Nigeria has successfully navigated its biggest challenge in 2015 – the political transition. With significantly elevated short-term political risk defused after the opposition victory and the president’s concession, focus shifts to the equally formidable economic challenges principally arising from precipitous decline in oil prices in the face of structural dependency on oil for budgets and exports, leading to fiscal imbalance, plunging currency values, turbulent financial markets and worsening an already difficult social context. The good thing from the point of view of business outlook is that managers may now take decisions without the spectre of disruptive politics and elections and attendant policy risks and uncertainty. While seeds of new sources of political risk may be present, the predominant emotion in boardrooms for now is clearly relief!
The main pointer to the policy environment over the medium term will be the team that President-elect Muhammadu Buhari assembles with effect from May 29th 2015. Six members of the incoming government’s transition committee have economic and business credentials – Doyin Salami, Muhammed Hayatudeen, Wale Edun, Bola Adesola, Festus Odimegwu and Nike Aboderin. It is hoped that they will exert positive influence on the incipient administration’s policy proposals. Another early signal will be the government’s disposition to power privatization, agricultural reform and any other sensible policies of the outgoing regime. A third pointer will be the role and influence of the vice president-elect, Yemi Osinbajo, in policy leadership.
Nigeria has historically had a policy imperative for carrying out three structural economic diversifications – diversifying the structure of domestic production; diversifying exports (and therefore sources of foreign reserves and stability of exchange rates), and diversifying sources of government revenue and budgets. The first diversification has by-and-large been achieved as GDP rebasing vividly demonstrated. There was a time when three sectors – agriculture; crude petroleum and gas; and wholesale and retail trade – accounted for 75-80 percent of GDP. Today those three sectors account for around 55 percent of GDP with real estate, manufacturing and telecommunications each accounting for nearly 10 percent of output. New sectors – entertainment, film, music and broadcasting; professional and technical services; construction; hospitality, etc – have also emerged and together services accounts for over 50 percent of GDP. Clearly, the diversification required in Nigeria is no longer of domestic output.
Yet measures are needed to further deepen the diversified nature of local production and expand and accelerate GDP growth. Such measures include downstream petroleum sector deregulation to create a domestic refining and petrochemicals sector, create jobs and export refined petroleum products rather than crude oil; the preceding policy recommendation must of course be complemented with privatization of existing state-owned petroleum refineries and, in my view, other privatisations – of airports, seaports and rail infrastructure and services amongst others; we must make a big push for investments in solid minerals especially from global mining companies which will require furthering reform in the sector as well as confidence-boosting measures led from the very top. Rather than ponder reversal of power privatization, the government must entrench and consolidate power reform and address concerns around gas availability and pipeline sabotage, transmission, tariffs and new investments. Government must seek growth and jobs through targeting opportunity sectors – solid minerals, refining and petrochemicals, new upstream oil investments (which requires fiscal terms acceptable to the international oil majors), power and infrastructure, agro-processing, retail and construction.
We must then turn to the two outstanding mandatory diversifications – of exports and government revenue. The aforementioned prescriptions will of course address both objectives with export and revenue possibilities in solid minerals, refined petroleum products, manufactured goods (if power improves as a result of sector consolidation) and greater government revenue from generalized output growth. Beyond these, policies to improve economic competitiveness and investment climate as well as specific sectoral incentives to promote exports will be required. There also remains substantive scope for further export income from the non-formal sectors, entertainment, film, music, sports, broadcasting, art, etc. There is clearly an imperative for increasing the tax component of government revenue, not just as an economic strategy for reducing oil dependency, but also as a political tool to deepen democracy and foster increased government accountability. A VAT increase may be considered but I generally have a counter-intuitive inclination to support a wider corporate and personal tax net (and policies such as one-off amnesties and lower personal and corporate tax rates, especially for SMEs) rather than increasing the burden on an already stretched narrow population of taxpayers.
In terms of managing plummeting public finances, I have simple formulae – use private capital for infrastructure; free up resources from downstream petroleum sector deregulation as well as privatization of commercial activities; carefully leverage borrowings, using long-term development finance for social investments in education, health, urban mass transportation, infrastructure and allowing NNPC JV funding requirements to be addressed using global investment capital; and reduce corruption and waste to free up additional resources from the public sector. A rationalization of the public sector (along the lines suggested by the Oronsaye Committee) and fiscal practices across arms and tiers of government is probably mandatory.
The incoming government has its work cut out. It will operate in a context defined by high expectations and euphoria, with many electoral promises anchored on large, new welfare payments, but an economic reality in which hard decisions, including some previously rebuffed by the opposition, will have to be taken! But with a rational policy posture and focus on structural change, this environment may actually represent a period of opportunity.
Opeyemi Agbaje
