Nigeria Should Borrow its Way out of Economic Slump

Nigeria has to borrow its way out of the current economic slump.

As most are aware, the construction sector in Nigeria has shrunk considerably over the past three quarters with most workers losing their jobs. This follows fast on the heels of the massive retrenchment in the oil and gas sector. Most firms have also put a hold on recruitment until when the economy recovers. With these telltale signs on show, one does not need a soothsayer to proclaim that the economy is tumbling.  

So far, the Nigerian government has been doing its best to stabilize the economy mostly through monetary policy actions. Understandably, the government, with its dwindling resources, does not have the financial muscle to engage in expansionary fiscal policy. Nevertheless, with the magnitude of economic decline we are currently facing, we need a combination of loose monetary policy and expansionary fiscal policy to get the economy working again. This brings me to my premise: the federal government should borrow to bolster the economy given its extremely low debt profile (Debt-to-GDP ratio of about 11%).

When the economy begins to suffer from slowing growth and rising unemployment, it is usually because there is not enough money circulating in the economy. Therefore, governments usually step in to inject money into the economy. This is done either by adjusting taxes and government spending (expansionary fiscal policy) or by adjusting interest rates and reserve requirements, and buying bonds (loose monetary policy). Sometimes it is expedient to make use of both.

According to Keynesian fiscal theory, due to the inability of the market and the economy to self- regulate especially in times of recession, there is a need for government intervention to jump-start the economy by injecting some money into it. This can be achieved via a mixture of demand-side stimulus (putting money into the hands of middle and lower class consumers, to stimulate spending) and supply-side stimulus (cutting business and corporate taxes to encourage reinvestment into new businesses and large-scale expansion, thus generating more jobs).

With global crude oil prices currently mired in the $40s, the federal government needs to borrow the money it needs to initiate and complete capital projects earmarked for 2015 as well as fund 2016’s budget adequately. Spending on infrastructural projects as well as meeting recurrent expenditure obligations (ensuring civil servants and pensioners are paid) will go some extent to put money into circulation and stimulated economic growth.

The Great Ebeano Fire

At about 6 pm on Tuesday, sad news filtered through the airwaves that Ebeano Supermarket (Lekki branch) was ablaze. As the news sank in, sympathy and emotion took the reins. However, reason popped up at some point as I realized that there are indeed many positives to take from the incidence, depressing as the news might sound. Yes, you heard me right . . . POSITIVES.

It only requires a little thinking outside the box to change the gloomy narrative to one of inspiration. I say this because history tells us that The Great Fire of London gave way to the modern city of London - a pace setter of its time.  The Great Chicago Fire birthed the new Chicago city – the third largest city in the U.S and home to the world's first skyscraper.

So what positives can we take from “The Great Ebeano Fire?”

1. Ride the current wave of popularity:                                                                             Ebeano is currently in the news. It has both the sympathy and attention of the public and that makes for an excellent PR opportunity to sell the vision of the supermarket chain. The company can come out with a clear statement thus:
   
   

   “We are Ebeano supermarket, a one-stop shopping supermarket chain. We lost our Lekki branch, which will reopen in three months’ time. Meanwhile we have five other location at Gbagada, Isheri Magodo; Chevron Drive, Bluecrest Mall, and Ikota Shopping Complex all in Lekki . Do continue to patronize us.”                                                                 

2. Build a better outlet                                                                                             Starting all over again presents a huge advantage. The firm now has the hindsight to design and build a better outlet, to avoid all the mistakes it made last time.                                                                      
3. Highlight the importance of Insurance & safety management systems    Insurance firms can use this incidence to highlight the importance of buying insurance. Safety firms can ride on this to promote corporate investment in workplace safety systems and equipment.                                                                                                    
4. Learn from the entire experience:                                                                         Every misfortune is a unique opportunity to learn and grow. Disasters help to figure out a lot about ourselves, the extent of our capabilities, and life in general. Ebeano can go on to become a better retail outfit from this experience if they actually learn from it

Do not get me wrong. I do understand the gravity of such a loss and the frustration and pain it brings. However, such mishaps will be the more tragic if no lessons are learnt from them.

Governance in Nigeria: The Real Issues

It has been one splendid show. A soap opera gone viral . . . However, I am bothered. I am concerned that a mundane activity such as the current ministerial screening is generating so much attention nationwide. I am disturbed and wonder if we are moving in the right direction.

We need to face the real issues hindering our advancement as a nation. The states are responsible for most things that affect Nigerians on an ongoing basis and some attention should be directed at them.

-       Basic education – primary and secondary

-       Primary health care

-       Roads - most of the roads we ply in and out of our homes

-       Pipe borne water

All these fall under the ambit of our state governments and no one talks about them. It seems like the federal government always steals the show and enjoys the attention. They do not attempt to re-direct attention to the states. Maybe they feel it gives them relevance.  The state governments in turn shirk their responsibilities, taking full advantage of the entire farce.

While the state should ideally do most of the operational stuff (save for security, foreign affairs etc.), the federal arm of government should be more concerned about scoping out a vision as well as policy plans for the nation:

-       How the economy will diversify to becoming a manufacturing or services hub in the West African sub-region over the next ten years

-       How we plan to transform our weak institutions – the judiciary, customs, internal revenue service – over the next five years

-       How the ministry of transport plans to transform our disjointed road networks over the next twenty years

-       How the ministry of agriculture plans to modernize the sector over the next ten years

Such issues debated in the national assembly should be the things occupying our attention. Our focus should be to pass into law such policies that set the long-term direction of the nation. Once ratified, they set the course of governance regardless of the shift in power every four or eight years.

Several feeble attempts have been made in the past at setting such policies. However, they felt more like sideshows and not really the focus of those regimes. Policy should drive all subsequent actions of government. They are not ideas to be documented and kept in the archives while the governments busies itself commissioning roads and bore holes.

We do not really need to appoint technocrats to achieve the above. What we really need is a total change of mindset. Everyone is involved from the leader to the led. If the citizens like their rulers do not know what is required to run a nation, then no one will be held accountable. If sideshows like ministerial screening are the things that arouse our interest, then we will all have to settle for the incremental drip … drip … drip we call growth. 

Putting the “Largest Economy in Africa” Tag into Perspective

In 2014, the National Bureau of Statistics (NBS) announced the rebasing of Nigeria’s 2013 GDP figures from N43 trillion ($270 billion) to about N81trillion ($510 billion). Subsequently, Nigeria (previously the third largest economy in Africa behind South Africa and Egypt) was heralded as the largest economy in Africa. This is very reminiscent of its “Giant of Africa” tag in the 70s and 80s. The rebasing exercise has raised a lot of questions about its meaning and relevance. Critiques complain that it is of no real value since much of the touted growth is non-inclusive: There is rising inequality with much of the country’s wealth residing in the hands of a very privileged few while the masses wallow in abject poverty.

Though the points raised above are valid, I would like to put the “largest economy” tag into perspective by looking at government budget (revenues and expenditures). But before we take a deep dive, I would first like to state that size does not necessarily imply quality. That Nigeria is the largest economy in Africa does not imply it is the most advanced, modernized, or developed. A Rising GDP is just a necessary but not a sufficient condition for economic development.

Before touching on government budget, let’s take a quick look at GDP per capita.

Per capita income is a measure of average income per person in a country. It is the GDP divided by the total population and measures how prosperous a country feels to each of its citizens. GDP in turn is the market value of all “officially” recognized final goods and services produced within a country in a given period (NBS).

 

Source: AnswersAfrica. Top 10 African Countries with  the Biggest Economy

Looking at the table above, out of the ten largest economies in Africa by GDP; Nigeria comes 7^th in terms of per capita GDP. Despite being the largest economy in Africa, the standard of living in Nigeria remains relatively low. Viewed the other way round, it simply implies that given Nigeria’s population size its GDP should be way above its current rebased value of $569 billion.

Source: CIA, The World FactBook

A country’s national budget is very important as it is the expression of public policy determining the allocation of resources and consequently economic growth and expansion. Governments are governed mainly by their budgets, which are written estimates of anticipated revenue and expenditures during a specific period of time. Nigeria ranks a miserly 6^th out of the top ten African economies in terms of budget. The revenue accruing to the federal government of Nigeria in 2014 is a meager $23 billion while South Africa earns about $87.1 billion. Hence South Africa’s revenue is four times that of Nigeria even though Nigeria’s economy is about twice that of South Africa. Likewise South Africa’s expenditure ($102 billion) is three times that of Nigeria ($34.62). South Africa earns and spends more than Nigeria and this in part explains why its economy is far more developed. Excluding Nigeria and the bottom three countries (Sudan, Ethiopia, Tanzania), the other countries' budgetary expenditure as a percentage of their GDP averages 36%. Nigeria budgetary expenditure is merely 6% of its GDP. If Nigeria is to spend 36% of its GDP, its budget will be about $200 billion.

Based on its GDP, Nigeria should be earning more revenues than South Africa and it can earn more if it strengthens its tax systems and continues to diversify the economy. The World Bank currently classifies Nigeria as a lower-middle-income economy (countries with GNI per capita between $1,046 to $4,125) with robust growth averaging 7% for the past decade. However, it is currently threatened by exchange-rate volatility and falling global oil prices that impact public-sector revenues. Lower revenues due to the over-dependence on oil (oil accounts for 75% of the country's revenues) means ever dwindling government expenditure on much needed infrastructure required to develop the country.  

This brings me home to my question, “Given that Nigeria needs to develop and modernize, must its spending on infrastructural depend solely on what government generates in revenues? The answer is “NO.” The Africa Infrastructure Country Diagnostic (AICD) Report for 2011 estimates that Nigeria requires sustained spending of $14.2 billion per annum over the next decade in order to address the infrastructure challenge. Furthermore, it is estimated that Nigeria needs N10.63 trillion ($67 billion) for road upgrades, bridge repairs, the energy sector, hospitals and schools. Clearly, Nigeria must borrow to be able to build new infrastructure. As early mentioned, Nigeria should be spending close to $200 billion and if the country is serious about developing, it has to borrow to cover the current revenue shortfall. However, budgetary discipline and a change in fiscal policy are needed to ensure money borrowed is judiciously employed. Nigeria’s budget should ideally be clocking the neighbourhood of $200 billion is we are serious about advancing our economy.

Countries with growing vibrant economies usually take on more debt to finance economic development. Governments borrow to maximise their GDPs and grow their economies. Ironically, the opposite is the case in Nigeria. Despite the fact that the economy has been growing at 7% for over a decade, Nigeria has maintained extraordinarily low debt levels of about 9.9% since 2005 (compared to an average of 60% in Eurozone countries- IMF). Nigeria has a very poor road and rail network, only one functional seaport, and a largely inadequate power supply system. With our current budget levels, we will keep taking ten years to build a ten kilometer road. It is best for Nigeria to follow the BRICS model where on the average, debt to GDP ratio is 41.7%.

References

• FinIntell. http://www.myfinancialintelligence.com/banking-and-finance/real-output-and-aggregate-leverage-%E2%80%93optimal-levels-emerging-economies#sthash.LGzOAQpD.dpuf
• CIA World Fact Book
• AnswersAfrica. http://answersafrica.com/largest-economies-africa.html

Why Have State Governors Gone Off The Radar?

When and how did we get it completely wrong? I mean, how can we as a people, a nation, completely lose focus? Governance has been reduced to one big comedy show filled with power tussles, propaganda, and slug fests between opposing political camps. The entire nation has become so glued to this show airing round the year non-stop and people no longer discuss issues or ask key questions. As a result, our politicians are running wild and our dear nation keeps crawling and creeping instead of advancing in leaps and bounds.

I have an issue with the way our states are being run with governors shirking their core duties with impunity. The way we practice our version of federalism is appalling. It is a situation where every state governor is fully focused on the central government, refers all matters to the central government, waits for the central government, and even lives in the federal capital. Most, if not all, states of the federation have been reduced to glorified administrative units of the federal government. They basically process payroll and occasionally execute one or two non-economic or social impacting project(s) that they later use to embark on sustained media propaganda with the widespread, now famous tagline - dividends of democracy.

Apart from Lagos state, most states of the federation depend solely on allocations from the central government and do not generate or intend to generate enough internal revenues to prosecute any appreciable social and economic development. Everyone waits for the federal government to take them to the long awaited promise land.

To refresh our minds, a federal system of government simply means that governmental powers are shared between the central government and its components - state and local governments. The federal government simply sets the policies and is in charge of security and defense. The rest of the work (and that is a whole lot) lies with the states. States and LGAs are assigned primary responsibility for the delivery of basic public services like primary education, primary health care, potable water and sanitation, and local roads linking communities to schools, health facilities, markets etc. Lagos state is a case in point. Pipe borne water is almost non-existent in the entire state apart from areas like Yaba, Surulere, Ikeja and environs where laid by the colonial government. Primary schools and secondary schools are in a terrible state and primary health care facilities are far from adequate. 

The argument usually comes up that the current situation with our federalism is far from perfect. The federal government in Nigeria encroaches upon the jurisdiction and sovereignty of states and we are yet to get our fiscal allocation policies right hence most state cannot achieve much given the financial restrictions they face. My response to this is that even with this backdrop, state governments can still do a whole lot. If each state focuses on one sector at a time, a lot can be achieved over the years. And in any case, most state governors, past and present, have been accumulating enormous amount of debt burden on their respective states. What exactly have they achieved with all these loans? 

Expecting the federal government to solve all our existing problems is like expecting a manager to do eighty per cent (80%) of the work for his direct reports. It should be the other way round. It is high time our people wake up from their slumber (and while awake avoid being completely sucked into the soap opera on show at the federal level) and start demanding more from their state governors. These people should be held accountable for not bringing about some level of progress in their states.

OF THE RECENT POWER SUPPLY IMPROVEMENT IN NIGERIA

The amount of misinformation in the media today is terrifying. And even more worrying is the fact that most Nigerians seem not to look for facts. The poor quality of thinking out there beggars belief. One such recent misinformation that has caught my attention is the way the seeming improvement in power supply has been credited to our recently inaugurated President.

First and foremost, the power sector has long been privatized to a large extent, except for transmission and pricing. It is therefore incorrect, to a large extent, to credit any improvement in the sector solely to any seating government.

The key driver for the sector is natural gas supply and most people do not get it. Eighty per cent (80%) of the power generated in Nigeria comes from thermal stations with only twenty per cent (20%) coming from hydroelectric stations. Hence a lot depends on natural gas supply:

The power sector has always had the issue of inadequate gas supply to the thermal plants either through vandalism of our gas pipelines or a complete lack of supply. The local supply of gas has always been inadequate due to the existing arbitrage opportunity between local and global natural gas prices. Global gas price has always been higher making it more profitable to export gas. The price for gas in Nigeria is regulated by the Nigerian Electricity Regulatory Commission (NERC). For a long time, natural gas price was fixed at $1.5 per thousand cubic feet (MCF) while international gas price has hovered around $3.6 MCF peaking at $5.0 MCF in early 2014.

Source: Nasdaq - Natural Gas Price

The Federal Government in December 2014 announced an increase in the price of gas to $2.5 per MCF effective from January 1, 2015. Coincidentally, the global price of natural gas started tanking in November 2014 and currently sells at $2.68 MCF. This explains the boost in local natural gas supply to our power generating stations, hence the improvement in power generation to about 6,000 megawatts (MW) while we transmit only about 4,800 MW. However, this is still far from adequate as Nigeria’s power need is closer to 20,000 MW. The seeming improvement in the experience of power supply is as a result of power consolidation in a few regions like Lagos and Abuja – ideally this is how it ought to be. But as a direct result, some other regions in the country are currently experiencing less power supply as.

Has power generation increased? 

Yes it has “slightly” increased. 

Does the seating president have anything to do with it? 

The improvement is largely due to improved gas supply due to market forces pushing global prices south and NERC reviewing local gas price upwards. But since the revision has done even before the current president was sworn into power, the answer is a “No”. 

Do we now have adequate power supply? 

By all means “No”. We are generating just about a fourth of our current power need which will grow by twenty per cent (20%) every 3 to 4 years in line with growth in per capita income.

References

Chidi Okoro, 2015. Electric Power Supply Adequacy in Nigeria - My Thoughts, http://justchidi.blogspot.com.ng/2015/09/electric-power-supply-adequacy-in.html?m=1

Nasdaq, End of day Commodity Futures Price Quotes for Natural Gas (NYMEX), http://www.nasdaq.com/markets/natural-gas.aspx#ixzz3mHIclPEs