Ever since Nigeria started harvesting its oil endowment, its economy’s umbilical cord has avoidably been firmly tied to the volatility of this commodity’s price.
This vulnerability is demonstrably reflected in that about 65% to 70% of annual government expenditure comes from oil revenues. Historically, it’s been as high as 90%. And every downturn in global oil prices has curiously hit Nigeria like a predictably repeated below-the-belt punch.
Most would have thought that any well-meaning national leadership would by now have long found a way of dealing with such a well-understood problem, which often bears huge consequences. These include regressive austerity policies, deferral of vital investment projects, a decline in economic growth and an increase in unemployment.
Nigeria’s pace of economic growth is forecast to slow to 2.63% in 2015, more than half the 2014 rate. The official unemployment rate has stagnated at around 8%, while fiscal deficit has grown from 0.1 to about 3.0 as a percentage of GDP.
There is also intense devaluation pressure on the currency. International investors are also pulling away from Nigeria alongside the de-listing of its sovereign bond from JP Morgan’s Government Bond Index-Emerging Markets.
For the umpteenth time, the question is: how should Nigeria weather yet another episode of oil price shock? This time it’s likely to be worsened by two events of significant global effect. Those are the slowdown in China’s economic growth and the likely interest rates hike by the US.
Interestingly, the US’s discovery of less expensive ways of extracting oil and gas from formerly inaccessible parts, which triggered the current glut in global oil supply, is unlikely to reverse trend any time soon. And Europe is still mired in the Greek debt matter and Russia’s apparent aggression. These events also have global economic impacts.
The slowdown in China would cause a huge decline in demand for oil and other commodities. And the tapering off or reversal of quantitative easing, by way of interest rates hike by the US central bank, would mean shortage of internationally supplied funds to developing countries.
Such funds had in the recent past aided investment activity in many promising, developing countries – including Nigeria. Now the cost of external funds would, no doubt, increase and put pressure on the external debt bills of these countries. This would in turn beget further cutback in investment activity.
Nigeria should see this as an opportunity to truly restructure its economy and society. This should be viewed as a blessing in disguise that presents an opportunity to fine-tune, if not relaunch, the economy.
Nigeria’s immediate past finance minister, Ngozi Okonjo-Iweala, had some sensible ideas on how to counter this accelerating economic headwind:
- the initiation of a higher surcharge on luxury imports – private jets, boats and ski gears, SUVs and the like; and
- extending tax collection to formerly un-taxed groups in the informal sector and under-taxed multinational firms.
These quick steps would yield immediate increase in fiscal resources.
Another low-hanging fruit is the scrapping of the corruption-ridden petroleum subsidy. This is believed to cost billions of US dollars annually.
This season of low expenditure expectations, low oil prices and that most Nigerians do not own cars make this a most opportune time to act. This removal should be accompanied by a corresponding spending on mass public transportation – buses, trains and ferryboats – roads, railways and waterways infrastructure.
President Muhammadu Buhari’s government should focus on stopping state corruption that diverts contract and salary payments, and delays continuation of vital infrastructure projects. It should take these steps transparently, within the law and without impunity.
As the source of the problem, the oil industry also can help counter the current downturn. The commodities sectors of many African countries are notorious as the biggest source of illicit financial outflows from Africa, with Nigeria a prominent poster-boy. In Nigeria this sector is subject to state capture. Abuse by powerful cartels and the game-playing with the Petroleum Industry Bill could mean that the sector will keep on hemorrhaging stupendous amount of resources.
A less market-determined way of providing for infrastructure projects on course is the use of bilateral arrangement to barter oil for technical and/or construction assistance. In addition to ensuring the supply of vital infrastructure, this kind of astutely negotiated bilateral exchange would also minimize graft by tying oil harvest to identifiable project deliveries.
Leave the currency
The temptation to devalue the currency for an immediate counter effect is as ill-advised as adding fuel to a burning house. The same can be said of adopting austerity policies, whose effects are usually regressive and felt over a longer period.
Nigeria hardly exports any manufactured good, so it needs not devalue its currency to make its trading partners demand more of its exports. Besides, its commodity exports are invoiced in US dollars.
Devaluation would simply increase the local currency cost of production of businesses that use imported inputs. It could stoke the fires of inflation and entice a lazy government into “inflation funding” its fiscal deficit. Nigeria can manage the cost of defending its currency by outlawing importation of luxury products and thus reduce demand for foreign exchange.
The good that could come from this seeming “bad movie re-run” will be found in responses whose outcomes are likely to arrive in the long run and be long-lasting. Such responses can be viewed as all restructuring that effectively diversifies the Nigerian economy. Importantly, restructuring must root out unorganised and production-stifling corruption.
Building and entrenchment of institutions, and re-positioning of education to produce human resources necessary for scaling up Nigeria’s productive capabilities for efficient production and competitiveness would also yield welcome long-term outcomes. But these may never take hold or be sustainable unless Nigeria addresses its flawed political arrangement, which fosters social conflict and destructive corruption.
The current administration seems to be focused on fighting proximate corruption. Unfortunately this does not address the root cause of the most destructive kind of corruption that is truly bedeviling Nigeria.
Kalu Ojah is on the staff of Wits Business School, at the University of Witwatersrand, as a Full Professor of Finance and Director of the Master in Finance & Investment.