Nigeria Economy | |
Nigeria Economy | |
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Tuesday, July 7, 2020 / 12:23 PM / by Dr. Olisa Agbakoba, SAN / Header Content Image: Dr. Olisa Agbakoba, SAN
Introduction
The
massive macro-financial shock caused by Covid-19 has continued to ravage the
global economy putting all systems and nations under severe financial
instability never seen in history. Stock Markets around the world have been
pounded and ravaged, and oil prices have fallen to an all-time low. Nigeria is
not spared from this crisis. Total
revenue expected to be realised from the 2020 National budget was
N8.42trillion. However, following the Covid-19 pandemic, revenue projection was
reduced to N5.16trillion. This represents a drop of close to 40% or
N3.26trillion. Key sectors like manufacturing, maritime, aviation,
hospitability and the creative industry, collapsed resulting in huge financial
and job losses.
The
first-quarter report of the Nigerian Bureau of Statistics (NBS) shows a slow-paced growth of -0.68% as GDP
contracted by 1.87% when compared to the fourth quarter of 2019. If this
continues into the second quarter there are ominous signals of an impending
recession. The World Bank 2020, Global Economic Prospects, June
2020, forecast that the Covid -19 pandemic will plunge all countries into
the worst recession in history. GDP of advanced economies are projected
to shrink by 7 percent. The outlook for emerging market and developing
economies is bleak as they are forecast to contract by 2.5 percent. This would
represent the weakest showing by this group of economies in at least sixty
years. The crucial issue is - How do we avoid and or minimize the impact of
inevitable recession on our economy?
The first and critical policy action is to
harmonize fiscal and monetary policy. Fiscal policy must be expansionary.
In other words, big spending is required to massively stimulate the economy.
This is called Keynesian economics named after the economist John Maynard Keynes. Keynesian economics served as the standard economic model in the
developed
nations during the latter part of the Great
Depression, World War
II, and the post-war economic expansion (1945-1973). American President, Franklin Delano Roosevelt used the
Keynesian economic model by spending massively on public works programs to get
America out of the great depression. The mantra for Nigeria is to spend big to
get out of recession. We acknowledge the government has adopted an expansionary
policy by borrowing massively but we must have a clear strategy. First, we must
determine our Public Sector Borrowing Requirements (PSBR). Additionally, we
will need to identify an inventory of Public Sector Spending Requirements
(PSSR).
The
PSBR and the PSSR should be indexed to identify funding gaps.
Additionally, an inventory of government assets should be created as we have
many wasting assets that can be converted to cash. Using the abandoned Federal
Government Secretariat in Lagos as the index case, informed valuers believe it
has a forced market value of N100 Billion. This can build the East West Road.
Abandoned projects abound, Ajaokuta Steel, Aladja Steel, the Newsprint at
Iwopin, the various steel rolling mills around the country, the Onitsha Port,
etc. It is believed these assets are worth at least N15, Trillion yet untapped.
These wasting assets, if sold will boost fiscal policy immensely. Turning to
Monetary Policy, we clearly need a very flexible monetary policy with interest
rates pegged at no more than 5% (Single-digit) to create a framework for
quantitative easing and open market
operation (OMO).
Quantitative easing (QE) makes borrowing easy
for business. QE makes burden on business lighter. OMO flood the economy with
liquidity. A harmonized fiscal and monetary policy will lay the
foundation to rebuild the economy. Three requirements to avoid a recession
are Job creation, revenue mobilization and control of cost of governance.
If we get the macroeconomic environment right, which is the alignment of fiscal
and monetary policy, it will release economic energy to create Jobs estimated
at between 5 and 6 Million, year on year. With respect to revenue generation
with the right framework, massive funds can be generated and pumped into the
economy. With respect to cost of governance, everybody knows it is far too
high. In the revised 2020 budget, 73.5% of total expenditure are for salaries
and debt servicing, while only 26.5% are for capital expenditure. This is
unsustainable. We cannot continue to borrow to pay high recurrent bills. Rather
we must invest in capital expenses to reflate the economy.
The Government has taken steps to implement the Orosanye report but there needs to be a timeline for implementation. Corruption is a leading cause of high cost of governance. It is important to review anti-corruption strategies to reduce public corruption. Tackling the menace of big government and public corruption will give us more balanced revenue to debt profile. With the macroeconomic framework highlighted above, we can now review some critical factors that can help grow the economy and avoid recession.
Diversification of the Economy
This
is one area government needs to urgently activate because of the massive budget
deficit. Nigeria runs a mono -cultural economy as 85% of her revenue is derived
from crude oil exports. As a result of the price shocks occasioned by
Covid - 19, crude oil receipts have gone down and are no longer able to sustain
the economy. The total revenue
expected to be realised as stated in the 2020 budget is N8.42trillion,
including a deficit of N2.17t. However, following the Covid -19 pandemic,
fiscal deficit has grown from N2.17t to N5.37t, which must expectedly be
financed by fresh borrowing. We are now running a deficit budget and
borrowing massively. Unless we diversify the economy, we will continue to
borrow to the point where it becomes unsustainable. Many governments have paid
lip service to diversification, but this is the time to develop a very strong
policy on diversification. We must follow the example of the United Arab
Emirates which diversified their economy by reducing dependence on oil receipts
from100% to only 35% by going into service and smart industries. Some of
the sectors to diversify our economy are:
Agriculture
Agriculture
is one of the largest contributors to Nigeria's GDP and has the potential to
create massive numbers of new Jobs, especially in Northern Nigeria that has
very fertile agricultural land. But our policy on agriculture must move away
from subsistence to mechanized agriculture. The Central Bank of Nigeria's
Anchor Borrowers programme that made Nigeria self-sufficient in rice production
has shown the potential of the Agriculture Sector. The Central Bank has
identified 10 crops to support namely rice, wheat, milk, tomato, fish, cotton
etc. This is a great leap forward for the sector. Mechanized Agriculture will
not only create Jobs but also improve National Security by offering employment
to our teeming youths exploited for banditry and terrorism.
Transportation
This
is a massive sector that can create millions of jobs and billions in revenue.
But the starting point is to have a cohesive multi-model transportation policy
to take care of the 4 critical sectors of air, sea, road, and rail. Once there
is an effective transportation policy it will impact each of the 4 sectors in
the following ways:
Aviation/Space
Aviation
is a major transportation sector. Unfortunately, Nigeria has no presence in the
international Aviation business. Nigeria Airways has long been comatose.
Foreign aircraft dominate the Nigerian airspace and earn well over 2 trillion
Naira annually to our exclusion. 2 trillion Naira is substantial in our
national budget. A Fly Nigeria Act will ensure that public funds
to purchase air tickets must originate and fly on a Nigerian carrier. The Fly
Nigeria Act will create an instant market of goods, passengers and services for
our national carrier. Jobs will be created and revenue generated to the
advantage of the economy.
Space
technology is huge. The late English theoretical physicist and cosmologist, Stephen Hawking referred to
space as the future of mankind. Regrettably, Nigeria is not
harnessing this sector. Space has many major applications for developing
our economy. We will mention two examples. First, space can be applied to the
energy sector as remote sensing establishes the quantum of our hydrocarbons.
Second, is the link between space and national security. Satellite technology
intelligence gives us vital footprints in the national security infrastructure.
The growing threat of terrorism and the adverse impact on economic stability
can be checked by intelligence provided by space satellites. Nigeria has no
space legislation. This hurts economic transformation.
Railway
and Road Transport
The
opportunities for rail and road are unimaginable. They connect people and
open markets so goods and services are exchanged. Government is investing
heavily in this sector but a lot more investment is required. The CBN recently
launched InfraCo, a $39 Billion (N15 Trillion) infrastructure development fund
but N15 Trillion is not enough. Rail and roads need a lot more investment
because its revenue and job potentials are huge. The Post-COVID economy must
create what is called socialized jobs. American President, Franklin Roosevelt
used social jobs to push America out of the Great Depression, by creating the
Tennessee Valley Authority, and employed over 4 million people. To accomplish
all these, a strong Public-Private Sector Partnership (PPP) is vital.
Maritime
This
sector has been completely ignored but it has the capacity to generate over
Seven Trillion Naira annually and four million jobs over 5 years. All
that is required is the implementation of local content and Cabotage rules
especially relating to the oil and gas sector which is currently dominated by
foreigners. Our Cabotage legal regime must be enforced to stem capital flight
and boost capacity for Nigerian Ship owners. Several critical bills relating to
the maritime sector pending before the National Assembly require immediate
enactment and implementation. Some of the bills are the Petroleum Industry Bill
(PIB), the Ports and Harbour Bill, Maritime Zones Bill, Ocean Bill etc. There
is also an urgent need to review the Nigerian Shipping Policy Act of 1987. The
enactment of a law on maritime zones is also long overdue. The Maritime Zones
bill will extend Nigeria's EEZ of 200 nautical miles by another 150miles. This
will create massive new revenue streams and generate jobs in the maritime
sector.
Hydrocarbons
and Solid Minerals
Although
oil receipts are down, our huge gas reserves present opportunities for
alternative revenue sources. Russia's revenue from gas exports in 2017 was $
38.1 Billion. The success of Nigeria's LNG has demonstrated that gas revenue is
massive but only if exploited. Nigeria can also derive revenue from
petrochemicals like methanol which Nigeria currently imports. But the legal framework
must be right. The legal framework relating to hydrocarbons is skewed in favour
of foreign companies in the entire value chain. In at least four cases,
banking, insurance, shipping, legal service, capital flight is massive. In
relation to shipping alone, it has been suggested that Nigeria loses over 10
Billion Dollars annually. Revenue loss will continue unless the legal framework
is amended to domesticate the value chain in hydrocarbons. It is
important to review the legal framework for local content with a view to
strengthen implementation and enforcement. It is also very important to address
the issue of corruption in the extractive industry. The continuing lapses and
loss to the nation in oil and gas revenue as revealed in the Report by Nigerian
Extractive Industries Transparency Initiative, NEITI, which indicate lack of
implementation of previous Reports, supports this. To ensure speedy reforms in
the oil & gas sector, the Petroleum Industry Bill has to be passed into
law. Our hydrocarbon resources especially gas is absolutely a major source of
revenue, and employment.
Solid
mineral is another sector that has not been adequately harnessed. Nigeria is
estimated to have about 34 solid minerals, with every Nigerian state boasting
of at least one of these minerals. This can generate $ 10 Billion and 5 million
Jobs. The Democratic Republic of Congo in 2017 alone saw the sector generate $
1.68 billion, accounting for 55.16% of the total government revenue and 17.40%
of the GDP. Solid minerals is undoubtedly capable of making a more pronounced
impact on the country’s employment rate and generating more revenue for the
government however, to derive the highest possible benefit from this sector, a
proper policy and legal framework needs to be put in place.
Information
Technology
Nigeria
can leverage its status as a multi-billion-dollar tech hub to develop its IT
sector and become a global IT services destination. Github, a leading software
development platform, recently reported that Nigeria is home to the fastest
growing developer community on their platform. The country has benefited from
companies like Andela which brought world-class training and job opportunities
to budding Nigerian programmers. Gebeya is promoting a similar model of
training the next generation of African developers. Nigeria's growing supply of
programmers will likely be met with rising demand from the country's constantly
expanding tech hubs. The potential of the business-to-business (B2B) or
enterprise software sector is also good news for the country's ITC sector.
African companies are expected to spend $3.6 trillion on B2B services in 2025.
Nigeria is well-positioned to be part of this growth given the coexistence of
traditional industries and B2B tech startups. The combination of a growing
local talent pool and a bustling B2B sector means that the IT sector can drive
economic growth for decades to come.
Entertainment
Nigeria's
entertainment industry already plays an important role in the Nigerian economy
but their full potential remains untapped. The industry was projected to
generate $1 billion in export revenues this year and bring in crucial foreign
currency. The industry has an added benefit over the natural resource sectors
since entertainment products are non-rival goods. This means that the local
consumption of a movie or a song, for example, does not prevent the export of
that same song to international markets. This allows Nigerian entertainment
products like songs, movies, and books to generate wealth indefinitely. The entertainment
industry drives job growth and employs millions of Nigerians in complex value
chains. Nollywood, Nigeria's film industry, produces an average of forty films
a week and directly employs 300,000 Nigerians. Nigeria's upcoming fashion
industry is perhaps the best example of old value chains meeting new ones:
designers are using local cotton to create garments being modeled at
international fashion weeks. The fashion industry directly employs and benefits
farmers, distributors, designers, and more.
Trade Policy
Nigeria
has no trade policy which is why it is a major dumping ground for foreign
goods. We spend billions of dollars importing basic food commodities that can
grow locally. We must grow what we eat. We need to reverse this with a
robust trade policy. Trade policy refers to the rules and regulations on
imports, exports, tariffs, duty etc. Trade policy rests on a tripod of critical
factors - import substitution, tariffs, border enforcement and
compliance. We need to enact trade remedies legislation and a trade
Expansion Act.
These
legislations will impose anti-dumping duties on non-essential products. There
are also special duties and measures we can impose on exports into Nigeria
which are subsidized by a foreign country. The trade remedies legislation will
prohibit imports if it is adjudged that they will cause material injury to
local industries, for example by impeding local growth. It is also
important to enact legislation that will support the recently established
Nigerian Office for trade negotiation (NOTN). It is crucial that the office is
elevated to ministerial level. We need to establish a National Customs
and Border Enforcement Services. This Border Enforcement Services will need new
legislation to merge immigration and customs services. The Border Enforcement
Service will replicate the US Customs and Border Enforcement Agency. The merged
service will reduce duplication and proliferation of agencies at the borders.
To comply with ECOWAS protocol and the African Continental Free Trade Agreement
(AfCFTA), the border closure policy should be replaced by a border enforcement
policy. A strong trade policy will help create millions of jobs, grow local
industries and expand the economy.
Access to Capital
Capital
is the oxygen and life blood of the economy. One of the areas where we can tap
into capital is the Housing/property market. Eighty per cent (80%) of Nigeria's
businesses rely on land and housing as collateral. Unfortunately, the slow
administration of the Land Use Act in terms of consents and permits has meant
that the banks have not accepted untitled property as collateral. This has
caused incalculable damage to businesses in need of capital. A recent study
shows that the housing inventory of Nigerian property exceeds six trillion dollars.
Nigerian property and housing market is dead capital because 80% of them have
no title or bad title and therefore not good as collateral for bank
loans. So creating the proper legal framework to make dead capital
fungible (easily transferable) will create an instant credit market and enable
Nigerians to borrow on their property. A Land Use Administration Act will
introduce new rules to make the consent process more efficient and give
confidence to banks to accept title documents as collateral. This process will
create an instant credit market to drive the economy and will easily contribute
at least 5% to GDP.
Government Stimulus Intervention
Because of Covid-19, the economy has taken a very big knock. It is the responsibility of government (like most western countries) to reboot the economy by supporting businesses with a business support fund of at least 50 trillion. We applaud the government for the injection of funds to support the economy. We note the following:
It
is a good start but not enough. The Government should look to ways and means by
the CBN to inject at least 50 trillion into the economy. Government can
intervene through a National Credit Guarantee Agency to support viable business
proposals so they Business can easily access credit. Major economies of the
world run on credit. The key is that the creditor is assured that he will be
paid by government guarantee. Another key institution is the Development
Bank (DBN). Nigeria has a Development Bank, but unfortunately undercapitalized.
The DBN needs to be properly capitalized to boost the economy.
Enabling Business Environment
The
factors listed above will not work without an enabling business environment.
The first step is to have an efficient legal and regulatory system. For
instance, the Nigerian judicature is based on the 1875 Judicature Act. The
consequence is that cases take too long to resolve. It takes between 5 to 20
years to resolve simple contractual disputes. Investors, both local and
international, will not invest in a country where simple contractual disputes
take between 5 to 20 years to resolve. We must give urgency to this sector and
reverse legal failure. A speed of justice policy will reduce delays. In this
regard, the National Assembly must consider enacting the Administration of
Civil Justice Bill to ensure efficient administration of civil disputes.
Also, new methods of dispute resolution should be considered such as
Alternative Dispute Resolutions, small claims courts, traditional and customary
arbitration. Quasi-judicial administrative tribunals can be established for
sectors, following the UK example. In England there are many administrative courts
for Telecommunications, Taxation, Transportation, Insurance, Education,
Financial Services, Trade, Investments, etc.
Finally, the Nigerian legal and regulatory
framework must be reviewed and structured to create the enabling environment
that can support the development of a digital economy. Enactment of the Company
and Allied Matters Bill will be an important step to improve the business
environment for entrepreneurship and to provide greater clarity for investment
funds. Once enacted, it will be important to develop regulations to support the
Companies and Allied Matters Bill and other relevant recently passed legislation,
such as the Secured Transactions Act, to ensure effective implementation.
Additionally, there should be a review of legislation impacting digital
entrepreneurship including the following:
i.
The Intellectual Property Policy and Legislative framework
ii.
Cybercrime Prevention Act
iii. The Venture Capital Incentive Act
The Tax incentives system akin to the pioneer
tax system is needed to ensure that the regulatory environment is investment
friendly rather than an impediment to the growth of the economy.
Discipline of Execution
Nigeria
has a plethora of laws, regulations, guidelines and Executive Orders. The
challenge is lack of implementation of these laws and regulations. Unless rules
are enforced, Nigeria will not easily overcome recession. A vigorous government
policy is needed to implement diversification, strong trade policy and access
to credit etc. There needs to be timelines and harmonization of work of the
various government agencies ministries. Nigeria can generate 10 million Jobs and over N100
trillion with full compliance with policy implementation. This will help to
mitigate the impact of the impending recession. The President must take
charge and ensure vigorous implementation.
Conclusion
The
story about diversification of the economy is an old argument going back 30
years and in fact the Nigerian economy is actually diverse but the problem is
lack of government consistency which has meant that although we have diversity,
no revenue flows out. We can only succeed if the twin administrative
tools of power of focus and discipline of execution are applied. This
presentation is made from the point of view of a development lawyer. It is up
to the economists to draw what they can to mitigate the impending recession.
About the Author
Dr Olisa Agbakoba is a Senior Advocate of Nigeria
(equivalent of Queen's Counsel) and a life bencher of the Body of Benchers.
He is one of Nigeria's leading experts in
Maritime Law and has litigated several complex maritime cases. He has
championed legal reforms in maritime law including the Cabotage Act, the
National Oceanic Policy and other strategic legislations. He played a major
role in the reform of both State and Federal High Court Rules for speedy
dispensation of justice. He is the founding President of the Nigerian Chamber
of Shipping, a member of the National Assembly Business Environment Roundtable
(NASSBER) and Vice Chairman Presidential Committee on the review of the
maritime sector.
Dr. Agbakoba is also a leading arbitrator,
an initiator and pioneer of Law Firm Annexed Arbitration/ Mediation Centre in
Lagos (Nigeria), the Olisa Agbakoba Legal (OAL) Arbitration
& Mediation Centre. He designed the ADR mechanism and rules for Asset
Management and Recovery of Nigeria (AMCON). He has been involved as counsel and
arbitrator in various national and cross border multi-million dollars disputes.
He is a Development law expert and has advocated
the application of Law in development planning and economic growth. He has
consulted and provided advisory services to the federal and state governments,
as well as government ministries, departments and multilateral agencies on
legal reforms and legislative advocacy. He has served in various appointive
governmental positions and a member of the Nigerian Economic Summit.
Dr. Agbakoba is a leading Human Rights
activist, a democracy and Rule of Law scholar. He became the President of the
Nigerian Bar Association (2006-2008) and in 1987; founded the Civil Liberties
Organization (CLO) of which he was the president from 1987 to 1995.
He has authored numerous books such as the
National Oceanic Policy, Development Law Policy, Federal High Court Practice
Manual, Maritime Newsletter Volume I & II among many others.
Related Reports (PDF)
1. Download the
Full PDF Report - Coronanomics and the Nigerian Economy, June 06, 2020
2.
Executive
Summary PDF - Proshare, June 06, 2020
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