The Nigerian economy is a powerful machine akin to a Formula One racing machine. Unfortunately, the economy has in the past been driven by leadership and a political class akin to a “Danfo Driver” steering a Formula One racing machine.
The Nigerian elections have been won and lost, a half-year process that has been detrimental to the economy and financial markets. Key economic and financial indicators are down year-on-year and year-to-date as well as corporate earnings, the most significant being a 1.5 percent loss in GDP growth, speculative devaluation and volatility of the Naira. The year-end outlook is also not bright, as most investors and corporate players are coasting and seem to have accepted 2015 as a lost year from a productivity standpoint. Politics in Nigeria, proven by recent events, is driven by personal interest at odds with national economic interests. The cost of political instability and drop in oil prices on productivity, economy and the financial markets in Nigeria is estimated between US$25-30billion.Who is counting? Certainly not the political class.
They have not come to terms with the fact that a new budget cycle has commenced, and it’s clear that the only tangible approach the new government can take is to start the process of amending the existing budget and delivering a new budget for next year that reflects the contemporary economic realities. The clear and present danger for the Nigerian economy is the threat of exit from the JPMorgan Emerging Market Index, as a result of the illiquidity in our foreign exchange market. An exit will harm Nigeria’s financial and economic rating. It will increase the cost of borrowing and limit access to the international financial markets for both sovereign and corporates. More importantly, an exit will also stem the flow of portfolio investment which peaked at US$20.5 billion in 2013, that otherwise can help stabilise the Naira rates and balance of payments. The lack of articulation on policy and economic direction by the new government is not helping matters and is unsettling the financial markets.
The next challenge the government faces is the validation and structured financing plan for the current fiscal deficit, estimated at N6.5 trillion. The government’s actions on the fuel subsidy could significantly increase this number. With the restructuring and swap of state government commercial bank loans into Treasury Bonds, the new government has increased the domestic debt profile by N1 trillion overnight. Unfortunately, the state governments have not been compelled to execute conditional covenants, such as adhering to the tenants of the Fiscal Responsibility Act, which stipulates provisions for fiscal discipline. With a US$49 billion domestic debt and US$10.8 billion external debt overhang, Nigeria is now committing 23 percent of its fiscal revenue to debt service. With the levels of projected fiscal deficit, we might exceed the revenue to debt service best practice benchmark of 25 percent by year-end. The alignment of fiscal and monetary policy which the economy benefitted from over the last five years seems to have been lost in the last two months. The CBN seems to have lost its independence and has been unable to clearly articulate a well thought-out strategy to manage the Naira, as new policies are announced weekly. This misalignment of fiscal and monetary policy has started to impact the macroeconomic indicators as inflation is creeping up into double digits with high levels of unemployment at 35 percent.
The effects of quantitative easing are manifesting on the Naira exchange rates as interest rates remain artificially high at 25 percent. This despite the excess supply of the currency in circulation M2 at N19 trillion, 25 percent or N4.75 trillion denominated in US dollar deposit. The banks have exacerbated the situation with about 50 percent of their loan books denominated in US dollars. These artificially high rates, and distortion it causes, are not sustainable in the long run. Western nations over the last eight years have maintained rates at below 1 percent to spur economic recovery. The financial intermediation rates, at 25 percent, cannot support productive investment, development and will stunt economic growth.
Therefore, major reforms are required in the banking system to support single-digit rates. Banks also have to use technology to reduce and manage costs, becoming more competitive in the process. Outside the macro economy, it’s critical that we review our trade and investment policy to ensure it is properly integrated into the global value-added system. The success we have had in the cement sector with import substitution and backward integration has primarily been driven by an individual and unfortunately not replicated nor institutionalized in other critical sectors such as agriculture. Drastic attention also needs to be paid to Customs and Excise reform and management, to ensure proper implementation of trade policy, industrial development and investment. The corruption menace of duty waivers, duty evasion, smuggling and weak import documentation has affected the Naira and discouraged industrial development, investment and expansion.
Nigeria has been defined as a corrupt country with weak institutions, poor governance, and compromised judiciary, with consistently low scores in the ease of doing business and competitiveness ranking. In spite of all these, the Nigerian economy with a GDP of US$535 billion is the largest in Africa with a global G20 ranking. Until recent times the Nigerian economy sustained a 7 percent annual growth rate, ranking it amongst the top three fastest growing economies globally. Our substandard physical and social infrastructure needs to be upgraded with power and education as key priorities.
Addressing the infrastructure deficit, corruption, good governance and the rule of law will no doubt propel Nigeria to realise its potential and capacity as a G10 economy. The euphoria the new government has generated, its effort and progress to clean up the system in an effort to restore sanity are highly commendable. The visit to the US has provided a strong endorsement of our new president’s character and anti-corruption crusade. However, while the institutional anti-corruption and recovery crusade is progressing, the president must urgently focus his attention on the economy before he appoints his managers. He must articulate his economic policy and zero tolerance gospel in the direction of his domestic audience, to restore confidence to the economy and financial markets. He reached his international audience while in Washington D.C. with great effect via his speeches in the US and Washington Post editorial.
The Nigerian economy despite of all the shortcomings is a potential G10 economy. A recent Economist article highlights the “opportunity that knocks” with the new government in place, having endorsed President Buhari before the election. A 2013 article in the same publication cautions Nigeria: “Africa’s giant is waking up but still looks unsteady on its feet like a heavyweight boxer who has gone too many rounds.”
The same publication has in the past asked if “anyone has seen a giant” and warns further that the awaking giant eventually might fall flat on its face. The Nigerian economy is a powerful machine akin to a Formula One racing machine. Unfortunately, the economy has in the past been driven by leadership and a political class akin to a “Danfo Driver” steering a Formula One racing machine.
President Buhari needs to demonstrate policy leadership and must not be shy on the issues of the economy. To achieve G10 targets, we need the right drivers with strong leadership backing. The president invariably has been elected on a change platform. However, if one observes what has been going on in the legislative branch, there is a serious cause for concern. There are critical laws that need to be unbundled and a lot more that need passage to move our economy forward. When these divisions reappear at the passage of a critical bill, they can be detrimental to our economic progress. Machiavelli offers his views on change in his classic “The Prince” adept to the Nigerian way: “And let it be noted that there is no more delicate matter to take in hand, nor more dangerous to conduct, nor more doubtful in its success, than to set up as a leader in the introduction of changes. For he who innovates will have for his enemies all those who are well off under the existing order of things, and only the lukewarm supporters in those who might be better off under the new. This lukewarm temper arises partly from the fear of adversaries who have the laws on their side and partly from the incredulity of mankind, who will never admit the merit of anything new, until they have seen it proved by the event.”
Adetilewa Adebajo
Adebajo, investment banker & economist, is the CEO of The CFG Advisory.
