Four years on from the first annual contraction in economic activity in over three decades, the odds are high, that Nigeria’s economy will experience another full-year decline after going into a technical recession in Q3 2020.
Across the 2016 recession and ongoing 2020 episode, Nigeria’s economy faced exogenous shocks, a sharp drop in oil prices (which induced recessionary conditions across all major oil exporters) in the former, and the COVID-19 outbreak which has pushed the world economy into a recession. Following the discovery of proven vaccine therapies, expert commentary, and analyst prognosis, hinged on the assumption that a successful roll-out of COVID-19 vaccination programs across countries, is for a V-shaped economic recovery.
For Nigeria, this rebound will be towards an economic growth number between 2-3 percent which implies little change in individual fortunes as real GDP growth roughly matches population growth. Though the recent #ENDSARS protests could be naively presented as frustration over excessive police brutality, those protests were essentially about anger over the inability of political leadership and governance to deliver seismic improvements in the socio-economic welfare of the average Nigerian.
Alongside growing concerns over the spate of insecurity, the time for the Muhammadu Buhari administration to act decisively is now. Restoring optimism over Nigeria’s economic prospects requires pushing growth back towards either the mid-to-high single-digit levels observed in the era between 2000 and 2010 or uncharted waters of double-digit expansions. This article looks to set out broad ideas on how to revamp Nigeria’s economic growth engine.
A trip down memory lane
Looking back at history, following the return to democratic rule in 1999, Nigeria’s economy expanded at the fastest pace of growth since 1980, with an average growth of 8.4% during the Obasanjo administration (1999-2007) which decelerated to 6% under the Yaradua/Jonathan era (2007-2015) before a drop-off to 2-3% under the Buhari administration (2016-date). Growth over the democratic era (average: +6%) is a significant uplift from the lost decade during the 1990s and the volatile 1980s period under military rule when Nigeria tried to reform in response to the collapse in oil prices.
Figure 1: Economic Growth 1981-2020e
So what factors account for the marked improvement between the post-1999 era and the prior two decades? Looking at sector data for a start, economic growth in post-1999 period revolved around the traction in the non-oil sector which effectively boiled down to rapid expansion across three sub-components: services, trade, and agriculture. The key pillar of uplift in Services GDP was telecommunications GDP which went from 0.1% of the economy in 2000 to 10.9% in 2019. To situate this properly, Nigeria’s telecommunications sector is now larger than the oil sector from effectively ground zero in 2000 and the gains here entirely reflect the outcome of the decision in 2001 to liberalize the sector by giving ground to private capital.
The move raised the number of active lines in Nigeria from a little over 100k lines in 2000 to 208million lines at the end of October 2020. The lesson here is that Nigeria’s government in 2001 stopped trying to waste meagre resources in a feeble attempt at investing in telecommunications, under an inefficient monopoly (NITEL), and allowed private capital (foreign and local) to sort out the sector.
For trade GDP, the underlying drivers of the expansion were more fortuitous and less deliberate as thanks to a strong run in oil prices, starting in 2003, Nigeria’s external accounts underwent a sizable transformation with the re-emergence of a large current accounts surplus which visibly boosted FX reserves.
Alongside, a relatively weaker exchange rate in REER terms, the improvement in FX reserves allowed for a more liberal approach to trade policy, with the relaxation of many hitherto restrictions on imports. Accordingly, trade GDP expanded from 11-12% of GDP in the 1990s to 15-16%. On the agriculture pillar of the growth uplift, where an expansion was observed in the area under cultivation, my thesis is that better farm input sourcing and demand from a resurgent manufacturing sector helped drive improvements.
Noteworthy is that contribution from the oil sector was minimal (bar 2000 and 2002) reflecting static oil production despite much higher oil prices, including an unmatched era of USD100/bbl. between 2010 and 2014. The lack of progress on expanding oil production is a testament to the lack of political will towards reforming oil policy to drive higher private investment. In summary, reforms which boosted private investment in telecommunications, less restrictive trade policies occasioned by improvement in FX receipts, and possibly better farm input sourcing underpinned the strong growth in the Obasanjo years and well into the Yar’adua/Jonathan era.
Figure 2: Decomposition by Sector
However, despite the strong growth over the Obasanjo era, many Nigerians struggled to connect with this reality, and debates over growing income inequality and poverty rates dominate public discourse. Looking at more structural data on growth drivers uncover some clues as to why. In elementary economics, there are four factors of production: labour, land, capital, and entrepreneurship. To simplify things, economists often distill these factors into two: labour and capital. Looking at the data, Nigeria’s economy is dominated by capital intensive sectors which account for over two-thirds of output which implies that more of the national income is captured by owners of capital despite our high population.
As consumption expenditure dominates aggregate spending, the mismatch between GDP by income and GDP by expenditure naturally cascades into high unemployment rates, stark income inequality (as owners of capital get more share of income), naturally low aggregative savings, and low tax collection. In short, our GDP comes from sectors with a great need of our least abundant resource (capital) but with less use of our most abundant resource (labour). Growth can never be inclusive under these settings.
Figure 3: Decomposition of GDP by Income
For a start after over ten years of running at double-digit growth, Nigeria’s voice-driven telecom revolution appears to have its peak and maturation has set in with teledensity above 100%. Most people who need a phone already have one! This means that the marginal contribution of telecommunications GDP to overall growth would be minimal. Secondly, the collapse in oil prices over the 2014-16 era has resulted in a return to trade-restrictive policies (aka import demand management) that characterized the 1980s and 1990s and which worked to limit growth in trade GDP (20% of the economy) pushing the sector into recession.
Lastly, while agriculture GDP remains in growth, a myriad of factors: insecurity, input supply chain issues, and the perennial issues of weak irrigation, logistic, and storage infrastructure bottlenecks continue to repress growth. Throw in the odd shocks to oil production from militant attacks in 2016 and OPEC induced shutdowns in 2020 and a perfect storm of forces have imposed a deceleration in growth. The journey to sub-par growth began with the deliberate or otherwise lukewarm appetite by succeeding governments since 2007 to embrace greater liberalization of the Nigerian economy. As such growth has naturally become less resilient.
In response to the initial oil price shock, the Buhari government announced moves to stimulate aggregate demand via increased government spending. However, this approach while theoretically appealing evades the points uncovered by the long history of reform: each crisis is an opportunity to grow the private sector not expand the public one. In any case, the Nigerian government is simply too small to move much as, despite successive records in nominal budgets, government spending in real terms is lower than at the start of the last decade.
Figure 4: Government Spending (% of Real GDP)
Attempts to spend our way out of the crisis naturally implies more borrowings given the limited ability of the Nigerian state to mobilise tax revenues, which will only constrain the fiscal space for future governments. Our low tax revenues are a function of the structure of the economy, which as we saw earlier places a clear emphasis on capital-intensive sectors vs. labor-intensive sectors which ensures high labour unemployment and limited income taxes. The bulwark of tax revenues in most countries is personal income taxes vs. corporation taxes. Given this backdrop any tax mobilization drives will merely entail marginal improvements, seismic growth will remain elusive.
The sojourn through Nigeria’s economic history reveals few insights as to what is required to move growth up several gears.
Firstly, growth is unlocked when capital (private or public) and management expertise is deployed towards expanding the capacity of a sector to deliver more goods and services to either Nigerians or the rest of the world. Given the perennial limited resource constraints facing Nigeria’s government due to a low tax base, a function of underlying economic structure (little to do about tax evasion or avoidance), the big growth outcomes (read telecoms) occurred when government gave up its strategy of investing puny amounts in a sector and allowed private capital (foreign and/or local) and their focus for making money to do the heavy lifting. With adequate regulation as in the telecoms case, the gains can astronomical and focal sectors quickly become net positive for tax and employment as the telecommunications sector is now a large contributor to tax receipts and employer of labour.
Secondly, Nigeria’s most abundant resource is low-skilled labour which as was the case with China (and unlike India which had a higher share of educated citizens) is more suited for industrialization vs. a services dominated economy. However, Nigeria’s present economic structure is dominated by capital intensive sectors with limited requirements for low-skilled labour.
A progression to a services-led economy will lead to the exclusion of a large segment of society which has long-term implications for social unrest. Accordingly, the policy can and should look to re-focus economic activities towards the absorption of the large mass of low-skilled labour to place economic growth on a more sustainable footing. This path obviously runs through agriculture and manufacturing. This does not mean taking the eye off services, as a friend would say, you can run and chew gum at the same time. It just means we know where the strategic imperative lies.
Thirdly, Nigeria’s external sector is highly vulnerable to oil price shocks which propagate themselves across the economy in reduced consumption and trading activity and inflation. Solving this problem entails ensuring food independence across selected tubers and grains, to a large extent, and given Nigeria’s oil resources, energy independence to a lesser extent.
To use the language of differential calculus, these two are necessary conditions, a sufficient condition for sustainably sorting external sector vulnerabilities requires not just food and energy independence but significant ramp-up in non-oil manufacturing exports to which potential exists. While scope exists for increased service exports given Nigeria’s financial and growing technology sector, boosting non-manufacturing exports requires over the near term a focused industrial policy targeting competitive key agro-allied and low-valued manufacturing products.
Given the last item, a key goal of economic policy should be towards raising the competitiveness of Nigeria’s non-oil exports which will require significant investment in infrastructure (power and transport) to lower production costs, improved security within Nigeria’s borders, lower capital costs, and let’s say an ‘appropriately aligned’ real exchange rate that seeks to exploit the geographic realities of being surrounded by CFA franc currencies
Four Big Economic Reform Ideas: Go big or go home
Privatization & Liberalization of Nigeria’s logistics sector (rail, road, ports, airports & post): if the 2000s are to be characterized by reforms of telecommunications and the 2010s as the era of power sector reforms, then the natural progression is to decisively address big bang reforms to Nigeria’s logistics and transportation sector. Policy focus must be daring and ambitious with a drive to ensure to the extent the permissible frictionless movement of goods and services between the various parts of Nigeria using the most efficient means possible.Private financed Infrastructure delivery and management but public ownership: The FGN is clearly at the limits of fiscal abilities and realistically, increasing fiscal support for infrastructure delivery will translate to unsustainable public debt levels. Rather than pushing leverage to unsustainable levels for projects where there is a weak political will to impose cost-reflective tolls, the FGN should simply package these projects into dedicated private infrastructure funds which retain public ownership but provide long-term concession arrangements. Target the big Nigerian infrastructure projects: rail, ports, key arterial roads, and bridges.A food-centric industrial and trade policy: As noted earlier, fixing Nigeria’s external account vulnerabilities entails ensuring food independence. Addressing this entails a more targeted attempt at raising aggregate output and yields on key food crops (grain, tuber), animal products (milk, meat, poultry, fish) interspersed with selected cash crops (such as cashew for example) to provide the right blend. Alongside, work on infrastructure, the policy should focus on driving large scale commercial investing alongside well-designed community out-grower programs for target commodities. Gains from here are crucial towards driving down food prices.
Given the downward outlook for oil prices (due to the secular shift called climate change), the outlook for Nigeria’s oil sector is bleak. As such Nigeria will need to find a credible solution to the external account imbalance problem that dogged growth between the 1980s – 1990s and since 2016. Given our population size and high youth population, Nigeria needs a new plan for growth. As in the early 2000s, this requires another big push towards cultivating private capital into underserved sectors to move the wheel of growth onto a new plane.
The subtext for this piece is drawn from a book of a similar title by Ben Bernanke which chronicles the logic behind his decision at the peak of the global financial crisis to act ignoring the armchair idealists. Seizing the urgency of the times requires the adoption of bold reforms that will attract and inject private capital with the promise of efficient management into dormant sectors of the economy with government taking the backseat of regulation.
The era of the dogma of waiting for the government to find money to sort out the economy is over. While a shift towards decentralization is politically appealing, the perceived economic gains are likely to be illusionary. To move the economic needle, emphasis must be on greater private sector involvement in the management of large parts of the economy (most sectors outside of basic education, primary healthcare, and defence). The big policy reforms required are a mix of privatization, liberalization, and commercialization of large sectors of the economy.
“There is a time in every man’s education when he arrives at the conviction that envy is ignorance; that imitation is suicide; that he must take himself for better, for worse, as his portion; that though the wide universe is full of good, no kernel of nourishing corn can come to him but through his toil bestowed on that plot of ground which is given to him to till. The power which resides in him is new in nature, and none but he knows what that is which he can do, nor does he know until he has tried.” – Ralph Waldo Emerson (Self Reliance)
Written by Wale Okunrinboye
Source: NairametricsPost views in 5 minutes: 0 views