H1:2018 Review and H2:2018 Outlook - Where is the Growth?... "In a Virtuous Cycle"


Friday, July 06, 2018  08:38 AM   /  Afrinvest 

Executive Summary

Global Macroeconomic Highlights

In our earlier report on the outlook for 2018, we highlighted our expectation for a further recovery in global economies to be supported by favourable financial conditions as well as recovery in the Euro Area, growth in China and a rebound in frontier markets on the back of improving commodity prices. We noted likely threats that included increasing geo-political risks, trade protectionism and policy normalization by systemic central banks. Whilst we have seen these factors play out in the global economy within the first half of 2018, the broad outlook on global growth remains largely optimistic with the IMF revising upwards its global growth forecast for 2018 to 3.9% in April, from 3.8% earlier projected. 

The IMF also revised its growth forecast in Advanced Economies to 2.5% from an initial forecast of 2.0%, citing a stronger case for the euro area and Japan which are expected to benefit from the spill-over of the expansionary fiscal policy in the United States. In Emerging Markets and Developing Economies (EMs &DEs), China maintained its lead as a key driver for broad based expansion with a forecast of 6.9%, although threatened by new trade tariffs imposed by the United States on goods from China. Despite this threat, economic growth remains strong in India, on the back of ongoing structural reforms leading to a stronger growth projection of 7.4% in 2018 from 6.7% in 2017. Growth in Sub-Saharan Africa (SSA) is projected at 2.8% for 2018 from 2.6% earlier forecast, largely driven by expected improvements in Nigeria, South Africa and Angola. 

Relatedly, policy normalisation from systemic central banks has remained a key theme, with the US Fed and the European Central Bank (ECB) spearheading this charge on the back of favourable labour market conditions and synchronisation in global growth driven by rising inflation. The associated capital flow reversals from frontier markets was evident in H1:2018 and is expected to be sustained in H2:2018. Hence these economies are expected to take steps to counter the impact of the capital flow reversals on economic growth. 

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Domestic Macroeconomic Highlights 

Following the upturn from its worst recession in 27 years, which began in Q2:2016, Nigeria’s economic recovery path has been reinforced by the sustained stability in oil prices with four consecutive quarters (since Q2:2017) of positive, slow but steady growth. Notwithstanding the stable trajectory, economic activities have slowed in the first half of the year (H1:2018) given the delayed passage and implementation of the 2018 “Budget of Consolidation”, a major limiting factor in the drive towards implementing the Federal Government’s Economic Recovery and Growth Plan (ERGP) – the fiscal paper drafted to address some of the deep-rooted structural imbalances in the economy. In addition, food supply disruptions resulting from the current security crises - which in turn fueled inflationary pressures - coupled with tighter monetary stance of the Central Bank of Nigeria (CBN) towards stabilizing the currency market, contributed to the slow growth rate reported. Nonetheless, the domestic macroeconomic performance has been largely satisfactory on the back of persistent disinflation, rising oil prices and external reserves, increased foreign exchange liquidity with frequency of interventions, improved total capital flows into the country and favourable balance of trade. 

The upward trajectory in oil prices to the high of US$79.80/b (23/05/2018) in H1:2018 was on the back of Organization of the Petroleum Exporting Countries’ (OPEC) agreed production cut deal of 1.8mb/d in December 2016 as well as unexpected supply disruptions in Venezuela, Libya and Angola. This impacted positively on Nigeria’s foreign reserves, rising 22.7% to US$47.6bn (13/06/2018) from US$38.8bn (29/12/2017). Consequently, the CBN maintained its exchange rate peg with the naira appreciating to N305.80/US$1.00 (June 2018) from N306.00/US$1.00 (Dec 2017) while the stability and liquidity in the foreign exchange market improved as we recorded growing confidence by investors in the Investors and Exporters’ (I & E) window in H1:2018 relative to FY:2017. Specifically, the activity level in the I&E FX window rose 24.2% to US$29.7bn in H1:2018, 1.24x the entire value of transaction (US$23.9bn) recorded since the inception of I&E till Dec-2017, with average daily transaction of US$247.5m in H1:2018 compared to US$170.9m in 2017. Although, the CBN’s participation is estimated at circa 30.0% of the transactions in the window, the increased level of participation to some extent underscores the flexibility of the market as well as investors’ preference of the I&E as the platform for FX deals. This has largely removed the pressures from the parallel market rate which now sometime, trade at a discount to the NAFEX rate. 

Monetary Policy: Exchange Rate Stability Bias Remains Key Anchor 

The CBN continued its easing cycle in H1:2018 as we anticipated, guiding short-term rates downward in the fixed income market despite maintaining status quo on Monetary Policy Rate (MPR) in the first two Monetary Policy Committee (MPC) meetings. The benchmark policy rate was maintained at 14.0% but average OMO (Open Market Operation) rate moderated 3.8ppts in the period to 12.3% from 16.1% in 2017 while Broad Money Supply (M2) in turn increased to N25.2tn in May-2018 from N24.0tn in Dec-2017 in line with the easing cycle. As part of its secondary mandate, the Apex Bank also sustained its development financing agenda through the use of the Anchor Borrowers’ Programme (ABP) which aided credit flow to sensitive and growth catalyzing sectors of the economy whilst using the favoured flexible OMO strategy and frequency of auctions in the primary market as a means of ensuring stability in price levels without tweaking the MPR. 

Again, H1:2018 reflected the policy focus of the CBN, especially in deploying the traditional tools of monetary policy management. For the third year running, monetary policy has been anchored on the deployment of direct mop-up strategy through OMO for controlling aggregate money supply as against the indirect use of interest rate (MPR) or Cash Reserve Ratio (CRR) which have remained at 14.0% and 22.5% respectively for at least two years. This reiterates our position on the impotence of MPR in achieving expansionary or contractionary monetary target.

In H2:2018, we expect the MPC to maintain status quo on key monetary policy indicators for the rest of the year due to the expected expansionary impact of bunched release of fiscal spending as well as political spending ahead of the 2019 General Elections. Also, the ongoing policy normalization by systemically important central banks - US Fed, Bank of England (BoE) and European Central Bank (ECB) - further limits the possibility of a rate cut to preserve the attractiveness of Nigerian financial assets and reduce the ongoing capital flow reversal presently experienced in the financial markets. However, we do not rule out the possibility of a politically induced benchmark rate reduction in Q3:2018 in order to advance the argument of making credit available to the real sector even though the effect will be muted by the use of OMO.
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Fiscal Policy: Another Budget of Wishful Spending 

The role of fiscal policy as a key macroeconomic tool for growth and development is reflected in the effectiveness and efficiency of government’s revenue base as well as the structure of its expenditure. The late approval of the 2018 budget in June, seven months after it was first submitted to the National Assembly for deliberations, has hindered the extent of the full impact of stimulating economic activities through meaningful fiscal spending. The underperformance of the non-oil sector output growth in Q1:2018 (+0.8%) clearly indicates the impact of fiscal policy drag, other structural vulnerabilities and low investor confidence with FDI consistently lagging expectation. 

A cursory look at the approved budget relative to the actual performance of 2017 presents a disturbing picture especially in terms of actual revenue numbers cum the elevated deficit levels.  As at 9M:2017, total revenue accruing from oil, non-oil and other financing sources - including refund from Paris Club, exchange rate gains and independent revenue – amounted to N3.1tn, annualized to N3.7tn for FY:2017, falling short of estimated budget (N5.1tn) by 28.1%. More disturbingly, the revenue gap would have been worse at 50.8% but for providence through other revenues, items that were not envisaged by the budget. Juxtaposing this with the signed 2018 Budget, where total revenue is estimated to double 2017 actual at N7.2tn, there are legitimate grounds to contest the possible realization of the proposed spending. 

Notwithstanding our reservations on the potential feasibility of the budget, we believe there are still bright spots, especially in terms of the proposed capital spending on key infrastructure projects which have the potential to unlock growth in critical sectors of the economy. While we believe fixing deep rooted structural bottlenecks that will enable the private sector through Public Private Partnership (PPP) initiatives support the efforts of government, increased fiscal spending still remains a catalyst for improved economic growth in the short term. Despite this, the government must tread cautiously on expansionary budgeting given its weak revenue fundamentals while focusing on fiscal consolidation and seeking ways to diversify its revenue base. 

Improving Fiscal Revenue through Efficient Tax Collection System: How Far Gone? 

Since 2016, there has been a renewed drive towards improving revenue collection by expanding the tax net while also granting amnesty to encourage tax evaders to comply. The Federal Inland Revenue Service (FIRS) rolled out the Voluntary Assets and Income Declaration Scheme (VAIDS) initiative, which commenced from the 1st of July 2017 and was extended till the end of H1:2018 with the aim of increasing the national taxpayers’ base as well as boosting the country’s tax revenue to GDP ratio, while pursuing its conscientious implementation. According to the Chairman of FIRS, VAIDS has recovered about N30.0bn from individuals and corporate bodies since inception and the number of people in the tax net have grown from 14 million in 2016 to over 19 million in 2018. This suggests that while revenue projection was only 9.8% successful, the scheme recorded 125.0% of planned number of people expected to join the tax net. 

In addition to VAIDS, the Federal Ministry of Finance in collaboration with the Economic and Financial Crimes Commission (EFCC) has launched the “Project Light House” initiative, a data mining programme, which has identified 130,000 high profile individuals for scrutiny upon expiration of VAIDS. Whilst we commend the effort of government to diversify revenue through taxes, we also note that deliberate policies of government in specific critical sectors can help unlock the growth potentials of the economy which in turn increases revenue collection through taxes. For instance, a market approach to fixing the oil & gas and power sector bottleneck can help improve the economics of these sectors while also increasing their tax remittances to government.

Polity and Security Trepidations: Death Spiral 

Ahead of the 2019 General Elections, the intensifying polity uncertainties amid the ongoing security challenges threatening the various parts of the country, are major downside risks to watch out for in H2:2018.

So far, H1:2018 has witnessed increased agitations and many calls for restructuring. Amid these tensions, the signing of the “Not Too Young to Run Act” by President Muhammadu Buhari on 31st May, 2018 - which addresses the age discrimination in candidacy for the legislative and executive branches through lower age limits – is a welcome development. Furthermore, the strains in the polity have been aggravated by the increasing rifts between the executive and legislative arms of government which culminated into the delay in approving and signing the 2018 budget. Other issues calling for concerns are protests around protecting the principles of the Rule of Law, Constitutionalism, Independence of the Security Operatives (such as the Police), manipulation of the Judiciary, blatant disobedience of court orders by the Executive and its agencies amongst others. 

On polity, Nigerians have shown significant dissatisfaction with the current developments in the economy as well as President Buhari’s 3rd year stay in office (June 2015 to May 2018) as revealed by the Job Approval rating of the NOI polls. Results showed that the President’s rating has been on a downward trend, declining from a high of 80.0% recorded in October 2015 to a low of 37.0% in August 2016 but currently stands at 41.0% (May 2018); average rating in 2018 is 39.6%. Out of 10 key indicators on a scale of 100%, the President rated poorly on 9, with only 1 rated slightly below average (security) – Security (43%), Agriculture & Food Security (34%), Corruption (32%), Power (27%), Healthcare (25%), Education (24%), Infrastructure (21%), Economy (16%), Job Creation (15%) and Poverty Alleviation (12%). 

The Path to Achieving Optimal and Sustainable Growth in Nigeria.

The mission to achieve inclusive and sustainable growth has attracted global attention with a universal call to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030 as evinced in the 17 Sustainable Development Goals (SDGs). According to the United Nations Development Programme (UNDP), despite the decline in the number of people living in extreme poverty (less than US$1.25 a day), from 1.9 billion in 1990 to 836 million in 2015, 80.0% of these people are in the South Asia and Sub-Saharan African regions. 

Furthermore, a recent report by the Brookings Institution using the World Poverty Clock data (June 2018) shows that Nigeria has become the extreme “Poverty Capital” of the World, overtaking India even though India’s population is 7.0x larger than Nigeria’s (73.0m extremely poor people in India account for 5.6% of its population). Specifically, 86.7 million (50.0% of Nigerians from its estimated 180 million people) fall within the extreme poverty net. This is further aggravated by the estimated fast paced growth in its population by 2050 (estimated at 400 million people). This quagmire is traceable to the mismanagement and inefficient allocation of scarce resources by the government to key priority sectors that will propel a more inclusive and sustainable growth as well as eradicate poverty by a substantial amount in coming years.
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Nigerian Financial Markets

Following the sterling performance of the local bourse in 2017 – (3rd best performer in the world, best performing market in Africa), investors marched into 2018 with high expectations for the year. As a result, the market was set for a bullish run and this was seen in the first month of the year. Investors positioned across all segments of the market, especially in stocks that had underperformed in the previous year. In the Banking sector, while tier 1 banks continued to enjoy buy interest, tier 2 banks became the toast of investors with rallies seen across counters despite weak fundamentals. In the same vein, the positive sentiment filtered into the Oil & Gas, Consumer and Industrial Goods sector. Likewise, some Insurance stocks which had hitherto traded at the price floor of 50 kobo gained momentum during the period. Consequently, the local bourse trended northwards for most of January, with YTD return as high as 17.9% on 19/01/2018. However, after hitting this mark, the benchmark index began to pare gains as sustained profit taking by investors dragged performance in subsequent months; H1:2018 return settled flat at 0.1%. 

We projected then that market performance in 2018 will be largely determined by: (i) earnings fundamentals of companies; (ii) stability in the FX market; and (iii) fund flow dynamics to emerging and frontier markets. While we have seen the aforementioned factors come to the fore in H1:2018, the impact has been more skewed towards negative than positive and we expect these to be major themes during H2:2018. 

Although we had forecast a 19.8% return for the market (base case), emerging events in 2018, especially policy normalization in global markets as well as risk factors around the 2019 general elections present compelling reasons to revise our forecast. Our revision employed a blend of relative and absolute valuation methodologies with associated probabilities of occurrence. Hence, we have arrived at the following revised market performance numbers for full year 2018: Bear case (ASI: 39,076.96 points, +2.2%), Base case (ASI: 42,057.42 points, +10.0%) and Bull case (ASI: 45,233.98 points, +18.3%). Based on current market sentiment, we place a higher probability of 50.0% on our bear case scenario as we expect market performance to remain pressured on the back of capital flow reversals ahead of the 2019 general elections. Nevertheless, we do not rule out the possibility of positives that could boost sentiment; thus, we place a 30.0% probability on our base case scenario with the most unlikely 20.0% chance of occurrence on our Bull case. Even though our revised market projection suggest reduced return for 2018, we still expect a positive performance for the year. 

On the other hand, the fundamentals of the fixed income market have hitherto played out as we anticipated at the beginning of 2018, especially in terms of moderating yields in the domestic market - in line with the debt restructuring strategy of the Federal Government of Nigeria (FGN) - and on the global front, rising yield on emerging market fixed income assets as monetary policy across systemic central banks normalizes. We envisaged paucity of supply of instruments, coupled with fast moderating yield relative to 2017, support attraction to bonds and force yields below benchmark rate. Nonetheless, we anticipated activity to determine the direction of SSA Eurobond yields. Actual market data for H1:2018 reflects our broad-based expectations for the market. Although we had forecast a 1.6% moderation in average bond yield, the current market conditions suggest possible volatility till year end. We are of the view that the strategy deployed to tracking the market will have to be double phased. Yet, we still maintain that the yield environment in H2:2018 will be largely determined by market activities as have been played out in H1:2018. We envisage the possibility of an average of 1.5% uptick in short term rates, possibly to compensate for polity risks and prevent capital flight, with this potentially impacting on long dated instruments.

Where is the Growth?

In our earlier report, “The Virtuous Cycle… Again!” we highlighted that Nigeria had exited a “vicious cycle” of macroeconomic instability and weak capital market return and entered into a “virtuous cycle” of stability in external sector indicators and fiscal balance, declining inflationary pressures, improving growth profile, increasingly accommodative monetary policy and strong capital market returns. 

Our view on the virtuous cycle was largely tied to the following.

•  Expanding crude oil production volumes which have stabilized around 2.0mb/d.

• Stability in the FX market following the increased volume of FX interventions as well as sustained liquidity in the market-oriented FX segment (the I&E FX window), which allowed for flexibility in pricing of FX as well as efficiency and transparency in allocation. In H1:2018, total volume of transactions in the I&E FX window stood at US$30.0bn, surpassing the total turnover recorded in 2017 (US$23.9bn).

• The launch of Economic Recovery and Growth Plan (ERGP) in Feb-2017 - arguably the most ambitious development plan by the FGN since the National Economic Empowerment and Development Strategy (NEEDS) document published in 2004. The ERGP is a medium-term plan (2017-2020) which focuses on five key priority areas; 1) Stabilizing the macroeconomic environment, 2) Ensuring energy sufficiency (power & petroleum products), 3) Achieving agriculture and food security, 4) Improving transportation, and 5) Driving industrialization by focusing on small and medium scale enterprises. An implementation and performance measurement management process was also set up to drive execution of the plan.

• Efforts at tackling some of Nigeria’s deep-seated structural constraints by surpassing Ease of Doing Business reform target of moving up 20 places in World Bank’s Ease of Doing Business ranking in 2018. Nigeria moved up 24 places to 145th and ranked in the top 10 most improved countries in 2017.


Whilst we note that some of these factors could have been either due to happy coincidences or providence - a consequence of deliberate government efforts - the fact remains that prevailing conditions suggest continued improvement in the economy. Nonetheless, the pace of recovery since exiting recession in Q2:2017, has remained rather slow and below the perceived long run optimal level of 7.3% - the 10-year average growth rate of the economy pre-oil price shock. 

Consequently, investors’ sentiment towards the Nigerian economy and financial market seems to be waning in what we reflect to be a “Search for Growth”. The situation is further compounded by the developments in the polity especially relating to the security concerns in the build up to 2019 General Elections, disrespect for Rule of Law by the Executives, prolonged rift between the Legislature and the Presidency and several other structural issues which now begs the question: as to what evidence will the Buhari government present as a rationale for its re-election campaign?  

Regardless of these macroeconomic indicators that all point toward a positive outlook on the economy, key factors we believe will set the economy on a path to achieving optimal and sustainable growth include the following.

•           Complete Deregulation of the Oil and Gas Sector

•           Market Approach to Enhancing the Economics of Power Sector

•           Driving Human Capital Development through Education and Quality Health Care

•           Decisive Executive Stance on Fixing Security Stigma

•           Bridging Infrastructure Deficit and Promoting Fiscal Revenue Diversification

•           Preserving Democratic Institutions and Entrenching Professionalism in Governance

•           Resource Decentralization Needed for Viable Sub-National Governments

1. Complete Deregulation of the Oil and Gas Sector

The ERGP may have highlighted and suggested plans for driving efficiency of exploration and production in the oil & gas sector but the force of implementation has been rather feeble. In the upstream space, possible sale of some oil & gas assets was conceptualized for promoting optimisation of production in the ERGP document but there has been little implementation although the 2018 budget estimates about N701.0bn revenue to be realised from the sale of assets. The midstream sector has been left to the private players with the FGN hoping to see the completion of 650,000b/d capacity of refined oil & gas products by Dangote Refinery set for H2:2019 – akin to subcontracting policy formulation and governance to a private company. This is hoped to drive the efficiency of the downstream oil & gas as the current pricing policy remains sub-optimal. 

Successive Nigerian governments have delayed and paid lip service to deregulation of the downstream oil & gas sector principally due to the “potential political cost” of such decision. In the meantime, with the cost of subsidizing the product has increasingly become unsustainable in light of government revenue fundamentals. The government has always erroneously argued for subsidy on petrol – while other products such as diesel and kerosene are fully deregulated – to protect the poor; but in reality, consumption of petrol is higher for the rich than the poor. This is a clear case of inefficient allocation of resources through flagrant disregard of market order. Before the adjustment in pump price of PMS (Premium Motor Spirit) in May 2016 from N86.5/litre to N145.0/litre, total payment for petrol subsidy between 2010 and 2015 by the government was estimated at N7.3tn - an amount sufficient to finance at least 2 year’s budget - between 2010 and 2015.  Yet, there has been no commitment to resolving this thorny issue even with the present administration whose successive budgets from 2016 till date have indirectly and opaquely gulped N1.3tn in subsidy payments (Afrinvest estimates at an average consumption of 60.0ml/d) while not making any reference to subsidy. As at H1:2018, Afrinvest estimates that N294.8bn had been expended to subsidize petrol, estimating from the differential between the landing cost (based on PPRA’s template) and pump price relative to the volume of import (according to data from the NBS). This is more worrisome if compared to the approved 2018 budget as 2018 YTD subsidy payment account for more than 117.0% or annualized 234.0% of the amount budgeted for capital projects by the Ministry of Transportation. 

Typical of our unrelenting call for efficiency, our philosophy remains that “government has no business doing business”. We remain unshaken in our conviction on the need to urgently liberalize the sector, allow market prices to move in tandem with demand and supply conditions in global oil prices and domestic exchange rate. This has the potential capacity to propel increased investments and enhance the overall efficiency of the sector. Our observation is that continuous subsidy payment without deregulation of the sector will perennially inhibit investment flow that could generate massive employment opportunities for the populace.  This in our view will eventually lower entry barriers, improve innovation, competition, efficiency and ultimately force retail pump prices down.

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2.Market Approach to Enhancing the Economics of Power Sector

Although the ERGP emphasized promoting energy efficiency, especially in the power sector, the achievement of efficiency in these critical sectors have been largely underwhelming. The ongoing challenges regarding governance, funding, legal, regulatory and pricing across the power sector value chain (generation, transmission and distribution) are yet to be resolved. In generation, the ability to stay profitable in the long term is threatened by non-market reflective tariffs following the shutdown of the MYTO II (Multi Year Tariff Order) plan. Though steady production has been assured by NBET’s (Nigerian Bulk Electricity Tariffs) partial guarantee of payment from the CBN’s intervention fund of N720.0bn, we believe the lack of political will to entrench cost reflective tariffs is a drag to promoting the economics of the sector as this also stalls investment in capacity expansion while making the sector completely non-bankable. 

Currently, NBET, with total capital base of US$800.0m, offtakes power from the 6 GENCOs and 4 IPPs (Independent Power Plant) through PPA (Power Purchase Agreement) and sells to the DISCOs by signing vesting contracts. Yet, the very assumptions of MYTO II computation, at the very minimum, have changed in exchange rate (N178/US$1.00 relative to current N360/US$1.00) and gas prices (US$2.30/mmbtu compared to current US$2.88/mmbtu), but electricity tariffs remain the same. This suggests that between Feb 2016, when the last tariff increase was implemented, and now, NBET would have incurred some payables due to the GENCOs, at least twice the amount it should have paid using the non-market reflective tariffs. Hence, barring the support of the Ministry of Power and the CBN, the entire capital of NBET would have by now been eroded. It appears, therefore, that the existence of NBET in its current format wholly owned by government, will continue to breed inefficiency and delay the transition to a market run sector. 

On the transmission side, government continues to invest in expanding infrastructure to provide an avenue for wheeling energy generated through the same centralized process that we term: “Economic Wastage in Scarcity”. The key issue of decentralising the transmission process, which is still being undermined by the government – especially given the enabling laws that are lacking, must be addressed in order to curb the current level of inefficiencies. Recent reforms by the NERC to encourage mini grid solutions, generating less than 1MW off the national grid, is a positive step that needs to be further developed towards complete de-concentration. Also, the Transmission Company of Nigeria (TCN) itself needs to be privatised for greater efficiency.  In our opinion, a move to change the existing laws on transmission and even privatise the process will allow for better electricity coverage, increased transparency and improved efficiency. 

Lastly, distribution has been heavily laden with the usual ATC&C (Aggregate Technical Commercial and Collection) losses as well as metering issues which continue to drag the entire value-chain. In our view, resolving the metering conundrum will go a long way in permanently solving the power sector dilemma in Nigeria. While all parts of the value chain are critical to the success of the sector, an effective distribution system aids collection and payment for power, prevents theft and enhances efficiency through reduction in ATC&C losses. Absence of collection creates illiquidity in the system – a problem which is currently curtailed by NBET’s intervention. We strongly believe that government, asides regulation of best practices in the industry through NERC, needs to completely hands-off participation in the sector while directing any intervention towards complete metering of consumers similar to the model deployed in Kenya to attain significant mileage in metering of consumers.

3. Driving Human Capital Development through Education and Health

Human capital development in Nigeria has failed majorly due to ineptitude and neglect of what should be a priority focus area of a progressive government. In 2017, the NBS estimated that about 75.0% (1.2m applicants) of total university applicants (1.6m applicants) failed to secure admission that year. This is largely due to capacity inadequacies in the current universities compared to the growing student population. As a case in point, there are just over 150 universities in Nigeria with a total admission capacity of 500,000 people compared with Anadolu in Turkey which admits 550,000 students online and 7,000 students on campus annually. We note that given the role of education as a tool for economic emancipation, increasing the access to education will filter into expanding the knowledge, skill and efficiency of labour. Nevertheless, addressing this systemic deficiency would require a robust and functional educational system that we strongly believe is easier resolved with technology as investment in classroom infrastructure would require significant resources and will never catchup with pent up demand and population growth. 

Likewise, the health sector in Nigeria is largely unreliable as even reflected in President Buhari’s lack of trust in the local health industry. Despite the President’s noted disapproval of foreign medical trips by government officials in April 2016, he has himself made multiple trips abroad for medical treatment. Furthermore, health insurance coverage in Nigeria is very low with 5.0% of the total population covered by the National Health Insurance Scheme (NHIS). The number of health care professionals in Nigeria is abysmal relative to the population as reflected in the doctor to patient ratio of 1:6000 in Nigeria against 1:2083, 1:1300 and 1:400 in India, South Africa and the United States. This is further worsened by the migration of health professionals from Nigeria at an increasingly alarming rate. Last year, the Nigerian Medical Association noted that more than 40,000 of the 75,000 registered Nigerian doctors were practicing abroad. We note that if this is left unaddressed, the continuous brain drain would have far reaching impact on the general health and well-being of Nigerians. We believe that government would need to increase and channel budgetary allocation to the health sector and engage health insurance-private sector driven model to fixing the health issues in the country. More importantly, we believe efficiency principles should drive any investment model for the health sector.

4. Decisive Executive Stance on Fixing Security Stigma

The incessant security crises witnessed in recent years and more prominently in H1:2018, is a major threat to Nigeria’s unity and sustainability as a nation with “claimed” actions and interventions by the Federal Government yielding little or no results. First and foremost, the government scores very poorly in fulfilling its key constitutional directive which states that: “the primary purpose of government shall be the protection and security of lives and property”. Whilst we are of the view that the various security issues plaguing the country – Boko Haram insurgency, ethnic agitations in the South East, Niger Delta militancy and the recent Fulani Herdsmen/Farmers crisis - stem from several reasons, the Executive’s indecisive stance in addressing them in a timely manner has further exacerbated the situation. Although agitations in the South East and Niger Delta have been largely minimal in the first half of the year, the Herdsmen/Farmers crisis and Boko Haram insurgency have continued to account for record high deaths with over 1,813 deaths in H1:2018. 

To further compound the issue, there have been several calls against the regional favouritism of key appointments in the cabinet. Currently, ca. 80.0% of security chiefs are from the north and their relative underperformance since assuming office - which was evident in the Benue, Taraba and Plateau massacres - have been treated with levity. Till date, none of these chief security officers have been sanctioned for their slow responses during times of distress and the Presidency appears to be unperturbed. In our opinion, the inability to prevent avoidable deaths is a clear demonstration of abrogation of the responsibility of government. Without a doubt, we believe there is an urgent need for a radical overhaul in Nigeria’s security architecture particularly with regards to policing. We strongly believe that policing should be decentralized and moved from the exclusive to the concurrent list in line with best practices given the language and cultural diversity, geographic spread and under developed infrastructure of the country. We see the state of security as a ticking time bomb that if not defused could be a major threat to the socio - political stability of the economy in the near term.

5.Bridging Infrastructure Deficit and Promoting Fiscal Revenue Diversification

The widening infrastructural deficit has continued to hamper competitiveness and growth in the Nigerian economy. To tackle this challenge, the National Integrated Infrastructure Master Plan (NIIMP) - which focuses on investing in transport, energy, ICT, social infrastructure, housing, security and agriculture - was drawn up in 2014. However, implementation of this plan has remained sub-optimal given the amounts budgeted for such critical sectors since then. According to the NIIMP, an estimated total of US$3.0tn will be needed to revamp and maintain Nigeria’s infrastructure.  The poor state of infrastructure in Nigeria is further buttressed by the understanding that the optimal proportion of infrastructure stock to GDP is at about 70.0%; current level in Nigeria is between 20 - 25%. Furthermore, efforts and policies geared towards achieving this goal have been underwhelming as reflected in the deteriorating conditions of some of the key infrastructural dependent sectors of the economy. 

Notably, Nigerian seaports have been underutilized and operated in a grossly inefficient manner despite its significant contribution to government’s revenue (N299.6bn in 2017). According to the NBS, port data reveal that ocean going vessels decreased to 4,175 in 2017 from 4,622 in 2016, indicating a reduced preference for Nigerian seaports as a result of poor infrastructure, duplicity of charges, inefficient service deliveries, high waiting period and increased Terminal Handling Charges (THC). In addition, the Lagos port remains the most active due to its proximity to market and as a result, is often congested as the existing infrastructure for transportation of goods remains below par. We believe that improved operations and investment in these ports will boost competitiveness and flow of trade which will have positive spill-over effects on growth. 

Relatedly, improving infrastructure in Nigeria would also boost the fiscal revenue base which further supports the goal of revenue diversification away from oil. Other sectors that will benefit from increased spending on infrastructure include agriculture, manufacturing and trade, all of which also have a catalysing impact on the economy at large. We recommend the adoption of more Public Private Partnership structures by the government as a more efficient route to driving infrastructural development as well as strengthening fiscal diversification. Furthermore, infrastructural development through effective utilization of earmarked funds will further drive real sector growth and improve trade competitiveness.

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6. Preserving Democratic Institutions and Entrenching Professionalism in Governance

There is no gainsaying the need to strengthen the fibre of the existing institutions in the country and ensuring that they remain truly democratic, devoid of ethnic and religious colourations and truly seen to be run on the ethos of professionalism in order to preserve their strength and sacredness, regardless of changes in government. We note the recent deterioration in democratic values, blatant disobedience of Court Orders by the Executive and its agencies and disrespect for the principles of the rule of law as well as defilement of key government positions on the altar of politics, ethnicity and religion without careful consideration of the wider negative consequences of such abuse. The independence and integrity of the Judiciary most especially needs to be addressed as non-compliance sets a bad precedence and have a negative impact in the long run as this remains a key pillar on which democratic institutions are built. Another issue that calls for concern is the seeming abuse of the independence of security operatives (such as Police, State Security Service etc), which the President needs to critically address to restore the respect and authority of these institutions. 

Similarly, entrenching competence and professionalism in government is needed to build a just and equitable society as highlighted by the constitution. Whilst we acknowledge the federal character principle, which aims to foster equity and inclusiveness as stipulated in the constitution, we believe that competence and professionalism particularly in sensitive security positions should override other considerations including federal character.

7. Resource Decentralization Needed for Viable Sub-National Governments

As we have often highlighted, there is the need to create viable Sub-National governments in order to increase the pace of growth and development of the states. This can be achieved by encouraging and driving states’ viability through resource control. An analysis of the economic viability of the various states in the country has become increasingly important given the heavy dependence on federal allocations. This has become rather unsustainable given the shabby government revenue consequent on the fall in crude oil prices which is yet to recover to the pre-2015 levels; this has necessitated a decline in the monthly allocation of stipends to the States. Consequently, State governments need to look inward and strengthen their internally generated revenue structure to substantially create a departure from the heavy dependence on Federal government revenue. Lagos and Rivers State, are two of the few states in the country that can fulfil their economic obligations without necessarily depending on the allocation from the Federal government. The 2017 data for Internally Generated Revenue (IGR) for each of the 36 states released by the National Bureau of Statistics (NBS) indicated that Lagos and Rivers State accounted for about 45.2% of total IGR in the country. 

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