pipelines and domestic gas;
5) Our civil/public service is still bloated, corrupt and inefficient and has become the excuse for a privileged 2% of the population to consume close to 60-70% of the annual budget via the recurrent expenditure vote. What is left over for the capital vote is insufficient to help finance social and physical infrastructure. Methinks mass redundancies are now inevitable, along with the implementation of an even bolder Orosanye Report because the nation is now stuck with a public service and legislators that we could only afford at $100 per barrel oil prices;
6) Less than 25% of our 36 States are economically viable. In the early 1960s, when Sir Ahmadu Bello wanted to build roads in the old Northern Region, he set aside salaries for a Works Minister (also a Parliamentarian) a Permanent Secretary and a lean Ministry of Works after which all the money set aside for roads was used in actually building roads. Today, overheads associated with 19 Commissioners and 19 Permanent Secretaries and their privileged workers consume virtually all the funds set aside for roads, leaving little or nothing left over for actually building State Government roads in most of the North. The obvious answer is political restructuring, as unpalatable as it may sound to some. For example, in terms of zonal overhead spending, we “expanded” the North from one regional government to 19 States and now need to “bring it down” to a more affordable 3 zones by retaining some overheads at the zonal level instead of spreading same over 19 states. We should keep an open mind towards this political restructuring argument because it is not even true that homogeneity within a State or zone necessarily guarantees peace. Somalia is homogenous and yet it is probably the closest thing there is today globally to a failed State. Conversely, there are communities, States and nations around the world which are heterogeneous, but which are living peacefully together;
7) To help overcome, the social and physical infrastructure deficit, we need to embark upon the restructuring canvassed in 5) and 6) above, whilst also embracing the private sector as the engine of growth and a capable partner/financier of infrastructural development. The Power and Transportation sectors are crying for more and not less privatisation. The logic of the power sector reforms was built around the adoption of cost-reflective tariffs, which we have since thrown out of the window. The transmission sector and gas supply difficulties are some of the other weak links in the power value chain;
8) A dysfunctional legal system is an impediment to the rapid growth of a modern economy. The Chief Justice of the Federation must “buy into” and spearhead radical reform of our legal system;
9) The anticorruption crusade will only complement the positive changes envisaged above if the Government itself respects the rule of law and obeys the Courts. We should err on the side of 14th Daily Trust Dialogue – Thursday 19th January 2017 3 extending the “benefit of the doubt” to accused persons whenever allegations are unsubstantiated or cannot be proven beyond reasonable doubt. This need not signify the end of the anticorruption crusade because there will always be enough cases which can be proven beyond reasonable doubt. It is better to let four people who might be guilty go free than to convict one innocent man. The latter drains all the energy out of the anticorruption crusade and also destroys business confidence;
10) Restoring business confidence should be the primary preoccupation guiding virtually every statement by public officers. This calls for a paradigm shift because the current preoccupation is for every Minister, Governor, Regulator or overzealous official to threaten investors with closure, bankruptcy, fines or seizure of their goods. Frightened businessmen (local or foreign) will not invest. We should be wooing investors instead of threatening them;
11) The Federal Government should immediately appoint directors to the boards of every regulatory agency. Keeping a Lone Wolf at the head of a regulatory agency is dangerous and therefore detrimental to business confidence. The important lesson from the recent Financial Reporting Council of Nigeria imbroglio is that a single rogue regulator can hold the entire system to ransom, help destroy business confidence and hamper economic growth. This only became possible because the checks and balances which our laws envisaged, through the appointment of Boards, Council members or Commissioners, were not in place.
Our economy is underperforming because, amongst other things, it is caught up in a low foreign exchange trap. Borrowing alone is not and can never be a panacea. Indeed, borrowing without instituting necessary and badly needed economic and structural reforms is akin to suicide. Those who are canvassing for more foreign debt simply because our debt/GDP ratio is low are overlooking the fact that our debt service ratios are already high. Our debt service ratios are high because our Tax/GDP ratio at 6% is exceedingly poor. It will require a few years of concerted action to move economic agents from the informal sector to the formal sector in a significant way before our tax/GDP ratio rises significantly. Relying on debt alone to get us out of the present low foreign exchange trap is therefore a high risk strategy. I consider it to be ill-advised. That is why I also emphasise 2) and 3) above. They help to improve the forex supply situation, without burdening our already high debt service ratios. If care is not taken, our deteriorating economy might take us on the “road to Venezuela or Zimbabwe”. Nigerians take pride in arguing that the Lord loves us and so he always intervenes by bringing us back from the precipice in the nick of time. I do not doubt that. What I truly believe is that the Lord intervenes through people. After the unbridled insults that were heaped on the Emir of Kano and a few others who dared to tell the Government the truth about the parlous state of our economy, the easiest path for me would have been to keep quiet or to simply blame speculators, detractors or past regimes. If I did that then the attack dogs would have won. NO, I am not about to abandon my right to free speech on account of some insincere sycophants. I speak because I want my country to improve. So help me God.
*Atedo N A Peterside CON is the President & Founder of ANAP Foundation and is also the Chairman of Stanbic IBTC Holdings Plc and Cadbury Nigeria Plc Twitter @AtedoPeterside