When I visited Nigeria in the first fortnight of May after a gap of over two years, I realized that the country’s infrastructure has not changed much and there is a palpable deterioration of the economy. The deterioration is manifest in long lines at the gas stations, somewhat vacant restaurants, relatively low presence of foreigners at major hotels, high prices of most essential consumer goods and limited stocks of goods at departmental stores. The refrain of a large number of Nigerians is that the decline in crude oil prices and the slackness of demand for the favorite Bonny Light, apart from endemic corruption and fears of insecurity, have caused the current economic agony. They speak in general terms of solutions to overcome the present situation. There are however no specificities in respect of each of these factors. Unfortunately, the devil is in the details.
We will not deal with corruption and security issues here because their resolution depends largely on the strength of administrative and operational decisions and actions. They do affect the investment climate and therefore the economic prospects. However, to say that augmenting investment would first need totally clean administrative setup and personal and collateral security is a big stretch.
Undoubtedly, the president has to fire on an unenviably large number of cylinders. He should completely demolish the old economic paradigms and reconstruct new ones that ensure that the economy is truly free from vulnerability to external forces and internal economic and political pressures. This is a difficult exercise because it would demand the president to build a consensus. We shall pick up here five areas to reduce economic vulnerability in some detail.
First, the crude oil plays a major role in the Nigerian economy even today, notwithstanding the enormous rhetoric for diversification of the economy since 1986. If crude oil export earnings decline, the fiscal situation will be precarious. It is a widely agreed fact that 70 per cent of total revenues of the government is from crude oil. A fall in crude oil export earnings would impose constraints on the ability to import consumer goods and at times even petroleum products. This is because about 90 per cent of export earnings are from crude oil exports. The economy has four non-functioning oil refineries and depends on other countries for importation of petroleum products. Future crude export demand has become uncertain, given the slow and uncertain recovery of advanced and some emerging economies and the gradual increase in energy production from alternate sources such as coal and shale oil. Nigeria has also to observe the rules that OPEC lays down with regard to the quantum of production of crude oil.
How does one reduce vulnerability when crude prices dip below say $60 a barrel? Nigeria needs to shop for those oil-importing countries who would be prepared to buy Bonny Light at a mutually agreed price of, say, $65/$70 a barrel on a forward delivery basis with a 10 percent deviation over the agreed price in case the spot prices move upward in the international markets over a four-week period. This would imply that price negotiation would be a one-way street. It would not happen if spot prices fall below the mutually agreed price. In case the buyer insists of negotiating the price in the event of a fall in spot prices, Nigeria may have to move out of the contract with a month’s notice.
Such an arrangement will assure definitive export earnings. It will act as a benchmark and impart fiscal discipline as well. The fiscal profile that emerges from such an arrangement could be for purposes of analysis regarded as a ‘permanent’ component of fiscal operations. This would imply that there could be a ‘transitory’ or ‘temporary’ component of fiscal operations as well. It is possible to consider using the transitory component keeping in view the impact that it could have on food inflation and the exchange rate of the naira. For this purpose, one needs to work out the margin of tolerance of food inflation. The external value of the naira would be manageable to a good measure if the economy produces most consumer goods for domestic use. However, when the economy slows down, it is necessary to look beyond the orthodoxy about fiscal position and provide stimulus. The time has come for considering fiscal stimulus given the expected fall in growth in 2015 to less than 5 per cent.
Yet another measure that needs to be undertaken for reducing vulnerability is to get the refineries to work. Modernizing the refineries and removing obsolescence in the existing refineries should be the main work of an implementation group. The group should perform two tasks. One, it should help enter into contracts with foreign firms on terms that emerge from global tendering. The Federal Government may approach the World Bank to help Nigeria get the required help in the matter. One of the terms would be that the refinery should be functional within 12 months from the date of the signing of the contract. The other term of the contract would be that the said foreign firm would also provide a long-term loan at a fixed rate of interest to cover a certain proportion of the modernization cost. If the World Bank could provide modernization costs on IDA terms, that would ease strain on government coffers. The government could also consider outsourcing management of the refineries for a period of three years so that future functioning of the refineries would be on a firm and sustained basis.
Suppose the funding for modernization of refineries on the above premises is not possible. The government then may raise special bonds for the purpose and let pension funds invest in them on a mandatory basis. However, to assuage opposition to mandatory requirement, the government may offer an annual coupon rate equivalent to the average inflation rate of the last three months plus a 2-percentage-point margin. The same offer could be open to other voluntary investors including commercial banks. The bond could be for a period of five years and could be marketable 24 months after its date of issue.
Once the refineries function, there will be saving of international reserves to the extent of trend quantum of imports of petroleum products. Besides, transportation and power sectors would get a boost with the easy availability of refinery products. The issue of pricing of these products would inevitably arise even if it would not pose a serious problem. What is important is to ensure that there are no subsidies on the sale of petroleum products on a universal basis. At best, targeted subsidies for poorer sections of the population may be considered. Such an outcome would reduce vulnerability of the economy to domestic pressures as well as external environment.
The third area relates to the distribution of oil account. State and local governments often invoke constitutional principles for taking a major portion of the cake without regard to the vulnerability that their actions would pose in the event of a fall in crude oil export earnings. This has often constrained the buffer that foreign exchange reserves provide in the event of any real or financial crisis, either internally or externally induced. The president may consider working on a consensus agreement on the way the crude account should be distributed and on the minimum amount of international reserves that the country should always maintain. It entails some technical work on which economists in the Central Bank of Nigeria (CBN) and the Ministry of Finance (MoF) could work quickly and submit their findings to the president.
The fourth area pertains to the real sector. Land reforms are imperative for incentivizing agriculture not only to improve productivity but also to diversify agriculture. There is no reason why Nigeria cannot produce a variety of fruits and vegetables that one normally sees in the markets of the West. There is also no reason why rice is the main produce and not lentils or millets or wheat. Application of new farm technologies is all that is required with appropriate institutional reforms and some financial support from banks and other financial intermediaries. It is necessary to view agriculture as a sector that caters not only to domestic consumption needs but also to exports. Land reforms would be an invaluable aid in the value chain that would help achieve this objective.
Medium and small-scale enterprises deserve priority status in institutional financing. Some countries have mandatory proportions of total lending allotted for this sector. There is no reason why Nigeria cannot view this sector on similar lines. The CBN could ask banks to work out a medium-term road map of lending sector-wise in such a manner that medium and small-scale enterprises a well as agriculture get the needed financial support at competitive rates of interest. This is necessary because credit off-take by both these sectors over the years has been very limited, hardly 10 per cent of the total bank credit to the private sector. The government on its part may need to pitch in with funds for building the necessary infrastructure—roadways, warehousing and marketing—for growth of agriculture and medium and small-scale enterprises. Focus on this area would reduce the vulnerability of the economy to external influences.
The fifth area relates to human resource management for sustained economic growth. Committed bureaucracy and judiciary personnel will help to implement according to law the measures that the president takes for (a) enhancement of growth and economic welfare, (b) curbing corruption and (c) improving security. It is not easy to find committed personnel. It is also not easy to make them accountable in law and in practice. The president has to face this test. He has to address all the areas focused here simultaneously and expeditiously and bring about a sound governance framework.
A. Vasudevan
Vasudevan was in Abuja for almost five years from 2007 to the middle of 2012. He was associated with the CBN as Special Advisor to the Governor on Monetary Policy and Operations.
