The International Monetary Fund reminded Nigeria recently of the dire economic choices it faces. Christine Lagarde, its managing director, met with top government officials and private sector chiefs and spelt out the need to change lanes from perdition onto the path of real growth and prosperity. With global markets in turmoil, the Federal Government, more than ever before, needs to pursue policies targeting production, exports and job creation.
Lagarde’s message, though conciliatory and devoid of the hectoring that developing nations usually experience from the international financial institution, was nonetheless forthright in the analysis of the state of the Nigerian economy. It has been taking a bashing since oil prices began crashing in August 2014. Oil prices hovered around $30 per barrel on Tuesday, spelling more bad news for an economy that relies for over 90 per cent of public revenues on crude oil and has anchored its 2016 national budget on an average price of $38pb. The oil production target of 2.2 million barrels per day is also threatened by renewed bombings of oil and gas pipelines in the Niger Delta region by heavily armed militia-cum-criminal gangs.
A Bloomberg analysis in November suggested that, to fund its budget, Nigeria needed an average oil price of $120pb. On the ropes, the government aims to borrow N1.84 trillion to plug a projected deficit of N2.22 trillion in fiscal 2016 in a N6.08 trillion budget that allots only 30 per cent to capital expenditure. Yet, the country is faced with an acute infrastructure deficit that delivers only 4,000 megawatts of power, 3,557 kilometres of rail tracks, while seaports, airports and roads are substandard and ill-maintained.
Lagarde was therefore not telling us anything new; the crucial take-away from her interactions was the need for quick, creative and bold action to turn around the economy from the buffeting headwinds. Her panaceas – Resolve, Resilience and Restraint – are positive guidelines that the Muhammadu Buhari government should and is better able to adopt than his corrupt and fiscally reckless predecessors. On the global scene, she identified the slowdown and changes in China, lower commodity prices and monetary policy turbulence in major economies. These “economic transitions,” she said, create spillovers in trade, exchange rates, asset markets and capital flows.
Nigeria is caught in this vortex, made more uncomfortable for her 170 million citizens by decades of poor economic management and corruption. Turning the tide will require acting with an iron resolve to effect a fundamental change in the way we run government. The waste, excessive spending on maintaining a few bureaucrats, elected and appointed officials, must stop, to achieve a 60:40 per cent ratio in capital-to-recurrent spending at all levels. While we support broadening of the tax base to wean government off its reliance on commodity sales, we reject moves to raise the Value Added Tax from five per cent as Lagarde and senior government figures canvass.
Comparing our low VAT rate to others’ is deceptive. Lagarde’s France and other European Union member countries provide high quality basic services – water, top-rate schools and health care facilities, social security, efficient policing and municipal services as well as affordable housing. Nigeria has no social security safety net and millions of Nigerians have to provide their own security, water, transport and power through standby generators. Less than 50 per cent of Nigerians have access to wholesome pipe borne water with many rural communities lacking it completely, according to UNICEF.
How times change! Resilience, according to Lagarde, will require more wisdom in borrowing. The Debt Management Office site shows that total debts, external and internal, stood at $63.8 billion as of June 30, 2015. Now standing at 12 per cent of GDP, Buhari should hearken to an IMF that now preaches caution in taking loans unlike our bureaucrats who compare us to nations with higher debt-to-GDP ratios to justify more borrowing. Our debt “weighs heavily on the public purse,” said the IMF, with 35 kobo of every N1 accruing to the government used to service debts. All loans should now be tied to, and used for, critical infrastructure projects; never again for consumption.
Lagarde’s advice for restraint translates to ensuring that all revenues are effectively utilised. This is critical for a population traumatised by corrupt and banal governments that earned over $250 billion between 1999 and 2015 from oil and gas, according to a World Bank estimate, but have only debts and collapsing infrastructure to show for it.
Buhari and his team have an arduous task. IMF has lowered its initial forecast of 6.3 per cent GDP growth in 2016 to a modest 4.2 per cent, with some other analysts expecting only 3.2 per cent. The Nigerian Stock Exchange lost N1.76 trillion in the first two weeks of this year, continuing a trend that saw the bourse losing 23.8 per cent value in 2015. Last week, the naira exchanged at over N300 to $1 at the parallel market, while inflation rose to 9.6 per cent last month. Unemployment continues to take a high toll and the figure of 24.1 per cent for 2014 is believed to be understated today.
To transform the economy, the Buhari administration should pursue an export-led growth policy. In 1963, South Korea exported goods worth less than $600 million at today’s price. By 2013, Ricardo Husmann, a professor at Harvard University, said the country had exported goods worth $600 billion, mostly electronics, machinery, transportation equipment and chemical plants by adopting export-led economic development strategy.
The IMF recommendations that government should spend more on high-value added projects, on power, transport and housing, accord with our long-canvassed interventions. We prefer that the government should exit commercial ventures entirely and forge a robust partnership with the private sector to attract massive investment in rail, ports, airports, steel, power and downstream oil and gas sectors. All policies should be geared towards creating jobs, diversifying the economy, boosting exports, facilitating SMEs and start-ups and ensuring food self-sufficiency as quickly as possible.
